As Filed with the Securities and Exchange Commission on June 24, 1999
Registration No. 333-78115
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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SHAMAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3095806
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
213 East Grand Avenue
South San Francisco, California 94080-4812
(650) 952-7070
(Address, including zip code, and telephone number, including area code,
of the Registrant's principal executive offices)
LISA A. CONTE
President and Chief Executive Officer
Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, California 94080-4812
(650) 952-7070
(Name, address, including zip code, and telephone number,
including area code, of agent for service of process)
Copies to:
Donald C. Reinke
Bruce P. Johnson
Bay Venture Counsel, LLP
1999 Harrison Street, Suite 1300
Oakland, California 94612
510-273-8750
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
--------
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
Subject to Completion, Dated ________________, 1999
1,000,000 Rights to Purchase Series R Convertible Preferred Stock
1,000,000 Shares of Series R Convertible Preferred Stock
Shaman Pharmaceuticals, Inc.
We are offering to sell up to 1,000,000 shares of our Series R Convertible
Preferred Stock to all persons who were owners of our common stock on
_____________, 1999, and an indeterminate number of shares of our common
stock as may be issuable upon conversion of the Series R Convertible
Preferred Stock or as a result of stock splits, stock dividends and other
similar transactions. This offering is not being underwritten. There is no
minimum number of shares that we must sell to complete the rights offering.
Each share of Series R Preferred Stock will automatically convert on February
1, 2000 into a number of shares of common stock equal to $15.00 divided by
the conversion price then in effect. The conversion price shall be equal to
the lesser of $_____, which is equal to 10% of the average closing sales
price of our common stock as reported on the OTC Bulletin Board for the 10
trading days ending three trading days prior to the date of this prospectus,
or the price that is equal to 10% of the average closing sales price of our
common stock for the 10 trading days ending three trading days prior to
February 1, 2000. The Series R Preferred Stock will be entitled to receive
dividends and will have liquidation rights as described in this prospectus.
Each share of Series R Preferred Stock will have the right to vote on all
matters submitted or required to be submitted to the vote of the stockholders
and shall have 100 votes per share.
If you owned common stock on ______________, 1999, the record date for this
offering, you will receive, at no cost, a right to buy seven shares of Series
R Preferred Stock at a price of $15.00 per share for each _______shares of
common stock that you owned on this record date. This right is called the
basic subscription privilege. If you elect to purchase all of the shares
that you are eligible to purchase, you may also request to buy additional
shares of Series R Preferred Stock at the same price as the basic
subscription privilege. This right is called the over-subscription
privilege. You must purchase a minimum of seven shares of Series R Preferred
Stock to participate, and if you hold fewer than ___ shares of common stock
on the record date, you will be allowed to purchase seven shares of Series R
Preferred Stock, which will be considered your basic subscription privilege.
Your subscription rights are not transferable and will not be listed for trading
on any stock exchange.
You may purchase shares beginning on the date of this prospectus and until
5:00 p.m. Eastern Daylight Savings Time on August ___, 1999. If you wish to
participate in this offering, we recommend that you follow the instructions set
forth in this document and that you submit all subscription documents to the
subscription agent at least 10 days before the deadline. All subscriptions will
be held in escrow by our subscription agent, BankBoston, N.A., until accepted by
Shaman. We reserve the right to cancel or extend the subscription rights
offering at any time before the expiration date.
Our common stock is traded on the Over-the-Counter Electronic Bulletin
Board under the symbol "SHMN." On June 15, 1999, the last sale price for the
common stock as quoted on the OTC Bulletin Board was $1.56 per share. We have
applied for approval for quotation of the Series R Preferred Stock on the OTC
Bulletin Board under the symbol "SHMNO."
--------------
You should carefully consider the risk factors beginning on page 11 before
purchasing any of the Series R Convertible Preferred Stock.
---------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _____________________, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective and all consents have been
obtained from the relevant state securities commissions. We are not offering to
sell these securities and we are not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
[This Page Intentionally Left Blank]
2
You should rely only on the information contained in this prospectus or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this prospectus may only be
accurate on the date of this prospectus.
TABLE OF CONTENTS
Page
Prospectus Summary..................................................... 4
Risk Factors........................................................... 11
Where You Can Find More Information.................................... 20
Use of Proceeds........................................................ 21
Price Range of Common Stock............................................ 22
Dividend Policy........................................................ 22
Capitalization......................................................... 23
Selected Financial Data................................................ 24
Management's Discussion and Analysis of Financial Condition
And Results of Operations............................................ 25
Business............................................................... 32
Management............................................................. 42
Capital Stock.......................................................... 58
Shares Eligible for Future Sale........................................ 64
The Rights Offering.................................................... 65
Legal Matters.......................................................... 70
Experts................................................................ 70
Index to Financial Statements.......................................... F-1
3
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus, including "Risk Factors" and
the financial statements, carefully before making an investment decision.
All information contained in this prospectus reflects a 1-for-20 reverse
stock split of the common stock effected on June 22, 1999.
Shaman Pharmaceuticals, Inc.
Our Business, Strategy and Products
We are focused on the discovery, development, and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
We intend to implement our commercialization efforts through our recently
established botanicals division, which we have named ShamanBotanicals.com. Our
commercialization plan includes the use of community building initiatives on the
Internet and other distribution channels, and is based on marketing our
exclusive access to our proprietary branded products. We also have available for
out-licensing a pipeline of botanical product candidates, as well as novel
pharmaceutical product candidates for major human diseases developed by
isolating active compounds from tropical plants with a history of medicinal use.
In 1997, the U.S. dietary supplement market was $12.9 billion, of which
over $4.0 billion was comprised of herbal or botanical dietary supplements. In
1998, this number was projected to reach $5.0 billion, with a compounded yearly
growth rate of approximately 35%. In 1997, 24% of people within U.S. households
reported using botanical dietary supplements. The growth of this market has been
led by consumers who are interested in complementary, non-pharmaceutical options
for treating symptoms, fulfilling unmet dietary needs, and optimizing health,
either as an alternative to, or in conjunction with, more conventional medical
approaches. We believe that the use of these products will continue to expand
based upon the aging of the U.S. population, increasing scientific evidence and
acceptance by the conventional medical establishment, and the recent entrance of
powerful consumer companies which provide greater product confidence, while
broadening the base of consumer users.
The unique positioning of our botanicals business stems from our
significant financial investment in our prior pharmaceutical product candidates,
more than 10 years of extensive field research by our teams of ethnobotanists
and physicians, and pharmaceutical-level chemical standardization, and
biological and clinical testing. We are applying this methodology to our new
industry, and we intend to set a new standard in this industry. In the last
decade, we have amassed a large body of information on the health benefits of
thousands of tropical plant species that have a history of human use and have
organized this information into an extensive relational database. This database
includes information on over 2,600 tropical plants, many of which have not been
introduced or fully developed in the U.S. dietary supplement market. We have
identified plants with a documented ethnomedical history of use in our library
and database of botanicals for use in key market categories with significant
commercial potential. Because many of these plants reflect the previously
untapped plant diversity of the rainforests, many represent novel botanical
products that we believe present an opportunity to attain a strong, proprietary
market position. We currently have a fully-developed product, SB-300, and we
expect to commercialize this product in the near future by applying the funds
raised in this rights offering and raised through partnering development
agreements we are working to put in place.
We have the opportunity to differentiate our product candidates in
consumers' minds relative to those of our competitors. Key points of
differentiation include:
* Novel plants/products for unmet needs;
* Documented, first-hand field experience with traditional use;
* Rainforest-based plants and products, since most botanical
supplements products currently come from plants found in
temperate areas;
* Our commitment to conservation and reciprocity;
* Sustainable sourcing and supply;
* Quality manufactured, standardized products; and
* Clinically-tested products.
Our commercialization strategy is to create high-end branding of the
Shaman name on our propriety products addressing serious unmet healthcare
concerns, and to market these proprietary products to specific communities
affected by such healthcare issues. Our e-commerce web site,
ShamanBotanicals.com, which is currently under construction, will be designed to
include several distinct features, such as exclusive access to our proprietary
products, and links to peer-reviewed clinical data supporting the clinical
action of our products. We also intend to offer access to certain medical
experts, in some cases exclusively, for medical commentary. Other planned
4
features of our web site include bulletin board postings, community chat rooms,
customer security and customization, and affiliate programs. Finally,
information on our reciprocity programs will be available as well.
Our first product launch will be SB-300, a botanical dietary supplement to
normalize water flow in the bowel and promote stool formation. SB-300 will
initially be targeted to people with AIDS/HIV who suffer from chronic diarrhea.
We plan to market SB-300 via the Internet, 1-800 direct response advertising,
limited storefront access in major market cities, and focused mail order
opportunities. In addition, we are working with several leading treatment
activists to have them feature the introduction of this product in their
regional organizations' newsletters. We expect to begin marketing SB-300
commencing in the third quarter of 1999.
Commencing fourth quarter of 1999, we also intend to market SB-300 to
travelers and others suffering from acute episodes of diarrhea. The product will
be differentiated from that targeted to the AIDS/HIV community in that it will
be a lower dose and packaged in smaller quantities to address the nature of its
expected use in the target customer base.
We believe that selling a traveler's health-related product on the
Internet presents an attractive marketing opportunity since two primary uses of
the Internet are currently healthcare information and travel. We intend to
market this product with banner advertising at affiliate travel sites and point
of purchase at high-risk diarrhea destinations, sample programs to adventure
travel and tour companies traveling to such areas, and other highly focused
target customer programs.
We are also working to develop a second product line based on a diet
system to mitigate Syndrome X symptoms. Syndrome X is the cluster of metabolic
disorders that occur in the face of elevated insulin when an individual is
insulin resistant, yet still maintains glucose control and is therefore not
diabetic. This cluster of coronary heart disease risk factors, such as elevated
triglycerides and lower HDL-cholesterol, the "good" cholesterol, are the silent
killers associated with Syndrome X. Shaman's Sr. Vice President of Clinical
Research, Dr. Gerald Reaven, has developed a trademarked Syndrome X diet system
for persons exhibiting Syndrome X symptoms, and has performed over 20 years of
clinical research documenting the benefits of this diet system. Direct
comparison clinical trial data supports that this diet system provides superior
benefits to those exhibiting Syndrome X symptoms than the low fat/high
carbohydrate diet guidelines recommended by the American Heart Association.
Approximately 30% of the US population is insulin resistant and subject to
Syndrome X. We anticipate that a product line would include bars, drinks, and
snacks which follow the trademarked anti-Syndrome X diet system, infused with
proprietary Shaman botanicals to address further these metabolic disorders.
Many people with AIDS/HIV who are effectively managing the AIDS virus with
their antiviral therapies are now also demonstrating metabolic abnormalities
consistent with insulin resistance and Syndrome X and are progressing to
coronary heart disease and type II diabetes. We intend to leverage the identity
we will work to establish in the AIDS/HIV community through our SB-300 product
to commence marketing our Syndrome X diet system in this community, and intend
to initially target this community.
We have identified multiple areas of future dietary supplement product
interest and have identified specific priority product candidates. Some of these
proposed product areas include gastrointestinal relief, sexual function aids,
antioxidants/cardiovascular protectors, sleeping aids, calming agents and weight
management. Products in these areas may be developed under the Shaman brand in
the future, or selectively out-licensed.
Our History
Until December 1998, we were solely focused on developing pharmaceuticals
products derived from tropical plant sources. Our pharmaceutical business model
was dependent upon our ability to launch our first pharmaceutical product in
1999. As a result of the U.S. Food and Drug Administration response to our
proposed fast-track New Drug Application package for our leading pharmaceutical
product candidate, SP-303/Provir and insufficient resources to continue the
costly process of conducting a second pivotal trial which would have created
significant delays, we restructured our business to focus on the development and
marketing of dietary supplements. As a result, we now have available for
out-licensing our pipeline of novel pharmaceutical product candidates for major
human diseases developed by isolating active compounds from tropical plants with
a history of medicinal use.
We were incorporated in California in May 1989, began operations in March
1990 and reincorporated in Delaware in January 1993. Our address is 213 East
Grand Avenue, South San Francisco, California, 94080-4812 and our telephone
number is (650) 952-7070. Our web site is located at http://www.shaman.com.
Information contained on our web site does not constitute part of this
prospectus.
5
Provir(TM), SP-303(TM), SB-300(TM), ShamanBotanicals.com(TM), Syndrome X
Diet(TM), and our stylized logo are trademarks of Shaman. Shaman Pharmaceuticals
(R) is a registered U.S. trademark of Shaman Pharmaceuticals, Inc.
Summary of the Rights Offering
Series R Convertible Preferred
Stock offered by Shaman..... 1,000,000 shares at $15.00 per share offered on a
pro-rata "rights offering" basis to all owners of
shares of our common stock on ___________, 1999.
Preferred stock outstanding
after the offering.......... Up to 1,016,667 shares of Series R Convertible
Preferred Stock
115,958 shares of Series C Convertible Preferred
Stock
1,478 shares of Series D Convertible Preferred
Stock
Common stock outstanding after
the offering................ 2,596,975 shares
This number is based on shares outstanding as of
June 15, 1999 and excludes (1) 68,065 shares of
common stock subject to outstanding options under
our stock option plans; (2) 104,833 shares
reserved for issuance for outstanding warrants;
(3) an estimated 6,588,523 shares reserved for
issuance upon the conversion of Series C
Convertible Preferred Stock; (4) an estimated
1,274,205 shares reserved for issuance upon the
conversion of Series D Convertible Preferred
Stock and (5) approximately 81,733,450 shares
reserved for issuance upon the conversion of the
Series R Preferred Stock being offered hereby and
the shares of Series R Preferred Stock that are
currently outstanding and are reserved for
issuance upon exercise of outstanding warrants,
based upon a conversion price of the Series R
Preferred Stock of $0.20, which is equal to 10%
of the average closing sales price of the common
stock for the 10 trading days ending three
trading days prior to June 15, 1999.
Use of proceeds............... We intend to use approximately $600,000 of the
funds generated by this rights offering to repay
a senior secured lender, and in addition expect
to repay up to $1,000,000 borrowed by Shaman to
the extent such debt has not been converted into
shares of Series R Preferred Stock at the
election of the debtholders under a credit
agreement entered into in April 1999. The
remaining proceeds will be used to fund the
initial commercialization of our first product,
SB-300, expected to be approximately $2.5 million
for initial launch, and to pursue development,
production and marketing of our botanicals
products, and for working capital, including
current liabilities and general purposes. There
is no minimum number of shares that we must sell
to complete this offering, and the proceeds we
receive in this offering could be substantially
less than the total of $15 million being offered.
Description of Series R
Convertible Preferred Stock. The Series R Preferred Stock will automatically
convert into shares of common stock on February
1, 2000. The following is the formula which will
be used to calculate the conversion of Series R
Preferred Stock: $15 divided by the conversion
price equals the number of common stock shares
into which each share of Series R Preferred Stock
is convertible. The conversion price will be
equal to the lower of $_______, which is equal to
10% of the average closing sales price of our
common stock on the OTC Bulletin Board for the 10
trading days ending three trading days prior to
the date of this prospectus, or a per share price
that is equal to 10% of the average closing sales
price of our common stock for the 10 trading days
ending three trading days prior to February 1,
2000.
6
Description of Series R
Convertible Preferred
Stock (continued)........... The Series R Preferred Stock will be entitled to
receive dividends only to the extent that our
common stock is entitled to receive dividends and
will participate with the common stock pro rata
on an as-converted to common stock basis, based
on a conversion ratio of ___ shares of common
stock for each share of Series R Preferred
Stock. In the event of liquidation, dissolution
or winding up of Shaman, the holders of the
Series R Preferred Stock are entitled to receive,
in preference to the holders of the common stock
but after payment of the liquidation preferences
of any outstanding shares of Series C Preferred
Stock and Series D Preferred Stock, an amount
equal to $15 per share. Each share of Series R
Preferred Stock will have the right to vote on
all matters submitted or required to be submitted
to the vote of the stockholders and shall have
100 votes per share.
Eligible stockholders......... Only persons who owned shares of our common
stock on _________________, 1999 will be eligible
to purchase shares of Series R Preferred Stock
in this offering.
Subscription rights........... If you are an eligible stockholder, you will have
two subscription rights:
(1)Basic subscription privilege. If you held
common stock on ____________, 1999, then you
will have the right to purchase ___ shares of
Series R Preferred Stock at a price of $15 per
share, for each share of common stock you
owned as of ____________, 1999. We require a
minimum subscription of seven shares of Series
R Preferred Stock, or $105. This means that if
you hold fewer than ___ shares of common stock
on the record date, you will be allowed to
purchase seven shares of Series R Preferred
Stock to meet the minimum subscription
requirement, which will be considered your
basic subscription privilege.
(2)Over-subscription privilege. If you elect to
purchase all of the shares that you are
eligible to purchase in your basic
subscription privilege, you may also request
to buy additional shares. In exercising this
over-subscription privilege, you must specify
the maximum number of shares of Series R
Preferred Stock that you are willing to buy at
$15.00 per share.
We will round up to the nearest whole number in
determining the number of shares that we will
issue to each stockholder pursuant to these
rights.
Non-transferabiltiy of
subscription rights........... Your basic subscription and over-subscription
rights are not transferable.
Allocation of shares.......... If we receive subscriptions for more shares
than are being offered, we will allocate
shares first to those stockholders who are
exercising their basic subscription privilege. We
will then allocate the remaining shares among
those who exercise the over-subscription
privilege, in proportion to the maximum number of
shares that each subscriber offers to purchase
above his basic subscription privilege.
7
Payment for shares............ Payment for shares may be made by delivery
of cash, check or money order.
How to subscribe ..............You should carefully complete and sign the
subscription agreement enclosed with this
prospectus and forward it to BankBoston, N.A.,
our subscription agent, whose address appears
below. Be sure to include with your subscription
agreement a check or money order for the full
amount of your subscription price, including any
shares for which you have over-subscribed.
Checks and money orders will be cashed and held
in escrow by our subscription agent, but will not
be distributed to Shaman until we accept your
subscription in whole or in part. If your
subscription is accepted in part due to
over-subscription, the subscription agent will
forward to you a check for the difference. No
interest will be paid on the funds submitted for
subscription.
Cancellation of subscription.. Once you have submitted your subscription
documents, your exercise of subscription rights
may not be revoked.
Delivery of subscription Subscription documents should be delivered to the
documents................... applicable address below:
By Mail
-------
BankBoston
Corporate Actions
P.O. Box 8029
Boston, MA 02266-8029
By Hand
-------
Securities Transfer & Reporting Services
C/O Boston EquiServe
100 Williams Street, Galleria
New York, NY 10038
By Overnight Carrier
--------------------
Boston EquiServe
Attn: Corporate Actions
150 Royall Street
Canton, MA 02021
Persons wishing to exercise
for the benefit of others... Brokers, banks, trustees and other individuals
or entities that hold common stock for the
benefit of others may, if authorized by the
beneficial owner, complete the subscription
agreement and submit it to the subscription agent
with the proper payment.
8
Delivery of certificates for
Series R Convertible
Preferred Stock............. Certificates representing shares of Series
R Preferred Stock will be delivered to
subscribers as soon as practicable after your
basic subscription has been accepted, which may
occur at any time prior to the expiration of this
offering. Our acceptance of your basic
subscription privilege or any other stockholder's
basic subscription privilege is not subject to
the receipt of any minimum amount of
subscriptions. We may accept your basic
subscription amount prior to accepting your
over-subscription amount. In that event, we will
deliver stock certificates for the basic
subscription amount, and the subscription agent
will retain the over subscription amount in
escrow until the expiration of this offering. At
that time, we will determine the amount of the
over-subscription to be accepted for each
stockholder, and will issue stock certificates
and refund any balance due to the stockholders.
We expect that this may take two weeks or longer
following our acceptance of your subscription,
due to the need to allow checks for subscription
funds to clear. There is no minimum number of
shares we must sell to complete this offering,
and we may only be able to sell substantially
less of the Series R Preferred Stock than we are
offering.
Certain federal income tax
consequences................ Your receipt or exercise of the subscription
rights should not be treated as a taxable event
for United States federal income tax purposes,
but may have other tax effects.
Expiration date of rights
offering.................... August ____, 1999, at 5:00 p.m. Eastern Daylight
Savings Time, unless extended by Shaman in its
sole discretion.
Termination of offering....... We may cancel this offering at any time. If we
cancel the offering, we will return your
subscription payment without interest.
Proposed OTC Bulletin Board
trading symbol for the
Series R Preferred Stock.... SHMNO
Questions regarding the
offering.................... If you have any questions about this offering,
including questions about subscription
procedures and requests for additional copies of
this prospectus or other documents, please
contact:
Shareholder Communications Corporation
17 State Street
New York, NY 10004
Stockholders may also telephone at
1-800-546-8622, and banks and brokers may
telephone at 1-212-805-7113.
9
Summary Financial Information
We are providing the following information to aid you in the analysis of
the offering. We derived the information for the years ended December 31, 1996,
1997 and 1998 from our audited financial statements for 1996 through 1998 which
are included elsewhere in this prospectus. We derived the unaudited information
for the quarters ended March 31, 1998 and 1999 and at March 31, 1999 (actual)
from unaudited financial statements which are not included in this prospectus.
In the opinion of management, the unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation. The results of operations for the interim
periods shown herein are not necessarily indicative of operating results for the
entire year. This information is only a summary and you should read it in
conjunction with Shaman's financial statements and related notes, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus and contained in annual
reports, quarterly reports and other information on file with the Securities and
Exchange Commission.
Statement of Operations Data
(in thousands, except per share data)
Year Ended December 31, Three Months Ended March 31,
--------------------------------- -----------------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
Revenue from collaborative agreements $ 3,406 $ 3,500 $ 2,660 $ 875 $ -
Operating expenses:
Research and development 19,138 24,140 32,393 7,513 2,468
General and administrative 3,537 4,833 5,565 1,276 1,494
Restructuring costs - - - - 2,189
-------- -------- -------- -------- --------
Total operating expenses 22,675 28,973 37,958 8,789 6,151
-------- -------- -------- -------- --------
Loss from operations (19,269) (25,473) (35,298) (7,914) (6,151)
Interest income (expense), net 479 (3,815) (1,483) (575) (186)
-------- -------- -------- -------- --------
Net loss (18,790) (29,288) (36,781) (8,489) (6,337)
Deemed dividend on Preferred Stock - - (1,742) - (2,273)
-------- -------- -------- -------- --------
Net loss applicable to Common Stockholders $(18,790) $(29,288) $(38,523) $ (8,489) $ (8,610)
========= ========= ========= ========= =========
Basic and diluted net loss per Common Share $ (27.85) $ (34.44) $ (38.31) $ (9.52) $ (5.18)
========= ========= ========= ========= =========
Shares used in calculation of basic and
diluted net loss per Common Share 675 850 1,006 892 1,663
========= ========= ========= ========= =========
The following table indicates a summary of our balance sheet at March 31,
1999, and as adjusted to reflect the sale of 1,000,000 shares of Series R
Convertible Preferred Stock after deducting estimated offering expenses of
$300,000. See "Use of Proceeds" and "Capitalization."
Balance Sheet Data
March 31, 1999
--------------------
Actual As Adjusted
------- -----------
(unaudited)
Cash, cash equivalents, and short-term investments $ 2,711 $ 17,411
Working capital (5,531) 9,169
Total assets 6,323 21,023
Long-term obligations, including current installments 4,287 4,287
Accumulated deficit (159,043) (159,043)
Total stockholders' equity (net capital deficiency) (4,167) 10,533
10
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks described below and the other information in this prospectus
before deciding to invest in shares of our Series R Convertible Preferred Stock.
The risks and uncertainties described below may not be the only ones facing
Shaman. Additional risks and uncertainties not presently known to us may also
impair our business. These risk factors supplement and do not supercede the risk
factors contained in our annual report on Form 10-K for the year ended December
31, 1998 and any other filings we make with the Securities and Exchange
Commission. If any of the following risks actually occur, our business,
operating results and financial condition and your investment in us could be
materially and adversely affected. In such case, the trading price of our stock,
both common and preferred, could decline and you might lose all or part of your
investment.
This prospectus also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including the risks faced by us described below and elsewhere in this
prospectus.
Risks Related to the Rights Offering
You will likely experience immediate and substantial dilution in the book value
of your investment
Assuming that the price at which the Series R Preferred Stock will convert
into shares of common stock is $_____, which is equal to 10% of the average
closing sales price of the common stock for the 10 trading days ending three
trading days prior to the date of this prospectus, each share of Series R
Preferred Stock will convert into __________ shares of common stock. Since the
price of the Series R Preferred Stock is $15.00 per share, this means that the
effective per share price of the common stock to be issued upon conversion will
be $__________. Although this price is substantially less than the current
market price of our common stock, it is still substantially higher than the net
tangible book value of our common stock. In the event that the actual conversion
price is equal to this price, purchasers of shares of Series R Preferred Stock,
on an as-converted into common stock basis, in this offering will experience
immediate and substantial dilution of $_______ in the pro forma net tangible
book value per share of common stock. See "Dilution."
The rights offering will significantly reduce the ownership interest of
stockholders who do not participate
If you do not exercise your subscription rights, your relative ownership
interest in Shaman will be decreased by the issuance of shares of Series R
Preferred Stock to those stockholders who exercise their subscription rights. In
addition, since the effective price of the common stock into which the Series R
Preferred Stock is convertible will be substantially below the market price of
the common stock, the issuance of the common stock upon conversion of the Series
R Preferred Stock, and subsequent sales of this common stock, will likely
depress the market price of the common stock. Any such decrease in the market
price of the common stock will in turn also increase the number of shares of
common stock into which any shares of Series C and Series D Convertible
Preferred Stock that are then outstanding are convertible, causing further
reduction in the percentage ownership of the holders of our common stock,
particularly to those stockholders who do not participate.
The Series R Preferred Stock could trade substantially below the initial
offering price
We intend to obtain prior to the effective date of this offering an opinion
from Alliant Partners that the terms of the rights offering are fair, from a
financial point of view, to our stockholders. Nevertheless, the offering price
does not necessarily bear any relationship to the book value of our assets, past
operations, cash flow, earnings, financial condition or any other established
criteria for value and should not be considered an indication of our underlying
value. Our common stock and the Series R Preferred Stock may trade at prices
below the offering price at any time after the date of this prospectus. This
offering is not being managed by any underwriter or market maker. As a result,
the price of the Series R Preferred Stock may be subject to fluctuation and
variability and may trade substantially below the initial offering price.
You will not be able to cancel your subscription prior to the expiration date of
the offering and will be unable to sell your shares until stock certificates are
issued to you, even if the trading price of the Series R Preferred Stock
declines before you are able to sell it
Since we may accept basic subscription privileges and may issue shares of
Series R Preferred Stock prior to the expiration of this offering, the Series R
Preferred Stock may begin trading before the expiration of the offering. The
public trading market price of the Series R Preferred Stock may decline before
the subscription rights expire. Once you have exercised your subscription
rights, you may not revoke your exercise for any reason. Until certificates are
delivered upon acceptance of your subscription, you will not be able to sell the
shares of Series R Preferred Stock that you purchase in the rights offering.
11
Delivery of these certificates is subject to delay. We will not pay you interest
on funds delivered to the subscription agent pursuant to the exercise of your
subscription rights. We may terminate the rights offering at any time. If we
elect to withdraw or terminate the rights offering, neither we nor the
subscription agent will have any obligation with respect to the subscription
rights except to return, without interest, any subscription payments.
If we lose the right to use our net operating losses as a result of a change in
control resulting from this offering, we could be subject to greater tax
liabilities in the future, which could adversely affect our future operating
results and cash flows and thereby could decrease our stock price
The completion of the rights offering may result in a "change of
ownership" under the provisions of the Internal Revenue Code of 1986 and similar
state code provisions. Utilization of our net operating losses and credits may
be subject to a substantial annual limitation due to these "change in ownership"
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization, which could subject us to greater tax
liabilities in future periods and adversely affect our operating results and
cash flows, which could decrease our stock trading price.
We expect to record a significant deemed dividend in connection with the
issuance of the Series R Preferred Stock, which will increase our net loss
applicable to common stockholders and could decrease our stock price
The conversion price at which the Series R Preferred Stock is convertible
into shares of our common stock will be discounted from the reported trading
price by 90%. For financial accounting purposes, a portion of the proceeds of
this offering will be allocated to this "beneficial conversion" feature and
recognized as a deemed dividend to our preferred stockholders over the period
from the date the shares are issued to February 1, 2000. This deemed dividend
will increase the net loss applicable to our common stockholders. We will be
unable to determine the exact amount of the dividend to be recognized until the
date the Series R Preferred Stock is issued, although, assuming all 1,000,000
shares are sold, and assuming a conversion price of $____, the deemed dividend
would be $____. The increase in the net loss applicaable to common stockholders
resulting from the deemed dividend could decrease our stock price.
Risks Associated with our Business
If we do not raise significant additional capital, we will be unable to
commercialize our first product or to fund continuing operations, and may be
forced to cease operations
We need substantial working capital to fund our operations. As of March
31, 1999, we had cash, cash equivalents and short-term investment balances of
approximately $2.7 million. Our long-term capital requirements will depend on
numerous factors, including among others, the extent and progress of additional
development activities related to the botanicals products, the success of any
marketing efforts related to the botanicals products, the success of any
out-licensing efforts with respect to the pharmaceuticals programs. Our
projections show that cash on hand plus approximately $1.0 million available
under a credit agreement entered into in April 1999 will be sufficient to fund
operations at the current level through mid-August 1999. Unless we are
successful in our efforts to sell or out-license our pharmaceutical products, or
to sell or establish collaborative agreements to sell our botanical products, we
will be unable to fund our current operations beyond mid-August 1999. In
addition, unless we are successful in our efforts to raise additional capital
through this offering or other offerings of equity securities, to sell or
out-license our pharmaceutical products, or to sell or establish collaborative
agreements to sell our botanical products, our cash resources will be used to
satisfy our existing liabilities, and we will therefore be unable to fund our
operations, which may result in significant delay of our planned activities or
the cessation of operations. Even if we are successful in these efforts to raise
additional funds, such funds may not be adequate to fund our operations on a
long-term basis.
The delisting of our common stock from The Nasdaq National Market on
February 2, 1999 constituted an optional redemption event for our Series D
Preferred Stock. Since we do not have adequate resources to pay to redeem the
Series D Preferred Stock, we have issued a notice to the holders of the Series D
Preferred Stock as required under our charter that prevented the redemption of
the Series D Preferred Stock. Under the terms of our charter, the effect of
preventing this redemption event by issuing the notice was to increase the
annual cumulative dividend payable to the Series D Preferred Stock holders to
$180 per share and to adjust the conversion price of the Series D Preferred
Stock to 72% of the lowest trading price for a designated period prior to the
conversion. The notice preventing the redemption of the Series D Preferred Stock
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market, The Nasdaq SmallCap Market, the American Stock Exchange
or the New York Stock Exchange.
We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and prepare for
12
commercialization of products. If we raise additional funds by issuing
equity securities, current stockholders, especially those who do not participate
in this proposed rights offering, may experience significant dilution. If we
obtain additional funds through collaborative agreements, we may be required to
relinquish rights to certain of our technologies, product candidates, products
or marketing territories that we would otherwise seek to develop or
commercialize ourselves. We may be unable to obtain adequate financing on
acceptable terms when needed. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate one or more of our research, development, or commercialization
programs, which would have a material adverse effect on our business, financial
condition and results of operations.
Possible inability to continue as a going concern increases investment risk
We have suffered recurring and significant losses from operations. We have
also relied upon debt and equity financing to fund these losses and cash flow
deficits. Cash flows from future operations, if any, may not be sufficient to
enable us to continue our current level of operations, or to meet our debts as
they come due. As a result, we may not be able to continue as a going concern.
For the year ended December 31, 1998, our independent auditors have issued a
report which contains explanatory language for the uncertainty related to our
ability to continue as a going concern. If we are to remain as a going concern,
we will need to become and remain profitable and will also need additional
financing. We may not be successful in obtaining new financing and may have to
curtail or cease operations. This factor increases the risk to investors.
We have a history of operating losses, expect continuing losses and may never
achieve profitability
We have incurred significant losses in each year since our founding in
1989 and expect to continue to incur losses for the foreseeable future. We
incurred a net loss of approximately $6.3 million for the quarter ended March
31, 1999 and additional non-cash expense of $2.3 million incurred in connection
with the issuance of the control notice to holders of Series D Preferred Stock,
and as of March 31, 1999, our accumulated deficit was approximately $159
million.
If we are to become and remain profitable, we will need to, among other
things, generate product revenues. We have not generated any product sales to
date. We have changed the direction of our operations and are pursuing a new
business model in the botanical dietary supplement industry. Our botanical
dietary supplement products are being prepared for commercial introduction. In
order to generate revenues or profits, we must successfully market these
products or enter into collaborative agreements with others who can successfully
market them. Even if our products are introduced, they may not achieve market
acceptance or we may not achieve profitability.
Our pharmaceutical product candidates and compounds are still in the
research and development stage and we have ceased all our pharmaceutical
operations. In order to generate revenues from these products, we must
out-license these product candidates. It is possible that our out-licensing
efforts may not be successful, and that we or our licensees may not obtain
required regulatory approvals. Even if our product candidates are developed and
introduced, they may not be successfully marketed or may not achieve market
acceptance or we may not achieve profitability.
The ownership interests of our common stockholders will be substantially reduced
by future issuances of stock upon exercises and conversions of currently
outstanding options, warrants and preferred stock
We currently have outstanding many securities that are convertible into
shares of common stock. The holders of common stock will be diluted upon the
exercise of outstanding options and warrants and upon conversion of the Series C
Preferred Stock and the Series D Preferred Stock. The Series D Preferred Stock
is currently convertible into common stock at a price equal to 72% of the market
price of the common stock, and commencing in August 1999, the Series C Preferred
Stock will be convertible at a price equal to 85% of the market price of the
common stock and may be freely resold on the market. The common stock issued
upon conversion of the Series C and Series D Preferred Stock will substantially
dilute the common stock and will likely depress the price of the common stock if
large amounts are offered for sale in the open market. In addition, there are
currently outstanding 16,667 shares of Series R Preferred Stock and warrants to
purchase 73,112 shares of Series R Preferred Stock. The exercise of these
warrants and the sale of common stock underlying the Series R Preferred Stock
will also dilute the common stock.
13
If we are not successful in transitioning into the botanical dietary supplements
business, we may never achieve revenues or profitability
We have transitioned our operations from pharmaceutical product
development to botanical dietary supplement development and commercialization.
We have no experience in this new industry segment and must create a new
business model. Some skills and relationships developed over time may not be
transferable to our new business. While we have been working with natural
products since our inception, we have no prior experience manufacturing or
marketing dietary supplements. We may not be successful in these activities and
may never generate revenues or profitability from our botanicals business.
Our botanical products are at various stages of development, ranging from
initial research to final formulation. We will need to conduct additional
research and development to move our product candidates toward
commercialization. Our research and development efforts on potential products
may not lead to development of products that we can successfully commercialize.
In addition, we may not be able to produce our products in commercial quantities
at acceptable costs, or to market and sell our products successfully. Our
products may also prove to have undesirable or unintended side effects that may
prevent or limit their commercial use. Accordingly, we may curtail, redirect,
suspend or eliminate our product development or commercialization at any time.
The failure or loss of third parties on which we rely to manufacture our
products and to perform other services could delay or disrupt the supply of
products we sell, and thereby could adversely affect our future operations and
financial results
We currently produce products only in pilot scale quantities and do not
have the staff or facilities necessary to manufacture products in commercial
quantities. Therefore, we must rely on collaborative partners or third party
manufacturing facilities. We may not be successful in entering into third party
manufacturing arrangements on acceptable terms, if at all. In addition, should
we or our third party manufacturers encounter delays or difficulties in
producing, packaging and distributing our finished products, our clinical trials
and market introduction and subsequent sales of our products could be adversely
affected.
Contract manufacturers must conform to certain Good Manufacturing
Practices regulations for foods on an ongoing basis. Our dependence on third
parties for the manufacture of our products may adversely affect our ability to
develop and deliver products on a timely and competitive basis.
Since we have only a limited marketing staff, we may never achieve adequate
sales and revenues to achieve profitability
We currently have minimal marketing staff. If we are unable to
successfully establish, execute and finance a complete marketing plan for our
first product, SB-300, or subsequent products, we may not achieve a successful
product entry into the marketplace and may fail to achieve adequate sales and
revenues from our botanical products to achieve profitability. It is unlikely we
would ever achieve profitability if our first product is not successfully
marketed and sold.
Costs incurred in connection with the termination of prior research and
development agreement could adversely impact our business
The research and development efforts in our discontinued diabetes program
were dependent upon arrangements with Lipha/Merck. We are currently in
negotiations with Lipha/Merck for the discontinuation of their research
agreement. Lipha/Merck will make no further research payments, and may have a
claim against us in connection with the termination of the agreement. We may
never derive any significant revenues from any of our existing or future
collaborations and may incur a loss in connection with the termination of
existing collaborations.
If we fail to compete in the intensely competitive botanical dietary supplement
industry, we may never achieve profitability
The dietary supplement business is highly competitive and is characterized
by significant pressure on pricing and heavy commitment of marketing resources
for commodity products. Although our products are proprietary, we may face
competition from start-up companies developing and marketing new commercial
products that have or claim to have similar functionality. Our failure to
successfully compete for customers would inhibit our future growth, revenues and
profitability.
If we do not succeed in marketing our botanical products over the Internet, we
may be unable to sell adequate volumes of our products or generate revenues
adequate to achieve profitability
We intend to market our first product, SB-300, directly to consumers
through the Internet on our web site. We have no experience in marketing any
product on the Internet, and we have no market visibility or brand name
awareness on the Internet. Although Internet sites marketing dietary supplements
14
do exist, the Internet may never develop as a strong or viable marketing and
distribution channel for dietary supplements. We may not be successful in using
the Internet as a direct marketing and distribution channel for our products,
and if we do not succeed, we may be unable to generate adequate revenues to
achieve profitability.
The failure of third party Internet access providers to keep our web site
operational could adversely affect our business
We will rely on third parties to provide us with access to the Internet and
to enable commerce over our web site, including providing adequate security of
information provided over the web site. Any failure by such third party
providers to provide uninterrupted access by our customers to our web site and
to ensure that commerce can be conducted on our web site could disrupt sales and
discourage use of our web site, which would have a material adverse effect on
our business.
On-line security breaches could harm our business
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We plan to
rely on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission
of confidential information to and from our web site. It is possible that
advances in computer capabilities, new discoveries or other developments will
result in a compromise or breach of the algorithms that we select for this
purpose.
We may be required to expend significant capital and other resources to
protect against the threat of such security breaches or to alleviate problems
caused by such breaches. The public's concern over the security of Internet
transactions and the privacy of users may also inhibit the growth of the web as
a means of conducting commercial transactions. To the extent that our activities
or those of third party contractors involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
expose us to a risk of loss or litigation and possible liability. Our security
measures may not be sufficient to prevent security breaches, and the failure to
prevent such security breaches could disrupt our sales and marketing efforts and
result in liability, which could have a material adverse effect on our business.
Government regulation of dietary supplements could increase our costs or
prohibit or limit sales of our products
The manufacturing, processing, formulating, packaging, labeling and
advertising of our botanical dietary supplement products are subject to
regulation in the United States by several federal agencies, including the Food
and Drug Administration, the Federal Trade Commission, the Consumer Product
Safety Commission, the Department of Agriculture and the Environmental
Protection Agency. Our activities are also regulated by various agencies of the
states and localities where we will distribute and sell our products.
The composition and labeling of dietary supplements is most actively
regulated by the FDA under the provisions of the Federal Food, Drug, and
Cosmetic Act. The FFDC Act has been revised in recent years by the Nutrition
Labeling and Education Act of 1990 and by the Dietary Supplement Health and
Education Act of 1994.
Our botanical product candidates are generally regulated as dietary
supplements under the 1994 Dietary Supplement Health and Education Act, and are,
therefore, generally not subject to pre-market approval by the FDA. However,
these product candidates are subject to FDA regulation, particularly relating to
adulteration and misbranding. For instance, we are responsible for ensuring that
all dietary ingredients in a supplement are safe, and must notify the FDA in
advance of putting a product containing a new dietary ingredient, defined as an
ingredient not marketed in the United States before October 15, 1994, on the
market and furnish adequate information to provide reasonable assurance of the
ingredient's safety. Currently, we are only pursuing products that are old
dietary ingredients and are therefore not subject to this procedure. Further, if
we make statements about a supplement's effects on the structure or function of
the body, we must, among other things, substantiate that the statements are
truthful and not misleading. In addition, our product labels must bear proper
ingredient and nutritional labeling and we must manufacture our supplements in
accordance with current Good Manufacturing Practices regulations for foods. A
product can be removed from the market if it is shown to pose a significant or
unreasonable risk of illness or injury. Moreover, if the FDA determines that the
"intended use" of any of the our products is for the diagnosis, cure,
mitigation, treatment or prevention of disease, the product would meet the
definition of a drug and would require pre-market approval of safety and
effectiveness prior to its manufacture and distribution. Our failure to comply
with applicable FDA regulatory requirements may result in, among other things,
injunctions, product withdrawals, recalls, product seizures, fines, and criminal
prosecution.
In March 1999, new FDA regulations governing the labeling of dietary
supplements took effect. The new rules require that information such as the
complete list of ingredients and levels of vitamins and minerals be included on
product labels. While in our judgment these regulatory changes are generally
favorable to the dietary supplements industry, in the future we may be subject
15
to additional laws or regulations that could have an adverse effect on the
industry and on our business. In addition, existing laws and regulations may be
repealed and applicable regulatory authorities may interpret them stringently or
unfavorably.
We cannot predict the nature of future laws, regulations, interpretations
or applications, nor can we determine what effect either additional government
regulations or administrative orders, when and if promulgated, or disparate
federal, state and local regulatory schemes would have on our business in the
future. Any change could materially and adversely affect our results of
operations and financial condition.
Governmental regulations in foreign countries where we may commence or
expand sales may prevent or delay entry into the market or prevent or delay the
introduction, or require the reformulation, of our products. Compliance with
such foreign governmental regulations is generally the responsibility of our
partners or distributors in those countries, which distributors are independent
contractors over whom we have limited or no control.
The costs of compliance with environmental laws and regulations, or our
inability or failure to comply with environmental laws and regulations, could
have a material adverse affect on our business
In connection with our research and development activities and
manufacturing of materials, we are subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and wastes. Although we believe we comply with these laws and
regulations in all material respects and have not been required to take any
action to correct any noncompliance, we may be required to incur significant
costs to comply with environmental and health and safety regulations in the
future. Our research, development, and manufacturing activities involve the
controlled use of hazardous materials and chemicals. Although we believe that
our safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, we cannot eliminate
the risk of accidental contamination or injury from these materials completely.
In the event of an accident, we could be held liable for any resulting damages.
Although we have secured insurance to mitigate such expense, any such liability
could exceed our insurance coverage and resources. Such liability could require
us to use a large amount of cash, which would not be available for funding
operations or development and commercialization of our products and would
therefore have a material adverse effect on our business, financial condition
and results of operations.
Product liability claims asserted against us in the future could exceed our
insurance coverage and result in substantial liability to Shaman
Our business exposes us to potential product liability risks that are
inherent in the development, testing, manufacture, marketing and sale of
pharmaceutical and dietary supplement products. Product liability insurance for
the pharmaceutical and dietary supplement industries generally is expensive. Our
present product liability insurance coverage, which includes coverage for acts
by third parties, including manufacturers of our product candidates, may not be
adequate. We will also need to increase our insurance coverage as we further
develop our products, and we may be unable to obtain adequate insurance coverage
against all potential claims at a reasonable cost. Some of our development and
manufacturing agreements contain insurance and indemnification provisions
pursuant to which we could be held accountable for certain occurrences. If we
are subject to product liability claims for which we have inadequate insurance,
we could be required to use a large amount of cash, which would not be available
for funding operations or development and commercialization of our products and
would therefore suffer a material adverse effect on our business, financial
condition and results of operations.
Negative publicity regarding the safety or quality of our products could
adversely impact our sales and revenues
Because we depend on consumers' perception of the safety and quality of
our products as well as similar products distributed by other companies, which
may not adhere to the same quality standards as ours, if our products or a
competitor's similar products were asserted to be harmful to consumers, our
business could be adversely affected by that negative publicity. In addition,
because we depend on perceptions, adverse publicity associated with illness or
other adverse effects resulting from consumers' failure to use our products as
we suggest, other misuse or abuse of our products or any similar products
distributed by other companies could affect the market acceptance of our
products and materially adversely affect our ability to market and sell our
products.
Furthermore, we believe the recent growth experienced by the nutritional
supplement market is based in part on national media attention regarding recent
scientific research suggesting potential health benefits from regular
consumption of certain dietary supplements and other nutritional products. This
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary, and in the
future scientific results and media attention may contain unfavorable or
16
inconsistent findings that could have a material adverse effect on our ability
to market and sell our products.
Our dependence on raw plant material from Latin and South America, Africa and
Southeast Asia makes us particularly susceptible to the risks of interruptions
in our supplies
We currently import all of the plant materials for our products from
countries in Latin and South America, Africa and Southeast Asia. We are
dependent upon a supply of raw plant material to make our products. We do not
have formal agreements in place with all of our suppliers. Continued source of
plant supply risks include:
* unexpected changes in regulatory requirements,
* exchange rates, tariffs and barriers,
* difficulties in coordinating and managing foreign operations,
* political instability, and
* potentially adverse tax consequences.
Interruptions in supply or material increases in the cost of supply could
disrupt or delay sales of our products, inhibit our ability to market our
products, and have a material adverse effect on our business, financial
condition and results of operations. If the prices of raw materials rise, we may
not be able to raise prices quickly enough to offset the effect of these
increased raw material costs, if at all.
In addition, tropical rainforests and irreplaceable plant resources found
only in such rainforests are currently threatened with destruction. The
destruction of portions of the rainforests which contain the source material
from which our current or future products are derived could disrupt supplies,
cause the cost of supplies to increase dramatically, and materially and
adversely affect our business, financial condition and results of operations.
If we fail to protect our intellectual property rights, we could lose our
ability to stop competitors from using our trademarks or selling our products
Our success will be substantially dependent on our proprietary technology.
We rely primarily on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our intellectual property. These means of protecting our proprietary rights may
not be adequate. Our trademarks are valuable assets that are very important to
the marketing of our products. Our policy is to pursue registrations for all of
the trademarks associated with our key products. We currently have 20 U.S.
patents issued, 12 U.S. patent applications pending, and one international
application filed. The pending patents may never be approved or issued. Any
issued patents may not provide sufficiently broad protection or may not prove
valid or enforceable in actions against alleged infringers. Others may
independently develop similar products, duplicate any of our products or design
around any of our patents. In addition, many foreign countries may not protect
our products and intellectual property rights to the same extent as the laws of
the United States, and there is considerable variation between countries as to
the level of protection afforded under patents and other proprietary rights.
Such differences may expose us to increased risks of commercialization in each
foreign country in which we may sell products. We also depend on unpatented
trade secrets. All of our employees have entered into confidentiality
agreements. However, others may independently develop substantially equivalent
information and techniques or otherwise gain access to our trade secrets, our
trade secrets may be disclosed or we may be unable to effectively protect our
rights to unpatented trade secrets. To the extent that we or our consultants or
research collaborators use intellectual property owned by others in their work
for us, disputes also may arise as to the rights in related or resulting
know-how and inventions. Litigation may be necessary in the future to enforce
our intellectual property rights, protect our trade secrets or to determine the
validity and scope of the intellectual property rights of others. In the event
of litigation to determine the validity of any third party's claims, we could be
required to expend significant resources and divert the efforts of our technical
and management personnel, whether or not such litigation is determined in our
favor.
Our success in outlicensing our pharmaceutical assets depends in large
part on our ability to obtain and maintain patents, protect trade secrets and
operate without infringing upon the proprietary rights of others. The patent
position of companies in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office, or PTO, or the courts regarding the breadth of
claims allowed or the degree of protection afforded under pharmaceutical
patents.
We are currently in a dispute in Europe regarding a patent for our
proanthocyanidin polymer composition, which covers the active ingredient in
SP-303/Provir. The European Patent Office, the French Patent Office, the German
Patent Office and the Australian Patent Office have each granted a patent
containing broad claims to proanthocyanidin polymer compositions and methods of
17
use of such compositions, which are similar to our specific composition, to Leon
Cariel and the Institut des Substances Vegetales. The effective filing date of
these patents is prior to the effective filing date of our foreign pending
patent application in Europe. Certain of the foreign patents have been granted
in jurisdictions where examination is not rigorous. We have instituted an
Opposition in the European Patent Office against granted European Patent No.
472531 owned by Leon Cariel and Institut des Substances Vegetales. We believe
that the granted claims are invalid and intend to vigorously prosecute the
Opposition. In the United States, the Patent and Trademark Office awarded
judgment to us in an Interference regarding this patent dispute.
We may be unsuccessful in having the granted European patent revoked or
the claims sufficiently narrowed so that our proanthocyanidin polymer
composition and methods of use are not potentially covered. The holders of the
granted European patent may assert against us claims relating to this patent. If
they are successful, we may not be able to obtain a license to this patent at
all, or at reasonable cost, or be able to develop or obtain alternative
technology to use in Europe or elsewhere. If we cannot obtain licenses to the
patent, we may not be able to introduce or sell our SP-303/Provir product in
Europe. The earlier effective filing date of this patent could limit the scope
of the patents, if any, that we may be able to obtain or result in the denial of
our patent applications in Europe or elsewhere.
Infringement claims by third parties could require us to expend significant
resources, and could, if successful, require us to obtain licenses or develop
non-infringing technology and therefore could materially adversely effect our
business
The pharmaceutical industry and, to a lesser extent, the dietary
supplement industry, is subject to frequent litigation regarding patent and
other intellectual property rights. Leading companies and organizations in these
industries have numerous patents that protect their intellectual property rights
in these areas. Third parties may assert claims against us with respect to our
existing and future products. In the event of litigation to determine the
validity of any third party's claims, we could be required to expend significant
resources and divert the efforts of our technical and management personnel,
whether or not such litigation is determined in our favor. In the event of an
adverse result of any such litigation, among other requirements, we could be
required to develop non-infringing technology or to obtain licenses to the
technology that is the subject of the litigation. We may not be successful in
developing non-infringing technology or in obtaining a license to use the
technology on commercially reasonable terms.
If any of our executive officers and key personnel leave Shaman, our ability to
launch our first product or to market our products, and our ability to develop
any new products, would be adversely effected, which would adversely effect our
business.
Our success depends in large part upon the continued contributions of our
key senior management. Our future performance also depends on our ability to
attract and retain qualified management and scientific personnel. Competition
for such personnel is intense, and we may be unable to continue to attract,
assimilate or retain other highly qualified technical and management personnel
in the future. The loss of key personnel or the failure to recruit additional
personnel or to develop needed expertise could inhibit our ability to launch and
market our products, develop new products, or effectively manage our business.
The recent delisting from the Nasdaq National Market may reduce the liquidity
and marketability of our stock and may depress the market price of our stock
On February 2, 1999, Nasdaq delisted our common stock from The Nasdaq
National Market and moved our stock to the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board. Although our securities are included on the
OTC Bulletin Board, there can be no assurance that a regular trading market for
the securities will be sustained in the future. The OTC Bulletin Board is an
unorganized, inter-dealer, over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market, and quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for The Nasdaq Stock Market. Therefore, prices for securities traded
solely on the OTC Bulletin Board may be difficult to obtain. The reduced
liquidity of our stock and the reduced public access to quotations for our stock
could depress the market price of our stock.
"Penny Stock" regulations may impose restrictions on marketability of our
stock
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that is not traded on a
national securities exchange or Nasdaq and that has a market price of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. Since our securities that are currently included on the OTC
Bulletin Board are trading at less than $5.00 per share at any time, our stock
may become subject to rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors. Accredited investors generally include
investors that have assets in excess of $1,000,000 or an individual annual
18
income exceeding $200,000, or, together with the investor's spouse, a joint
income of $300,000. For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require, among other things, the delivery, prior
to the transaction, of a risk disclosure document mandated by the SEC relating
to the penny stock market and the risks associated therewith. The broker-dealer
must also disclose the commission payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the penny stock rules may restrict the ability of broker-dealers
to sell our securities and may affect the ability of stockholders to sell our
securities in the secondary market.
Our stock price has been and may continue to be highly volatile
The price of our common stock has been particularly volatile and will
likely continue to fluctuate in the future. Announcements of technological
innovations, regulatory matters or new commercial products by us or our
competitors, developments or disputes concerning patent or proprietary rights,
publicity regarding actual or potential product results relating to products
under development by us or our competitors, regulatory developments in both the
United States and foreign countries, public concern as to the safety of
pharmaceutical or dietary supplement products, and economic and other external
factors, as well as period-to-period fluctuations in financial results, may have
a significant impact on the market price of our common stock. In addition, from
time to time, the stock market experiences significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies or industries. The market price of our common stock, like the stock
prices of many publicly traded smaller companies, has been and may continue to
be highly volatile.
Anti-takeover provisions in our charter documents and Delaware law may inhibit
potential acquisition bids for Shaman, which may adversely affect the market
price of our common stock and the voting rights of the holders of the common
stock
Certain provisions of our charter documents and Delaware law make it more
difficult for a third party to acquire, and may discourage a third party from
attempting to acquire us, even if a change in control would be beneficial to
our stockholders. These provisions could also limit the price that certain
investors might be willing to pay in the future for shares of the common stock.
The provisions include the division of our board of directors into two separate
classes, the ability of the board to elect directors to fill vacancies created
by an expansion of the board, the power of the board to amend our bylaws, and
the requirement that at least 66% of the outstanding shares are required
to call a special meeting of stockholders. Our board will also have the
authority to issue up to 93,715 additional shares of preferred stock, after
giving effect to the issuance of up to 1,300,000 shares of Series R Preferred
Stock, and to fix the price, rights, preferences, privileges and restrictions of
those shares without any further vote or action by the stockholders. The rights
of the holders of common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock with voting rights could make it more
difficult for a third party to acquire a majority of the outstanding voting
stock. Certain provisions of Delaware law applicable to us could also delay or
make more difficult a merger, tender offer or proxy contest involving Shaman,
including Section 203 of the Delaware General Corporation Law, which prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless certain conditions are
met.
19
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-1, File No.
333-78115, we have filed with the Securities and Exchange Commission. This
prospectus does not contain all of the information set forth in the registration
statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information regarding Shaman, you may refer
to the registration statement, including its exhibits and schedules. The
registration statement may be inspected at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part of the registration statement may be
obtained from the SEC upon payment of the prescribed fees.
We also file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices located at 75 Park Place, New York, New
York 10007, and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. You may also obtain copies of such material by mail from the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. You may also examine our SEC filings through the
SEC's web site at http://www.sec.gov.
20
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 1,000,000 shares of
Series R Convertible Preferred Stock offered by this prospectus will be
$14,700,000, after deducting estimated offering expenses of $300,000. We intend
to use the funds generated by this offering to retire certain existing debt,
pursue development, production and marketing of products within the botanicals
business and for working capital purposes.
We intend to use approximately $600,000 of the net proceeds of this
offering to repay indebtedness to GATX/MMC Partnership No. 1, and up to
$1,000,000 of indebtedness to certain stockholders, officers, and directors of
Shaman under a credit agreement entered into in April 1999, unless such debt is
converted at the election of the holders of this debt into Series R Preferred
Stock. As of the date of this prospectus, we have not borrowed any amount under
this credit agreement. We expect to use the balance of the net proceeds for the
initial commercialization of our first product, SB-300, currently budgeted at
approximately $2.5 million, and for the development, production, and marketing
of our other botanical product candidates, for working capital, including
current liabilities and for general corporate purposes. In the event that less
than all of the shares of Series R Preferred Stock are sold, we will still be
required to repay approximately $500,000 in outstanding indebtedness. To the
extent less than all of the shares of Series R Preferred stock are sold, we will
have fewer funds available for the commercialization of SB-300 and for the
funding of our operations.
The amounts actually expended for these purposes may vary significantly
depending upon numerous factors, including the amount raised by this offering,
progress of our research and development programs, the status of competitive
products and the availability of alternative financing, including agreements
with other companies relating to the development and marketing of our products
and the other factors described under "Risk Factors." Accordingly, we will
retain broad discretion in the allocation of the net proceeds of this offering.
Pending such uses, the net proceeds of this offering will be invested in United
States government securities, other investment grade debt securities and other
short-term investments. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
21
PRICE RANGE OF COMMON STOCK
Since February 2, 1999, Shaman's common stock has been traded on the OTC
Bulletin Board of the National Association of Securities Dealers, Inc. under the
symbol "SHMN." Our common stock was traded on the Nasdaq Stock Market from our
initial public offering on January 26, 1993 until February 1, 1999.
Set forth below is the range of high and low closing sale prices for
Shaman's common stock for the periods indicated, as reported by the OTC Bulletin
Board or The Nasdaq Stock Market, as applicable, and as adjusted for the
1-for-20 reverse stock split effected on June 22 1999:
High Low
------ -----
Fiscal Year 1997
First Quarter Ended March 31, 1997 $ 125.00 $ 77.60
Second Quarter Ended June 30, 1997 $ 123.80 $ 93.80
Third Quarter Ended September 30, 1997 $ 140.00 $ 102.40
Fourth Quarter Ended December 31, 1997 $ 141.20 $ 85.00
Fiscal Year 1998
First Quarter Ended March 31, 1998 $ 110.00 $ 82.60
Second Quarter Ended June 30, 1998 $ 100.00 $ 88.20
Third Quarter Ended September 30, 1998 $ 80.00 $ 63.80
Fourth Quarter Ended December 31, 1998 $ 66.20 $ 21.80
Fiscal Year 1999
First Quarter Ended March 31, 1999 $ 40.60 $ 3.40
Second Quarter Ending June 30, 1999
(through June 15, 1999) $ 4.60 $ 1.20
DIVIDEND POLICY
We have paid no cash dividends on the common stock since our inception and
do not anticipate paying any dividends in the foreseeable future. Our loan
agreement with MMC/GATX Partnership No. 1 restricts the payment of cash
dividends on any equity security so long as any amount remains outstanding under
such loan agreement. In addition, Shaman's charter requires that Shaman pay all
required dividends to the holders of Series C Preferred Stock and Series D
Preferred Stock, respectively, prior to the payment of dividends to the holders
of our common stock or Series R Convertible Preferred Stock. At March 31, 1999,
we had an accumulated deficit of $159.0 million and, until this deficit is
eliminated, we will be prohibited from paying cash dividends except out of net
profits.
22
CAPITALIZATION
The following table sets forth the unaudited actual capitalization of
Shaman as of March 31, 1999 and as adjusted to reflect the sale of 1,000,000
shares of Series R Preferred Stock offered hereby at the estimated public
offering price of $15.00 per share and after deducting the estimated offering
expenses of $300,000.
March 31, 1999
------------------------------
Actual (2) As Adjusted (1)
----------- ---------------
(unaudited)
(in thousands, except share and per share amounts)
Long-term debt and capital lease obligations, including current portion........... $ 4,287 $ 4,287
Stockholders' equity
Preferred Stock, $.001 par value per share, 2,000,000 shares authorized;
Series A Preferred Stock, 400,000 shares authorized and designated;
400,000 shares issued and outstanding, actual and as adjusted....... -- --
Series C Preferred Stock, 200,000 shares authorized and designated;
115,958 issued and outstanding, actual and as adjusted.............. -- --
Series D Preferred Stock, 6,285 shares authorized and designated;
2,075 shares issued and outstanding, actual and as adjusted......... -- --
Series R Preferred Stock 1,300,000 shares authorized and designated;
1,000,000 shares issued and outstanding, as adjusted................ -- 1
Common Stock, $.001 par value per share, 70,000,000 shares authorized;
1,929,358 shares issued and outstanding, actual and as adjusted..... 2 2
Additional paid-in capital.................................................. 154,990 169,689
Deferred compensation and other adjustments................................. (116) (116)
Accumulated deficit......................................................... (159,043) (159,043)
---------- ----------
Total stockholders' equity........................................... (4,167) 10,533
---------- ----------
Total capitalization................................................. $ 120 $ 14,820
========== ==========
- ----------
(1) Adjusted to reflect the sale of 1,000,000 shares of Series R Convertible
Preferred Stock at the estimated public offering price of $15.00 per share
and the application of the estimated net proceeds of approximately $14.7
million. See "Use of Proceeds."
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
23
SELECTED FINANCIAL DATA
We are providing the following information to aid you in the analysis of
the offering. We derived the information for the years ended December 31, 1994,
1995, 1996, 1997 and 1998 from our audited financial statements for 1994 through
1998. The 1996 through 1998 financial statements are included elsewhere in this
prospectus. We derived the unaudited information for the quarters ended March
31, 1998 and 1999 and at March 31, 1999 from unaudited financial statements
which are not included in this prospectus. In the opinion of management, the
unaudited financial statements include all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation. The results
of operations for the interim periods shown herein are not necessarily
indicative of operating results for the entire year. This information is only a
summary and you should read it in conjunction with Shaman's financial statements
(and related notes) and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this prospectus and
contained in annual reports, quarterly reports and other information on file
with the Securities and Exchange Commission.
Year Ended December 31, March 31, 1999
------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenue from collaborative agreements $ 1,360 $ 2,210 $ 3,406 $ 3,500 $ 2,660 $ 875 $ -
Operating expenses:
Research and development 18,643 17,635 19,138 24,140 32,393 7,513 2,468
General and administrative 3,545 3,705 3,537 4,833 5,565 1,276 1,494
Restructuring costs - - - - - - 2,189
-------- -------- ------- -------- -------- -------- --------
Total operating expenses 22,188 21,340 22,675 28,973 37,958 8,789 6,151
-------- -------- -------- -------- -------- -------- --------
Loss from operations (20,828) (19,130) (19,269) (25,473) (35,298) (7,914) (6,151)
Interest income 2,045 1,695 1,082 1,218 550 232 73
Interest expense (698) (569) (603) (5,033) (2,033) (807) (259)
-------- -------- -------- -------- -------- -------- --------
Net loss (19,481) (18,004) (18,790) (29,288) (36,781) (8,489) (6,337)
Deemed dividend on Preferred Stock - - - - (1,742) - (2,273)
-------- -------- -------- -------- -------- -------- --------
Net loss applicable to Common Stockholders $(19,481) $(18,004) $(18,790) $(29,288) $(38,523) $ (8,489) $ (8,610)
========= ========= ========= ========= ========= ========= =========
Basic and diluted net loss per Common Share(1) $ (30.02) $ (27.36) $ (27.85) $ (34.44) $ (38.31) $ (9.52) $ (5.18)
========= ========= ========= ========= ========= ========= =========
Shares used in calculation of basic and
diluted net loss per Common Share(1) 649 658 675 850 1,006 892 1,663
========= ========= ========= ========= ========= ========= =========
December 31, March 31,
----------------------------------------------------- ----------
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- ----------
Balance Sheet Data:
Cash, cash equivalents, and short-term investments $ 39,843 $ 26,665 $ 16,533 $ 21,421 $ 9,165 $ 2,711
Working capital 33,422 22,850 9,641 14,547 1,043 (5,531)
Total assets 49,673 33,810 22,377 26,753 13,139 6,323
Long-term obligations, including current installments 5,017 6,041 4,816 6,802 5,219 4,287
Senior convertible notes - - - 9,967 - -
Accumulated deficit (45,828) (63,832) (82,622) (111,910) (150,434) (159,043)
Total stockholders' equity (net capital deficiency) $ 41,300 $ 24,205 $ 11,977 $ 5,148 $ 2,110 $ (4,167)
- ----------
(1) Basic and diluted net loss per share is based on the weighted average number
of Common Shares outstanding during the period. We have not paid any cash
dividends on our capital stock since inception.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are focused on the discovery, development, and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
We intend to develop and commercialize our Shaman-branded products through our
recently established botanicals division. We also have available for
out-licensing a pipeline of botanical product candidates, as well as novel
pharmaceutical products for major human diseases developed by isolating active
compounds from tropical plants with a history of medicinal use.
Until December 1998, we were focused solely on developing pharmaceutical
products derived from tropical plant sources. Our pharmaceutical business model
was dependent upon our ability to launch our first pharmaceutical product in
1999. As a result of the U.S. Food and Drug Administration response to our
proposed fast-track New Drug Application package for our leading pharmaceutical
product candidate, SP-303/Provir and insufficient resources to continue the
costly process of conducting a second pivotal trial which would have created
significant delays, we restructured our business to focus on the development and
marketing of dietary supplements.
Results of Operations for the Quarters Ended March 31, 1998 and 1999
The results of operations for the quarter ended March 31, 1998 relate to
our pharmaceutical operations. Since we ceased operations of our pharmaceutical
business and focused our efforts in our botanical business in February 1999, our
results of operations for the quarter ended March 31, 1999 and future periods
are not comparable to the same periods last year.
Restructuring Costs
On February 1, 1999, we initiated a restructuring plan in which we closed
down the operations of our pharmaceutical business. We now intend to out-license
worldwide marketing rights to all our pharmaceutical compounds and will focus
our efforts on the development and commercialization of botanical dietary
supplements. The restructuring plan includes: cessation of pharmaceutical
research and development activities and related operations; outlicensing of all
of our current pharmaceutical research programs; reduction in force of
approximately 60 employees, which was then 65% of our workforce; sale or
disposal of all of our fixed assets that are not needed for our botanicals
business; and sub-leasing a portion of our facility.
The termination of 60 employees occurred on February 1, 1999. The
following table summarizes Shaman's restructuring activities as of March 31,
1999.
Total
Restructuring Balance
Category Charges Spending March 31, 1999
---------------------------- ------------- -------- --------------
(in thousands)
Severance and related charges $ 467 $ 352 $ 115
Write-off impaired assets 122 122 0
Cancellation of contracts 1,200 0 1,200
Other 400 0 400
-------- -------- --------
$ 2,189 $ 474 $ 1,715
======== ======== ========
We recorded collaborative revenues of $875,000 and $0 for the quarters
ended March 31, 1998 and 1999, respectively. Revenues for the first quarter of
1998 resulted from research funding from Lipha S.A., a wholly-owned subsidiary
of Merck KGaA, Darmstadt, Germany and research funding from our collaboration
with Ono Pharmaceutical Co. Ltd. of Osaka, Japan, which expired in May 1998.
In addition, we have approximately $969,000 recorded as deferred revenue
which we have not yet earned. We are currently in negotiations with Lipha/Merck
for the discontinuation of the research and development agreement.
25
In December 1998, we renegotiated the terms of the existing agreement with
Lipha/Merck. Under the new terms, we forgave $6.0 million in aggregate payments
due over the remaining term of the original agreement in exchange for a one-time
up-front payment of an aggregate of $2.0 million, consisting of a $1.0 million
research payment which remains recorded as deferred revenue that we have not yet
earned, and a $1.0 million equity investment. We are currently in negotiations
with Lipha/Merck for the discontinuation of this agreement. There will be no
further research payments from Lipha/Merck. See "Risk Factors Costs incurred in
connection with the termination of prior research and development agreement
could adversely impact our business".
We incurred research and development expenses of $7.5 million and $2.5
million, of which $149,000, was related to the research and development of the
botanicals division for the quarters ended March 31, 1998 and 1999,
respectively. This decrease was primarily attributable to the closing down of
our pharmaceutical business as of February 1, 1999. Research and development
expenses are expected to decrease in 1999 as compared to 1998 annual and quarter
ended March 31, 1998 as we focus our efforts in our botanicals business,
effective February 1, 1999.
General and administrative expenses were $1.3 million and $1.5 million for
the quarters ended March 31, 1998 and 1999, respectively. This increase was
primarily attributable to legal dispute costs. General and administrative
expenses are expected to decrease in 1999 since we have ceased operations in our
pharmaceutical business and focused our efforts in our botanicals business,
effective February 1, 1999.
Interest income was $232,000 and $73,000 for the quarters ended March 31,
1998 and 1999, respectively. Interest income decreased for the period ended
March 31, 1999, compared with the period ended March 31, 1998, due to lower
average cash and investment balances as we continue to fund our operations.
Interest expense was $807,000 and $259,000 for the quarters ended March 31, 1998
and 1999, respectively. Interest expense decreased for the period ended March
31, 1999, compared with the period ended March 31, 1998 due to lower average
debt balances.
Results of Operations for the Years Ended December 31, 1996, 1997 and 1998
The results of operations for the years ended December 31, 1996, 1997 and
1998 were for our pharmaceutical operations. Our results of operations for
fiscal year 1999 will not be comparable, as we ceased operations of our
pharmaceutical business and focused our efforts in our botanical business in
first quarter of 1999.
We recorded collaborative revenues of $3.4 million, $3.5 million and $2.7
million for 1996, 1997, and 1998, respectively. Revenues for 1998 resulted from
research funding from our collaboration with Lipha/Merck and research funding
from our collaboration with Ono Pharmaceutical Co. Ltd., which expired in May
1998. Revenues for 1997 also resulted from research funding from our
collaboration with Lipha/Merck and Ono. Revenues for 1996 resulted from research
funding from our collaboration with Ono, an additional $1.0 million payment from
Ono for enhanced rights to our antidiabetic compounds, and research payments and
access fees from our collaboration with Lipha/Merck.
We incurred research and development expenses of $19.1 million, $24.1
million, and $32.4 million for 1996, 1997 and 1998, respectively. These expenses
include salaries for scientific personnel, clinical development costs,
laboratory supplies, patent protection and consulting fees, travel, plant
collections, facilities expenses and other expenditures relating to research and
product development. Research and development expenses increased $5.0 million in
1997 compared with 1996, and $8.3 million in 1998 compared with 1997. The
increase in 1997 was primarily attributable to an increase in clinical
development activities with respect to SP-303/Provir of $3.8 million and to
increased scientific salaries of $1.2 million, which were partially offset by
reduced expenses for clinical development activities for nikkomycin Z of $1.1
million. The increases in 1998 were primarily attributable to the completion of
a $7.0 million Phase III human clinical trial for SP-303/Provir for the
treatment of diarrhea in people with AIDS and $2.4 million of the manufacturing
scale-up and to increased scientific salaries of $1.2 million, which were
partially offset by a reduction of costs associated with our diabetes program of
$2.8 million. Research and development expenses are expected to decrease in 1999
as we ceased operations in our pharmaceutical business and focused our efforts
in our botanicals business, effective February 1, 1999.
General and administrative expenses were $3.5 million, $4.8 million and
$5.6 million for 1996, 1997 and 1998, respectively. These expenses include
administrative salaries, consulting, legal, travel and other operating expenses.
General and administrative expenses increased $1.3 million in 1997 compared to
1996, and increased $0.7 million in 1998 compared to 1997. The increase in 1997
was primarily attributable to an increase in compensation and marketing research
of $388,000 related to development of SP-303/Provir, as well as additional legal
expenses of $631,000 primarily related to certain disputes related to our
intellectual property rights. The increase in 1998 over 1997 was primarily
attributable to additional costs, including an increase in compensation,
26
consulting expenses and commercial development activities of $530,000, related
to the development of SP-303/Provir. General and administrative expenses are
expected to decrease in 1999 as we ceased operations in our pharmaceutical
business and focused our efforts in our botanicals business, effective February
1, 1999.
Interest income was $1.1 million, $1.2 million and $0.6 million for 1996,
1997 and 1998, respectively. Interest income increased $100,000 in 1997 compared
with 1996, and decreased $700,000 in 1998 compared with 1997. Interest income
fluctuations have been consistent with changes in average cash and investment
balances with which we substantially funded our operations in 1996, 1997 and
1998. The balances of cash, cash equivalents and investments were $16.5 million,
$21.4 million and $9.2 million at December 31, 1996, 1997 and 1998,
respectively.
Interest expense was $603,000, $5.0 million and $2.0 million for 1996,
1997 and 1998, respectively. Interest expense increased in 1997 compared with
1996 principally due to a $3.7 million non-cash interest charge related to the
issuance of senior convertible notes in June 1997, as well as the interest
expense related to our secured debt financing in May 1997. Interest expense
decreased in 1998 compared with 1997 principally due to a $3.7 million non-cash
interest charge related to the issuance of senior convertible notes in June
1997, offset by interest expense related to capital lease agreements and the
secured debt financing. Interest expense in the future will be dependent in part
on our capacity to finance future operating and equipment needs.
Delisting of our common stock from Nasdaq National Market
The delisting of our common stock from The Nasdaq National Market on
February 2, 1999 constituted an optional redemption event for our Series D
Preferred Stock. Since we do not have adequate resources to pay to redeem the
Series D Preferred Stock, we have issued a notice to the holders of the Series D
Preferred Stock as required under our charter that prevented the redemption of
the Series D Preferred Stock. Under the terms of our charter, the effect of
preventing this redemption event by issuing the notice was to increase the
annual cumulative dividend payable to the Series D Preferred Stock holders to
$180 per share and to adjust the conversion price of the Series D Preferred
Stock to 72% of the lowest trading price for a designated period prior to the
conversion. The notice preventing the redemption of the Series D Preferred Stock
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market, The Nasdaq SmallCap Market, the American Stock Exchange
or the New York Stock Exchange. In connection with the issuance of such notice,
we recorded a deemed dividend charge in the amount of $2,273,614 in the first
quarter of 1999.
At December 31, 1998, we had federal net operating loss carryforwards of
approximately $48.6 million. The federal net operating loss carryforwards will
expire at various dates beginning in 2004 through 2013, if not sooner utilized.
Utilization of the net operating losses and credits is subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986, as amended. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Liquidity and Capital Resources
As of March 31, 1999, our cash, cash equivalents, and investments totaled
approximately $2.7 million, compared with $9.2 million at December 31, 1998. We
invest excess cash according to our investment policy that provides guidelines
with regard to liquidity, type of investment, credit ratings and concentration
limits.
In April 1999, we entered into a credit facility and note purchase
agreement with certain investors, stockholders, key executives and members of
the board of directors, pursuant to which we may borrow up to approximately $1.0
million at any time commencing on May 14, 1999 and until the earlier of the
completion of a registered public offering of our equity securities, or
September 1, 1999. Any convertible promissory notes issued pursuant to the
credit agreement will be due and payable on the earlier of (1) 30 days
subsequent to the completion of the public offering, or (2) December 31, 1999.
Interest on the convertible promissory notes will accrue at an annual rate of
12%. The convertible promissory notes, if and when issued, will be secured by
certain assets of Shaman and will be convertible into shares of the class and
series of equity securities offered by us in the first registered public
offering effected by us after the date of the credit agreement, or into common
stock if no such offering occurs prior to December 31, 1999. In connection with
the credit agreement, we issued warrants to purchase shares of the same class
and series of equity securities as those into which the debt is convertible. The
number of shares subject to these warrants is equal to 50% of the debt amount
divided by the per share sale price of the shares sold in the public offering.
These warrants are exercisable, on a cashless basis, commencing on April 5,
1999, and through the third anniversary date of the public offering. The
conversion price of the convertible promissory notes and the exercise price of
the warrants is equal to the per share offering price in the public offering. If
a public offering is not completed prior to December 31, 1999, then the
27
conversion price of the convertible promissory notes and the exercise price of
the warrants will be the lower of $0.05 per share of our common stock, or 1/3 of
the five-day weighted average trading price of our common stock for the period
ending three trading days prior to conversion or exercise.
The delisting of our common stock from The Nasdaq National Market
constituted an Optional Redemption Event, as defined in our Certificate of
Incorporation, for the Series D Preferred Stock. In connection therewith, on
February 4, 1999, we issued a Control Notice, as defined in the Certificate of
Incorporation, that prevented the redemption of the Series D Preferred Stock.
This Control Notice will remain in effect for as long as we are not listed on
any of The Nasdaq National Market, The Nasdaq SmallCap Market, the American
Stock Exchange or the New York Stock Exchange. Delivery of the Control Notice
had the effect of increasing the annual dividend to $180 per share and adjusting
the conversion price of the Series D Preferred Stock to 72% of the low trading
price during a designated time period prior to the conversion.
In December 1998, we completed a private sale of 240,604 shares of common
stock for aggregate net proceeds of approximately $7.1 million. In connection
with this offering, we have committed a five-year, 3.6% royalty on net sales of
SP-303/Provir, if any, in the United States for distribution to HIV/AIDS
charities. We intend to honor this royalty payment through the sale of our first
botanical product, SB-300, to be initially marketed to the HIV/AIDS community.
In December 1998, we issued 37,360 shares of common stock to consultants
for services rendered. We recorded an expense of approximately $1.1 million in
conjunction with the consulting services.
In October 1998, we completed the sale to the public of an aggregate of
140,880 shares of our Series C Convertible Preferred Stock for aggregate gross
proceeds of $14.1 million. Each share of Series C Preferred Stock is entitled to
receive cumulative dividends paid semi-annually to the holders of record of such
shares as follows: (1) an annual stock-on-stock dividend, paid in arrears, in
shares of common stock, calculated as the quotient of $10.00 divided by 85% of
the average closing price of the common stock for the 10-day trading period
ending three trading days prior to the date the dividend is paid; plus (2) a
cash amount equaling 0.00005% of our U.S. net sales of our SP-303/Provir product
for the treatment of diarrhea, if any, for the preceding two calendar quarters
less $5.00. If, under Delaware law, we are unable to pay the cash portion of the
dividends, then the cash portion will be paid in shares of common stock valued
at 85% of the average closing price of the common stock for the 10-day trading
period ending three trading days prior to the date on which the dividend is
paid. We intend to honor this royalty portion of the dividend through the sale
of our first botanical product, SB-300, to be initially marketed to the HIV/AIDS
community. Each share of the Series C Preferred Stock was convertible for a
period of 30 days after August 18, 1998, and will be convertible again
commencing 12 months after the initial issuance date at the election of each
holder, and automatically on the sixth anniversary of the initial issuance date
into the greater of (1) 0.8333 shares of common stock or (2) such number of
shares of common stock as equals $100, which was the price paid per share of
Series C Preferred Stock, divided by 85% of the average closing price of the
common stock reported by Nasdaq for the 10-day trading period ending three
trading days prior to the date of conversion. The common stock is currently
trading on the OTC Bulletin Board. During the initial 30-day conversion period
for the Series C Preferred Stock, 24,922 shares of the Series C Preferred Stock
were converted into an aggregate of 93,077 shares of common stock. In connection
with the issuance of the Series C Preferred Stock, we recognized a non-cash
charge in the amount of $679,000.
In June 1998, we entered into stock purchase agreements with certain of
our stockholders pursuant to which we acquired the right to sell to these
stockholders, subject to certain conditions up to an aggregate of 7,000 shares
of Series B Custom Convertible Preferred Stock for an aggregate purchase price
of $7,000,000. The stock purchase agreements were terminated upon the closing of
the Series C Convertible Preferred Stock financing in October 1998. As
consideration for entering into the stock purchase agreements, we issued to
these stockholders warrants to purchase an aggregate of 17,500 shares of common
stock. The warrants are exercisable for a period of five years at an exercise
price per share equal to 115% of the average trading price of the common stock
during specified measurement periods. We have attributed a value of $1.5 million
to these warrants.
In June 1997, we issued $10.4 million of senior convertible notes. The
notes mature in August 2000 and bear interest at a rate of 5.5% per annum.
Interest on the notes was payable in common stock or cash at our option.
Initially, the notes were convertible into common stock at 100% of the low
trading price during a designated time period prior to conversion provided that
the conversion price would not be less than $110.00 per share. Starting in
November 1997, the notes were convertible into common stock at a 10% discount
from the low trading price during a designated time period prior to the
conversion, with a floor of $110.00 through March 31, 1998, pursuant to a
November 1997 understanding with the note holders to revise the terms of the
notes (see next paragraph). Of the notes issued, $400,000 was issued to the
placement agent as part of the placement fee. We paid the placement agent an
additional $300,000 in cash. The placement fees and other offering costs were
28
capitalized in other assets as deferred issuance costs and were amortized to
interest expense over the life of the notes to the extent the notes were not
converted to common stock. The net proceeds totaled approximately $9.5 million
after the placement agent's fees and other offering expenses.
In March 1998, Shaman and the purchasers of the notes entered into an
amendment agreement with the purchasers of the notes in order to avoid
conversion of the notes at a price that would be unduly dilutive to our existing
stockholders. As consideration for entering into the amendment agreement, we
issued to the purchasers of the notes warrants to purchase an aggregate of 6,875
shares of common stock. The warrants are exercisable through March 18, 2001 at
an exercise price of $150.00 per share. We have attributed a value of $309,000
to these warrants. On December 10, 1998, we issued to the note holders an
aggregate of 4,784 shares of the Series D Convertible Preferred Stock in
exchange for the cancellation of an aggregate of $4.8 million, including accrued
interest, of the notes. Each share of Series D Convertible Preferred Stock is
entitled to receive, when, as, and if declared by the Board of Directors out of
funds legally available for such purpose, cumulative dividends at the rate of
$55 per annum. Dividends on the Series D Preferred Stock are payable in cash or
shares of common stock or any combination of cash and shares of common stock, at
our option and are payable quarterly on February 1, May 1, August 1 and November
1 of each year. Each share of Series D Preferred Stock is convertible, at any
time, into the common stock at the lesser of (1) $22.50 per share or (2) 90% of
the low trading price during a designated time period prior to the conversion.
In addition, the holders received an aggregate of 38,373 warrants to purchase
additional shares of common stock in exchange for surrendering the redemption
rights previously held by them under the notes. The warrants were priced at 150%
of the average closing price for the month of December 1998. We have attributed
a value of $943,680 to these warrants.
In May 1997, we obtained a $5.0 million, 36-month term loan to pay off
pre-existing debt, finance capital asset acquisitions and finance continued
research and clinical development of our product candidates. The loan carries an
interest rate of 14.58% and is payable in equal monthly installments over the
term of the loan. The lender was granted ten-year warrants to purchase 10,000
shares of common stock at $125.00 per share. We have attributed a value of
$648,000 to these warrants.
In April 1997, we sold 80,000 shares of common stock at $99.40 per share
in a registered direct public offering, which yielded gross proceeds of $7.95
million. The net proceeds of approximately $7.8 million from this offering were
used for the continued research and clinical development of our product
candidates.
In January 1997, we sold 100,000 shares of common stock in a registered
direct public offering for gross proceeds of $9.0 million. The net proceeds of
approximately $8.1 million from this offering were used for the continued
research and clinical development of our product candidates.
In September 1996, we entered into a five-year collaborative agreement
with Lipha/Merck to jointly develop our antihyperglycemic drugs. Upon signing
the collaboration, we received an annual research fee of $1.5 million which was
amortized to revenue over twelve months, as work was performed. We also received
approximately $3.0 million for 19,446 shares of common stock priced at $154.20
per share, representing a 20% premium to the weighted average price of the
common stock at the time of purchase. In exchange for development and marketing
rights in all countries except Japan, South Korea, and Taiwan, which countries
are covered under an earlier agreement between Shaman and Ono, Lipha/Merck
agreed to provide up to $9.0 million in research payments and up to $10.5
million in equity investments priced at a 20% premium to a multi-day volume
weighted average price of the common stock at the time of purchase. The
agreement also provided for additional preclinical and clinical milestone
payments to us in excess of $10.0 million per compound for each
antihyperglycemic drug developed and commercialized. Lipha/Merck agreed to bear
all pre-clinical, clinical, regulatory and other development expenses associated
with the compounds selected under the agreement. In addition, as products are
commercialized, we would receive royalties on all product sales outside the
United States and up to 50% of the profits, if we exercised our co-promotion
rights, or royalties on all product sales in the United States. Certain of the
milestone payments would be credited against future royalty payments, if any,
due to us from sales of products developed pursuant to the agreement.
In December 1998, we renegotiated the terms of the existing agreement with
Lipha/Merck. Under the new terms, we forgave $6.0 million in aggregate payments
due over the remaining term of the original agreement in exchange for a one-time
up-front payment of an aggregate of $2.0 million, consisting of a $1.0 million
research payment, which remains recorded as deferred revenue that we have not
yet earned, and a $1.0 million equity investment.
29
For the year ended December 31, 1998, we recognized $1.9 million in
revenue from the Lipha/Merck collaboration. In addition, we received a total
$2.5 million for issuance of 57,762 shares of common stock, of which 40,650
shares were priced at $37.00 per share in September 1998 and 17,112 shares were
priced at $58.40 per share in December 1998, each representing a 20% premium to
the weighted average price of the common stock at the time of purchase.
On February 1, 1999, we discontinued all the research and development
activities related to the collaborative agreement. We are currently in
negotiations with Lipha/Merck for the discontinuation of this research
agreement. There will be no further research payments from Lipha/Merck.
In July 1996, we closed a private placement pursuant to Regulation S under
the Securities Act of 1933, as amended, in which we received gross proceeds of
$3.3 million for the sale of 400,000 shares of Series A Convertible Preferred
Stock and for the issuance of a six-year warrant to purchase 27,500 shares of
common stock at an exercise price of $203.60 per share. The Preferred Stock does
not carry a dividend obligation and will convert into common stock no later than
July 23, 1999 at a price per share between $120.00 and $163.00, depending on the
market value of common stock during the period prior to conversion. The holder
of preferred shares is entitled to a liquidation preference of $163.00 per
share.
We have incurred substantial additional costs in the first quarter of 1999
relating to our restructuring in February 1999. We expect to continue to incur
losses at least through 1999. Our cash, cash equivalents and investment balances
are approximately $2.7 million at March 31, 1999. We anticipate that our cash,
cash equivalents and investment balances, and the net proceeds from this
offering, assuming all of the shares are sold in the offering, will be adequate
to fund our operations through at least the end of 1999. Our projections show
that cash on hand plus approximately $1.0 million available under the Credit
Agreement will be sufficient to fund operations at the current level through
mid-August, 1999. Unless we are successful in our efforts to sell or out-license
our pharmaceutical products, or to sell or establish collaborative agreements to
sell our botanical products, we will be unable to fund our current operations
beyond mid-August, 1999. In addition, unless we are successful in our efforts to
raise additional capital through this offering or other offerings of equity
securities, to sell or out-license our pharmaceutical products, or to sell or
establish collaborative agreements to sell our botanical products, our cash
resources will be used to satisfy our existing liabilities, and we will
therefore be unable to fund the operations of our botanicals business, which may
result in significant delay of our planned activities or the cessation of
operations. Even if we are successful in these efforts to raise additional
funds, such funds may not be adequate to fund the operations of our botanicals
business on a long-term basis. If additional funds are raised by issuing equity
securities, significant dilution to existing stockholders may result and there
can be no assurance that additional funding will be available on reasonable
terms, or at all.
Year 2000 Compliance
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Based on recent assessments, we have determined that we will be required
to certify portions of our software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. We presently believe that
with modifications or replacements of existing software and certain hardware,
the year 2000 issue can be mitigated. We believe that such modification and
replacements are not significant, and should such modification and replacements
be delayed there would be no material impact on our operations.
We are approximately 85% complete with the assessment of all internal
systems that could be significantly affected by the year 2000. To date, all
assessments have been performed by our employees, and we have therefore not
incurred any external costs. We estimate that upgrades for those systems not in
compliance will total approximately $280,000. After the assessment phase is
completed, we will have to purchase, install and test the upgrades to ensure
they meet internal year 2000 compliance. We expect to complete our internal year
2000 readiness program in the third quarter of 1999. We are in the process of
asking our significant suppliers and subcontractors that do not share
information systems with us whether their systems are year 2000 compliant. To
date, we are not aware of any suppliers or subcontractors with a year 2000 issue
that would materially impact our results of operations, liquidity, or capital
resources. However, we have no means of ensuring that suppliers or
subcontractors will be year 2000 ready. The inability of our suppliers or
subcontractors to complete their year 2000 resolutions to process in a timely
fashion could materially and adversely impact us.
30
We currently have no contingency plans in place in the event we do not
complete all phases of the year 2000 program. We plan to evaluate the status of
completion in second quarter 1999 and determine whether such a plan is
necessary.
Qualitative and Quantitative Disclosures About Market Risk
We are exposed to market risk, including changes to interest rates. A
discussion of our accounting policies for financial instruments and further
disclosures relating to financial instruments is included in the Summary of
Significant Accounting Policies in the Notes to Financial Statements.
We monitor the risks associated with interest rates and foreign currency
exchange risks and have established policies and business practices to protect
against these and other exposures. We place our investments in instruments that
meet high credit quality standards, as specified in our investment policy
guidelines; the policy also limits the amount of credit exposure to any one
issue, issuer, or type of instrument and does not permit derivative financial
instruments in our investment portfolio. As a result, we do not expect any
material loss with respect to our investment portfolio.
The following table provides information about our financial instruments
that are sensitive to changes in interest rates. For investment securities, the
table presents principal cash flows and related weighted-average interest rates
by expected maturity dates.
Fair Value
at
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
---- ---- ---- ---- ---- ---------- ----- --------
ASSETS
- ------------------------
(in thousands)
Cash equivalents $2,955 - - - - - $2,955 $2,945
Weighted average
interest rate 5.28%
Short-term investments $3,282 - - - - - $3,282 $3,277
Weighted average
interest rate 5.76%
LIABILITIES
- -------------------------
(in thousands)
Long-term debt, including
current portion
Fixed rate $2,973 $1,371 $540 $540 - - $5,424 $4,628
Weighted average
interest rate 13.64% 13.56% 12.00% 12.00%
31
BUSINESS
This prospectus also contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks faced by us
described below and elsewhere in this prospectus.
Overview
We are focused on the discovery, development, and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
We intend to implement our commercialization efforts through our recently
established botanicals division, which we have named ShamanBotanicals.com. Our
commercialization plan includes the use of community building initiatives on the
Internet and other distribution channels, and is based on marketing our
exclusive access to our proprietary branded products. We also have available for
out-licensing a pipeline of botanical product candidates, as well as novel
pharmaceutical product candidates for major human diseases developed by
isolating active compounds from tropical plants with a history of medicinal use.
Botanicals
Background
In 1997, the U.S. dietary supplement market was $12.9 billion. Of this,
over $4.0 billion were herbal or botanical dietary supplements. In 1998, this
number was projected to reach $5.0 billion, with a compounded yearly growth rate
of approximately 35%. In 1997, 24% of U.S. households reported using herbal or
botanical dietary supplements. The growth of this market has been led by
consumers who are interested in complementary, non-pharmaceutical options for
treating symptoms, fulfilling unmet dietary needs, and optimizing health, either
as an alternative to, or in conjunction with, more conventional medical
approaches. We believe that the use of these products will continue to expand
based upon the aging of the population, increasing scientific evidence and
acceptance by the conventional medical establishment, and the recent entrance of
powerful consumer companies which provide greater product confidence, while
growing the base of consumer users.
We believe that room exists for significant continuing growth of the
dietary supplement market and expect the two key drivers of market growth to be
(1) growth in the number and breadth of consumers utilizing these products; and
(2) continuing effective product innovation to fuel both trial and repurchase.
Growth in the number and breadth of consumers utilizing these products has
already begun, and is based in part upon the entrance of the large consumer
healthcare companies into the botanical dietary supplements market. These
companies have increased the visibility of botanical dietary supplements,
placing them not only in local health food stores but also in neighborhood
grocery stores, drug stores, and mass merchandisers. Additionally, these
companies are spending on large direct-to-consumer advertising campaigns,
placing advertisements during primetime television and in mainstream newspapers
and magazines. Consumer surveys show this advertising has resulted in a broader
base of consumers being made aware of, trying and utilizing dietary supplements.
Simultaneous with the broadening of the consumer base, the botanical
dietary supplements market has grown partially as a result of the media
highlighting new products. For example, in 1997, ABC's 20/20, The New York Times
and Newsweek carried a series of stories about St. John's wort, increasing trial
and usage of this dietary supplement dramatically. Interestingly, while the
month-on-month growth of sales of St. John's wort has now slowed, this initial
increase in sales has been maintained throughout the industry. These new product
"bursts" have fueled episodic but sustained market growth by driving new
purchases, and in the process, the repurchase of other products once the
consumer is at the point of purchase. Hence, the industry's view is that the
media and consumers are looking for continuing effective product innovation--for
the next St. John's wort--to fuel both trial and repurchase. Products with a
proprietary position have proven to be particularly successful in the past.
Finally, as more consumers have entered the dietary supplement market,
they have also begun to demand better quality, more consistency and
standardization of products, and scientific evidence regarding the safety and
efficacy of products. Increased demand has also strained the supply of natural
plant material for some popular products. Not all companies in the industry have
proven capable of meeting these consumer demands.
32
Strategy
The concept for our ShamanBotanicals.com division was developed in 1998,
and has become the focus of our operations in 1999. The purpose of the
botanicals business is to discover, develop and market novel, proprietary
botanical dietary supplements derived from tropical plant sources through
community building initiatives on the Internet and other focused marketing
channels. The unique positioning of our botanicals business stems from our prior
experience and efforts in developing pharmaceutical products from tropical plant
sources, including significant financial investment, more than 10 years of
extensive field research by our teams of ethnobotanists and physicians, and
pharmaceutical-level chemical standardization, biological and clinical testing.
We are applying this methodology to our new industry, and we intend to set a new
standard in this industry. In the last decade, we have amassed a large body of
information on the health benefits of thousands of tropical plant species that
have a history of human use, and we have organized this information into an
extensive relational database. This database includes over 2,600 tropical
plants, many of which have not been introduced or fully developed in the U.S.
dietary supplement market. We have identified plants with a documented
ethnomedical history of use in our library and database of botanicals for use in
key market categories with significant commercial potential. Because many of
these plants reflect the previously untapped plant diversity of the rainforests,
they may represent novel botanical products that have the opportunity to attain
a strong, proprietary market position. We currently have a fully-developed
product, SB-300, and we expect to commercialize this product in the near future
by applying the funds raised in this rights offering and via partnering
development agreements we are working to put in place.
We have the opportunity to differentiate our product candidates in
consumers' minds relative to those of our competitors. Key points of
differentiation include:
* Novel plants/proprietary products for unmet needs;
* Documented, first-hand field experience with traditional use;
* Rainforest-based plants and products, since most botanical
supplements products currently come from plants found in
temperate areas;
* Our commitment to conservation and reciprocity;
* Sustainable sourcing and supply;
* Quality manufactured, standardized products; and
* Clinically-tested products.
Our commercialization strategy is to create high-end branding of the
Shaman name, on our propriety products addressing serious unmet healthcare
concerns, and to market these proprietary products to specific communities
affected by such healthcare issues. Our e-commerce web site,
ShamanBotanicals.com, which is currently under construction, will be designed to
include several distinct features, such as exclusive access to our proprietary
products, and links to peer-reviewed clinical data supporting the clinical
action of our products. We also intend to offer access to certain medical
experts, in some cases exclusively, for medical commentary. Other planned
features of our web site include bulletin board postings, community chat rooms,
customer security and customization, and affiliate programs. Finally,
information on our reciprocity programs will be available as well.
Product Discovery and Development Process
We build on the knowledge and expertise of ethnobotanist and physician
teams who work with traditional healers to identify effective treatments in the
therapeutic areas that we have targeted. These teams gather comparative data on
traditional medicinal and health uses of plants from geographically diverse
tropical areas and prioritize plant candidates based on common use among
cultures and other factors. The prioritization process includes cross-checking
field-derived information against the results of literature searches as to
chemical constituents, previously discovered biological activity and other
reported medicinal uses. This process is integral to both our pharmaceutical and
dietary supplement discovery and development programs.
We were able to initiate our botanicals business by further exploring the
botanical library and pipeline we have developed over the past 10 years. In the
last decade, we have amassed a large body of information on the healing benefits
of thousands of tropical plant species that have a history of human use and have
organized this information into an extensive relational database. This database
includes information on over 2,600 tropical plants, many of which have not been
introduced or fully developed in the U.S. dietary supplement market. Currently,
most dietary supplements are derived from plants from temperate regions. We have
identified plants with a documented ethnomedical history of use in our library
and database of botanicals for use in key market categories with significant
commercial potential.
33
We intend to differentiate ourselves within the botanical dietary
supplement marketplace by backing proprietary products and promotion with
quality research, development and manufacturing, a carry-over from our
pharmaceutical culture and skill base. Given consumer demand for quality and the
relative lack of specific regulatory standards in the dietary supplement
industry, we intend to set our own high standard for quality and product
standardization for our botanical products. We intend to develop standardization
processes for the ingredients in all our products, including safety verification
and, where appropriate, human clinical testing of potential products. Once
completed, published clinical data can be utilized for educational purposes with
consumers and retailers seeking more information about our products. This
distribution of "third party" literature for education and promotional sales can
be particularly effective with Internet purchases. We believe that these
elements, along with unique formulations and existing and future patents, should
add to the proprietary position of our products.
Product Candidates
Our first botanical dietary supplement product will be SB-300, which is
designed to normalize water flow in the bowel and promote stool formation.
SB-300 is an extract of Croton Lechleri, a plant used by indigenous people for
relief of gastrointestinal symptoms, and contains a chemical activity marker,
SP-303, a patented, clinically proven antidiarrhea agent. SB-300 also has a
patented formulation. The mechanism of SB-300 is a desirable anti-secretory
activity, and SB-300 does not have anti-motility effects, such as the side
effects of constipation and cramping associated with the use of immodium and
loperamide. Such anti-motility agents generally cannot be used on a continuous
basis as a result of these side effects.
We plan to commercialize this product ourselves through community building
initiatives on the Internet and other appropriate focused channels of
distribution. We intend to market the product initially to people with HIV/AIDS
who suffer from chronic diarrhea, and then travelers and others who suffer from
acute bouts of diarrhea. We are also considering developing a pediatric
formulation of SB-300, which would complete three distinct commercial product
opportunities from one plant extract, differentiated by formulation, packaging,
and target customer/community base.
We are also working to develop a second product line based on a diet
system to mitigate Syndrome X symptoms. Syndrome X is the cluster of metabolic
disorders that occur in the face of elevated insulin when an individual is
insulin resistant, yet still maintains glucose control and is therefore not
diabetic. This cluster of coronary heart disease risk factors, such as elevated
triglycerides and lower HDL-cholesterol, the "good" cholesterol, are the silent
killers associated with Syndrome X. Shaman's Sr. Vice President of Clinical
Research, Dr. Gerald Reaven, has developed a trademarked Syndrome X diet system
for persons exhibiting Syndrome X symptoms, and has performed over 20 years of
clinical research documenting the benefits of this diet system. Direct
comparison clinical trial data supports that this diet system provides superior
benefits to those exhibiting Syndrome X symptoms than the low fat/high
carbohydrate diet guidelines recommended by the American Heart Association.
Approximately 30% of the US population is insulin resistant and subject to
Syndrome X. We anticipate that a product line would include bars, drinks, and
snacks which follow the trademarked anti-Syndrome X diet system, infused with
proprietary Shaman botanicals to address further these metabolic disorders.
Many people with AIDS/HIV who are effectively managing the AIDS virus with
their antiviral therapies are now also demonstrating metabolic abnormalities
consistent with insulin resistance and Syndrome X and progressing to coronary
heart disease and type II diabetes. We intend to leverage the identity we will
work to establish in the AIDS/HIV community through our SB-300 product to
commence marketing of our Syndrome X diet system in this community, and intend
to initially target this community.
Future Product Candidates
We have strategically identified multiple areas of dietary supplement
product interest and have identified specific priority product candidates for
the future based on four criteria:
* key market categories with significant commercial potential,
* the needs of an aging demographic in the U.S. population,
* areas where quick, symptomatic relief could be observed, and
* areas where we have first-hand ethnomedical experience and
where sustainable supply of raw materials exists.
34
Some of these proposed product areas include gastrointestinal relief,
sexual function aids, antioxidants/cardiovascular protectors, sleeping aids,
calming agents and weight management.
Another potential product opportunity is a proprietary, enhanced
formulation of one of the world's leading phytomedicines. We have filed a patent
application for this product. We believe this product represents a significant
out-licensing opportunity.
All of these potential products are based on plant material on the FDA's
grandfathered old dietary ingredient list, which includes dietary ingredients
that were sold in the United States prior to 1994, allowing for immediate
product introduction without a need for regulatory application or approval.
We believe our current and prior research and development efforts would
allow us to introduce up to eight products, including human clinical testing,
within the first two years of our botanicals operations. We believe that all of
these product areas offer significant opportunity for growth. Products in these
areas may be developed for sale under the Shaman brand name in the future, or
selectively out-licensed.
Sales and Marketing
Our first product launch will be SB-300, a botanical dietary supplement to
normalize water flow in the bowel and promote stool formation. SB-300 will
initially be targeted to people with AIDS/HIV who suffer from chronic diarrhea.
We plan to market SB-300 via the Internet, 1-800 direct response advertising,
limited storefront access in major market cities, and focused mail order
opportunities. In addition, Shaman is working with several leading treatment
activists to have them feature the introduction of this product in their
regional organizations' newsletters. We expect to begin marketing SB-300
commencing in the third quarter of 1999.
Commencing in the fourth quarter of 1999, we also intend to market SB-300
to travelers and others suffering from acute episodes of diarrhea. The product
will be differentiated from that targeted to the AIDS/HIV community in that it
will be a lower dose and packaged in smaller quantities to address the nature of
its expected use in the target customer base.
We believe that selling a traveler's health-related product on the
Internet presents an attractive marketing opportunity since two primary uses of
the Internet are currently healthcare information and travel. We intend to
market this product with banner advertising at affiliate travel web sites and
point of purchase at high-risk diarrhea destinations, sample programs to
adventure travel and tour companies traveling to such areas, and other highly
focused target customer programs.
In marketing a diet system product line to address Syndrome X symptoms, we
intend to leverage the identity we will work to establish in the AIDS/HIV arena
through sales of SB-300, and will initially target this community. Similarly to
SB-300, we believe we will be able to implement efficient and focused promotion
and distribution to the AIDS/HIV community, and then expand our marketing
efforts to focus on mass market indications.
Thus, our initial customer base communities will include:
- people with AIDS/HIV suffering from chronic diarrhea;
- travelers to high-risk diarrhea destinations;
- people with AIDS/HIV exhibiting Syndrome X symptoms
- the Syndrome X population at large.
Both diarrhea and Syndrome X appear to be under-served and
under-recognized on most Internet healthcare sites. We believe that the features
to be offered on our web site relating to information on these health issues,
together with the exclusive access of our web site to our proprietary products,
presents an opportunity for our website to become one of the definitive sites
for the communities affected by these health concerns for complementary medical
alternatives.
Customers and Partners
The market for dietary supplements in the United States is growing. In
recent consumer surveys, 25% to 30% of consumers report having utilized a
botanical dietary supplement, and 36% report moderate to heavy use of
complementary medicine.
35
We believe that our botanicals business has two key initial classes of
customers:
* consumers, primarily in the HIV/AIDS community, the traveler's
market, and Syndrome X community to whom we intend to market our
first product, SB-300, and our anticipated second anti-Syndrome X
diet product line; and
* mass market and multi-level companies that are interested in
licensing or partnering with us for the commercialization of our
products.
Potential SB-300 customers
Diarrhea in people with HIV and AIDS is a devastating syndrome. In 1997 in
the United States, there were an estimated 225,000 people with AIDS and between
650,000 and 900,000 individuals in the United States were believed to be
infected with HIV. While fewer people are dying of AIDS, new cases of AIDS and
HIV are still increasing and people are now living longer with both AIDS and
HIV. Sources indicate that, of the combined HIV and AIDS population in the
United States, approximately 20% to 40% suffer from diarrhea at any given time,
with an average duration of 90 days per year. Although protease inhibitors and
highly active antiretroviral therapy have improved the prognosis for people
living with HIV and AIDS, the problem of diarrhea persists. In the majority of
cases the symptom is thought to be related to the anti-viral drugs. Diarrhea
therefore remains a serious problem that has not been adequately addressed.
Diarrhea not only compromises the health and quality of life of
individuals with AIDS and HIV but also has been shown to increase dramatically
the cost of these individuals' medical care. Furthermore, people with chronic
diarrhea are forced to restrict their daily activities to accommodate the
disruptions caused by this condition because current symptomatic therapies
provide either poor relief or undesirable side-effects.
We believe that a product that normalizes water flow in the bowel and
promotes stool formation represents a large, focused and untapped market
opportunity. We believe that the competitive promotional response may be limited
in this discrete market because no specific dietary supplements or
over-the-counter antidiarrheals have targeted this population to date, likely
because there are no indication or studies in this patient population and the
mechanism of action of anti-motility products is counter-indicated for chronic
diarrhea. Further, we hope eventually to build a niche market position by
catering specifically to the needs of the HIV/AIDS community with a full product
line.
For the traveler's market, SB-300 provides a natural alternative to
currently available treatments which have unpleasant side effects, such as
constipation and rebound diarrhea. More than 35 million individuals travel
annually to countries that present the risk of traveler's diarrhea.
Potential Partners
We are actively engaged in partnering discussions with top tier companies
in both the mass market and multi-level dietary supplement arenas. No agreements
have been reached or entered into to date. We are focusing our partnering
efforts initially on the multi-level market arena, and then intend to focus on a
large mass market, heavily promotional, healthcare deal which will require a
longer period of time to negotiate.
Mass Market
The entrance of large healthcare and consumer products companies into the
dietary supplement industry has fueled the expanded placement of botanical
dietary supplements beyond local health food stores and into neighborhood
grocery stores, drug stores and mass merchandisers. To promote this placement,
these companies are spending huge sums on advertising and promotion relative to
previous marketing budgets for dietary supplements that rarely topped $1
million. For example, in 1998, American Home Products Corporation spent an
estimated $12 million on its Centrum(R) line, Bayer Corporation spent an
estimated $35 million on its One-A-Day(R) line of eight products, and
Warner-Lambert Company spent an estimated $15 million on its Quanterra(R) line
of two products. Such large promotional expenditures are relatively recent
because historically sales of single products or even lines of products rarely
passed the single-digit million mark. However, industry analysts now report much
higher sales figures. For example, American Home Products, Bayer and
Warner-Lambert are forecasting combined first year sales of over $100 million
for their botanical lines, largely a result of significant promotion. Through
increased promotional budgets, companies such as these are educating more
consumers about the benefits of herbal and botanical products, thereby
increasing consumer trial and repurchase. If these trends continue, the growth
36
of the botanical dietary supplement market could far surpass growth in the past.
Each of these product lines is simply a new opportunity of commodity botanical
products.
We believe that another key driver of continued growth will be the
introduction of new botanical dietary supplement products. Introduction of new
products has in the past not only brought new consumers into the market but also
fueled the purchase of other existing botanicals. The large healthcare and
consumer products companies are currently tapping into the commonly known
commodity botanical products, primarily of European origin. Once growth of these
products is maximized, novel proprietary products will be needed, and we believe
we are uniquely positioned to meet this need in certain market areas.
We plan to partner with mass market companies in order to expand the
advertising and promotion of our botanical dietary supplement products. Such a
partnership would combine the benefits of our new products with the partner's
ability to generate large advertising and public relations campaigns for our new
product lines, similar to those created for existing consumer product lines. In
addition, we could pursue a licensing arrangement, such as that completed
between PharmaPrint, Inc. and American Home Products, in which the Shaman name
could be co-branded with a product or product line with a partner.
Multi-Level
Multi-level marketing is a system of network marketing comprised of two
components: one-on-one selling and yearly sales conventions. Distributors,
usually individuals looking for a home-based business or the opportunity to
supplement their regular income, sell products to friends and relatives.
Distributors are incentivized to sign-up their friends as distributors, and they
receive in return an incentive for all the sales in their network. Hence, the
impact is that of an ever-growing customer base that is somewhat captive and
more predisposed to purchase than the broad consumer public. In addition, this
type of selling makes the emotional impact of product stories very important, as
distributors need to believe in the products they are selling to friends.
The primary form of promotion in the multi-level marketing channel, beyond
one-on-one selling, is the yearly sales convention. Each year, all distributors
are brought together for a multi-million dollar sales convention. On-stage
presentations are given on four to five key new products, or a product line,
being launched in the coming year. The history of the products, testimonials and
their uses are discussed. Then, distributors are sent back to their homes for
another year of selling. During the year, incentives may be given for reaching
certain sales quotas on a particular product or product line.
Dietary supplements have been a mainstay of the multi-level marketing
industry. However, botanicals are a newer player on the scene. Some multi-level
firms such as AmWay Corporation, with its NutriLite line, and Nu Skin
Enterprises, Inc. have embraced the commonly used commodity botanicals. However,
it is new products that fuel the growth in multi-level marketing.
Our botanical products lend themselves to this market for several reasons.
We have truly novel products--the lifeblood of this distribution channel.
Further, the origins of our products are unique and lend themselves to the type
of interesting and emotionally compelling selling stories required for
peer-to-peer selling. These would make for entertaining sales convention
presentations, featuring famous ethnobotanists and the rainforest. Additionally,
our reciprocity and conservation policies provide interesting content for
responsible and compelling story-based selling.
Internet
We intend to use Internet marketing of our proprietary products as a means
to achieve high-end branding of our products. We believe that this exclusive
access to our proprietary products may be the most important advantage of our
ShamanBotanicals.com e-commerce site. The Internet offers an opportunity to
provide, within the requirements of the Dietary Supplement Health and Education
Act, easily and quickly accessible third-party literature and supportive
information on-line. We expect to offer bulletin board postings, community chat
rooms, patient security and customization as features on our web site. We also
expect to have exclusive access to certain medical experts for medical
commentary. Affiliate programs are expected to be important. For example, since
diarrhea appears as a side effect in the labeling of over 80% of
pharmaceuticals, the indication for our product SB-300 of normalizing water flow
in the bowel and promoting stool formation, provides a natural link between the
problem caused by these pharmaceutical products and the solution offered by
SB-300. Finally, information on our reciprocity programs will be available as
well.
37
Competition
Competition in the botanical dietary supplement market differs by channel
of distribution. Historically, competition within the health food channel was
fragmented and made up of over 200 small, mostly privately held companies. More
recently, several large consumer healthcare companies have opened up the
mass-market channel, including American Home Products with its Centrum(R) Herbal
brand, Bayer's introduction of botanical ingredients in their One-A-Day(R) line,
and Warner-Lambert's introduction of their Quanterra(R) brand. Overall, the
entrance of these companies is expected to broaden consumer acceptance of
botanical products and grow the total botanical dietary supplement market, with
the mass market becoming the largest, fastest-growing distribution channel. In
order to enter this key channel, we intend to partner with a company with direct
to consumer promotional capabilities and extensive experience in this market. We
believe that a partner in this channel will value the quality and scientific
rigor behind our products.
In the multi-level marketing channel, key players include Shaklee
Corporation, Nu Skin Enterprises, Inc., USANA, Inc. and OmniLife. Again, we
intend to partner with a top-tier company in this channel. We believe that
partners in this channel will appreciate the novel products we have to offer and
the compelling stories of their rainforest and traditional use origins.
There is currently no established leader in marketing dietary supplements
through the Internet, although several Internet sites do exist, including
AllHerb.com, Mothernature.com, and Greentree.com. The emerging "drugstore "
sites such as Drugstore.com and PlanetRx.com also carry some dietary
supplements. We intend to start our own website within this distribution
channel, with the unique attraction of our own, proprietary products available
on the site, particularly targeting the HIV/AIDS community. We have reserved the
Internet domain name "ShamanBotanicals.com." We do not expect to compete
head-to-head with the existing Internet sites, where there has been little
differentiation between sites with respect to product offerings. Rather,
ShamanBotanicals.com will focus first on the needs of the HIV/AIDS community,
including information and nutritional products particularly important for people
with diarrhea and other associated problems. The design of our website will be
integral to the launch and sale of our first product, SB-300, via the Internet
distribution channel, and other community building initiatives.
Government Regulation
The term "botanical dietary supplement" is defined by the 1994 Dietary
Supplement Health and Education Act as "an herb or other botanical or a
concentrate, constituent, extract or combination of any botanical that is
intended for ingestion as a tablet, capsule, or in liquid form and is not
represented for use as a conventional food or as a sole item of a meal or the
diet and is labeled as a dietary supplement." The 1994 Dietary Supplement Health
and Education Act specifically outlines how botanical products are to be
regulated and treated. Some commonly known commodity botanical dietary
supplement products include ginseng, gingko biloba, St. John's wort, and
echinacea. This statutory definition also differentiates botanical dietary
supplements, vitamins and minerals from conventional foods or food additives.
Under the law, botanicals may be sold as dietary supplements with claims as to
their effect on the structure or function of the human body, providing the
seller has adequate documentation for the claims. Botanical dietary supplements
are regulated by the FDA. However, some botanical dietary supplement products
require no review or approval to enter the market, while some new products may
require the submission of basic safety data prior to marketing. As a result, the
FDA regulatory process in the botanical dietary supplement industry is much less
rigorous than in the pharmaceutical industry, allowing for much faster market
introduction.
One of the unique provisions of DSHEA is the distinction between new
dietary ingredients and old dietary ingredients, which had a history of being
marketed in the United States prior to DSHEA. Old dietary ingredients have been
"grand-fathered" under the law, allowing them to be commercialized without
further FDA review. Our pipeline includes more than 400 botanical candidates
that are old dietary ingredients, including several near-term product
candidates, and numerous new dietary ingredients candidates.
Pharmaceuticals
Background
Pharmaceutical companies continually search for innovative products
available for in-license to enhance their existing product portfolios. Products
that have an entirely different approach or means of accomplishing the desired
therapeutic effect than products currently available are particularly in demand.
In addition, companies are looking to develop or in-license products that may be
more effective and/or less costly than those currently available, or those that
38
could offer an alternative to other, more invasive forms of medical treatment
and address the self-medication and quality of life issues of the current aging
consumer population.
Strategy
Until recently, we were primarily focused on discovering and developing
novel pharmaceutical products for major human diseases by isolating and
optimizing active compounds found in tropical plants with a history of medicinal
use. We have conducted human clinical trials with our three lead product
candidates -- SP-303/Provir (Phase III/II), nikkomycin Z (Phase I) and SP-134101
(Phase I) -- targeting five indications. Due to unforeseen delays and costs
necessary to complete additional trials for our lead compound, SP-303/Provir for
the treatment of diarrhea in people with AIDS, we have chosen to discontinue all
pharmaceutical development, manufacturing and marketing activities. We now
intend to out-license worldwide marketing rights to our pharmaceutical assets.
Product Discovery and Development Process
In our efforts to develop pharmaceutical products we previously focused on
drugs extracted from plants with a long history of medicinal use. Through this
process, we successfully identified and developed a number of pharmaceutical
candidates, particularly through the preclinical and early clinical stages.
These efforts have produced a portfolio of product candidates for out-license.
Product Candidates
We conducted human clinical trials with our three leading product
candidates -- SP-303/Provir (Phase III/II), nikkomycin Z (Phase I), and
SP-134101 (Phase I) -- targeting five indications. We have discontinued all
pharmaceutical development, manufacturing and marketing activities and plan to
out-license all of the pharmaceutical applications of our technology.
The following table describes the major therapeutic areas in which we have
had active product development and research. Efforts are being made to
out-license all of these pharmaceutical products:
Product Indication Status Commercial Rights
- ------- ---------- ------ -----------------
Provir AIDS-associated Completed Phase III Shaman
diarrhea study in Q4, 1998.
Completed a Phase II
efficacy study in Q4, 1997
Provir Watery diarrhea Completed two Phase II Shaman
efficacy trials in Q3,
1998. Completed
initial Phase II
efficacy studies in
1996 & 1997
Provir Pediatric Formulation to be Shaman
diarrhea developed
Nikkomycin Z Endemic mycoses Completed Phase I study Shaman
in Q2, 1997.
Nikkomycin Z Azole-resistant Initiation of clinical Shaman
and Azoles Candida program pending pre-
clinical development
by Pfizer
SP-134101 Type II Diabetes Completed Phase I study Shaman
in Q1, 1998
Oral Type II Diabetes Preclinical, Ono; Lipha/Merck;
antihyperglycemic 29 compounds and Shaman. Shaman
compounds receives royalties
on sales outside
the U.S. and
profit sharing in
the U.S.
39
Sales and Marketing
We intend to out-license worldwide marketing rights to our pharmaceutical
assets.
Customers and Partners
We continue to pursue discussions for the out-licensing of our
pharmaceutical assets.
In September 1996, we entered into a five-year collaborative agreement
with Lipha/Merck to develop jointly our antihyperglycemic drugs. We are
currently in negotiations with Lipha/Merck for the discontinuation of this
research agreement. Lipha/Merck will make no further research payments. We are
in discussions with Lipha/Merck regarding the dissolution of this relationship.
In May 1995, we entered into a collaborative agreement with Ono
Pharmaceutical Co. Ltd. providing for, among other things, three years of
funding for the research and development of compounds for the treatment of Type
II diabetes. Although the on-going research funding period under such agreement
has expired, Ono continues to have contractual obligations to us for the
potential payment of milestones and royalties. There can be no assurance that
such milestones will be attained or that we will receive any future milestone
payments or royalties from Ono.
Competition
The out-licensing of pharmaceuticals is a competitive enterprise. Although
many companies consider licensing opportunities, they often investigate multiple
opportunities before settling on a select few. While Shaman is subject to this
competition, we have had significant interest in our products based upon their
novelty, safety, efficacy, and advanced stages of development. We are actively
seeking to out-license our products and we have multiple on-going discussions.
To date, these discussions have not resulted in any out-licensing agreements.
Patents and Proprietary Rights
Proprietary protection for our product candidates, processes and know-how
is important to our business. Our policy is to file patent applications to
protect technology, inventions and improvements that are considered commercially
important to the development of our business. We also rely upon trade secrets,
know-how and continuing technological innovation to develop and maintain our
competitive position. We aggressively prosecute and defend our patents and
proprietary technology.
We have 20 U.S. patents issued to date. In addition, we currently have 12
U.S. patent applications pending with the U.S. Patent and Trademark Office and
multiple applications filed under the Patent Cooperation Treaty. We do not know
whether any of these applications will result in the issuance of any patents or,
if any patents are issued, whether any issued patent will provide significant
proprietary protection or will be circumvented or invalidated.
We have been issued a U.S. patent related to our specific proanthocyanidin
polymer compositions designated SP-303/Provir. Specifically, the patent contains
composition of matter claims related to SP-303/Provir contained in our
SP-303/Provir product. We have also filed foreign applications corresponding to
our issued U.S. patents relating to our proanthocyanidin polymer composition. We
have been granted patents in Australia, Mexico and New Zealand and have patent
applications pending in Canada, Europe, Japan, the Republic of Korea and
Singapore.
We have also filed a U.S. patent application directed to new formulations
and methods of using our specific proanthocyanidin polymer composition for
treatment of watery diarrhea. These formulations are contained in our
SP-303/Provir product.
We have 10 issued U.S. patents relating to compositions and methods for
treating Type II diabetes, as well as reducing hyperglycemia associated with
other etiologies. We also have eight additional U.S. patent applications pending
that relate to compositions and methods for treating Type II diabetes, as well
as reducing hyperglycemia associated with other etiologies. We have filed 11
international applications under the Patent Cooperation Treaty designating a
number of foreign countries, as well as applications in Taiwan, corresponding to
eleven U.S. applications and plan to file additional corresponding foreign
applications within the relevant convention periods.
40
We also have one issued U.S. patent and corresponding international patent
applications in a number of foreign countries relating to methods for
administering and sustained release formulations for anti-fungal agents like
nikkomycin Z. The methods and compositions are useful for treatment of fungal
infections, particularly candidiasis, the most frequently encountered
life-threatening mycoses. We have licensed several patents from Bayer AG
relating to the use of nikkomycin Z and the composition and use of nikkomycin Z
in combination with other antifungal compounds for the development of antifungal
agents.
There can be no assurance that our pending patent applications will result
in patents being issued or that, if issued, patents will afford protection
against competitors with similar technology; nor can there be any assurance that
others will not obtain patents that we would need to license or circumvent. See
"Risk Factors--Uncertainty Regarding Patents and Proprietary Rights; Current
Legal Proceedings Regarding Patents and Proprietary Rights."
Community Commitment
The Healing Forest Conservancy
In January 1990, we formed The Healing Forest Conservancy, a California
not-for-profit public benefit corporation which is dedicated to maintaining
global biocultural diversity. The Conservancy focuses on conserving plants that
have been used traditionally for medicinal and health purposes and conserving
the knowledge of cultures that utilize them. We have donated 667 shares of our
common stock to the Conservancy's endowment fund. We also plan to donate
additional funds when we have achieved profits from product sales, if any, to
provide benefits to indigenous peoples in the countries where our source plants
are obtained.
The Shaman HIV Investment Trust
In 1998, we made a commitment to create the Shaman HIV Investment Trust,
which provides funding for charitable causes within the HIV/AIDS Community,
including services, education and research. We have committed to the Trust a
royalty on the first five years of U.S. product net sales of SB-300 which are
sold in the HIV/AIDS market. The Trust will be administered independently by a
committee of HIV/AIDS community leaders.
The Living With AIDS Initiative
As part of Shaman's Living with AIDS reciprocity initiative, we are
supporting the Trekking with AIDS Dawn Averitt program. Dawn is a 30 year-old
woman who has been living with the HIV virus for 11 years. She is an
internationally known treatment activist supporting grass-roots efforts to
provide education, empowerment, and treatment for all people with AIDS and HIV.
She has recently launched on a five month trek of the Appalachian trail to
promote awareness for the challenging quality of life issues associated with
living with HIV and AIDS. Her broader message is that we all live with
challenges and need to take control of our healthcare and quality of life
choices, a message right in line with the goals of product development and
commercialization at ShamanBotanicals.com.
Employees
In February 1999, we ceased operations in our pharmaceuticals business and
downsized by approximately 60 employees, or 65% of our workforce. As of June 15,
1999, we had 25 employees. The remaining employees are expected to focus their
activities primarily on the botanicals business.
41
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to the
executive officers, directors and key employees of Shaman as of June 15, 1999:
Name Age Position
- ------------------------- --- --------------------------------------------------------------------------------
Lisa A. Conte............ 40 Director, President, Chief Executive Officer, and Chief Financial Officer
Steven R. King, Ph.D..... 41 Senior Vice President, Ethnobotany and Conservation
Gerald M. Reaven, M.D.... 70 Senior Vice President, Clinical Research
Thomas Carlson, M.D...... 42 Vice President, Medical Ethnobotany
John W.S. Chow, Ph.D..... 47 Vice President, Technical Operations
Tom White................ 40 Senior Vice President, Commercial Strategy and Chief Sales and Marketing Officer
G. Kirk Raab (1)......... 63 Chairman of the Board
Loren D. Israelsen....... 43 Director
Adrian D.P. Bellamy (2).. 57 Director
Jeffrey Berg............. 52 Director
Herbert H. McDade, Jr.... 72 Director
M. David Titus (1)....... 42 Director
- --------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Lisa A. Conte founded Shaman in May 1989 and currently serves as Shaman's
President, Chief Executive Officer, Chief Financial Officer, and Director.
From 1987 to 1989, Ms. Conte was Vice President at Technology Funding, Inc., a
venture capital firm, where she was responsible for the analysis and management
of healthcare industry investments. From 1985 to 1987, she conducted risk and
strategy audits for venture capital portfolio companies at Strategic Decisions
Group, a management consulting firm. Ms. Conte received an A.B. in Biochemistry
from Dartmouth College, an M.S. in Physiology/Pharmacology from the University
of California, San Diego and an M.B.A. from The Amos Tuck School, Dartmouth
College.
Steven R. King, Ph.D. joined Shaman in March 1990. He currently serves as
Senior Vice President, Ethnobotany and Conservation and is responsible for
coordinating our Scientific Strategy Team. From 1989 to 1990, Dr. King was the
chief botanist for Latin America at Arlington, Virginia's Nature Conservancy. He
worked in 1988 as Research Associate for the Committee on Managing Global
Genetic Resources at the National Academy of Sciences, and was a Doctoral Fellow
from 1983 to 1988 at The New York Botanical Garden's Institute of Economic
Botany. Dr. King received a B.A. in Human Ecology from the College of the
Atlantic and M.S. and Ph.D. degrees in Biology from City University of New York.
Gerald M. Reaven, M.D. joined Shaman as a consultant in February 1995 and
became an employee in July 1995. He currently serves as Senior Vice President,
Clinical Research. Dr. Reaven came to Shaman from the Stanford University School
of Medicine where he served as a faculty member since 1960 and a Professor of
Medicine since 1970. Over the last 20 years, Dr. Reaven served as head of the
Division of Endocrinology and Metabolic Diseases, Division of Gerontology and
director of the General Clinical Research Center. Dr. Reaven also served as head
of the Division of Endocrinology, Gerontology and Metabolism at Stanford
University School of Medicine, and Director of the Geriatric Research, Education
and Clinical Center, at the Palo Alto Veterans Affairs Medical Center. Dr.
Reaven received his A.B., B.S. and M.D. from the University of Chicago.
Thomas Carlson, M.D. joined Shaman in October 1992. He currently serves as
Vice President, Medical Ethnobotany and is responsible for developing
ethnobotancial field research and coordinating clinical studies. Dr. Carlson has
conducted research with traditional healers in over 40 different indigenous
groups in 15 different tropical countries. Prior to joining Shaman, from 1990 to
1992, Dr. Carson practiced General Pediatrics at Kaiser Permanente in Santa
Clara, California and worked at the Aravind Childrens and Eye Hospitals in
Madurai, India on child malnutrition and blindness. From 1987 to 1990, Dr.
Carlson completed his Internship and Residence in Pediatrics at Stanford
University Medical Center. Dr. Carlson received his M.D. from Michigan State
University and a B.S. and M.S. in Botany from the University of Michigan.
42
John Chow joined Shaman in April 1998 as Vice President of Technical
Operations. Prior to joining Shaman, from December 1997 to April 1998, Dr. Chow
served as Director, Product and Technology Evaluation at Bristol-Myers Squibb
Company, where he performed technical due diligence toward the acquisition and
licensing of various dosage forms and technologies and reviewed and approved new
product specifications. Prior to holding this position, from July 1980 to
December 1997, Dr. Chow held other positions, also with Bristol-Myers Squibb
Company, where he was responsible for developing strategies for manufacturing
consolidation, facilitating technology transfers of new and existing products,
and directing technical operations of an international plant. Dr. Chow received
a B.S. in Pharmacy from Washington State University, a Ph.D. in Pharmaceutical
Chemistry from Ohio State University and an M.B.A. in Pharmaceutical/Chemical
Studies from Fairleigh Dickinson University.
Tom White joined Shaman in May 1999 as Senior Vice President, Commercial
Strategy, and Chief Sales and Marketing Officer. Prior to joining Shaman, from
April 1998 to May 1999, Mr. White served as Executive Vice President, General
Manager Functional Food & Beverages at Weider Nutrition International. Prior to
that, from June 1995 to March 1998, he was a Principal in the firm of White,
Smith-White & Partners, a consumer products consulting firm, and from August
1993 to May 1995, he served as Director of Marketing for Pete's Brewing Company.
Mr. White received his B.A. in Journalism from the University of Missouri, and
his M.S. in Advertising from Northwestern University.
G. Kirk Raab became a director in January 1992 and Chairman of the Board in
September 1995. Mr. Raab was President, Chief Executive Officer and director of
Genentech, Inc. from February 1990 to July 1995 and President, Chief Operating
Officer and director from February 1985 to January 1990. Before joining
Genentech, Mr. Raab was associated with Abbott Laboratories, serving as
President, Chief Operating Officer and director. Mr. Raab is also Chairman of
the Board of Connectics, Inc., Oxford GlycoSciences (UK) Ltd. and LXR
Biotechnology, Inc., and is a director of Bridge Medical, Inc., Accumetrics,
Inc. and Applied Imaging Corporation. Mr. Raab holds a B.A. in Political Science
from Colgate University.
Loren D. Israelsen became a director in April 1999. Mr. Israelsen has been
President of LDI Group, a consulting firm specializing in dietary supplement and
phytomedicine issues, since 1997. From 1990 to 1997, Mr. Israelsen practiced law
at a private firm. From 1981 to 1990, Mr. Israelsen served in various positions
at Murdock International Corporation, including President from 1989 to 1990,
Vice President of Strategic Development from 1986 to 1989 and General Counsel
from 1981 to 1986. While acting as Vice President of Strategic Development, he
identified and negotiated several license agreements to bring the world's
leading phytomedicines, including Ginkgo biloba extract, milk thistle extract,
echinacea, evening primrose oil, and saw palmetto extract, to the United States.
Mr. Israelsen has served as General Counsel/Vice President to the American
Herbal Products Association, Co-counsel to the European American Phytomedicine
Coalition, industry liaison to FDA's expert advisory committee on Ephedra and
advisor to the Natural Products Quality Assurance Alliance, the Office of
Technology Assessment and the Office of Dietary Supplements. Since 1992, he has
served as Executive Director of the Utah Natural Products Alliance, which was
instrumental in developing and passing the Dietary Supplement Health and
Education Act of 1994.
Adrian D.P. Bellamy became a director in October 1997. Since April 1995,
Mr. Bellamy has served as Chairman and a director of each of Airport Group
International Holdings, L.L.C. and Gucci Group N.V. From September 1983 to April
1995, Mr. Bellamy served as Chairman of the Board of Directors and Chief
Executive Officer of DFS Group Limited, a specialty retailer. He received a B.A.
in Communications and an M.B.A. from the University of South Africa. Mr. Bellamy
is a director of The Body Shop, Inc., The Body Shop International PLC, The Gap,
Inc., Paragon Trade Brands, Inc. and Williams-Sonoma, Inc.
Jeffrey Berg became a director in June 1998. Mr. Berg has been the Chairman
and Chief Executive Officer of International Creative Management, Inc. since
1985. Mr. Berg, one of the leading agents in the entertainment industry, has
been in the entertainment industry for over 25 years. Mr. Berg received a B.A.
from the University of California at Berkeley and a Master of Liberal Arts from
the University of Southern California. He served as Co-Chair of the California
Information Technology Council and is a director of each of Oracle Corporation
and Excite, Inc.
Herbert H. McDade, Jr. became a director in October 1991. He has served as
Chairman of the Board and Chief Executive Officer of Chemex Pharmaceuticals,
Inc. since February 1989 and as Chief Executive Officer from February 1989
through January 1996, when Chemex Pharmaceuticals merged with Access
Pharmaceutical Corporation and the combined entity changed its name to Access
Pharmaceutical Corporation Inc. From October 1986 to January 1988, Mr. McDade
was Chairman, President and Chief Executive Officer of Armour Pharmaceuticals,
Inc., after previously serving as President, International Health Care Division
of the Revlon Health Care Group. Mr. McDade holds a B.S. in Biology from the
43
University of Notre Dame and a B.P.H. in Theology and Philosophy from Laval
University. He is Chairman of the Board of Access Pharmaceutical Corporation and
a director of Cytrx, Inc., Discovery Ltd. and several privately held companies.
M. David Titus became a director in April 1990. Mr. Titus is currently a
General Partner of Windward Ventures Management, L.P., a venture capital firm,
which he founded in November 1997. Prior to founding Windward Ventures
Management, L.P., Mr. Titus was Managing Director of Windward Ventures, a
venture capital consulting and investment firm, which he founded in 1993. From
May 1986 to December 1992, he served in various capacities at Technology
Funding, Inc., a venture capital firm, including Group Vice President,
Technology Funding, Inc., and General Partner of Technology Funding Limited.
Prior to joining Technology Funding, Inc. in May 1986, Mr. Titus was a founder
and Senior Vice President of the Technology Division of Silicon Valley Bank. Mr.
Titus earned a B.A. in Economics from the University of California, Santa
Barbara. He is a director of several privately held companies.
Number of Directors; Relationships
Our bylaws authorize the board to fix the number of directors serving on
the board, provided that such number shall not be less than five nor more than
nine. The number of directors is currently fixed at seven. All directors hold
office until the second annual meeting of stockholders following the annual
meeting of stockholders at which such director was elected, or until their
successors have been duly elected and qualified.
There are no family relationships among our executive officers or
directors.
Committees of the Board of Directors
Shaman's board of directors has an audit committee which is primarily
responsible for annually recommending independent auditors for appointment by
the board, for reviewing the services performed by our independent auditors and
reviewing reports submitted by the independent auditors. The audit committee
includes two directors, Messrs. Titus and Raab.
The board also has a compensation committee, which is comprised of Messrs.
McDade and Bellamy. The compensation committee reviews and approves our general
compensation policies and practices, sets compensation levels for our executive
officers and administers our 1992 Stock Option Plan and other employee benefits
programs.
Director Compensation
Each non-employee is reimbursed for reasonable expenses incurred in
connection with their attendance at such meetings.
The information given below is for historical purposes because each member
of the board of directors has agreed to surrender their outstanding options to
purchase shares of our common stock.
Shaman's non-employee directors receive stock options under our
1992 Stock Option Plan. See "1992 Stock Option Plan."
On June 30, 1998, Mr. Berg received an option to purchase 1,000 shares of
common stock in connection with his initial appointment to the board pursuant to
the automatic grant provision of the 1992 Stock Option Plan. The option has an
exercise price of $67.50 per share, the fair market value per share of the
common stock on the grant date. Mr. Berg has agreed to surrender these options.
On May 15, 1998, Messrs. McDade, Raab, Titus and Bellamy each received an
option grant for 375 shares of common stock under the automatic option grant
provisions of the 1992 Stock Option Plan. These options have an exercise price
per share of $98.75, the fair market value per share of common stock on that
date. Each of these directors has agreed to surrender these options.
On October 20, 1998, the compensation committee, as administrator of the
1992 Stock Option Plan, implemented an option cancellation/regrant program for
certain key consultants and non-employee directors, other than the members of
the compensation committee, holding options under the plan. Pursuant to this
program, each eligible non-employee director was given the opportunity to
surrender his outstanding options under the 1992 Stock Option Plan with exercise
prices in excess of $28.75 per share in return for a new option grant for the
same number of shares but with an exercise price of $28.75 per share, the
44
closing selling price per share of common stock as reported on the Nasdaq
National Market on the October 20, 1998 grant date of the new option. To the
extent the higher-priced option was exercisable for any option shares on the
October 20, 1998 cancellation date, the new option granted in replacement of
that option would become exercisable for those shares in a series of 12
successive equal monthly installments upon the optionee's completion of each
month of service over the one-year period measured from the October 20, 1998
grant date. The option would become exercisable for the remaining option shares
in one or more installments over the optionee's period of continued service,
with each such installment to vest on the same vesting date in effect for that
installment under the cancelled higher-priced option. The following non-employee
directors participated in the October 20, 1998 cancellation/regrant program with
respect to the indicated number of option shares: Mr. Raab, 17,214 shares with a
weighted average exercise price of $110.56 per share; Mr. Titus, 2,914 shares
with a weighted average exercise price of $128.48 per share; Mr. Berg, 1,000
shares with a weighted average exercise price of $67.50 per share. Each of these
directors has agreed to surrender such options.
On May 1, 1997, the board of directors approved a consulting arrangement
with Mr. Titus, one of its non-employee directors pursuant to which he is to
serve as a consultant to Shaman on financing matters and financial operations.
Under this arrangement, Mr. Titus was paid consulting fees in the amount of
$36,000 for the 1998 fiscal year. This arrangement expired in June 1998. As part
of his initial consulting arrangement, Mr. Titus was granted an option to
purchase up to 700 shares of common stock under the discretionary option grant
program in effect under the 1992 Stock Option Plan. Such option has an exercise
price of $107.50 per share, the fair market value of our common stock on the May
22, 1997 grant date of that option and is exercisable in full at any time prior
to May 22, 2007. This option was surrendered on October 20, 1998 under the
option cancellation/regrant program, in return for a new option grant for the
same number of shares but with an exercise price of $28.75 per share. The option
would have become exercisable in a series of 12 successive equal monthly
installments over the one-year period measured from the October 20, 1998 grant
date, however, Mr. Titus has agreed to surrender this option.
In August 1995, we entered into a consulting arrangement with Mr. G. Kirk
Raab, Chairman of the Board. As consideration for special consulting services
Mr. Raab performed under the consulting arrangement, Mr. Raab was paid an annual
consulting fee of $100,000. In addition, he was granted an option for 10,000
shares of common stock on August 21, 1995 with an exercise price per share of
$110.00, the fair market value per share of common stock on that date. The
option was granted under the discretionary option grant provision of the 1992
Stock Option Plan, and the option would have become exercisable in a series of
48 successive equal monthly installments over the four-year period measured from
the August 21, 1995 grant date, provided Mr. Raab continued to render services
to us pursuant to his consulting arrangement. This option was surrendered on
October 20, 1998 under the option cancellation/regrant program, in return for a
new option grant for the same number of shares but with an exercise price of
$28.75 per share. Mr. Raab has agreed to surrender this replacement option. In
addition, in connection with his services as a director and as Chairman of the
Board, Mr. Raab received an annual retainer fee of $60,000, payable after each
annual meeting of stockholders so long as Mr. Raab continued to render services
to us as Chairman of the Board. We paid a total of $66,667 of the consulting
fees in cash and on November 7, 1998, issued 6,783 shares of common stock in
payment of his consulting services for the 1998 fiscal year. Shaman and Mr. Raab
have agreed to terminate the compensation component of his consulting
arrangement and no further payments are to be due under this arrangement. Mr.
Raab still serves as Chairman of the Board.
In January 1999, we entered into a consulting agreement with Mr. Loren D.
Israelsen, a director and officer, pursuant to which he served as interim Chief
Executive Officer of our ShamanBotanicals.com division. Under this agreement,
Mr. Israelsen was paid a total of $30,000 for his services in January and
February 1999. In addition, upon further funding of Shaman, Mr. Israelsen is to
be paid $10,000 in deferred consulting expenses and an additional $150,000
project retainer to help close a corporate deal for the ShamanBotanicals.com
division. Such retainer will be paid in three installments during the third
quarter of 1999. Mr. Israelsen will also receive a success payment for each
corporate partnership as a percentage of the up front fee received from such
partner, which fee varies from two to five percent depending upon the timing of
closing such partnership.
Compensation Committee Interlocks and Insider Participation
During the 1998 fiscal year, Herbert H. McDade and Adrian D.P. Bellamy
served as members of the compensation committee of the board of directors. No
member of the compensation committee was, at any time during the 1998 fiscal
year or at any earlier time, an officer or employee of Shaman. No executive
officer of Shaman serves as a member of the board of directors or compensation
committee of any entity which has one or more executive officers serving as a
member of Shaman's board of directors or compensation committee.
45
Executive Compensation
The following table sets forth the compensation earned, for services
rendered in all capacities to us, for each of the last three fiscal years by
Shaman's Chief Executive Officer and the four other highest paid executive
officers serving as such at the end of the 1998 fiscal year whose salary and
bonus for that fiscal year was in excess of $100,000. The individuals named in
the table will be referred to in this prospectus as the Named Officers. No other
executive officer who would otherwise have been included in such table on the
basis of fiscal year 1998 salary and bonus resigned or terminated employment
during the year.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------------------------------------------------- ------------
Awards
---------
--------------------------------------------------------------------------
Other Securities
Annual Underlying All Other
Salary Compen- Options/ Compen-
Name and Principal Position Year ($)(1) Bonus ($) sation($) SARS (#) sation($)
- ------------------------------- ---- ---------- --------- ---------- --------- ---------
Lisa A. Conte, President, 1998 311,537(2) 3,000(3) -- 102,250(4) --
Chief Executive Officer 1997 312,901(5) 91,689(6) -- 14,750(4) --
and Chief Financial Officer 1996 286,190(7) 53,000(8) -- 5,250(4) --
Gerald M. Reaven, M.D. 1998 243,015 3,000(3) -- 10,750 --
Senior Vice President, 1997 239,114 25,000(9) -- -- --
Medical and Clinical Advisor 1996 227,878 3,000 -- 250 --
Atul S. Khandwala, Ph.D. (10) 1998 177,474 3,000(3) 125,531(11) 2,000 66,356(12)
Former Senior Vice President, 1997 226,031 20,000(9) -- -- 82,217(13)
Development and Chief 1996 187,563 3,000 51,200(14) 6,250 106,399(15)
Regulatory Officer
Steven R. King, Ph.D. 1998 179,329 3,000(3) -- 7,440 --
Senior Vice President, 1997 176,202 40,000(9) -- -- --
Ethnobotany and Conservation 1996 171,822 3,000 -- 2,750 --
James E. Pennington, M.D. (16) 1998 257,544 3,000(3) -- 6,250 --
Former Senior Vice President, 1997 58,490 70,000(17) -- 6,250 --
Clinical Research and 1996 -- -- -- -- --
Chief Medical Officer
Officer
Laurie Peltier(18), 1998 152,654 3,000(3) -- 3,250 25,000(19)
Vice President, Project 1997 87,674 20,000(20) -- 2,750 19,223(21)
Coordination 1996 -- -- -- -- --
- ------------------
(1) Includes amounts deferred under our Internal Revenue Code Section 401(k)
Plan and Section 125 Plan.
(2) Includes $59,573 and $13,431 attributable to child care costs and family
travel, respectively.
(3) Represents all employees bonus paid in 1998 for achievement of milestones
in 1997.
(4) Ms. Conte has agreed to surrender all of her currently held options.
(5) Includes $61,214 and $27,287 attributable to child care costs and family
travel, respectively.
(6) Includes $75,000 paid in 1998 for achievement of milestones in 1997.
(7) Includes $49,646 and $16,858 attributable to child care costs and family
travel, respectively.
(8) Includes $50,000 paid in 1997 for achievement of milestones in 1996.
(9) Represents bonus paid in 1998 for achievement of milestones in 1997.
(10) We accepted the resignation of Dr. Khandwala effective October 2, 1998.
(11) Represents amount paid in common stock for services rendered.
(12) Includes $3,000 received as a housing subsidy, $2,018 for travel expenses
and $61,338 for indebtedness for which repayment was forgiven.
(13) Includes $16,500 received as a housing subsidy, $1,164 for travel expenses
and $64,553 in indebtedness for which repayment was forgiven.
46
(14) Represents fees received from consulting services.
(15) Includes $13,445 received as a housing subsidy, $23,746 for moving and
relocation expenses, $1,562 for travel expenses and $67,646 in
indebtedness for which repayment was forgiven.
(16) Dr. Pennington joined us in September 1997. In 1997, he earned $58,490,
based on an annual salary of $255,000. Dr. Pennington was terminated
effective February 19, 1999 due to the elimination of his position in
connection with the our restructuring.
(17) Includes $60,000 sign-on bonus and $10,000 bonus paid in 1998 for
achievement of milestones in 1997.
(18) Ms. Peltier joined us in June 1997. In 1997, she earned $87,674, based
on an annual salary of $150,000.
(19) Represents closing costs on the sale of Ms. Peltier's former residence.
(20) Includes $10,000 sign-on bonus and $10,000 bonus paid in 1998 for
achievement of milestones in 1997.
(21) Represents moving and relocation expenses.
Stock Option and Stock Appreciation Rights under our 1992 Stock Option Plan
The following table contains information concerning the grant of stock
options under our 1992 Stock Option Plan to the Named Officers during the 1998
fiscal year. Except for the limited stock appreciation right described in
footnote (2) below which formed part of the option grant made to each Named
Officer, no stock appreciation rights were granted to such Named Officers during
the 1998 fiscal year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Option Term (1)
- ------------------------------------------------------- ----------------------------------------------------
% of Total
Number Options
of Granted
Securities to
Underlying Employees Exercise
Options/SARs in Fiscal Price Expiration
Name(*) Granted(#)(2) Year ($/Share)(3) Date 5% 10%
- --------------------- ------------- ---------- ------------ ---------- --------- ----------
Lisa A. Conte(4) 27,250 14.60% 25.62 09/17/08 $439,059 $1,112,663
75,000 40.19% 25.62 09/17/08 1,208,421 3,062,376
Gerald M. Reaven, M.D. 10,750 5.76% 25.62 09/17/08 173,207 438,941
Atul S. Khandwala, Ph.D. (5) 2,000 1.07% 28.75 10/19/08 4,211 8,535
Steven R. King, Ph.D. 7,440 3.99% 25.62 09/17/08 119,883 303,808
James Pennington, M.D. (6) 6,250 3.35% 25.62 09/17/08 100,702 255,198
Laurie Peltier 2,750 1.47% 25.62 09/17/08 44,309 112,287
500 0.27% 25.62 09/17/08 8,053 20,413
- -----------------
(1) Potential realizable value is based on assumption that the market price of
the common stock appreciates at the annual rate shown, compounded
annually, from the date of grant until the end of the 10-year option term.
There can be no assurance that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. As of March 31, 1999, the exercise price of all
options was significantly higher than the trading price of the stock on
that date.
(2) Each option has a maximum term of 10 years, subject to earlier termination
in the event of the optionee's cessation of service with Shaman. Except
for the options for 75,000 shares granted to Ms. Conte, 2,000 shares
granted to Mr. Khandwala and 500 shares granted to Ms. Peltier, each
option granted to the Named Officers in fiscal 1998 were part of the
September 18,1998 cancellation/regrant program. Accordingly, to the extent
the cancelled option for the same number of shares was exercisable for any
of those shares on the September 18, 1998 cancellation date, the new
option granted in replacement of that option will become exercisable for
those shares in a series of 12 successive equal monthly installments upon
47
his or her completion of each month of service over the one-year period
measured from the September 18, 1998 grant date. The option will become
exercisable for the remaining option shares in one or more installments
over her period of continued service, with each such installment to vest
on the same vesting date in effect for that installment under the
cancelled option. The options for 75,000 shares to Ms. Conte and 500
shares to Ms. Peltier will become exercisable for 12.5% of the option
shares upon completion of 6 months of service measured from the grant
date, and the balance of the option shares will become exercisable in a
series of 42 successive equal monthly installments over the optionee's
period of continued service thereafter. The option for 2,000 shares to Mr.
Khandwala will become exercisable in a series of six successive equal
monthly installments over the optionee's period of continued service
thereafter. However, each of the options granted to the named executive
officers will become immediately exercisable in full upon an acquisition
of Shaman by merger or asset sale, unless the option is assumed by the
successor entity. Each option includes a limited stock appreciation right
which will result in the cancellation of that option, to the extent
exercisable for vested shares, upon the successful completion of a hostile
tender for securities possessing more than 50% of the combined voting
power of our outstanding voting securities. In return for the cancelled
option, the optionee will receive a cash distribution per cancelled option
share equal to the excess of (1) the highest price paid per share of our
common stock in such hostile tender offer over (2) the exercise price
payable per share under the cancelled option.
(3) The exercise price may be paid in cash or in shares of common stock valued
at fair market value on the exercise date, or through a cashless exercise
procedure involving a same-day sale of the purchased shares. We may also
finance the option exercise by loaning the optionee sufficient funds to
pay the exercise price for the purchased shares and the federal and state
income tax liability incurred by the optionee in connection with such
exercise. The optionee may be permitted, subject to the approval of the
compensation committee, as administrator of the 1992 Stock Option Plan, to
apply a portion of the shares purchased under the option or to deliver
existing shares of common stock in satisfaction of such tax liability.
(4) Ms. Conte has agreed to surrender all of her currently held options.
(5) We accepted the resignation of Dr. Khandwala effective October 2, 1998.
(6) Dr. Pennington was terminated effective February 19, 1999 due to the
elimination of his position in connection with our restructuring.
Option Exercises and Holdings
The following table provides information with respect to the Named
Officers concerning the exercise of options during the 1998 fiscal year and
unexercised options held as of December 31, 1998. No stock appreciation rights
were exercised during such fiscal year, and except for the limited stock
appreciation right described in footnote (2) to the Stock Option/SAR Grants
Table which forms part of each outstanding stock option, no stock appreciation
rights were outstanding at the end of that fiscal year.
48
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Value
Realized Value of Unexcercised
(Market In-the-Money Options
price at at FY-End (Market
Shares exercise No. of Securities price of shares at
Acquired date less Underlying Unexercised FY-End less exercise
on exercise Options at FY-End (#) price) ($)(1)
Name Exercise price) ----------------------------- ---------------------------
(#) ($)(2) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- ---------- ---------- ------------ ------------- ----------- -------------
Lisa A. Conte(3) -- -- 4,771 101,229 $130,961 $1,265,364
Gerald M. Reaven, M.D. -- -- 2,687 8,062 $33,594 $100,781
Atul S. Khandwala, Ph.D.(4) -- -- 667 1,333 $6,247 $12,493
Steven R. King, Ph.D. -- -- 2,075 5,648 $25,902 $70,598
James Pennington, M.D.(5) -- -- 781 5,469 $9,766 $68,359
Laurie Peltier -- -- 281 2,969 $3,516 $37,106
- -----------------
(1) Based on the fair market value of our common stock on December 31, 1998 of
$38.12 per share, the Nasdaq National Market trading price at the close of
business that same day. As of March 31, 1999, these options had very
little value since the exercise price of all options was significantly
higher than the trading price of the stock on that date.
(2) Equal to the closing selling price of the purchased shares on the option
exercise date less the exercise price paid for such shares.
(3) Ms. Conte has agreed to surrender all of her currently held options.
(4) We accepted the resignation of Dr. Khandwala effective October 2, 1998.
(5) Dr. Pennington was terminated effective February 19, 1999 due to the
elimination of his position in connection with our restructuring.
Option Repricings
We implemented a special option cancellation/regrant program for all of
our employees, including executive officers, holding stock options with an
exercise price per share in excess of the fair market value of our common stock
on the regrant date. The cancellations/regrants were effected on September 18,
1998, and a number of outstanding options with an exercise price in excess of
$25.62 per share were surrendered for cancellation and new options for the same
aggregate number of shares were granted with an exercise price of $25.62 per
share.
49
The following table sets forth information with respect to each of the
Named Officers concerning his or her participation in the option
cancellation/regrant program effected on September 18, 1998. We have not
implemented any other option cancellation/regrant programs in which our
executive officers have participated.
Number of Market Length of
Securities Price of Exercise Option Term
Underlying Stock at Price at Remaining at
Options Time of Time of Date of
Repriced Repricing Repricing New Repricing
Repricing or or or Exercise or
Name Date Amended(1) Amendment Amendment Price Amendment
- ------------------ --------- ---------- --------- --------- --------- ---------
Lisa A. Conte(2) 9/18/98 500 $25.62 $ 70.00 $25.62 6.4 years
9/18/98 6,750 25.62 70.00 25.62 6.4 years
9/18/98 5,000 25.62 137.50 25.62 7.4 years
9/18/98 250 25.62 117.50 25.62 8.1 years
9/18/98 14,750 25.62 100.32 25.62 8.4 years
Gerald M. 9/18/98 10,000 $25.62 $ 72.50 $25.62 6.4 years
Reaven, M.D. 9/18/98 500 25.62 70.00 25.62 6.4 years
9/18/98 250 25.62 117.50 25.62 8.1 years
Atul S. Khandwala, --- --- --- --- --- ---
Ph.D.(3)
Steven R. King, Ph.D. 9/18/98 1,750 $25.62 $105.00 $25.62 6.2 years
9/18/98 1,250 25.62 70.00 25.62 6.4 years
9/18/98 1,190 25.62 70.00 25.62 6.4 years
9/18/98 500 25.62 70.00 25.62 6.4 years
9/18/98 2,500 25.62 137.50 25.62 7.4 years
9/18/98 250 25.62 117.50 25.62 8.1 years
James Pennington, 9/18/98 6,250 $25.62 $121.26 $25.62 9.0 years
M.D.(4)
Laurie Peltier 9/18/98 2,000 $25.62 $118.76 $25.62 8.8 years
9/18/98 750 25.62 118.76 25.62 8.8 years
- ----------------------
(1) As of March 31, 1999, the exercise price of the options was significantly
higher than the trading price of stock on that date.
(2) Ms. Conte has agreed to surrender all of her currently held options.
(3) We accepted the resignation of Dr. Khandwala effective October 2, 1998.
(4) Dr. Pennington was terminated effective February 19, 1999 due to the
elimination of his position in connection with our restructuring.
1992 Stock Option Plan
Our 1992 Stock Option Plan was adopted by the board of directors on
December 16, 1992, and has been amended several times since its adoption. The
1992 Stock Option Plan will terminate on December 31, 2008. As of June 15, 1999,
7,000,000 shares of common stock have been authorized for issuance under the
1992 Stock Option Plan. In addition, on February 1, 2000, the number of shares
of common stock issuable under the 1992 Stock Option Plan will automatically
increase by that number of shares which, when added to the number of shares
subject to then outstanding options under the 1992 Stock Option Plan and the
number of shares available for future option grant under the 1992 Stock Option
Plan immediately prior to such increase, will equal the lesser of (i) 25,000,000
shares or (ii) twenty percent (20%) of the sum of (i) the number of voting
shares of Shaman's capital stock outstanding at that time plus (ii) the number
of shares of common stock subject to the then outstanding options under the 1992
Stock Option Plan plus (iii) the number of shares available for future option
grant under the 1992 Stock Option Plan, after taking such increase into account.
As of June 15, 1999, approximately 27,575 shares of common stock had been issued
under the 1992 Stock Option Plan, 68,065 shares of common stock were subject to
outstanding options, and 6,904,360 shares of common stock were available for
future option grant. The share reserve under the 1992 Stock Option Plan has an
automatic share increase feature.
Subject to adjustment from time to time, the maximum number of shares of
common stock for which any one individual participating in the 1992 Stock Option
Plan may be granted stock options or separately exercisable stock appreciation
rights per calendar year, beginning with the 1999 calendar year, is 5,000,000
shares.
50
The 1992 Stock Option Plan contains two separate option grant programs:
* A discretionary option grant program under which key employees,
non-employee directors and consultants may be granted options to
purchase shares of common stock at a fixed price per share, and
* An automatic option grant program under which eligible non-employee
directors will automatically receive a special one-time option grant.
Options granted under the discretionary option grant program are either
incentive stock options designed to meet the requirements of Section 422 of the
Internal Revenue Code or non-statutory options not intended to satisfy such
requirements. All grants under the automatic option grant program are
non-statutory options.
The board of directors may terminate the 1992 Stock Option Plan at any
time. Any options outstanding at the time of such termination will continue to
remain outstanding and exercisable in accordance with the terms and provisions
of the instruments evidencing those grants. The 1992 Stock Option Plan will,
however, automatically terminate on the date all shares available for issuance
are issued as vested shares or cancelled pursuant to the exercise, surrender or
cash-out of outstanding options under the plan.
Discretionary Option Grant Program
The compensation committee of the board of directors administers the
discretionary option grant program. The compensation committee, as administrator
of this program, has full authority to determine the eligible individuals who
are to receive option grants and/or stock appreciation rights, the type of
option, either incentive stock option or non-statutory stock option, or stock
appreciation right, either tandem or limited, to be granted, the number of
shares to be covered by each granted option or right, the date or dates on which
the option or right is to become exercisable and the maximum term for which the
option or right is to remain outstanding.
Options granted under this program may either become exercisable in
periodic installments over the individual's period of service or may be
immediately exercisable for all the option shares at the exercise price paid per
share in the event the individual leaves our service prior to vesting in these
shares. Under the discretionary option grant provision of the 1992 Stock Option
Plan, we may grant options, for incentive stock option grants, at an exercise
price equal to the fair market value on the date of grant or, for non-statutory
grants, at an exercise price less than, equal to or greater than the fair market
value of the common stock on the date of grant. No option may be granted with a
term exceeding ten years. However, each such option may be subject to earlier
termination within a designated period following the optionee's cessation of
service with us. Options are not assignable or transferable by the optionee
except by will or the laws of inheritance following the optionee's death. The
optionee will not acquire any shareholder rights with respect to the option
shares until the option is exercised and the purchase price is paid for the
shares.
The option price may be paid in cash or in shares of common stock held by
the optionee. The compensation committee may also permit an option holder to pay
the option price for the purchased shares through a loan payable in installments
over a period of years.
In the event we are acquired, whether by a merger or asset sale, each
option at the time outstanding will automatically become exercisable for all of
the option shares at the time subject to such option and may be exercised for
any or all of such shares. However, an outstanding option will not so accelerate
if it is to be assumed by the successor corporation or the acceleration of such
option is subject to other limitations imposed by the compensation committee at
the time of the grant.
The compensation committee also has full power and authority, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options in the event of a change in control of Shaman, whether by
hostile tender offer for more than 50% of the outstanding voting stock or proxy
contest of the election of board members, so that each such option will become
exercisable, immediately prior to such change in control, for the total number
of shares of common stock at the time subject to such option.
Should an option expire or terminate for any reason prior to exercise in
full, the shares subject to the portion of the option not so exercised will be
available for subsequent grant under the 1992 Stock Option Plan. In addition,
unvested shares issued under the Plan and subsequently repurchased by us at the
option exercise price paid per share will be added back to the share reserve and
will accordingly be available for subsequent issuance under the 1992 Stock
51
Option Plan. However, shares subject to any option surrendered or cancelled in
accordance with the stock appreciation right provisions of the 1992 Stock Option
Plan will not be available for subsequent grants.
Automatic Option Grant Program
All grants under the automatic option grant program must be in strict
compliance with the express provisions of that program and no administrative
discretion will be exercised by the compensation committee of the board of
directors. Under the automatic option grant program each non-employee director
will receive:
* On February 1, 2000, a one-time option grant if he or she is serving as
a non-employee director at that time. The option will allow each such
non-employee director to purchase that number of shares of common stock
equal to one half of one percent of the number of voting shares of
Shaman's capital stock outstanding at that time; and
* Upon his or her initial appointment or election to the board of
directors, a special one-time option grant for that number of shares of
common stock equal to one half of one percent of the number of voting
shares of Shaman's capital stock outstanding on February 1, 2000,
provided such individual has not previously been employed by Shaman.
Each option granted under the automatic option grant program will have an
exercise price per share equal to the fair market value per share of common
stock on the grant date payable in cash or shares of common stock, and a maximum
term of ten years, subject to earlier termination upon the optionee's cessation
of board service. The grant will become exercisable for the option shares in a
series of 48 successive equal monthly installments over the optionee's period of
continued board service, measured from the grant date. However, the option will
become immediately exercisable for all of the option shares in the event of an
acquisition of Shaman by merger or asset sale or a hostile takeover by tender
offer for more than 50% of the outstanding voting stock or proxy contest for
board membership.
In addition, each option grant will be automatically cancelled upon the
successful completion of a hostile tender offer for more than 50% of Shaman's
outstanding voting securities. In return, the optionee will be entitled to a
cash distribution from Shaman in an amount per cancelled option share equal to
the excess of (1) the highest price per share of common stock paid in connection
with the tender offer over (2) the exercise price payable for such share.
401(k) Plan
We have a tax qualified salary deferral program under Section 401(k) of
the Internal Revenue Code. Under this program, any employee of Shaman may elect
to contribute up to 20% of his or her eligible earnings per pay period, up to
the maximum amount permitted per calendar year under the Federal tax laws. The
contributed earnings are credited to the employee's account under the 401(k)
Plan, and the account is held in trust as part of the plan assets. Each account
under the 401(k) Plan will be adjusted periodically to reflect its share of the
investment gains, earnings and losses of the trust fund, and the employee may
receive an in service loan distribution until the individual leaves Shaman's
employ, dies or becomes disabled. Alternatively, a terminated employee may defer
the distribution of the account balance until age 65. Although the 401(k) Plan
permits us to make contributions to the plan which either match in whole or in
part the salary deferral contributions made by the participants or which are
otherwise to be allocated to the accounts of participants on the basis of their
eligible earnings for the plan year for which such contribution is made, we have
to date made no contributions to the 401(k) Plan.
Employment Contracts, Termination Agreements and Change of Control Agreements
On March 15, 1999, the board of directors approved a change in control
provision concerning severance benefits for key executives. Pursuant to this
provision, should their employment with us terminate within 12 months after a
change in control, for any reason other than for cause, they will be entitled to
receive in one lump sum payment the cash equivalent of 12 months of base salary
plus any benefits to which they would otherwise be entitled. In connection with
these severance benefits, we have agreed to pay the premiums for any COBRA
coverage to which these individuals or their spouse or dependents are entitled
under a company sponsored medical plan after a change in control. In addition,
in the event of a change in control, all of the options held by such key
executives will automatically become fully vested and exercisable. Such
executives' exercisable shares will be fixed at the termination of their
employment, and they will have a period of 90 days from their termination date
52
to purchase such exercisable shares, as set forth in the stock option agreements
applicable to their options.
On May 27, 1998, we entered into a letter agreement with Stephanie C. Diaz
pursuant to which she served as Vice President, Chief Financial Officer,
commencing in June 1998. Pursuant to the letter agreement, Ms. Diaz was paid an
annual salary of $135,000 in addition to a $15,000 sign-on bonus. In addition,
Ms. Diaz was granted an option for 2,250 shares of common stock on June 30, 1998
with an exercise price per share of $67.50, the fair market value per share of
common stock on that date. The option became exercisable for 12.5% of the option
shares upon completion of six months of employment and for the balance of the
option shares in 42 equal monthly installments over the next 42 months of
employment. In the event Ms. Diaz's employment is terminated other than for
cause, she was to be paid salary and benefits for six months or until she
obtained full-time employment, whichever occurs first. Ms. Diaz resigned from
Shaman effective January 4, 1999. In connection with a revised agreement, Ms.
Diaz received a payment of three months salary and the continuance of the
exercise period under existing options for a period of 12 months following
termination of her employment.
On March 30, 1998, we entered into a letter agreement with John W.S. Chow,
Ph.D. pursuant to which he was served as Vice President, Technical Operations,
commencing in May 1998. Pursuant to the letter agreement, Dr. Chow was to be
paid an annual salary of $165,000 in addition to the sign-on bonus paid to him
in the amount of $10,000, and he was to be reimbursed, in an amount not to
exceed $25,000, for closing costs incurred in the sale of his former residence
in New Jersey and the purchase of his new residence in the Bay Area. Dr. Chow
will, however, be obligated to repay a prorated portion of both the sign-on
bonus and the reimbursed closing costs should he resign from Shaman within two
years after his hire date. Dr. Chow was also granted an option for 2,500 shares
of common stock on May 15, 1998 with an exercise price per share of $98.75, the
fair market value per share of common stock on that date. The option will become
exercisable in a series of monthly installments over the four year period
measured from the grant date as follows: 10% of the option shares will become
exercisable upon his completion of six months of employment measured from such
grant date, an additional 30% of the option shares will become exercisable in a
series of 18 successive equal monthly installments upon his completion of each
additional month of employment over the next 18 months thereafter, and the
remaining 60% of the option shares will become exercisable in a series of 24
successive equal monthly installments upon his completion of each additional
month of employment during the 3rd and 4th years of employment measured from the
grant date. Dr. Chow was also granted an additional 750 shares of common stock
on May 15, 1998 with an exercise price of $98.75, the fair market value per
share of common stock on that date. The 750 share grant will become exercisable
as follows: 375 shares upon Dr. Chow's completion of three years of employment
measured from the grant date, and the remaining 375 shares upon his completion
of four years of employment measured from the grant date. We further agreed to
pay Dr. Chow's reasonable moving expenses in an amount not to exceed $20,000 and
to provide him with an apartment for up to four months at a rental not to exceed
$2,500 per month. Should we terminate Dr. Chow's employment for any reason other
than for cause prior to May 1, 2001, we would continue to pay Dr. Chow's base
salary plus benefits on a monthly basis for up to six months or until Dr. Chow
obtains near full-time employment or consulting of at least 80% of his time,
whichever occurs sooner. We also extended a $300,000 loan to Dr. Chow in
connection with his purchase of a new residence in the Bay Area. See "Certain
Relationships and Related Transactions."
On August 21, 1997, we entered into a letter agreement with James
Pennington, Ph.D. pursuant to which he served as Senior Vice President, Clinical
Research and Chief Medical Officer, commencing October 1997. Pursuant to the
letter agreement, Dr. Pennington was paid an annual salary of $255,000 in
addition to a sign-on bonus paid to him in the amount of $60,000. In addition,
Dr. Pennington was granted, on September 16, 1997, an option to purchase 6,250
shares of common stock at a purchase price of $121.25 per share. The option had
a term of 10 years and was to become exercisable as follows: 12.5% of the option
shares upon Dr. Pennington's completion of six months of service, measured from
the grant date, and the balance of the option shares in 42 successive equal
monthly installments upon his completion of each of the next 42 months of
service thereafter. In the event that Dr. Pennington's employment is terminated
other than for cause, he would be entitled to receive salary and benefits for
nine months, or, if sooner, until Dr. Pennington obtained near full time
employment or consulting of at least 80% of his time. On February 15, 1999, we
entered into a new agreement with Dr. Pennington in connection with his
resignation as Senior Vice President, Clinical Research and Chief Medical
Officer, effective February 19, 1999. Under this agreement, payments were made
to Dr. Pennington until June 1999, at which time he secured employment elsewhere
and his severance payments were terminated. In addition, options previously
granted to him will continue to vest during this period following his
termination.
On February 9, 1996, we entered into a letter agreement with Atul S.
Khandwala, Ph.D. pursuant to which he served as Senior Vice President,
Development, commencing March 1996. Pursuant to the letter agreement, Dr.
Khandwala was paid an annual salary of $225,000. In addition, Dr. Khandwala was
granted an option to purchase 6,000 shares of common stock at a purchase price
of $137.50 per share. The option had a term of ten years and would become
exercisable over a four-year period in a series of 48 successive equal monthly
53
installments upon Dr. Khandwala's completion of each month of service with
Shaman over the four-year period measured from March 1, 1996. In the event Dr.
Khandwala's employment is terminated by us for any reason, Dr. Khandwala would
receive salary and benefits for a period of six months. On August 24, 1998, we
entered into a severance agreement with Dr. Khandwala in connection with his
resignation as Senior Vice President, Development and Chief Regulatory Officer
on October 2, 1998. Under this agreement, we will continue to forgive the
remaining balance of his loan over the remaining two and one half years of the
loan term, provided that Dr. Khandwala continues to provide consulting services
to us. On October 28, 1998, we entered into an agreement with Dr. Khandwala
pursuant to which he rendered consulting services to us through April 2, 1999.
In connection with this agreement, we issued to Dr. Khandwala 4,366 shares of
common stock and loaned him the funds necessary to satisfy the federal and state
withholding taxes applicable to those shares. In addition, we granted Dr.
Khandwala an option to purchase 2,000 shares of common stock at an exercise
price of $28.75, the fair market value of our common stock on October 20, 1998.
The option will become exercisable in six successive equal monthly installments
on the last day of each month during the consulting period.
None of our other executive officers have employment agreements with us,
and their employment may be terminated at any time at the discretion of the
board of directors. As administrator of the 1992 Stock Option Plan, the
compensation committee has the authority to provide for accelerated vesting of
the shares of common stock subject to any outstanding options held by the Chief
Executive Officer and our other executive officers or any unvested shares
actually held by those individuals under the 1992 Stock Option Plan upon a
change in control of Shaman effected through a successful tender offer for more
than 50% of our outstanding voting securities or through a change in the
majority of the board as a result of one or more contested elections for board
membership.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our Restated Certificate of Incorporation and Bylaws provide for
indemnification of directors, officers and other agents of Shaman. Each of the
current directors and certain officers and agents of Shaman have entered into
separate indemnification agreements with us.
Certain Relationships and Related Transactions
On June 17, 1998, we loaned $300,000 to John W.S. Chow, Ph.D., Vice
President, Technical Operations, to reimburse him for a reasonable difference
between the purchase price of his residence in the Bay Area and the cost of
comparable housing in New Jersey, his former state of residence. The loan is
evidenced by his promissory note of the same date which will become due and
payable in a series of five successive equal annual installments, with the first
such installment due on June 25, 1999. The note will bear interest at a variable
per annum rate equal to the short-term applicable federal rate in effect under
the federal tax laws for January of each calendar year the loan remains
outstanding. Accordingly, the interest rate in effect for the period Dr. Chow's
note was outstanding during the 1998 calendar year was 5.52%. Accrued and unpaid
interest will become due and payable each year on the same date the principal
installment for that year becomes payable. Each installment of principal and
accrued interest will automatically be forgiven as that installment becomes due,
provided Dr. Chow continues in our employ. However, the entire unpaid balance of
the note, together with all accrued and unpaid interest, will become immediately
due and payable upon Dr. Chow's termination of employment with us prior to June
25, 2003, unless Dr. Chow's employment is involuntarily terminated by us other
than for cause. In the event we terminate Dr. Chow's employment for any reason
other than for cause, or Dr. Chow's employment terminates by reason of his death
or disability, then the entire principal balance of the note plus accrued
interest will be forgiven. The amount outstanding on Dr. Chow's note, including
accrued interest, was approximately $313,188 as of March 31, 1999 and the
highest amount outstanding on that note during the 1998 fiscal year was
$308,729.
In April 1999, we entered into a credit facility and note purchase
agreement with certain stockholders, key executives and members of the board of
directors, pursuant to which we may borrow from such persons approximately
$1,000,000 at any time commencing on May 14, 1999 and until the earlier of the
completion of a registered public offering of our equity securities, or
September 1, 1999. As of the date of this prospectus, we have not borrowed any
amount under this credit agreement. Certain executive officers and directors who
participated in this credit agreement, up to a total of $200,000 include: Lisa
A. Conte, Steven R. King, John W.S. Chow, Thomas Carlson, G. Kirk Raab, Adrian
D.P. Bellamy, Herbert H. McDade, Jr. and M. David Titus. Any convertible
promissory notes issued pursuant to the credit agreement will be due and payable
on the earlier of (1) 30 days subsequent to the completion of the public
offering, or (2) December 31, 1999, for any amounts that are not converted into
Series R Preferred Stock currently being registered. Interest on the convertible
promissory notes will accrue at an annual rate of 12%. The convertible
promissory notes, if and when issued, will be secured by certain assets of
Shaman and will be convertible into shares of the class and series of equity
securities offered by us in the first registered public offering effected by us
54
after the date of the credit agreement, which is the Series R Preferred Stock,
or into common stock if no such offering occurs prior to December 31, 1999. In
connection with the credit agreement, we issued warrants to purchase shares of
the same class and series of equity securities as those into which the debt is
convertible. The number of shares subject to these warrants is equal to 50% of
the debt amount divided by the per share sale price of the shares sold in the
public offering. These warrants are exercisable, on a cashless basis, commencing
on April 5, 1999, and through the third anniversary date of the public offering.
The conversion price of the convertible promissory notes and the exercise price
of the warrants is equal to the per share offering price in the public offering.
If a public offering is not completed prior to December 31, 1999, then the
conversion price of the convertible promissory notes and the exercise price of
the warrants will be the lower of $0.05 per share of our common stock, or
one-third of the five-day weighted average trading price of our common stock for
the period ending three trading days prior to conversion or exercise.
See "Employment Contracts, Termination Agreements and Change of Control
Agreements" and "Director Compensation" with respect to further transactions
between us and our officers and directors.
55
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with
respect to the beneficial ownership of the common stock as of June 15, 1999 by
(1) all persons who are beneficial owners of five percent or more of the common
stock, (2) each director, (3) the Named Officers in the Summary Compensation
Table above and (4) all current directors and executive officers as a group. The
number of shares beneficially owned by each director or executive officer is
determined under rules of the SEC and the information is not necessarily
indicative of beneficial ownership for any other purpose. Shares of common stock
subject to options or warrants currently exercisable or exercisable within 60
days of June 15, 1999 are included in the number of shares beneficially owned by
the person holding such option or warrant for computing the percentage ownership
of such person, but are not treated as outstanding for computing the percentage
of any other person. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, based upon such information
furnished by such owners, have sole voting and investment power with respect to
such shares, subject to community property laws where applicable.
The percentages set forth in the percent column under the beneficial
ownership after the rights offering heading have been calculated based on the
assumption that each stockholder would subscribe for the stockholder's pro-rata
portion, determined as of June 15, 1999, of this rights offering, and assuming
the conversion of all outstanding Series R Preferred Stock. In the event each
stockholder subscribes for the stockholder's pro-rata portion of the rights
offering, the stockholders' beneficial ownership percentage of Shaman after the
rights offering will not be identical to its beneficial ownership percentage of
Shaman prior to the rights offering because SEC regulations require that we
include stock options exercisable within 60 days of June 15, 1999, for purposes
of the calculations in the table. However, for determining each stockholder's
pro-rata portion of the rights offering, we only include the Shaman common stock
owned by each stockholder and did not include exercisable or unexercisable
options.
To the extent any stockholder chooses not to subscribe for its pro-rata
portion of the rights offering, its beneficial ownership of Shaman after the
rights offering will be less than is indicated in this table. If any stockholder
chooses to subscribe for more than its pro-rata portion of the rights offering,
its beneficial ownership will be greater than is indicated in this table.
Benefits Ownership Prior Benefits to Ownership After
to the Rights Offering the Rights Offering
----------------------------------------- ---------------------------------
Name and Address of Beneficial Owner Shares Percent Shares Percent
- ------------------------------------- --------------- ------------------------ --------------- ----------------
Lisa A. Conte (1)................. 23,115 * 690,671 *
Steven R. King, Ph.D. (3).......... 6,620 * 28,652 *
Gerald R. Reaven, M.D. (4)......... 8,983 * 9,705 *
John Chow (5)...................... 833 * 833 *
Tom White ......................... 0 * 0 *
Thomas Carlson, M.D. (6)........... 3,788 * 3,788 *
G. Kirk Raab (7)................... 6,783 * 202,662 *
Adrian D.P. Bellamy ............... 0 * 0 *
Jeffrey Berg ...................... 0 * 0 *
Loren Israelsen ................... 0 * 0 *
Herbert H. McDade, Jr. ............ 0 * 0 *
M. David Titus .................... 250 * 7,470 *
Current Officers and Directors as
a group (121 persons)............. 50,372 1.93% 943,781 1.22%
- ----------------------
*.....Less than 1.0%
(1) This table is based upon information supplied to us by executive officers,
directors and stockholders owning greater than five percent, as set forth
in filings required by the Securities and Exchange Commission or as
otherwise provided. The address of each officer and director identified
in this table is that of Shaman's executive offices, 213 East Grand
Avenue, South San Francisco, CA 94080.
(2) Percentage of beneficial ownership is calculated assuming 2,596,975 shares
of common stock were outstanding as of June 15, 1999. Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange
56
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock subject to options or warrants
currently exercisable or convertible, or exercisable or convertible within
60 days of June 15, 1999, are included in the number of shares outstanding
for computing the percentage of the person holding such option or warrant
but are not included in the number of shares outstanding for computing the
percentage of any other person. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with respect to
all shares of common stock beneficially owned.
(3) Includes 5,857 shares subject to options exercisable within 60 days of
June 15, 1999.
(4) Includes 8,958 shares subject to options exercisable within 60 days of
June 15, 1999.
(5) Represents shares subject to options exercisable within 60 days
of June 15, 1999.
(6) Represents shares subject to options exercisable within 60 days
of June 15, 1999.
(7) Does not include 1,500 shares of Series C Preferred Stock which is
convertible to a certain number of shares of common stock, such number
which is determined in accordance with that certain Series C Stock
Purchase Agreement.
(8) Total shares held by directors and officers listed above. Also includes
19,436 shares which are currently issuable upon the exercise of
outstanding options.
57
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 220,000,000 shares of common
stock, par value $0.001 per share, and 2,000,000 shares of preferred stock, par
value $0.001 per share. We have designated 400,000 shares of our preferred stock
as Series A Preferred Stock, all of which are issued and outstanding; 200,000
shares as Series C Preferred Stock, 115,958 of which are issued and outstanding;
6,285 shares as Series D Preferred Stock, 1,478 of which are issued and
outstanding; and 1,300,000 shares as Series R Preferred Stock, 16,667 of which
are issued and outstanding, and up to 1,000,000 shares of which are subject to
issuance in this offering and up to 73,112 shares of which are subject to
issuance upon exercise of outstanding warrants.
Common Stock
As of June 15, 1999, there were 2,596,975 shares of common stock
outstanding held of record by approximately 953 stockholders, which we believe
represents approximately 15,000 beneficial stockholders. The holders of common
stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available therefor. See "Dividend Policy."
In the event of our liquidation, dissolution, sale or winding up, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of preferred
stock then outstanding. The common stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund rights
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessible.
Preferred Stock
Our board of directors has the authority to issue preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without the further
vote or action by the holders of common stock. The approval of the outstanding
shares of existing series of preferred stock would be required for the issuance
of any additional series of preferred stock with rights, preferences or
privileges senior to those of the existing series of preferred stock. The
issuance of preferred stock may delay, defer, or prevent a change in control of
Shaman without further action by the stockholders and may adversely affect the
voting and other rights of the holders of common stock.
Series A Preferred Stock
As of June 15, 1999, there were 400,000 shares of Series A Preferred Stock
outstanding held of record by one stockholder. The Series A Preferred will
convert into 27,157 shares of common stock on July 23, 1999.
Voting. Each holder of Series A Preferred Stock is entitled to that number
of votes equal to the number of shares of common stock into which the shares of
Series A Preferred Stock held by such stockholder are convertible and has voting
rights and powers equal to those of the common stock, except as otherwise
expressly provided or as required by law.
Dividends. Subject to preferential rights with respect to any series of
preferred stock which may from time to time come into existence, holders of
Series A Preferred Stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor. Any
dividends declared on the Series A Preferred Stock are not cumulative.
Liquidation Preference. In the event of a liquidation, dissolution, sale
or winding up of Shaman, holders of Series A Preferred Stock are entitled to
receive $8.15 per share, as adjusted for any stock dividends, combinations or
splits with respect to such shares, plus all accrued or declared but unpaid
dividends. If the assets and funds of Shaman legally available for distribution
to the holders of the Series A Preferred Stock are insufficient to permit
payment of the full preferential amount, then holders of the Series A Preferred
Stock are entitled to share ratably the entire amount of such assets or funds
legally available for distribution.
58
Conversion. Each share of Series A Preferred Stock is convertible into one
share of common stock, as adjusted for any stock dividends, combinations or
splits with respect to such shares, at any time at the option of the holder. The
minimum number of shares which may be converted at any one time is 75,000
shares, or such lesser number of shares as are then outstanding. Each share of
Series A Preferred Stock shall automatically convert into common stock on the
earlier to occur of: (1) immediately in the event that at any time prior to July
23, 1999, the closing sale price of our common stock for a period of 60
consecutive trading days exceeded $163.00 per share; or (2) July 23, 1999. If
the Series A Preferred Stock is automatically converted on July 23, 1999, the
conversion price into common stock is adjusted such that each share of Series A
Preferred Stock will automatically convert into such number of shares of common
stock as equals $163.00 divided by the weighted-average closing sale price for
the 60 consecutive trading days ending two days prior to July 23, 1999, but in
no event shall a share of Series A Preferred Stock be convertible into more than
1.358 shares of common stock, in each case as appropriately adjusted for any
stock dividends, combinations or splits with respect to such shares of common
stock.
Redemption. The Series A Preferred Stock is not redeemable.
Priority. The Series A Preferred Stock ranks senior to the common stock
and the Series R Preferred Stock and junior to the Series C Preferred Stock and
the Series D Preferred Stock, if issued, as to dividends, distributions and
distribution of assets upon liquidation, dissolution or winding up of Shaman.
Series C Preferred Stock
As of June 15, 1999, there were 115,958 shares of Series C Preferred Stock
outstanding held of record by 21 stockholders.
Voting. The holders of the Series C Preferred Stock are entitled during
the first year after August 18, 1998, to six votes for each one share of Series
C Preferred Stock held; and thereafter, to one vote for each share of common
stock into which such share of Series C Preferred Stock is convertible on the
record date for the matter to be voted on.
Dividends. Each share of Series C Preferred Stock shall be entitled to
receive cumulative dividends paid semi-annually on May 30 and November 29 of
each year as follows: (1) a stock-on-stock dividend of $10.00 per annum, paid in
arrears, in shares of common stock, valued at 85% of the average closing price
of the common stock for the 10 trading day period ending three trading days
prior to the date on which the dividend is paid; plus (2) a cash amount equaling
0.00005% of Shaman's United States net sales, if any, for the preceding two
calendar quarters of its SP-303/Provir product for the treatment of diarrhea
less $5.00, which is the value of the semi-annual stock dividend. We have agreed
to honor this royalty with our sales of SB-300, to the extent sold to the
HIV/AIDS community. If under Delaware law, we are unable to pay the cash amount
of the above described dividend, then the cash portion shall be payable in
shares of common stock, valued at 85% of the average closing price of the common
stock for the 10 day trading period ending three trading days prior to the date
on which the dividend is paid.
Liquidation Preference. In the event of a liquidation, dissolution, sale
or winding up of Shaman, holders of the Series C Preferred Stock shall be
entitled to receive, prior and in preference to the holders of the common stock,
the Series A Preferred Stock, and the Series D Preferred Stock and the Series R
Preferred Stock, an amount equal to $100 per share, plus any accrued and unpaid
dividends.
Conversion. Each share of Series C Convertible Preferred Stock shall be
convertible, at any time commencing on August 18, 1999 at the election of each
holder, and automatically on August 18, 2004, into the greater of (1) 0.8333
shares of common stock or (2) such number of shares of common stock as equals
$100 divided by 85% of the average closing price of the common stock for the 10
trading day period ending three trading days prior to the date of conversion.
Redemption. The Series C Preferred Stock is not redeemable.
Priority. The Series C Preferred Stock ranks senior to the common stock,
the Series A Preferred Stock, the Series D Preferred Stock and the Series R
Preferred Stock as to dividends, distributions and distribution of assets upon
liquidation, dissolution or winding up of Shaman.
59
Series D Preferred Stock
As of June 15,1999, there were 1,478 shares of Series D Preferred Stock
outstanding held of record by six stockholders.
Voting. Except as otherwise required by law or expressly provided
in the certificate of incorporation, the Series D Preferred Stock is not
entitled to vote on any matter.
Dividends. Each share of Series D Preferred Stock shall be entitled to
receive cumulative dividends at the rate of $55 per year payable quarterly
commencing on February 1, 1999. These dividends may be paid in cash or, subject
to certain limitations, any combination of cash and shares of common stock.
Dividends not paid on the due date shall accrue interest until paid at the rate
of 12% per annum. If the dividend is paid in shares of common stock, the number
of shares to be delivered to each holder of Series D Preferred Stock shall be
determined by dividing the aggregate dollar amount of the dividend payable to
each such holder by an amount equal to 90% of the outstanding price of the
common stock during 12 trading days ending one day prior to the date of the
conversion.
Liquidation Preference. In the event of a liquidation, dissolution, sale
or winding up of Shaman, holders of the Series D Preferred Stock shall be
entitled to receive, prior and in preference to the holders of the common stock,
the Series A Preferred Stock and the Series R Preferred Stock, but subordinate
to the holders of the Series C Preferred Stock, an amount equal to $1,000 per
share, plus any accrued and unpaid dividends.
Conversion. Each share of Series D Convertible Preferred Stock shall be
convertible at the election of the holder, at any time commencing on the date on
which any shares of Series D Preferred Stock were first issued, into a number of
shares of common stock equal to $1,000 plus any accrued but unpaid dividends and
interest on the Series D Preferred Stock, divided by 90% of the lowest trading
price of the common stock during the 12 trading days ending one day prior to the
date of the conversion.
The delisting of our common stock from The Nasdaq National Market on
February 2, 1999 constituted an Optional Redemption Event, as defined in our
Certificate of Incorporation. In connection therewith, on February 4, 1999, we
issued a Control Notice, as defined in our Certificate of Incorporation, that
prevented the redemption of the Series D Preferred Stock. This Control Notice
will remain in effect for as long as we are not listed on any of The Nasdaq
National Market, The Nasdaq SmallCap Market, the American Stock Exchange or the
New York Stock Exchange. Delivery of the Control Notice had the effect of
increasing the annual dividend to $180 per share and adjusting the conversion
price of the Series D Preferred Stock to 72% of the lowest trading price during
a designated time period prior to the conversion.
Redemption. The holders of the Series D Preferred Stock may require that
we redeem all or part of their shares if any of the following optional
redemption events occur: (1) for five consecutive trading days there is no
reported sale price of our common stock on Nasdaq, the New York Stock Exchange
or the American Stock Exchange, (2) our common stock ceases to be listed on
Nasdaq, the NYSE or the AMEX, (3) we merge or effect another transaction in
which we sell all or substantially all of our assets or our stockholders prior
to the transaction do not collectively own at least 51% of the voting securities
of the surviving corporation, or the common stock of the surviving corporation
is not listed on Nasdaq, the NYSE or the AMEX, (4) we adopt changes to our
certificate of incorporation that materially and adversely affect the rights of
the holders of the Series D Preferred Stock in a different and more adverse
manner than they affect the rights of the holders of the common stock, (5) if
the holders are unable for a period ranging from 20 to 30 days to sell their
shares of common stock issuable upon conversion of the Series D Preferred Stock
pursuant to an effective registration statement, or (6) if we fail or default in
performing any material obligation to a holder of Series D Preferred Stock under
the terms of our certificate of incorporation or the Series D Preferred Stock
purchase agreement. The per share redemption price is $1,000 plus 118% of
accrued but unpaid dividends on each share of Series D Preferred Stock.
We may under certain circumstances issue a control notice upon the
occurrence of any of the three optional redemption events described in clauses
(1), (2) and (3) above, which will prevent the requirement that we redeem the
shares. The issuance of this control notice has the effect of increasing the
annual cumulative dividend payable to the Series D Preferred stockholders to
$180 per share, if the redemption event was one of those described in clause (1)
or (2) above, or $300 per share for the redemption event described in clause (3)
above, and adjusting the conversion price of the Series D Preferred Stock to 72%
of the lowest trading price for a designated period prior to the conversion, if
the redemption event was one of those described in clause (1) or (2) above, or
63% of the lowest trading price for a designated period prior to the conversion,
for the redemption event described in clause (3) above.
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The delisting of our common stock from The Nasdaq National Market in
February 1999 constituted an optional redemption event for our Series D
Preferred Stock. Since we do not have adequate resources to pay to redeem the
Series D Preferred Stock, we have issued the control notice to the holders of
the Series D Preferred Stock as required under our charter that prevented the
redemption of the Series D Preferred Stock. The notice preventing the redemption
of the Series D Preferred Stock will remain in effect for as long as our
securities are not listed on any of The Nasdaq National Market, The Nasdaq
SmallCap Market, the AMEX or the NYSE.
Priority. The Series D Preferred Stock ranks senior to the common stock,
the Series A Preferred Stock and the Series R Preferred Stock but junior to the
Series C Preferred Stock as to dividends, distributions and distributions of
assets upon liquidation, dissolution or winding up of Shaman.
Series R Preferred Stock
Upon completion of this offering, up to 1,016,667 shares of Series R
Preferred Stock will be outstanding. The Series R Convertible Preferred Stock
will have the following rights, preferences and privileges:
Voting. The holders of the Series R Preferred Stock are entitled to 100
votes for each share of Series R Preferred Stock held.
Dividends. Subject to preferences that may be applicable to outstanding
preferred stock, the holders of Series R Preferred Stock are entitled to receive
ratably with the holders of the common stock, such dividends, if any, as may be
declared by the board of directors out of funds legally available therefor. See
"Dividend Policy."
Liquidation Preference. In the event of a liquidation, dissolution, sale
or winding up of Shaman, holders of the Series R Preferred Stock shall be
entitled to receive, prior and in preference to the holders of the common stock,
but subordinate to the holders of the Series A, Series C and Series D Preferred
Stock, an amount equal to $15.00 per share, plus any accrued and unpaid
dividends.
Conversion. The Series R Preferred Stock is not convertible until February
1, 2000. On that date, each share of Series R Preferred Stock shall be
automatically converted into a number of shares of common stock equal to $15.00
divided by the lower of (1) $_______, which is equal to 10% of the average
closing sales price for the common stock for the 10 trading days ending three
trading days prior to the date of this prospectus, or (2) the per share price
that is equal to 10% of the average closing sales price of our common stock for
the 10 trading day period ending three trading days prior to February 1, 2000.
Redemption. The Series R Preferred Stock is not redeemable.
Priority. The Series R Preferred Stock ranks equally with the common stock
and junior to the Series A, Series C and Series D Preferred Stock as to
dividends, and ranks senior to the common stock but junior to the Series A,
Series C and Series D Preferred Stock as to distributions of assets upon
liquidation, dissolution or winding up of Shaman.
Warrants
As of June 15, 1999, there were outstanding warrants to purchase an
aggregate of 104,833 shares of common stock at a weighted average exercise price
of $115.20 per share, and outstanding warrants to purchase an aggregate of
73,112 shares of Series R Preferred Stock at an exercise price of $15.00 per
share.
Between September 1990 and September 1993, we issued, in connection with
equipment lease financings, warrants to purchase 4,585 shares of common stock at
prices ranging from $48.00 to $216.60 per share. These warrants expire between
September 2000 and September 2002.
In July 1996, we issued to one investor warrants to purchase an aggregate
of 27,500 shares of common stock. These warrants are exercisable through July
26, 2002 at an exercise price of $203.68 per share. We have filed a registration
statement with the SEC for the resale of shares issued upon exercise of these
warrants, which registration statement was declared effective on November 30,
1998.
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In May 1997, we issued, in connection with a debt financing, warrants to
purchase 10,000 shares of common stock at an exercise price of $125.00 per
share. These warrants expire on May 7, 2007.
In March 1998, we issued to certain investors warrants to purchase an
aggregate of 6,875 shares of common stock. These warrants are exercisable
through March 18, 2001 at an exercise price of $150.00 per share. We have filed
a registration statement with the SEC for the resale of shares issued upon
exercise of these warrants, which registration statement was declared effective
on July 10, 1998.
In June 1998, we issued to certain investors warrants to purchase an
aggregate of 17,500 shares of common stock. These warrants are exercisable
through June 22, 2003 at an exercise price per share equal to 115% of the
average trading price of the common stock during specified measurement periods.
These warrants provide for adjustment of the number of shares of common stock
issuable upon exercise thereof, including upon the distribution of certain
dividends, upon our reorganization, reclassification or merger, or upon the
division or combination of our common stock. We have filed a registration
statement with the SEC for the resale of shares issued upon exercise of these
warrants, which registration statement was declared effective on July 10, 1998.
In December 1998, we issued to certain investors warrants to purchase an
aggregate of 38,373 shares of common stock. These warrants are exercisable
through December 10, 2003 at an exercise price per share equal to $61.40 per
share.
In April 1999, we issued to MMC/GATX Partnership No. 1 in connection with
the amendment of a loan agreement with GATX a cashless exercise warrant to
purchase 39,512 shares of the class and series of equity securities which are
being registered in this offering , which is the Series R Preferred Stock. This
warrant is exercisable commencing on the date of this prospectus and through the
seventh anniversary date of the earlier to occur of (1) December 31, 1999, or
(2) the date of this prospectus, subject to acceleration upon certain events.
The per share exercise price will be $15.00, which is the per share price at
which the Series R Preferred Stock is being sold in this offering.
In April 1999, we also issued to various lenders who were either existing
stockholders, key executives or directors of Shaman cashless exercise warrants
to purchase an aggregate of 33,600 shares of the class and series of equity
securities which are being registered in this offering , which is the Series R
Preferred Stock. These warrants are exercisable commencing upon the consummation
of the sale of the Series R Preferred Stock registered in this offering and
through the third anniversary date of such consummation, subject to acceleration
upon certain events. The per share exercise price will be $15.00, which is the
per share price at which the Series R Preferred Stock is being sold in this
offering.
Credit Facility Convertible Promissory Notes
Pursuant to the terms of our credit facility and note purchase agreement
with various lenders, at such time as we request funding of the credit facility
and receive the funds, we will issue senior subordinated secured convertible
promissory notes that are convertible after the date of the consummation of this
offering and prior to the earlier to occur of (1) January 1, 2000 and (2) thirty
days following the consummation date of this offering into an aggregate of
67,201 shares of Series R Preferred Stock, at a conversion price of $15.00 per
share.
As long as any of the foregoing warrants or convertible promissory notes
remain unexercised and outstanding, the holders thereof will have the
opportunity to profit from an increase in the market price of the common stock,
if any, without assuming the risk of ownership.
Registration Rights
We have granted to one investor certain demand rights and rights to be
included in registrations effected by Shaman to register shares of common stock
currently owned or in the future acquired by such investor pursuant to a stock
purchase agreement between us and such investor. The investor has waived these
registration rights with respect to this offering.
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We have granted to holders of warrants and convertible notes issued in
connection with a credit facility and note purchase agreement certain demand
registration rights covering the shares of Series R Preferred Stock underlying
these warrants and notes. We are required under these registration rights to
file a registration statement to register the shares no later than 30 days after
the effective date of this offering.
Anti-Takeover Effects of Provisions of Certificate of Incorporation and
Bylaws
Shaman is subject to the provisions of Section 203 of the Delaware General
Corporation Law statute. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the person becomes an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock.
Our Certificate of Incorporation divides the board of directors into two
classes with staggered two-year terms. Under our by-laws, any vacancy on the
board of directors, including a vacancy resulting from an enlargement of the
board of directors, may be filled by a majority of the directors then in office.
The classification of the board of directors and the limitation on filling of
vacancies could make it more difficult for a third party to acquire, or
discourage a third party from acquiring, control of Shaman.
Transfer Agent and Registrar
BankBoston, N.A. is the transfer agent and registrar for our
Series R Preferred Stock and common stock.
63
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of our common stock. In addition, an
active public market for our common stock may not continue in the future.
Upon completion of this offering, there will be approximately
____________________ shares of common stock outstanding, _________________
shares of common stock issuable upon conversion of outstanding shares of Series
D Preferred Stock, assuming a conversion price, which is based on the common
stock market price, of $_____ per share, and ________________ shares of common
stock issuable upon exercise of outstanding warrants, all of which are freely
tradeable without restriction, except for restrictions imposed on the resale of
shares held by our affiliates, as defined in the Securities Act. An additional
____________ shares of common stock will be issuable upon conversion of the
Series C Preferred Stock, assuming a conversion price, which is based on the
common stock market price, of $_____ per share, commencing on August 18, 1999,
all of which will be freely tradeable without restriction. We will also have up
to 1,016,667 shares of Series R Preferred Stock outstanding and 73,112 shares of
Series R Preferred Stock subject to issuance upon exercise of outstanding
warrants. The Series R Preferred Stock is convertible into common stock on
February 1, 2000. On that date, each share of Series R Preferred Stock will
automatically convert into a number of shares of common stock equal to $15.00
divided by the lower of (1) $_______, or (2) a per share price that is equal to
10% of the average closing sales price of our common stock for the 10 trading
days ending three trading days prior to February 1, 2000. Assuming a conversion
price of $____________ per share, upon conversion of the Series R Preferred
Stock on February 1, 2000, ________________ shares of common stock will be
issued, or issuable pursuant to warrants, that will be immediately freely
tradeable without restriction, other than by our affiliates.
64
THE RIGHTS OFFERING
The Subscription Rights
We are offering our stockholders the right to subscribe for and purchase
up to 1,000,000 shares of Series R Convertible Preferred Stock at $15.00 per
share. The rights offering is open only to those stockholders who owned common
stock on [________________, 1999]. The rights offering is not open to anyone who
did not own common stock on [_____________, 1999].
We are offering stockholders the opportunity to purchase seven shares of
Series R Preferred Stock for each _____ shares of common stock they owned on
[_______________,1999]. In determining the number of shares of Series R
Convertible Preferred Stock we will issue to each stockholder pursuant to the
subscription rights offered by this prospectus, we will round up to the nearest
whole number. We will not issue subscription rights to purchase fractional
shares and we will not pay cash in place of subscription rights. The
subscription rights are not transferable and will not be listed for trading on
any stock exchange. The Series R Preferred Stock will be quoted on the OTC
Bulletin Board under the symbol "SHMNO" and we expect that these shares will
trade prior to their conversion to common stock on February 1, 2000.
Basic Subscription Privilege
Each subscription right entitles you to purchase seven shares of Series R
Preferred Stock for each _____ shares of common stock you owned at the close of
business on [___________, 1999]. You must purchase a minimum of seven shares of
Series R Preferred Stock to participate, and if you hold fewer than ____ shares
of common stock on the record date, you will be allowed to purchase seven shares
of Series R Preferred Stock. You will receive certificates representing the
shares that you purchase pursuant to your basic subscription privilege as soon
as practicable after your basic subscription has been accepted, which may occur
at any time prior to the expiration of this offering. We may accept your basic
subscription amount prior to accepting your over-subscription amount. In that
event, we will deliver stock certificates for the basic subscription amount and
the subscription agent will retain the over-subscription amount in escrow until
the expiration of this offering, as provided below.
Over-Subscription Privilege
Each subscription right also grants you an over-subscription privilege to
purchase additional shares of Series R Preferred Stock that are not purchased by
other stockholders. You are entitled to exercise your over-subscription
privilege only if you exercise your basic subscription privilege in full. If you
wish to exercise your over-subscription privilege, you should indicate the
number of additional shares that you would like to purchase in the space
provided on your subscription agreement. When you send in your subscription
agreement, you must also send the full purchase price for the number of
additional shares that you have requested to purchase in addition to the payment
due for shares purchased through your basic subscription privilege. If the
number of shares remaining after the exercise of all basic subscription
privileges is not sufficient to satisfy all over-subscription privileges, you
will be allocated shares pro rata, subject to elimination of fractional shares,
in proportion to the number of shares you offer to purchase above your basic
subscription privilege. However, if your pro rata allocation exceeds the number
of shares you requested on your subscription certificate, then you will receive
only the number of shares that you requested, and the remaining shares from your
pro rata allocation will be divided among other stockholders exercising their
over-subscription privileges. In addition, we have the discretion to issue less
than the total number of shares that may be available for over-subscription
requests.
As soon as practicable after August ___, 1999, BankBoston, N.A., the
subscription agent, will determine the number of shares of Series R Preferred
Stock that you may purchase pursuant to the over-subscription privilege. You
will receive certificates representing these shares as soon as practicable after
the expiration date. If you request and pay for more shares than are allocated
to you, we will refund that overpayment, without interest to you. In connection
with the exercise of the over-subscription privilege, banks, brokers and other
nominee holders of subscription rights who act on behalf of beneficial owners
will be required to certify to the subscription agent and us as to the aggregate
number of subscription rights that have been exercised, and the number of shares
of Series R Preferred Stock that are being requested through the
over-subscription privilege, by each beneficial owner on whose behalf such
nominee holder is acting.
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Minimum Subscription Requirement
We require a minimum subscription of seven shares of Series R Preferred
Stock, or $105. This means that if you hold fewer than ____ shares of common
stock on the record date, you will be allowed to purchase seven shares of Series
R Preferred Stock, which will be considered your basic subscription privilege.
Plan of Distribution
On or about _____________, 1999, we will distribute the subscription
rights agreements and copies of this prospectus to individuals who owned shares
of our common stock on ____________, 1999. If you wish to exercise your
subscription rights and purchase shares of Series R Preferred Stock, you should
complete the subscription agreement and return it, with payment for the shares,
to the subscription agent, BankBoston, N.A. If you have any questions, you
should contact our information agent, Shareholder Communications Corporation, at
the telephone number and address on page ___. See "The Rights Offering --
Subscription Procedures."
We have retained our transfer agent, BankBoston, N.A., to assist with the
rights offering in the role of the subscription agent. The subscription agent
will hold all subscription agreements received from stockholders, and will be
responsible for delivering stock certificates and refunds, in case of
over-subscription or cancellation of the offering, to stockholders. We will pay
all fees and expenses of the subscription agent in connection with the rights
offering, which we estimate will be approximately $______. You are responsible
for paying any other commissions, fees, taxes or other expenses incurred in
connection with the exercise of the subscription rights.
Expiration Date
The rights offering will expire at 5:00 p.m., Eastern Daylight Savings
Time, on August __, 1999, unless extended in the sole discretion of Shaman. If
you do not exercise your basic subscription privilege or over-subscription
privilege prior to such time, we have the right to reject your subscription.
We reserve the right to reject any subscription agreements that the
subscription agent receives after 5:00 p.m. on the expiration date, regardless
of when the documents were originally mailed. Stockholders who wish to
participate in the rights offering should submit all subscription agreements to
BankBoston, N.A. by the expiration date, or to their broker or bank at least 10
days before the expiration date, to allow the broker or bank sufficient time to
carry out those instructions.
The rights offering is not conditioned upon our receipt of subscriptions
for any minimum number of shares. However, the rights offering may be cancelled
at any time prior to its completion, in which case all subscription payments
will be returned without interest.
Subscription Payments
Each subscription agreement submitted pursuant to this rights offering
must be accompanied by the full amount of the purchase price for all of the
shares of Series R Preferred Stock subscribed for by the stockholder. If a
stockholder submits less than the full purchase price, we will limit such
stockholder's maximum subscription to the number of shares purchasable with
those funds, rounded down to the nearest whole number of shares.
If a subscription is rejected in whole or in part, the subscription agent
will promptly refund payment for any unpurchased shares. We will not pay
interest on any subscription funds.
Determination of Offering Price
Our board of directors intend to obtain, prior to the effective date of
this offering, an opinion from Alliant Partners that the terms of this rights
offering are fair, from a financial point of view, to our stockholders. The
price at which the Series R Preferred Stock will convert into common stock was
set at a substantial discount to the actual trading price of our common stock.
This discount is offered as an incentive for our current stockholders to
participate in this offering. Nevertheless, the offering price does not
necessarily bear any relationship to the book value of our assets, past
operations, cash flow, earnings, financial condition or any other established
criteria for value and should not be considered an indication of our underlying
value.
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Subscription Procedures
To participate in the rights offering, you must submit a properly
completed subscription agreement, together with full payment of the offering
price for all shares for which you subscribe. Those who hold common stock for
the account of others, such as brokers, banks, trustees or depositories, should
notify the beneficial owners of those shares as soon as possible to ascertain
the beneficial owners' intentions and to obtain instructions with respect to the
rights offering.
The subscription agreement and payment must be received by the
subscription agent before 5:00 p.m., Eastern Daylight Savings Time, on August
___, 1999, unless extended in our sole discretion. Payment of the offering price
must be made:
- by check or bank draft drawn upon a U.S. bank or postal,
telegraphic, or express money order payable to "BankBoston,
N.A., as Subscription Agent;" or
- by notice of guaranteed delivery of payment from a bank, a trust company
or a New York Stock Exchange member.
Payment of the offering price will be considered made only upon (1) the
subscription agent's receipt of a certified check or bank draft drawn upon a
U.S. bank or any postal, telegraphic or express money order or (2) the clearance
of any uncertified check. If you wish to pay by uncertified personal check,
please note that your check may take five business days or more to clear and,
therefore, you should make payment sufficiently in advance of the expiration
date to ensure that payment is received and cleared by the expiration date.
Subscription agreements and any checks in payment of the offering price
should be delivered by mail, hand delivery, or overnight courier, to the
applicable address below:
By Mail By Hand By Overnight Carrier
------- ------- --------------------
Securities Transfer &
BankBoston Reporting Services Boston EquiServe
Corporate Actions C/O Boston EquiServe Attn: Corporate Actions
P.O. Box 8029 100 Williams Street, Galleria 150 Royall Street
Boston, MA 02266-8029 New York, NY 10038 Canton, MA 02021
If you do not indicate the number of shares to be purchased or do not
forward full payment of the offering price, then your payment will be credited
to purchase your basic subscription privilege to the full extent of the payment
received and, if any funds remain, will be credited to purchase your
over-subscription privilege to the extent of the remaining funds. In each case,
share amounts will be rounded down to the nearest whole number.
The method of delivery of the subscription agreement and payment of the
offering price will be at your election and risk. If sent by mail, it is
recommended that your subscription agreement and payment be sent by registered
mail, properly insured, with return receipt requested, and that a sufficient
number of days be allowed to ensure delivery to the subscription agent and
clearance of payment prior to the expiration date. Because uncertified personal
checks may take at least five business days to clear, you are urged to arrange
for payment by certified or cashier's check, money order or wire transfer of
funds.
Our answers to all questions concerning the timeliness, validity, form and
eligibility of any subscription will be final and binding. We may, in our sole
discretion, waive any defect or irregularity, permit a defect or irregularity to
be corrected within any time as we may determine, or reject the purported
exercise of any right. Subscriptions will not be considered to have been
received or accepted until all irregularities have been waived or cured within
the time that we determine in our discretion. Neither we nor the subscription
agent will be under any duty to notify you of any defect or irregularity in
connection with the submission of your subscription agreement or incur any
liability for failure to give notification.
If you have any questions concerning the rights offering or these
subscription procedures, or if you would like additional copies of this
prospectus or other documents, please contact our information agent: Shareholder
Communications Corporation, 17 State Street, New York, NY 10004. Banks and
brokers may call the information agent at (212) 805-7113, and stockholders may
call toll free at (800) 546-8622.
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Non-Transferability of Subscription Rights
Only you may exercise the basic subscription privilege and the
over-subscription privilege. You may not sell, give away or otherwise transfer
the basic subscription privilege or the over-subscription privilege.
No Revocation of Subscription
After you have exercised your basic subscription privilege or
over-subscription privilege, you may not revoke that exercise. You should not
exercise your subscription rights unless you are certain that you wish to
purchase shares of our Series R Convertible Preferred Stock.
Amendment and Termination of Rights Offering
We reserve the right to amend the terms and conditions of the rights
offering. If we make an amendment that we consider significant, we will (1) mail
notice of the amendment to all stockholders who owned shares of common stock on
___________, 1999, (2) extend the expiration date by at least 14 days and (3)
offer all subscribers not less than 10 days to revoke any prior subscriptions,
in whole or in part. In all other cases, subscriptions will be irrevocable.
We also reserve the right to terminate the rights offering at any time, in
our discretion, in which case all subscriptions will be cancelled, and we will
return all subscription payments to subscribers without interest.
Upon the occurrence of any change in or cancellation of the rights
offering, we will issue a press release to that effect, and we will file a
post-effective amendment to the registration statement covering this prospectus.
Shares of Common Stock Outstanding After the Rights Offering
Assuming we issue all of the shares of Series R Preferred Stock offered in
the rights offering and assuming conversion of all of such shares at a
conversion price of $____ per share, approximately ____ shares of common stock
will be issued and outstanding following the rights offering and conversion of
the Series R Preferred Stock. This would represent a __% increase in the number
of outstanding shares of our common stock. If you do not exercise your basic
subscription privilege, the percentage of Shaman common stock that you hold will
substantially decrease.
Certain Ownership Limits and Reporting Requirements
Any person or group that acquires direct or indirect beneficial ownership
of more than 5% of the outstanding shares of our common stock will be subject to
special reporting requirements under Section 13(d) or 13(g) of the Securities
Exchange Act of 1934. Any person or group that acquires direct or indirect
beneficial ownership of more than 10% of the outstanding shares of our common
stock will be subject to special reporting requirements under Section 16(a) of
the Exchange Act and may become liable under Section 16(b) of the Exchange Act
for reimbursement of any "short-swing profits." Please consult with your
attorney to see if these rules will apply to you.
State and Foreign Securities Laws
The rights offering is not being made in any state or foreign country in
which it is unlawful to do so, nor are we selling or accepting subscriptions
from holders who are residents of any such state or country. We may delay the
commencement of the rights offering in certain states or other jurisdictions in
order to comply with the securities law requirements of those states or other
jurisdictions. It is not anticipated that there will be any changes in the terms
of the rights offering. We may decline, in our sole discretion, to make
modifications to the terms of the rights offering requested by certain states or
other jurisdictions, in which case stockholders who live in those states or
jurisdictions will not be eligible to participate in the rights offering.
No Recommendations
We are not making any recommendation as to whether or not you should
exercise your subscription rights. You should make your decision based on your
own assessment of your best interests.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summarizes the material federal income tax consequences of
the rights offering. This summary is based on current law, which is subject to
change at any time, possibly with retroactive effect. This summary is not a
complete discussion of all federal income tax consequences of the rights
offering, and, in particular, may not address federal income tax consequences
applicable to stockholders subject to special treatment under federal income tax
law. In addition, this summary does not address the tax consequences of the
rights offering under applicable state, local or foreign tax laws. This
discussion assumes that your shares of Shaman stock and the subscription rights
and shares issued to you pursuant to the rights offering constitute capital
assets.
Receipt and exercise of the subscription rights distributed pursuant to
the rights offering is intended to be nontaxable to stockholders, and the
following summary assumes you will qualify for such nontaxable treatment. We
have not sought, nor do we intend to seek, any ruling from the IRS or an opinion
of counsel related to the tax matters described below.
This discussion is included for your general information only. You should
consult your tax advisor to determine the tax consequences to you of the rights
offering in light of your particular circumstances, including any state, local
and foreign tax consequences.
Taxation of Stockholders
Receipt of a subscription right: You will not recognize any gain or other
income upon receipt of a subscription right.
Tax basis of subscription rights: Your tax basis in each subscription
right will depend on whether you exercise the subscription right or allow the
subscription right to expire.
If you exercise a subscription right, your tax basis in the subscription
right will be determined by allocating the tax basis of your Shaman stock on
which the subscription right is distributed between the Shaman stock and the
subscription right, in proportion to their relative fair market values on the
date of distribution of the subscription right. However, if the fair market
value of your subscription rights is less than 15% of the fair market value of
your existing shares of Shaman stock, then the tax basis of each subscription
right will be zero, unless you elect, by attaching an election statement to your
federal income tax return for 1999, to allocate tax basis to your subscription
rights.
If you allow a subscription right to expire, it will be treated as having
no tax basis.
Holding period of subscription rights: Your holding period for a
subscription right will include your holding period for the shares of common
stock upon which the subscription right is issued.
Expiration of subscription rights: You will not recognize any loss upon
the expiration of a subscription right.
Exercise of subscription rights: You generally will not recognize a gain
or loss on the exercise of a subscription right. The tax basis of any share of
Series R Preferred Stock that you purchase through the rights offering will be
equal to the sum of your tax basis, if any, in the subscription right exercised
and the price paid for the share. The holding period of the shares of Series R
Preferred Stock purchased through the rights offering will begin on the date
that you exercise your subscription rights.
If treated as a taxable distribution: If, contrary to Shaman's intent, the
rights offering does not qualify as nontaxable, you would be treated as
receiving a taxable distribution equal to the fair market value of the
subscription rights on their distribution date. The distribution would be taxed
as a dividend to the extent made out of our current or accumulated earnings and
profits; and any excess would be treated first as a return of your basis
(investment) in your Shaman stock and then as a capital gain. You would have a
tax basis in the rights equal to the fair market value of the rights on the date
of the rights distribution and your holding period in the rights would begin on
the date of distribution of the rights. Expiration of the subscription rights
would result in a capital loss. You generally will not recognize gain or loss on
the exercise of a subscription right. The tax basis of any share of common stock
that you purchase through the rights offering will be equal to the sum of your
tax basis, if any, in the subscription right exercised and the price paid for
the share. The holding period of the shares of common stock purchased through
the rights offering will begin on the date that you exercise your subscription
rights.
Conversion of Series R Preferred Stock to Common Stock: There is some risk
that the Internal Revenue Service would argue that the conversion of the Series
R Preferred Stock to common stock is properly characterized as a taxable stock
69
dividend rather than a nontaxable event. If the conversion were treated as a
taxable stock dividend, the Internal Revenue Service may argue that the amount
of the dividend is equal to the amount of the discount from the stated trading
price of the common stock on which the conversion is based. Because the Series R
Preferred Stock will convert automatically and in the full to common stock, and
because the Series R Preferred Stock will not have any declared and unpaid
dividends as of the time the conversion occurs, Shaman anticipates that the
conversion of the Series R Preferred Stock will qualify as a nontaxable event.
If the conversion qualifies as a nontaxable event, your tax basis in your Series
R Preferred Stock will be allocated among the shares of common stock you receive
upon conversion, and the holding period of the shares of common stock will
include your holding period you had in the Series R Preferred Stock prior to
conversion.
Taxation of Shaman
We will not recognize any gain, other income or loss upon the issuance of
the subscription rights, the lapse of the subscription rights, or the receipt of
payment for shares of Series R Preferred Stock upon exercise of the subscription
rights.
LEGAL MATTERS
Brobeck, Phleger & Harrison LLP will deliver an opinion to us about the
validity of the issuance of the shares of our Series R Preferred Stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998, as set forth in their report, which contains an
explanatory paragraph describing conditions that raise substantial doubt about
our ability to continue as a going concern as described in Note 1 to the
financial statements. We've included our financial statements in this
prospectus and in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
70
SHAMAN PHARMACEUTICALS, INC
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors..............................................F-2
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999
(unaudited)...............................................................F-3
Statements of Operations for the years ended December 31, 1996, 1997,
and 1998 and the three months ended March 31, 1998 and 1999 (unaudited)...F-4
Statements of Stockholders' Equity for the years ended December 31, 1996,
1997, 1998 and the three months ended March 31, 1999 (unaudited)..........F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997,
1998 and the three months ended March 31, 1998 and 1999 (unaudited).......F-7
Notes to Financial Statements...............................................F-8
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Shaman Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Shaman Pharmaceuticals,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shaman Pharmaceuticals, Inc.
at December 31, 1998 and 1997, and the results of our operations and our cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company had cash, cash equivalents and short-term investments at December 31,
1998 aggregating $9.2 million which are not sufficient to enable the Company to
pay its existing liabilities and to fund its operations through December 31,
1999. The Company has incurred recurring operating losses and has total
liabilities at December 31, 1998 in excess of its available cash resources.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements referred to above do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Palo Alto, California
February 11, 1999, except for Note 10, as to which the date is June 22, 1999
ERNST & YOUNG LLP
F-2
SHAMAN PHARMACEUTICALS, INC.
BALANCE SHEETS
December 31, March 31,
---------------------------- -------------
1997 1998 1999
----------- ----------- -------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 11,340,702 $ 5,887,496 $ 1,706,936
Short-term investments 10,079,943 3,277,197 1,003,671
Amounts due from related parties 192,551 208,898 200,276
Prepaid expenses and other current assets 553,507 283,804 658,488
----------- ----------- -----------
Total current assets 22,166,703 9,657,395 3,569,371
Property and equipment:
Laboratory equipment 6,211,182 6,336,564 1,118,110
Computer equipment and furniture 1,158,869 1,474,914 367,332
Leasehold improvements 7,351,827 7,266,066 7,179,564
----------- ----------- -----------
14,721,878 15,077,544 8,665,006
Less: accumulated depreciation and amortization (10,749,738) (11,963,876) 6,279,270
----------- ----------- -----------
3,972,140 3,113,668 2,385,736
Other assets 613,657 368,080 368,080
----------- ----------- -----------
Total assets $ 26,752,500 $ 13,139,143 $ 6,323,187
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and other accrued expenses $ 925,701 $ 1,515,230 $ 1,309,352
Accrued clinical trial costs 1,689,659 2,051,134 1,087,786
Accrued professional fees 718,625 948,374 896,700
Accrued compensation 368,272 326,797 225,089
Accrued restructuring costs - - 1,715,132
Advances--contract research 1,133,605 968,750 968,750
Current installments of long-term obligations 2,783,976 2,803,861 2,897,494
----------- ----------- -----------
Total current liabilities 7,619,838 8,614,146 9,100,303
Long-term obligations, excluding current installments 4,017,979 2,415,137 1,389,651
Senior convertible notes 9,967,044 - -
Stockholders' equity:
Preferred stock, $0.001 par value; issuable in
series; 1,000,000 shares and 2,000,000 shares
authorized at December 31, 1998 and March 31, 1999,
respectively; 400,000, 519,533 and 518,033
convertible shares issued and outstanding at December
31, 1997, 1998 and March 31, 1999, respectively
(Liquidation preference at December 31, 1997,
1998 and March 31, 1999 -- $3,258,800, 18,429,310
and 16,929,310, respectively) 400 520 518
Common stock, $0.001 par value; 40,000,000 shares
and 70,000,000 authorized at December 31, 1998 and
March 31, 1999, respectively; 889,802 shares,
1,519,147 shares and 1,929,358 shares issued and
outstanding at December 31, 1997, 1998 and
March 31, 1999, respectively 890 1,519 1,929
Additional paid-in capital 117,181,430 152,727,444 154,990,316
Deferred compensation and other adjustments (124,910) (185,850) (116,086)
Accumulated deficit (111,910,171) (150,433,773) (159,043,444)
------------ ------------ ------------
Total stockholders' equity
(net capital deficiency) 5,147,639 2,109,860 (4,166,767)
------------- ------------- ------------
Total liabilities and stockholders' equity $ 26,752,500 $ 13,139,143 $ 6,323,187
(net capital deficiency) ============= ============= =============
See accompanying notes to financial statements.
F-3
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, Three Months Ended March 31,
----------------------------------------------- ------------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
Revenue from collaborative
agreements $ 3,406,250 $ 3,500,000 $ 2,659,856 $ 875,000 $ -
Operating expenses:
Research and development 19,138,190 24,140,246 32,393,374 7,513,098 2,468,118
General and administrative 3,537,157 4,833,489 5,565,066 1,276,111 1,493,785
Restructuring costs - - - - 2,188,857
------------- ------------- ------------- ------------- -------------
Total operating expenses 22,675,347 28,973,735 37,958,440 8,789,209 6,150,760
------------- ------------- ------------- ------------- -------------
Loss from operations (19,269,097) (25,473,735) (35,298,584) (7,914,209) (6,150,760)
Interest income 1,082,618 1,217,884 550,227 232,368 73,878
Interest expense (603,330) (5,032,684) (2,033,004) (806,896) (259,175)
------------- ------------- ------------- ------------- -------------
Net loss (18,789,809) (29,288,535) (36,781,361) (8,488,737) (6,336,057)
Deemed dividend on Preferred Stock - - (1,742,241) - (2,273,614)
------------- ------------- ------------- ------------- -------------
Net loss applicable to
Common Stockholders $(18,789,809) $(29,288,535) $(38,523,602) $ (8,488,737) $ (8,609,671)
============ ============ ============= ============= =============
Basic and diluted net loss per
common share $ (27.85) $ (34.44) $ (38.31) $ (9.52) $ (5.18)
============ ============ ============= ============= =============
Shares used in calculation of
basic and diluted net loss
per common share 674,800 850,500 1,005,700 891,800 1,662,750
============ ============ ============= ============= =============
See accompanying notes to financial statements.
F-4
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1997, and 1998
and the Quarter Ended March 31, 1999 (unaudited)
Deferred
Convertible Additional Compensation Total
Preferred Common Paid-In and Other Accumulated Stockholders'
Stock Stock Capital Adjustments Deficit Equity
------------ ----------- ------------- ------------- -------------- --------------
Balance at December 31, 1995 $ - $ 663 $ 88,183,521 $ (146,956) $ (63,831,827) $ 24,205,401
Issuance of 13,699 shares
of common stock upon
the exercise of stock options - 14 440,066 - - 440,080
Issuance of 400,000 shares
of series A convertible
preferred stock 400 - 3,057,823 - - 3,058,223
Issuance of
19,446 shares of common
stock in connection with
Lipha/Merck collaboration - 19 2,972,203 - - 2,972,222
Unrealized loss on
available-for-sale securities - - - (26,458) - (26,458)
Amortization and reversals of
deferred compensation - - (35,933) 153,164 - 117,231
Net loss - - - - (18,789,809) (18,789,809)
---------- ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1996 400 696 94,617,680 (20,250) (82,621,636) 11,976,890
Issuance of 974 shares
of common stock upon
the exercise of stock options - 1 64,155 - - 64,156
Issuance of 100,000 shares
of common stock in connection
with a registered direct public
offering in January 1997, net
of issuance costs of $.93 million - 100 8,070,310 - - 8,070,410
Issuance of 80,000 shares
of common stock in connection
with a registered direct public
offering in April 1997, net
of issuance costs of $.13 million - 80 7,824,174 - - 7,824,254
Issuance of 10,039 shares
of common stock in connection
with Lipha/Merck collaboration - 10 1,492,529 - - 1,492,539
Issuance of 2,755 shares
of common stock upon conversion
of senior convertible notes in
November 1997 - 3 223,160 - - 223,163
Unrealized loss on
available-for-sale securities - - - (9,720) - (9,720)
Deferred compensation related
to granting of options to
non-employees, net of
amortization and reversals - - 240,282 (94,940) - 145,342
Value ascribed to warrants issued
in conjunction with secured loan - - 648,000 - - 648,000
Value ascribed to in-the-money
conversion option of senior
convertible notes - - 3,692,140 - - 3,692,140
Value ascribed to warrants issued
in conjunction with senior
convertible notes - - 309,000 - - 309,000
Net loss - - - - (29,288,535) (29,288,535)
---------- ---------- ------------ ------------ ------------- ------------
Balance at December 31, 1997 $ 400 $ 890 $117,181,430 $ (124,910) $(111,910,171) $ 5,147,639
F-5
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
For the Years Ended December 31, 1996, 1997, and 1998
and the Quarter Ended March 31, 1999 (unaudited)
Deferred
Convertible Additional Compensation Total
Preferred Common Paid-In and Other Accumulated Stockholders'
Stock Stock Capital Adjustments Deficit Equity
------------ ----------- ------------- ------------- -------------- --------------
Balance at December 31, 1997 $ 400 $ 890 $117,181,430 $ (124,910) $(111,910,171) $ 5,147,639
Issuance of 792 shares
of common stock upon the
exercise of stock options - 1 21,714 - - 21,715
Issuance of 3,116 shares
of common stock to employees
from the 1998 special
issuance plan - 3 80,756 - - 80,759
Issuance of 37,360 shares
of common stock to consultants
for consulting services rendered - 37 1,074,073 - - 1,074,110
Sale of 57,762 shares
of common stock in connection
with Lipha/Merck collaboration - 58 2,499,942 - - 2,500,000
Deferred compensation related to
granting of options to
non-employees, net of
amortization and reversals - - 162,464 (75,849) - 86,615
Change in unrealized gain/loss
on available-for-sale securities - - - 14,909 - 14,909
Value ascribed to Warrants issued
in conjunction with Series B
Convertible Preferred Stock
($1,462,860) - - - - - -
Issuance of 10,082 shares
of common stock in connection
with senior convertible notes
quarterly interest payment - 10 650,531 - - 650,541
Issuance of 53,810 shares
of common stock upon the
conversion of 1,209 shares
of Series D Convertible
Preferred Stock (1) 54 (53) - - -
Issuance of 128,563 shares
of common stock upon the
conversion of senior
convertible notes - 129 5,453,055 - - 5,453,184
Sale of 140,880 shares
of convertible preferred stock
in connection with the Series C
Convertible Preferred Stock
Offering, net of issuance
costs of $1.5 million 141 - 12,598,553 - - 12,598,694
Value ascribed to in-the-money
conversion option of Series C
Convertible Preferred Stock - - 678,636 - - 678,636
Issuance of 93,077 shares
of common stock upon the
conversion of 24,922 shares
of Series C Convertible
Preferred Stock (25) 93 (68) - - -
Issuance of 4,179 shares
of common stock in
payment of Dividends on
Series C Convertible
Preferred Stock - 4 (4) - - -
Sale of 240,604 shares
of common stock in connection
with the private placement
offering in December 1998,
net of issuance costs of
$.13 million - 240 7,086,704 - - 7,086,944
Issuance of 4,784 shares
of Series D Convertible
Preferred Stock in exchange
for cancellation of senior
convertible note 5 - 4,176,106 - - 4,176,111
Value ascribed to in-the-money
conversion option of Series D
Convertible Preferred Stock - - 1,063,605 - - 1,063,605
Value ascribed to Warrants
issued in conjunction with
Series D Convertible
Preferred Stock ($943,680) - - - - - -
Net loss - - - - (38,523,602) (38,523,602)
---------- ---------- ------------ ------------ ------------- ------------
Balance at December 31, 1998 520 1,519 152,727,444 (185,850) (150,433,773) 2,109,860
Issuance of 8,204,208 shares
of common stock upon the
conversion of 1,500 shares
of Series D Convertible
Preferred Stock (unaudited) (2) 410 14,198 - - 14,606
Value ascribe to the
in-the-money conversion option
of Series D Convertible
Preferred Stock (unaudited) - - 2,273,614 - - 2,273,614
Other Preferred Stock
costs (unaudited) - - (24,940) - - (24,940)
Deferred compensation related
to granting of options to
non-employees, net of
amortization and reversals
(unaudited) - - - 54,700 - 54,700
Change in unrealized gain/loss
on available-for-sale
securities (unaudited) - - - 15,064 - 15,064
Net loss (unaudited) - - - - (8,609,671) (8,609,671)
---------- ---------- ------------ ------------ ------------- ------------
Balance at
March 31, 1999 (unaudited) $ 518 $ 1,929 $154,990,316 $ (116,086) $(159,043,444) $(4,166,767)
========== ========== ============ ============ ============= ============
See accompanying notes to financial statements.
F-6
SHAMAN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Years ended December 31, Three Months Ended March 31,
----------------------------------------------- ------------------------------
1996 1997 1998 1998 1999
-------------- ------------- ------------- ------------- -------------
Operating activities:
Net loss applicable to
Common Shareholders $ (18,789,809) $ (29,288,535) $ (38,523,602) $ (8,488,737) $ (8,609,671)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 2,245,860 1,718,167 1,214,139 380,844 170,749
Amortization of warrants
and deferred equity costs 117,231 390,729 286,664 270,068 108,702
Loss on disposal of fixed assets - - 19,834 26,593 121,696
Interest expense on issuance of
senior convertible notes - 3,692,140 - - -
Deemed dividend on preferred stock - - 1,742,241 - 2,273,614
Issuance of common stock to
consultants for services rendered - - 1,074,110 - -
Other compensation - - 80,759 - -
Payment of interest in common stock - - 328,743 288,563 14,607
Changes in operating assets and liabilities:
Prepaid expenses, current assets and
other assets (80,148) 628,198 755,280 (120,410) (93,999)
Accounts payable, accrued professional
fees, accrued compensation, accrued
clinical trial costs and contract
research advances 2,021,220 (748,327) 974,423 850,384 392,525
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (14,485,646) (23,607,628) (32,047,409) (6,792,695) (5,621,777)
------------ ------------ ------------ ------------ ------------
Investing activities:
Purchases of available-for-sale investments (10,872,811) (14,562,627) (5,255,947) (1,999,049) -
Maturities of available-for-sale investments 26,325,454 4,954,640 5,032,892 4,959,136 -
Sales of available-for-sale investments 1,494,000 - 7,040,710 899,007 2,288,589
Proceeds from sale of fixed assets due to
restructuring - - - - 235,636
Capital expenditures (864,729) (913,382) (375,501) (33,143) (80,836)
Employee loans, net of repayments - - (256,347) - 8,622
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities 16,081,914 (10,521,369) 6,185,807 3,825,951 2,452,011
------------ ------------ ------------ ------------ ------------
Financing activities:
Proceeds from issuance of preferred
stock, net 3,058,223 - 12,598,694 - -
Proceeds from issuance of common
stock, net 3,412,302 17,446,683 9,608,659 12,225 -
Proceeds from issuance of long-term obligations 600,000 5,000,000 - - -
Proceeds from issuance of senior
convertible notes, net - 9,479,039 - - -
Issuance and other related costs on
preferred stock - - - - (24,941)
Principal payments on long-term obligations (1,825,665) (2,936,297) (2,310,080) (643,964) (985,853)
Proceeds from asset financing arrangements - 429,023 511,123 211,232 -
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 5,244,860 29,418,448 20,408,396 (420,507) (1,010,794)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 6,841,128 (4,710,549) (5,453,206) (3,387,251) (4,180,560)
Cash and cash equivalents at beginning
of period 9,210,123 16,051,251 11,340,702 11,340,702 5,887,496
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 16,051,251 $ 11,340,702 $ 5,887,496 $ 7,953,451 $ 1,706,936
============= ============= ============ ============ ============
Supplemental information
Interest paid $ 603,330 $ 538,891 $ 605,069 $ 217,056 $ 262,266
============= ============= ============ ============ ============
See accompanying notes to financial statements.
F-7
SHAMAN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(information pertaining to the periods ended
March 31, 1998 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
General
To date, Shaman Pharmaceuticals has been primarily focused on discovering
and developing novel pharmaceutical products for major human diseases by
isolating and optimizing active compounds found in tropical plants with a
history of medicinal use. We have conducted human clinical trials with our three
lead product candidates -- SP-303/Provir (Phase III/II), nikkomycin Z (Phase I)
and SP-134101 (Phase I) -- targeting five indications. Due to unforeseen delays
and costs necessary to complete additional necessary trials for our lead
compound, SP-303/Provir for the treatment of diarrhea in people with AIDS, we
have chosen to discontinue all pharmaceutical development, manufacturing and
marketing activities. We intend to sell or out-license worldwide marketing
rights to our pharmaceutical assets. We plan to focus our efforts on our
Botanicals division.
Matters Affecting Ongoing Operations
The accompanying financial statements have been prepared assuming that we
will continue as a going concern. We have cash, cash equivalents and short-term
investments at December 31, 1998 aggregating $9.2 million which are not
sufficient to enable us to pay existing liabilities and fund our operations
through December 31, 1999. We have total liabilities in excess of our available
cash resources at December 31, 1998. We have had recurring net losses, including
a net loss applicable to common stockholders of $38.5 million in the year ended
December 31, 1998, and have an accumulated deficit of $150.4 million at December
31, 1998. These conditions raise substantial doubt about our ability to continue
as a going concern.
To address these matters, on February 1, 1999, we announced and initiated
the implementation of a Restructuring Plan which resulted in the immediate
cessation of all pharmaceutical research and development activities, a reduction
in workforce of 60 employees, and will result in the closing down of all of the
operations of our pharmaceutical business (see Note 2). After the implementation
of the Restructuring Plan, we expect our cash resources available at December
31, 1998 to be substantially used before the end of June 1999.
Further, we intend to sell or enter into outlicensing agreements with
respect to all of our current pharmaceutical research programs including
SP-303/Provir, nikkomycin Z and SP-134101. We are currently negotiating for the
termination of our remaining research and development collaboration agreement
with Lipha S.A., a wholly-owned subsidiary of Merck KGaA, Darmstadt, Germany. We
intend to focus our future efforts on the development and commercialization of
botanical dietary supplements derived from tropical plant sources.
Revenue Recognition
Revenue under our collaborative research agreements is recognized ratably
as costs are incurred by us in accordance with the performance requirements of
the agreements. Non-refundable payments that are not dependent on future
performance under collaborative agreements are recognized as revenue when
received. Payments received which are still subject to future performance
requirements are deferred until earned. Revenues from achievement of milestone
events are recognized when the funding party agrees that the scientific or
clinical results stipulated in the agreement have been met. Costs of contract
revenue approximate such revenue and are included in research and development
expenses.
Research and Development Expense
Research and development expense consists of independent research and
development costs and the costs associated with work performed under
collaborations. Research and development costs include direct and
research-related overhead expenses and are expensed as incurred.
F-8
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards, "Accounting for Stock-Based
Compensation" ("SFAS 123") which encourages, but does not require, companies to
record compensation expense for stock-based employee compensation plans at fair
value. We have elected to follow the disclosure requirements of SFAS 123 for the
year ended December 31, 1998, 1997 and 1996 and will continue to measure
stock-based compensation to employees in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Note 8 contains a summary of the pro
forma effects to reported net loss applicable to common stockholders and net
loss per common share for 1996, 1997 and 1998 as if we had elected to recognize
compensation expense based on the fair value of options granted as described by
SFAS 123.
We grant stock options to employees and directors for a fixed number of
shares with an exercise price equal to the fair market value of shares at the
date of grant. We account for stock option grants to employees and directors in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees
and, accordingly, recognize no compensation expense for the stock option grants
to employees and directors.
Per Share Data
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. The impact of stock options and other common stock
equivalents have been excluded from the computation in all years presented as
they are antidilutive.
Comprehensive Loss
As of January 1, 1998, we adopted Financial Accounting Standards Board
("FASB") Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS
130 established new rules for the reporting and displaying of comprehensive
income and its components; however, the adoption of this statement had no impact
on our net loss or total stockholders' equity. SFAS 130 requires unrealized
gains or losses on our available for sale securities, which prior to adoption
were reported in stockholder's equity, to be included in other comprehensive
income (loss). Our comprehensive loss was not materially different from our net
loss applicable to common stockholders in 1996, 1997 and 1998.
Cash, Cash Equivalents, Investments and Concentration of Credit Risk
We consider all highly liquid investments with remaining maturities of
three months or less at time of purchase to be cash equivalents. Investments
with maturities of less than one year from the balance sheet date and with
original maturities greater than 90 days are considered short-term investments.
Investments with maturities greater than one year from the balance sheet date
are considered long-term investments. Investments consist primarily of
commercial paper, investments in government securities, corporate bonds and
asset-backed securities. These investments typically bear minimal risk. This
diversification of risk is consistent with our policy to maintain high liquidity
and ensure safety of principal. We maintain our cash, cash equivalents and
investments in accounts with several United States banks and brokerage houses.
We determine the appropriate classification of debt securities at the time
of purchase and re-evaluate such determination as of each balance sheet date. As
of December 31, 1997 and 1998, we have classified our entire investment
portfolio as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, included in other
comprehensive income. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income or expense. The cost of securities
sold is based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income.
Property and Equipment
Property and equipment are stated at cost. Depreciation of equipment and
furniture is provided on a straight-line basis over the estimated useful lives
of the respective assets, which range from three (computer equipment and
furniture) to five (laboratory equipment) years. Equipment held under capital
leases is amortized using the straight-line method over the shorter of the lease
term or estimated useful life of the asset. Leasehold improvements are amortized
on a straight-line basis over the remaining life of the lease.
F-9
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Carrying Value of Long-Lived Assets and Long-Lived Assets to be Disposed Of
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of," we record impairment losses on long-lived assets when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Based on our estimate of future
undiscounted cash flows, except for a reserve included in the estimated
restructuring charge (see Note 2), we expect to recover the carrying amounts of
our long-lived assets. Nonetheless, it is reasonably possible that the estimate
of undiscounted cash flows may change in the near term resulting in the need to
write-down those assets to fair value.
Segment Reporting
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information ("FAS131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. We have determined that in
1996, 1997 and 1998, we operated in only one segment.
Unaudited Interim Financial Statements
The unaudited interim financial statements include all adjustments,
consisting only of normal recurring accruals, which the Company considers
necessary for a fair presentation of the financial position of the Company as of
March 31, 1999 and the results of operations and statement of cash flows of the
three months ended March 31, 1998 and 1999, as presented in the accompanying
unaudited interim financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
2. Restructuring Plan
On February 1, 1999, we announced and initiated implementation of a
restructuring plan which resulted in the closing down of the operations of our
pharmaceutical business. We now intend to out-license worldwide marketing rights
to all our pharmaceutical compounds and will focus our efforts on the
development and commercialization of botanical dietary supplements through our
botanicals division. The restructuring plan includes: cessation of
pharmaceutical research and development activities and related operations; sale
or outlicensing of all of our current pharmaceutical research programs;
reduction in force of approximately 60 employees (65% of our workforce);
dedication of initially 12 employees (as of February 26, 1999, 5 employees
remain) to the process of closing down the pharmaceutical business; termination
of the research and development contract with Lipha/Merck; settlement of
outstanding long-term equipment financing obligations; sale or disposal of all
of our fixed assets that are not needed for our botanicals business; and
sub-lease a portion of the facility.
The termination of 60 employees occurred on February 1, 1999. We recorded
total costs of the restructuring in the first quarter of 1999 of $2.2 million.
3. Collaborative Relationships
In September 1996, we entered into a five-year collaborative agreement
with Lipha/Merck to jointly develop Shaman's antihyperglycemic drugs. Upon
signing the collaboration, we received an annual research fee of $1.5 million
which was amortized to revenue over twelve months as the work was performed. We
also received approximately $3 million for 19,446 shares of common stock priced
at $154.20 per share, representing a 20% premium to the weighted average price
of the common stock at the time of purchase. In exchange for development and
marketing rights in all countries except Japan, South Korea, and Taiwan (which
F-10
are covered under an earlier agreement between Shaman and Ono Pharmaceutical Co.
Ltd. Osaka, Japan ("Ono"), Lipha/Merck agreed to provide up to $9.0 million in
research payments and up to $10.5 million in equity investments priced at a 20%
premium to a multi-day volume weighted average price of common stock at the time
of purchase. The research payments were recognized as revenue ratably as the
related costs were incurred by us in the performance of our obligations to
perform certain research and clinical trial activities. The agreement also
provided for additional preclinical and clinical milestone payments to us in
excess of $10.0 million per compound for each antihyperglycemic drug developed
and commercialized. Lipha/Merck agreed to bear all pre-clinical, clinical,
regulatory and other development expenses associated with the compounds selected
under the agreement. Preclinical and clinical milestone payments would be
recognized as revenue as certain preclinical hurdles were met and as certain
phases of the clinical trials and the FDA approval process were completed. In
addition, as products were commercialized, Shaman would receive royalties on all
product sales outside the United States and up to 50% of the profits (if we
exercise our co-promotion rights) or royalties on all product sales in the
United States. Certain of the milestone payments would be credited against
future royalty payments, if any, due to us from sales of products developed
pursuant to the agreement.
In December 1998, we renegotiated the terms of the existing agreement with
Lipha/Merck. Under the new terms, we forgave $6.0 million in aggregate payments
due over the remaining term of the original agreement in exchange for a one-time
up-front payment of an aggregate of $2.0 million, consisting of a $1.0 million
research payment (which remains recorded as deferred revenue that we have not
yet earned) and a $1.0 million equity investment.
For the year ended December 31, 1998, Shaman recognized $1.9 million in
revenue from the Lipha/Merck collaboration. In addition, we received a total
$2.5 million for issuance of 57,762 shares of common stock (40,650 shares priced
at $37.00 per share in September 1998 and 17,112 shares priced at $58.40 per
share in December 1998), each representing a 20% premium to the weighted average
price of common stock at the time of purchase. Revenues from Lipha/Merck
accounted for 12%, 43% and 70% of total revenues earned in 1996, 1997 and 1998
respectively.
On February 1, 1999, we discontinued all research and development
activities related to the collaborative agreement. We are currently in
negotiations with Lipha/Merck, for the discontinuation of this research
agreement. There will be no further research payments from Lipha/Merck.
In May 1995, we entered into a collaborative agreement with Ono providing
for, among other things, three years of funding for the research and development
of compounds for the treatment of Type II diabetes. Under the agreement, Shaman
was obligated to screen 100 diabetes-specific plants per year in vivo, isolate
and identify active compounds, and participate in any medicinal chemistry
modification. In turn, Ono provided us with access to Ono's preclinical and
clinical development capabilities through proprietary in vitro assays and
medicinal chemistry effort. Ono's development and commercialization rights are
for the countries of Japan, South Korea and Taiwan. Under the terms of the
agreement, Ono provided $7.0 million in collaborative research funding and will
pay preclinical and clinical milestone payments of $4.0 million per compound for
each antidiabetic drug that is commercialized.
We received an additional $1.0 million payment (beyond the $7.0 million
commitment) in December 1996 for enhanced access rights to these compounds. For
the years ended December 31, 1996, 1997 and 1998, Shaman recognized $3.0
million, $2.0 million and $790,000, respectively in revenue from the Ono
collaboration. Revenues from Ono accounted for 88%, 57% and 30% of total
revenues earned in 1996, 1997 and 1998, respectively.
In May 1998, our collaborative agreement with Ono, and the ongoing
research and development funding received pursuant thereto, expired under the
original terms thereof and was not renewed. Under the agreement, Ono will
continue to provide milestone payments and royalties to us on any resulting
products Ono develops from compounds identified during the three-year term of
the agreement.
Costs associated with revenue from these collaborations totaled $11.6
million, $11.4 million and $8.2 million for the year ended December 31, 1996,
1997 and 1998, respectively, and are included in research and development
expenses in the accompanying financial statements.
F-11
4. Investments
The following is a summary of available-for-sale securities (in thousands):
December 31, 1997
--------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ----------
U.S. Treasury securities
and government obligations $ 4,625 $ -- $ (10) $ 4,615
U.S. corporate bonds 3,000 -- -- 3,000
U.S. corporate commercial
paper and other 10,810 -- (20) 10,790
------- -------- -------- --------
Total $18,435 $ -- $ (30) $18,405
======= ======== ======== ========
Above amounts are included in the balance sheet as follows:
Cash and cash equivalents $ 8,345 -- $ (20) $ 8,325
Short-term investments 10,090 -- (10) 10,080
------- -------- -------- --------
Total $18,435 $ -- $ (30) $18,405
======= ======== ======== ========
December 31, 1998
--------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ----------
U.S. Treasury securities
and government obligations $ 2,255 $ -- $ (5) $ 2,250
U.S. corporate bonds 1,000 -- -- 1,000
U.S. corporate commercial
paper and other 4,984 -- (10) 4,974
------- -------- -------- --------
Total $ 8,239 $ -- $ (15) $ 8,224
======= ======== ======== ========
Above amounts are included in the balance sheet as follows:
Cash and cash equivalents $ 4,957 -- $ (10) $ 4,947
Short-term investments 3,282 -- (5) 3,277
------- -------- -------- --------
Total $ 8,239 $ -- $ (15) $ 8,224
======= ======== ======== ========
March 31, 1999
--------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ----------
U.S. Treasury securities
and government obligations $ 1,004 $ -- $ - $ 1,004
U.S. corporate commercial
paper and other 644 -- - 644
------- -------- -------- --------
Total $ 1,648 $ -- $ - $ 1,648
======= ======== ======== ========
Above amounts are included in the balance sheet as follows:
Cash and cash equivalents $ 644 -- $ - $ 644
Short-term investments 1,004 -- - 1,004
------- -------- -------- --------
Total $ 1,648 $ -- $ - $ 1,648
======= ======== ======== ========
F-12
The average remaining maturity of the portfolio was approximately four and
one-half months at December 31, 1997 and approximately less than one month as of
December 31, 1998, respectively.
The estimated fair value amounts have been determined by us using
available market information and appropriate valuation methodologies. However,
judgment is required in interpreting market data to develop the estimates of
fair value.
5. Long-Term Obligations
At December 31, 1998, long-term obligations consist of secured and
unsecured term loans and secured borrowings used to acquire property and
equipment, capital lease arrangements and a leasehold improvement financing
obligation.
In May 1997, we obtained a $5.0 million term loan to payoff pre-existing
debt, finance capital asset acquisitions and finance continued research and
clinical development. The loan is payable in thirty-six equal monthly
installments and the interest rate is 14.58%. The lender was granted warrants to
purchase 10,000 shares of common stock at $125.00 per share, which are
exercisable over a ten-year period. We have attributed a value of $648,000 to
these warrants. This amount has been recorded as a discount on the related debt
and is being amortized as interest expense over the term of the loan.
In June 1997, we issued $10.4 million of senior convertible notes with an
original maturity of August 2000. Interest, at 5.5% per annum, on the notes was
payable in common stock or cash at our option. Initially, the notes were
convertible into common stock at 100% of the low trading price during a
designated time period prior to conversion provided that the conversion price
would not be less than $110.00 per share. Starting in November 1997, the notes
were convertible into common stock at a 10% discount from the low trading price
during a designated time period prior to the conversion, with a floor of $110.00
through March 31, 1998, pursuant to a March 1998 amendment agreement with the
note holders whereby we issued to the note holders three-year warrants to
purchase an aggregate of 6,875 shares of common stock at an exercise price of
$150.00 per share as consideration for entering into the amendment agreement. We
have attributed a value of $309,000 to these warrants. This amount was recorded
as a discount on the related debt and was amortized as interest expense over the
term of the loan. Of the notes issued, $400,000 was issued to the placement
agent as part of the placement fee. We paid the placement agent an additional
$300,000 in cash. The placement fees and other offering costs have been
capitalized in other assets as deferred issuance costs and were amortized to
interest expense over the life of the notes to the extent the notes were not
converted to common stock. The net proceeds totaled approximately $9.5 million
after the placement agent's fees and other offering expenses. In connection with
the issuance of the notes, we recognized a non-cash charge in the amount of
$3,692,000, representing the value attributed to the in-the-money conversion
feature of the senior convertible notes.
Through December 9, 1998, an aggregate principal balance of approximately
$5.6 million of the Senior Convertible Notes was converted into an aggregate of
128,563 shares of common stock. On December 10, 1998, we issued to the note
holders an aggregate of 4,784 shares of our Series D Convertible Preferred Stock
in exchange for the cancellation of an aggregate of $4.8 million (including
accrued interest) of the notes.
Equipment borrowings totaled $401,555 and $0 at December 31, 1997 and
1998, respectively. The borrowings carried interest at rates ranging from 10.7%
to 12.75% at December 31, 1997, were secured by the equipment acquired, and were
payable in monthly installments ranging from $10,000 to $156,000 through
December 1998.
We also acquired certain equipment and furniture pursuant to capital lease
arrangements. The gross amount of equipment and furniture and the related
accumulated amortization recorded under capital leases included in property and
equipment are as follows:
1997 1998
------------ ------------
At December 31,
Equipment and furniture $ 1,890,164 $ 2,401,286
Less accumulated amortization (1,354,475) (1,668,460)
------------ ------------
$ 535,689 $ 732,826
============ ============
Amortization of assets acquired under capital leases is included in
depreciation and amortization expense.
In connection with the facility lease described in Note 6, we entered into
an agreement with the former tenant of the facility to acquire approximately
$1.5 million of tenant improvements by making annual payments to the former
tenant, including accrued interest of $540,000 in 1999 through 2002. The 1998
payment was not paid until January 1999.
F-13
Fair Value of Long-Term Obligations
The fair values of our long-term obligations are estimated using
discounted cash flow analyses based on our current incremental borrowing rate
for similar types of borrowing arrangements. The carrying amounts and fair
values of long-term obligations consisted of the following at December 31, 1998:
Carrying Value Fair Value
-------------- ----------
Leasehold improvements financings $ 2,032,045 $ 2,213,059
Secured Loan $ 2,724,189 $ 2,414,913
The carrying value of our term loan approximates our fair value because
the interest rates on the note takedowns are periodically reset.
At December 31, 1998, future payments on long-term obligations are as
follows:
Leasehold
Secured Capital Improvement
Loan Leases Financing Total
----------- -------- ------------ -----
1999 $1,893,219 $ 257,889 $1,080,000 $3,231,108
2000 830,970 281,333 540,000 1,652,303
2001 - 270,635 540,000 810,635
2002 - 60,673 540,000 600,673
2003 - - - -
----------- ---------- ----------- -----------
Total minimum payments $2,724,189 $ 870,530 $2,700,000 $6,294,719
Less amount representing
interest (at rate
ranging from 9.5%
to 12.0%) - (119,766) (667,955) (787,721)
----------- ---------- ----------- -----------
2,724,189 750,764 2,032,045 5,506,998
Less current
installments (1,893,219) (219,232) (691,410) (2,803,861)
----------- ---------- ----------- -----------
Long-term obligations,
excluding current
installments $ 830,970 $ 531,532 $1,340,635 $2,703,137
=========== ========== =========== ==========
6. Commitments and Contingencies
We lease our research and office facility in South San Francisco,
California under a noncancellable agreement expiring 2003, with options to renew
for a total of ten years. We are required to pay operating costs, including
property taxes, utilities, insurance and maintenance.
At December 31, 1998, the minimum noncancellable future rental payments
under our operating leases are:
1999 $ 1,210,837
2000 1,544,555
2001 1,590,892
2002 1,638,618
2003 281,296
------------
$ 6,266,198
============
Rent expense for each of the three years ended December 31, 1996, 1997 and
1998 was approximately $1,348,000 $1,154,000 and $1,189,000, respectively.
We are involved in a litigation and disputes which are incidental to our
business. While it is not possible to predict or determine the outcome of such
litigation and disputes, or to provide an estimate of the losses, if any, that
may arise, we believe the costs associated with all of these actions will not
have a material effect on our consolidated financial position or liquidity, but
could possibly be material to the consolidated results of operations.
F-14
Further, product liability claims may be asserted in the future relative
to events not known to management at the present time. We have insurance
coverage which we believe is adequate to protect against such product liability
losses as could materially affect our financial position.
7. Contractual Agreements
We have entered into license, clinical trial and supply agreements with
universities, research organizations and commercial companies. Certain of these
agreements require payments of royalties on future sales of resulting products
and may subject us to minimum annual payments to our contract partners. In
addition, we signed an agreement in 1995 which could result in the payment of
milestone installments if certain development objectives are achieved. To date,
payments under these agreements have not been significant and, at December 31,
1998, related noncancellable commitments are immaterial.
8. Stockholders' Equity
Preferred Stock
We are authorized to issue 1,000,000 shares of preferred stock (519,533
shares of which are issued and outstanding at December 31, 1998). Our Board of
Directors may set the rights and privileges of any preferred stock issued.
On December 10, 1998, we and certain institutional investors exchanged an
aggregate of $4.8 million (including accrued interest) of the Senior Convertible
Notes (the "Notes") for an aggregate of 4,784 shares of our Series D Convertible
Preferred Stock. Each share of Series D Convertible Preferred Stock is entitled
to receive, when, as, and if declared by the Board of Directors out of funds
legally available for such purpose, cumulative dividends at the rate of $55 per
annum. Dividends on the Series D Preferred Stock are payable in cash or shares
of our common stock or any combination of cash and shares of common stock, at
our option and are payable quarterly on February 1, May 1, August 1 and November
1 of each year. Each share of Series D Preferred Stock is convertible, at any
time, into common stock at the lesser of (a) $22.50 per share or (b) 90% of the
low trading price during a designated time period prior to the conversion. In
addition, the holders received an aggregate of 38,373 warrants to purchase
additional shares of common stock in exchange for surrendering the redemption
rights previously held by them under the Notes. The warrants were priced at 150%
of the average closing price for the month of December 1998. We have attributed
a value of $943,680 to these warrants. In connection with the issuance of the
Series D Preferred Stock, we also recognized a non-cash charge in the amount of
$1,063,605, representing the value attributed to the in-the-money conversion
feature of the Series D Preferred Stock.
The delisting of our common stock from The Nasdaq National Market
constituted an Optional Redemption Event (as defined in the Certificate of
Designation of Series D Preferred Stock) for the Series D Preferred Stock. In
connection therewith, on February 4, 1999, we issued a Control Notice (as
defined in the Certificate of Designation of Series D Preferred Stock) that
prevented the redemption of the Series D Preferred Stock. This Control Notice
will remain in effect for as long as we are not listed on any of The Nasdaq
National Market, The Nasdaq SmallCap Market, the American Stock Exchange or the
New York Stock Exchange. Delivery of the Control Notice had the effect of
increasing the annual dividend to $180 per share and adjusting the conversion
price of the Series D Preferred Stock to 80% of the amount the conversion price
would otherwise be.
In October 1998, we completed the sale to the public of an aggregate of
140,880 shares of our Series C Convertible Preferred Stock for aggregate gross
proceeds of $14.1 million. Each share of Series C Preferred Stock is entitled to
receive cumulative dividends paid semi-annually to the holders of record of such
shares as follows: (i) an annual stock-on-stock dividend, paid in arrears, in
shares of common stock (calculated as the quotient of $10.00 divided by 85% of
the average closing price of the common stock for the 10-day trading period
ending three trading days prior to the date the dividend is paid); plus (ii) a
cash amount equaling 0.00005% of our U.S. net sales of our SP-303/Provir product
for the treatment of diarrhea, if any, for the preceding two calendar quarters
less $5.00. If, under Delaware law, we are unable to pay the cash portion of the
dividends, then the cash portion will be paid in shares of common stock (valued
at 85% of the average closing price of the common stock for the 10-day trading
period ending three trading days prior to the date on which the dividend is
paid). We intend to honor this royalty portion of the dividend through the sale
of our first botanical product, if any. Each share of the Series C Preferred
Stock was convertible for a period of 30 days after the first issuance and will
be convertible again commencing 12 months after the initial issuance date
(August 18, 1998) at the election of each holder, and automatically on the sixth
anniversary of the initial issuance date into greater of (a) 0.8333 shares of
common stock or (b) such number of shares of common stock as equals $100 (the
price paid per share of Series C Preferred Stock) divided by 85% of the average
closing price of the common stock reported by Nasdaq for the 10-day trading
F-15
period ending three trading days prior to the date of conversion. The common
stock is currently trading on The Nasdaq OTC Bulletin Board. During the initial
30-day conversion period for the Series C Preferred Stock, 24,922 shares of the
Series C Preferred Stock were converted into an aggregate of 93,077 shares of
common stock. In connection with the issuance of the Series C Preferred Stock,
we recognized a non-cash charge in the amount of $678,636.
In June 1998, we entered into Stock Purchase Agreements with certain of
our stockholders pursuant to which we acquired the right to sell to these
stockholders, subject to certain conditions up to an aggregate of 7,000 shares
of Series B Custom Convertible Preferred Stock for an aggregate purchase price
of $7,000,000. The stock purchase agreements were terminated upon the closing of
the Series C Convertible Preferred Stock Financing in October 1998. As
consideration for entering into the stock purchase agreements, we issued to
these stockholders warrants to purchase an aggregate of 17,500 shares of common
stock. The warrants are exercisable for a period of five years at an exercise
price per share equal to 115% of the average trading price of the common stock
during specified measurement periods. We have attributed a value of $1.5 million
to these warrants.
In July 1996, we closed a private placement pursuant to Regulation S under
the Securities Act of 1933, as amended, in which it received gross proceeds of
$3.3 million for the sale of 400,000 shares of Series A Convertible Preferred
Stock and for the issuance of a six-year warrant to purchase 27,500 shares of
common stock at an exercise price of $203.60 per share. The Preferred Stock does
not carry a dividend obligation and will convert into common stock no later than
July 23, 1999 at a price per share between $120.00 and $163.00, depending on the
market value of common stock during the period prior to conversion. The holder
of preferred shares is entitled to a liquidation preference of 163.00 per share.
Common Stock
In December 1992, we adopted the 1992 Stock Option Plan (the "Plan") as
the successor plan to our 1990 Stock Option Plan. The Plan will terminate on the
earlier of December 31, 2002 or the date on which all shares available for
issuance under the Plan have been issued or canceled. The Plan provides for two
separate components: the Discretionary Option Grant Program and the Automatic
Option Grant Program.
Under the Discretionary Option Grant Program, options granted may either
be incentive options or non-statutory options. Incentive options may be granted
to employees at a price not less than the fair market value of Common Stock on
the grant date. Non-statutory options may be granted at a price determined by
the plan administrator. Each option granted is exercisable as determined by the
plan administrator, with a term not to exceed ten years. The Plan also allows
for the granting of options with repurchase rights and stock appreciation rights
at the discretion of the plan administrator.
Under the Automatic Option Grant Program, each individual who becomes a
non-employee board member on or after the effective date of the Plan is
automatically granted a non-statutory stock option to purchase 1,000 shares of
common stock. Further, each non-employee board member who has served as a member
for at least six months prior to the annual stockholders' meeting is
automatically granted an annual non-statutory stock option to purchase not more
than 375 nor less than 250 shares of common stock, depending on a calculation
based on the average selling price of the common stock. The exercise price of
each option granted is the fair value of the common stock on the date of grant.
These options have a ten-year term and vest over 24 months.
On September 18, 1998, the Plan Administrator implemented an option
cancellation/regrant program for all employees of the Company, including our
executive officers. Pursuant to that program, each such employee was given the
opportunity to surrender his or her outstanding options under the Plan with
exercise prices in excess of $25.62 per share in return for a new option grant
for the same number of shares but with an exercise price of $25.62 per share,
the closing selling price per share of common stock as reported on the Nasdaq
National Market on the September 18, 1998 grant date of the new option. Options
for a total of 92,760 shares with a weighted average exercise price of $105.50
per share were surrendered for cancellation, and new options for the same number
of shares were granted with the $25.62 per share exercise price. To the extent
the higher-priced option was exercisable for any option shares on the September
18, 1998 cancellation date, the new option granted in replacement of that option
will become exercisable for those shares in a series of twelve (12) successive
equal monthly installments upon the optionee's completion of each month of
service over the one (1) year period measured from the September 18, 1998 grant
date. The option will become exercisable for the remaining option shares in one
or more installments over the optionee's period of continued service, with each
such installment to vest on the same vesting date in effect for that installment
under the cancelled higher-priced option.
On October 20, 1998, the Plan Administrator implemented an option
cancellation/regrant program for the non-employee Board members (excluding the
Plan Administrator) and certain key independent consultants holding options
F-16
under the Plan. Pursuant to the October program, each such individual was given
the opportunity to surrender his or her outstanding options under the Plan with
exercise prices in excess of $28.75 per share in return for a new option grant
for the same number of shares but with an exercise price of $28.75 per share,
the closing selling price per share of common stock as reported on the Nasdaq
National Market on the October 20, 1998 grant date of the new option. Options
for a total of 29,232 shares with a weighted average exercise price of $122.46
per share were surrendered for cancellation, and new options for the same number
of shares were granted with the $28.75 per share exercise price. To the extent
the higher-priced option was exercisable for any option shares on the October
20, 1998 cancellation date, the new option granted in replacement of that option
will become exercisable for those shares in a series of twelve (12) successive
equal monthly installments upon the optionee's completion of each month of
service over the one (1) year period measured from the October 20, 1998 grant
date. The option will become exercisable for the remaining option shares in one
or more installments over the optionee's period of continued service, with each
such installment to vest on the same vesting date in effect for that installment
under the cancelled higher-priced option.
Both programs provide for automatic acceleration of the exercise period in
the event of certain corporate transactions, including a merger, asset sale or
change in control of the Company.
The 1990 Stock Option Plan provided for the granting of incentive and
non-statutory stock options. Both types of options were immediately exercisable
and expire ten years from the date of grant. Vesting of optioned shares was
determined by the board of directors and generally occurred over a two- to
four-year period from the date of grant. At December 31, 1998, all options to
purchase common stock issued under this plan were vested.
A summary of stock option activity is as follows:
Options Outstanding
------------------------------------------------------
Weighted Weighted
Average Average
Number Price Per Exercise Fair Value
of Shares Share Price At Grant
Date
--------- --------------- --------- -----------
Balance at
December 31, 1996 105,099 $1.20--$265.00 $109.60
Granted at fair value 47,577 82.60-- 136.20 108.20 $69.20
Exercised (974) 4.80-- 117.60 65.80
Forfeited (12,115) 70.00-- 265.00 128.00
-----------
Balance at
December 31, 1997 139,587 1.20-- 265.00 108.00
Granted at fair value 221,017 25.62-- 98.75 29.79 $29.81
Exercised (792) 1.20-- 70.00 27.41
Forfeited (139,135) 25.62-- 265.00 110.84
-----------
Balance at
December 31, 1998 220,677 $1.20-- 215.00 $ 28.13
===========
At December 31, 1998, 30,407 shares under options were exercisable at a
weighted average exercise price of $33.19 per share (65,502 shares under options
were exercisable at a weighted average exercise price of $105.00 per share at
December 31, 1997). A stock option grant of 75,000 shares of common stock
granted on September 18, 1998 at an exercise price of $25.62 per share was
pending stockholder approval.
F-17
The following table summarizes information regarding stock options
outstanding at December 31, 1998:
Weighted Shares under Options
Average Exercisable at
Option Shares Contractual Weighted December 31, 1998
Range of Outstanding at Remaining Average ---------------------------
Exercise December 31, Life Exercise Weighted Average
Prices 1998 (Years) Price Number Exercise Price
---------------- ---------------- ------------- ---------- -------- ----------------
$1.20 - $ 30.00 209,767 9.36 $ 25.40 26,650 $ 20.74
40.63 - 72.50 7,275 9.32 52.71 1,177 70.34
82.50 - 107.50 1,271 8.87 100.26 662 100.62
127.50 - 162.50 1,862 7.81 140.90 1,416 142.54
210.00 - 215.00 502 4.00 210.02 502 210.02
---------- --------
$1.20 - $215.00 220,677 9.33 $ 28.13 30,407 $ 33.19
========== ========
For certain options issued during the years ended December 31, 1993 and
1994, we recorded deferred compensation for the difference between the exercise
price and the fair market value of common stock at the date of grant. For
certain additional options issued during the years ended December 31, 1997 and
1998 to non-employees, we recorded deferred compensation expense for the fair
value of the options at the date of grant. Deferred compensation is amortized to
expense on a straight-line basis over the vesting period of the options.
Pro Forma Information
We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for our employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of our employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, and has been determined as if we had accounted for our
employee stock options granted subsequent to December 31, 1994 under the fair
value method of SFAS 123. The fair value for these options was estimated at the
date of grant using the Black-Scholes option pricing model. The following are
the weighted-average assumptions for 1996, 1997 and 1998, respectively:
risk-free interest rates of 5.73%, 6.27% and 4.57%; no dividends paid;
volatility factors of the expected market price of common stock of .75 and a
weighted-average expected life of the options of 3.85, 5.0 and 3.84 years. The
effects of applying FAS 123 for recognizing compensation expense and providing
pro forma disclosures in 1998, 1997 and 1996 are not likely to be representative
of the effects on reported net income in future years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of our employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro-forma net loss over the options' vesting periods.
Our pro forma information follows (in thousands except for net loss per share
information):
1996 1997 1998
--------- --------- ---------
Net loss applicable to
Common Stockholders
Historical $(18,790) $(29,289) $(38,524)
Pro forma $(20,280) $(31,101) $(40,734)
Net loss per common share
Historical $ (27.85) $ (34.44) $ (38.31)
Pro forma $ (30.05) $ (36.57) $ (40.50)
F-18
Reserved Shares
At December 31, 1998, 386,781 shares of common stock were reserved for
conversion of outstanding preferred stock and for issuance upon exercise of
outstanding options, warrants and options available for future grant. The
reserved shares excluded shares issuable upon conversion of Series C Preferred
Stock and 145,189 shares issuable upon exercise of the Company's stock options
which are exercisable after May 31, 1999.
Warrants
A summary of outstanding warrants to purchase common stock at December 31,
1998 is as follows:
Number of Exercise Term
Description Warrants Price in Year Expiration
------------------------------------ --------------- ---------------- ------- -------------
Lease financing arrangements 4,585 $48.00 - $216.60 5 - 7 2000 - 2002
Series A Convertible Preferred Stock 27,500 $203.68 6 2002
Secured term loan 10,000 $125.00 10 2007
Senior convertible notes 6,875 $150.00 3 2001
Series B Convertible Preferred Stock 17,500 $53.00 - $ 96.40 5 2003
Series D Convertible Preferred Stock 38,373 $61.40 5 2003
---------
104,833
=========
9. Taxes
As of December 31, 1998, we had federal net operating loss carryforwards
of approximately $141.2 million. The net operating loss and credit carryforwards
will expire at various dates beginning in 2004 through 2013, if not sooner
utilized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes.
Significant components of our deferred tax assets and liabilities for
federal and state income taxes as of December 31, 1997 and 1998 are as follows:
1997 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 35,200,000 $ 48,600,000
Research credits (expiring in 2004--2013) 2,800,000 3,900,000
Capitalized research and development costs 4,700,000 6,400,000
Other 400,000 (1,200,000)
------------ ------------
Total deferred tax assets 43,100,000 57,700,000
Valuation allowance for deferred tax assets (43,100,000) (57,700,000)
------------ ------------
Net deferred tax asset $ - $ -
============= =============
The net valuation allowance increased by $14.6 million during the year
ended December 31, 1998.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
10. Subsequent Events
In April 1999, directors of the Company holding stock options to purchase
an aggregate of 131,717 shares of common stock agreed to surrender these options
to the Company for cancellation.
On April 5, 1999, the Company entered into a credit facility and note
purchase agreement with certain investors, stockholders, officers and members of
the board of directors (the "Credit Agreement"), pursuant to which the Company
may borrow approximately $1.0 million at any time commencing on May 14, 1999 and
until the earlier of the completion of a registered public offering of the
Company's equity securities, or September 1, 1999 (the "Convertible Promissory
F-19
Notes"). The Convertible Promissory Notes will be due and payable on the earlier
of (i) 30 days subsequent to the completion of the public offering, or (ii)
December 31, 1999. Interest on the Convertible Promissory Notes will accrue at
an annual rate of 12%. The Convertible Promissory Notes, when issued, will be
secured by certain assets of the Company and be convertible into shares of the
class and series of equity securities offered by the Company in the public
offering, or into common stock if no such offering occurs prior to December 31,
1999. In connection with the Credit Agreement, the Company issued warrants to
purchase shares of the same class and series of equity securities as those into
which the debt is convertible. The number of shares subject to these warrants is
equal to 50% of the debt amount divided by the per share sale price of the
shares sold in the public offering. These warrants are exercisable, on a
cashless basis, commencing on April 5, 1999, and through the third anniversary
date of the public offering. The conversion price of the Convertible Promissory
Notes and the exercise price of the warrants is equal to the per share offering
price in the public offering. If a public offering is not completed prior to
December 31, 1999, then the conversion price of the Convertible Promissory Notes
and the exercise price of the warrants will be the lower of $0.05 per share of
common stock, or 1/3 of the five-day weighted average trading price of the
Company's common stock for the period ending three trading days prior to
conversion or exercise.
In April 1999, the Company entered into an amendment agreement with an
existing lender to permit the issuance by the Company of the Convertible
Promissory Notes. In connection with the amendment, the Company issued a warrant
to purchase shares of the class and series of equity securities offered by the
Company in the first registered public offering by the Company after the date of
the loan amendment, or into common stock if no such offering occurs prior to
December 31, 1999. The number of shares subject to these warrants is equal to
$592,685 divided by the per share sale price of the shares sold in the above
offering. This warrant is exercisable, on a cashless basis, commencing on April
30, 1999 and through the seventh anniversary date of the earlier to occur of (i)
December 31, 1999, or (ii) the date of the above offering. The per share
exercise price will be equal to the per share offering price of the above
offering, or, if no offering is completed by December 31, 1999, then the lower
of $0.05 per share of common stock, or 1/3 of the five-day weighted average
trading price of the common stock for the period ending three trading days prior
to conversion or exercise.
On June 11, 1999, the stockholders approved, and on June 22, 1999 the
Company effected, a one-for-twenty reverse stock split of the Company's
outstanding common stock. All common shares and per common share amounts have
been restated to reflect the reverse stock split in all periods presented.
F-20
================================================================================
[LOGO]
Series R Convertible
Preferred Stock
---------------
PROSPECTUS
---------------
June ____, 1999
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses expected to be
incurred by the Registrant in connection with the sale and distribution of the
securities being registered hereby. All amounts are estimated except the
Securities and Exchange Commission registration fee.
SEC registration fee................. $ 4,170
Accounting fees and expenses......... 75,000
Legal fees and expenses.............. 100,000
Printing and engraving fees.......... 25,000
Miscellaneous fees and expenses...... 95,830
--------
Total......................... 300,000
========
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding, if
the person acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. Section 145 further provides that a corporation
similarly may indemnify any such person serving in any such capacity who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses actually and reasonably incurred in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Delaware Court of Chancery or such other court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Registrant's Amended and Restated Certificate of Incorporation
provides that the Registrant's directors shall not be liable to the Registrant
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that exculpation from liabilities is not
permitted under the DGCL as in effect at the time such liability is determined.
The Registrant has entered into indemnification agreements with all of its
officers and directors, as permitted by the DGCL.
II-1
Item 15. Recent Sales of Unregistered Securities.
Since May 1996, we have sold and issued the following unregistered
securities (the share numbers and per share prices below reflect the
one-for-twenty reverse stock split of the outstanding common stock to be
effected prior to the completion of this offering):
(1) In June 1999, we agreed to issue to Michael Tempesta, prior to July
15, 1999, in connection with the settlement of litigation between Mr. Tempesta
and Shaman, 16,667 shares of Series R Preferred Stock.
(2) In April 1999, we issued to MMC/GATX Partnership No. 1 in connection
with the amendment of a loan agreement with GATX a cashless exercise warrant to
purchase 39,512 shares of the class and series of equity securities which are
being registered under this registration statement, which is the Series R
Preferred Stock. This Warrant is exercisable upon the effectiveness of this
registration statement and through the seventh anniversary date of the earlier
to occur of (1) December 31, 1999, and (2) the effective date of this
registration statement, subject to acceleration upon certain events. The per
share exercise price will be $15.00, which is the per share price at which the
Series R Preferred Stock is being sold in this offering.
(3) In April 1999, we also issued to various lenders who were either
existing stockholders, key executives or directors cashless exercise warrants to
purchase 33,600 shares of the class and series of equity securities which are
being registered under this registration statement, which is the Series R
Preferred Stock. These warrants are exercisable upon the consummation of the
sale of the Series R Preferred Stock registered under this registration
statement and through the third anniversary date of such consummation, subject
to acceleration upon certain events. The per share exercise price will be
$15.00, which is the per share price at which the Series R Preferred Stock is
being sold in this offering.
(4) In connection with the April 1999 debt offering, each lender was also
issued a senior subordinated secured convertible promissory note convertible
after the consummation of the Series R Preferred Stock offering and prior to the
earlier to occur of (i) January 1, 2000 and (ii) thirty days following the
consummation date of the offering into an aggregate of 67,201 shares of the
Series R Preferred Stock at a conversion price of $15.00 per share.
(5) In May 1997, we obtained a $5.0 million term loan to pay off
preexisting debt, finance capital asset acquisition and finance continued
research and development. The lender was granted warrants to purchase 10,000
shares of common stock at an exercise price of $125.00 per share. These warrants
expire May 7, 2007.
(6) On December 10, 1998, Shaman and certain institutional investors
exchanged an aggregate of $4.8 million, including accrued interest, of senior
convertible notes for common stock and an aggregate of 38,373 warrants to
purchase additional shares of common stock in exchange for surrendering the
redemption rights previously held by them under the notes. The warrants were
priced at 150% of the average closing price for the month of December 1998.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended, in reliance on
Section 4(2) of the Securities Act. In each such transaction, the recipients of
securities represented their intentions to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the securities issued in such
transactions
II-2
Item 16. Exhibits and Financial Statement Schedules.
The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.
(a) Exhibits
Exhibit
Number Description
- -------- -------------------------------------------------------------------
3.1** Amended and Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on June 22, 1999.
3.2(9) Amended and Restated Bylaws, as amended March 29, 1996.
4.1** Form of Certificate of Designation of Preferences of Series R
Preferred Stock of the Registrant
4.2(21) Form of warrant, dated April 5, 1999, issued to certain investors
of the Registrant.
4.3(21) Form of warrant, dated April 30, 1999, issued to MMC/GATX
Partnership No.1
4.4** Form of Subscription Agreement
4.5** Form of Instructions to Stockholders
4.6** Form of Letter to Common Stockholders of Record
4.7** Form of Letter to Banks and Brokers
4.8** Form of Letter to Beneficial Common Stockholders
5.1*** Opinion of Brobeck, Phleger & Harrison LLP.
10.1(1)(19) 401(k) Plan.
10.2(1)(19) Form of Stock Purchase Agreement.
10.3(1) Form of Indemnification Agreement.
10.4(1) Form of Agreement with Scientific Strategy Team Members.
10.5(1) Form of Proprietary Information and Inventions Agreement-Employees.
10.6(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.7(1)(18) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.8(1)(18) Stock Purchase Agreement dated June 15, 1990, between Shaman
and Lisa A. Conte.
10.9(1) Master Equipment Lease Agreement dated December 26, 1990, between
Shaman and Lease Management Services, Inc.
10.10(1)(18) Supply Agreement dated June 1, 1992.
10.11(1) Registration Rights Agreement dated October 22, 1992, as amended
December 14, 1992, between Shaman and certain holders of preferred
stock of Shaman.
10.12(1) Industrial Lease Agreement dated January 1, 1993, between Shaman
and Grand/ Roebling Investment Company.
10.13(4) Loan and Security Agreement dated September 27, 1993, between
Shaman and Household Commercial of California.
10.14(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
10.15(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.16(6)(18) Joint Research and Product Development Agreement, dated May 24,
1995, by and between Ono Pharmaceutical Co., Ltd. and Registrant.
10.17(a)(10) Amendment Agreement, dated December 4, 1996, to the Joint Research
and Product Development Agreement by and between Ono Pharmaceutical
Co., Ltd. and Registrant.
10.18(6)(18) License Agreement, dated June 8, 1995, by and between Bayer AG and
Registrant.
10.19(7)(18) Development Agreement, dated January 11, 1996, by and between
Abbott Laboratories and Registrant.
10.20(9)(18) Subscription Agreement dated July 25, 1996 by and between the
Registrant and Fletcher International Limited.
10.21(10)(18)Joint Research and Product Development and Commercialization
Agreement dated September 23, 1996, by and between Lipha,
Lyonnaise Industrielle Pharmaceutique S.A. and the Registrant.
10.22(10)(18)Stock Purchase Agreement dated September 23, 1996, by and between
Lipha, Lyonnaise Industrielle Pharmaceutique S.A. and the
the Registrant.
10.23(11)(19)Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as Amended and
Restated on February 14, 1997).
10.24(3)(19) Form of Notice of Grant with Stock Option Agreement.
10.25(3)(19) Form of Addendum to Stock Option Agreement (Special Tax Elections).
10.26(3)(19) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
II-3
10.27(11)(19)Form of Non-Employee Director Automatic Stock Option Agreement.
10.28(12) Masopracol License Agreement, dated as of March 19, 1997, by
and between Access Pharmaceuticals, Inc. and the Registrant.
10.29(12)(18)Amended and Restated Masopracol License Agreement, dated as
of April 1997, by and between Access Pharmaceuticals, Inc. and
the Registrant.
10.30(12) Loan and Security Agreement, dated as of May 7, 1997, between
MMC/GATX Partnership I and Registrant.
10.30A(12) Amendment No. 1 to Loan and Security Agreement, dated as of
June 30, 1997, by and between Registrant and MMC/GATX
Partnership No. I.
10.30B(15) Waiver letter dated July 16, 1998, executed by Shaman
Pharmaceuticals, Inc. and approved by MMC/GATX Partnership
No. I as to the payment of dividends on the Series C Preferred
Stock.
10.30C (21) Amendment No. 2 to Loan and Security Agreement, dated as of
April 30, 1999, by and between the Registrant and MMC/GATX
Partnership No. 1.
10.31(12) Secured Promissory Note, dated May 16, 1997, issued in favor
of MMC/GATX Partnership No. I.
10.32(12) Warrant, granted May 7, 1997, in favor of MMC/GATX
Partnership No. I.
10.33(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX Partnership
No. I and Registrant.
10.34(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.35(12) Amended Engagement Agreement, dated June 30, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.36(12) Form of Note Purchase Agreement, dated as of June 30, 1997, by and
between Registrant and certain investors.
10.37(13) Master Lease Agreement, dated September 15, 1997, between
Registrant and Transamerica Business Credit Corporation, with
related schedules.
10.38(13) Amendment to Note Purchase Agreement, dated as of June 30, 1997, by
and between Registrant and Certain investors.
10.39(14) Amendment Agreement, dated as of March 18, 1998, by and between the
Registrant and certain investors.
10.40(14) Form of Common Stock Purchase Warrant, dated as of March 18, 1998,
issued to certain investors.
10.41(14) Second Amendment Agreement, dated as of June 10, 1998, by and
between the Registrant and certain investors.
10.42(17) Exchange Agreement, dated as of December 10, 1998, by and between
Registrant and certain entities.
10.43(19) Common Stock Purchase Agreement dated as of November 18, 1998.
10.44(19)(20)Employment Agreement dated as of April 1, 1998, by and between
Registrant and John W.S. Chow.
10.45(19)(20)Promissory Note dated as of June 17, 1998, by and between
Registrant and John W.S. Chow.
10.46(20) Development and Commercial Supply Agreement, dated as of December
1, 1998, by and between Registrant and NYComed Inc.
10.47(21) Form of Credit Facility and Note Purchase Agreement, dated as of
April 5, 1999, by and between the Registrant and the Investors
named therein.
10.47A(21) Amendment No. 1 to Credit Facility and Note Purchase Agreement,
dated as of April 13, 1999, by and between the Registrant and the
Investors named in the Credit Facility and Note Purchase Agreement.
10.47B(21) Amendment No. 2 to Credit Facility and Note Purchase Agreement,
dated as of April 30, 1999, by and between the Registrant and the
Investors named in the Credit Facility and Note Purchase Agreement.
23.1** Consent of Ernst & Young LLP, Independent Auditors.
23.2*** Consent of Brobeck, Phleger & Harrison LLP (included in the opinion
filed as Exhibit 5.1).
24.1* Power of Attorney (included under the caption "Signatures").
27.1 (20) Financial Data schedule for period ended December 31, 1998.
II-4
27.2 (21) Financial Data schedule for period ended March 31, 1999.
99.1** Form of Letter to Stockholders.
99.2** Form of Question and Answer for Rights Offering.
99.3** Form of Fairness Opinion of Alliant Partners.
- ----------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was declared
effective January 26, 1993.
(2) Intentionally omitted.
(3) Incorporated by reference to exhibits filed on July 23, 1993 with
Registrant's Registration Statement on Form S-8, File No. 33-66450.
(4) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.
(5) Intentionally omitted.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.
(7) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(8) Intentionally omitted.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.
(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as amended.
(11) Incorporated by reference to exhibits filed on June 30, 1997 with
Registrant's Registration Statement on Form S-8, File No. 333-30365.
(12) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-3, File No. 333-31843.
(13) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
(14) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-49025.
(15) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-2, File No. 333-59053.
(16) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-67023.
(17) Incorporated by reference to exhibits filed on December 11, 1998 with
Registrant's Current Report on Form 8-K.
(18) Confidential treatment has been granted with respect to certain portions
of these agreements.
(19) Management contract or compensation plan.
(20) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
(21) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
(b) Financial Statement Schedules
None.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(A) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
II-5
(1) to include any prospectus required by Section 10(a)(3)
of the Securities Act;
(2) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in the volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimates maximum offering range may be reflected in the form of prospectus
filed with the commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation Of Registration
Fee" table in the effective registration statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement; provided,
however, that paragraphs (1) and (2) do not apply if the information required to
be included in a post-effective amendment by these paragraphs is contained in
periodic reports filed with or furnished to the Commission by the Registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the Registration Statement.
(B) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(C) To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of South San
Francisco, State of California, on the 23rd day of June, 1999.
SHAMAN PHARMACEUTICALS, INC.
By:/s/ Lisa A. Conte
------------------
Lisa A. Conte
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
Name Title Date
- -------------------------- ------------------------------- -------------
/s/ Lisa A. Conte
- -------------------------- Director, President, Chief June 23, 1999
Lisa A. Conte Executive Officer and Chief
Financial Officer, (Principal
Executive Officer and Principal
Financial and Accounting Officer)
/s/ G. Kirk Raab*
- -------------------------- Chairman of the Board June 23, 1999
G. Kirk Raab
/s/ Adrian D.P. Bellamy*
- -------------------------- Director June 23, 1999
Adrian D.P. Bellamy
/s/ Jeffrey Berg*
- -------------------------- Director June 23, 1999
Jeffrey Berg
/s/ Herbert H. McDade, Jr.*
- -------------------------- Director June 23, 1999
Herbert H. McDade, Jr.
/s/ M. David Titus*
- -------------------------- Director June 23, 1999
M. David Titus
-------------------------- Director June _, 1999
Loren D. Israelsen
*By:/s/ Lisa Conte
--------------------------
Lisa Conte, Attorney-in-fact
II-7
EXHIBIT INDEX
Exhibit
Number Description
- -------- -------------------------------------------------------------------
3.1** Amended and Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on June 22, 1999.
3.2(9) Amended and Restated Bylaws, as amended March 29, 1996.
4.1** Form of Certificate of Designation of Preferences of Series R
Preferred Stock of the Registrant
4.2(21) Form of warrant, dated April 5, 1999, issued to certain investors
of the Registrant.
4.3(21) Form of warrant, dated April 30, 1999, issued to MMC/GATX
Partnership No.1
4.4** Form of Subscription Agreement
4.5** Form of Instructions to Stockholders
4.6** Form of Letter to Common Stockholders of Record
4.7** Form of Letter to Banks and Brokers
4.8** Form of Letter to Beneficial Common Stockholders
5.1*** Opinion of Brobeck, Phleger & Harrison LLP.
10.1(1)(19) 401(k) Plan.
10.2(1)(19) Form of Stock Purchase Agreement.
10.3(1) Form of Indemnification Agreement.
10.4(1) Form of Agreement with Scientific Strategy Team Members.
10.5(1) Form of Proprietary Information and Inventions Agreement-Employees.
10.6(1) Form of Proprietary Information and Inventions
Agreement-Consultants.
10.7(1)(18) License Agreement dated February 8, 1990, between Shaman and
Dr. Michael Tempesta.
10.8(1)(18) Stock Purchase Agreement dated June 15, 1990, between Shaman
and Lisa A. Conte.
10.9(1) Master Equipment Lease Agreement dated December 26, 1990, between
Shaman and Lease Management Services, Inc.
10.10(1)(18) Supply Agreement dated June 1, 1992.
10.11(1) Registration Rights Agreement dated October 22, 1992, as amended
December 14, 1992, between Shaman and certain holders of preferred
stock of Shaman.
10.12(1) Industrial Lease Agreement dated January 1, 1993, between Shaman
and Grand/ Roebling Investment Company.
10.13(4) Loan and Security Agreement dated September 27, 1993, between
Shaman and Household Commercial of California.
10.14(4) Common Stock Warrant dated September 30, 1993, issued to
MMC/GATX Partnership No. I.
10.15(4) Common Stock Warrant dated October 5, 1993, issued to Meier
Mitchell & Co.
10.16(6)(18) Joint Research and Product Development Agreement, dated May 24,
1995, by and between Ono Pharmaceutical Co., Ltd. and Registrant.
10.17(a)(10) Amendment Agreement, dated December 4, 1996, to the Joint Research
and Product Development Agreement by and between Ono Pharmaceutical
Co., Ltd. and Registrant.
10.18(6)(18) License Agreement, dated June 8, 1995, by and between Bayer AG and
Registrant.
10.19(7)(18) Development Agreement, dated January 11, 1996, by and between
Abbott Laboratories and Registrant.
10.20(9)(18) Subscription Agreement dated July 25, 1996 by and between the
Registrant and Fletcher International Limited.
10.21(10)(18)Joint Research and Product Development and Commercialization
Agreement dated September 23, 1996, by and between Lipha,
Lyonnaise Industrielle Pharmaceutique S.A. and the Registrant.
10.22(10)(18)Stock Purchase Agreement dated September 23, 1996, by and between
Lipha, Lyonnaise Industrielle Pharmaceutique S.A. and the
the Registrant.
10.23(11)(19)Shaman Pharmaceuticals, Inc. 1992 Stock Option Plan (as Amended and
Restated on February 14, 1997).
10.24(3)(19) Form of Notice of Grant with Stock Option Agreement.
10.25(3)(19) Form of Addendum to Stock Option Agreement (Special Tax Elections).
10.26(3)(19) Form of Addendum to Stock Option Agreement (Limited Stock
Appreciation Rights).
10.27(11)(19)Form of Non-Employee Director Automatic Stock Option Agreement.
10.28(12) Masopracol License Agreement, dated as of March 19, 1997, by
and between Access Pharmaceuticals, Inc. and the Registrant.
10.29(12)(18)Amended and Restated Masopracol License Agreement, dated as
of April 1997, by and between Access Pharmaceuticals, Inc. and
the Registrant.
II-8
10.30(12) Loan and Security Agreement, dated as of May 7, 1997, between
MMC/GATX Partnership I and Registrant.
10.30A(12) Amendment No. 1 to Loan and Security Agreement, dated as of
June 30, 1997, by and between Registrant and MMC/GATX
Partnership No. I.
10.30B(15) Waiver letter dated July 16, 1998, executed by Shaman
Pharmaceuticals, Inc. and approved by MMC/GATX Partnership
No. I as to the payment of dividends on the Series C Preferred
Stock.
10.30C (21) Amendment No. 2 to Loan and Security Agreement, dated as of
April 30, 1999, by and between the Registrant and MMC/GATX
Partnership No. 1.
10.31(12) Secured Promissory Note, dated May 16, 1997, issued in favor
of MMC/GATX Partnership No. I.
10.32(12) Warrant, granted May 7, 1997, in favor of MMC/GATX
Partnership No. I.
10.33(12) Amendment to Warrants, dated May 7, 1997, MMC/GATX Partnership
No. I and Registrant.
10.34(12) Engagement Agreement, dated April 7, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.35(12) Amended Engagement Agreement, dated June 30, 1997, by and between
Registrant and Diaz & Altschul Capital, LLC.
10.36(12) Form of Note Purchase Agreement, dated as of June 30, 1997, by and
between Registrant and certain investors.
10.37(13) Master Lease Agreement, dated September 15, 1997, between
Registrant and Transamerica Business Credit Corporation, with
related schedules.
10.38(13) Amendment to Note Purchase Agreement, dated as of June 30, 1997, by
and between Registrant and Certain investors.
10.39(14) Amendment Agreement, dated as of March 18, 1998, by and between the
Registrant and certain investors.
10.40(14) Form of Common Stock Purchase Warrant, dated as of March 18, 1998,
issued to certain investors.
10.41(14) Second Amendment Agreement, dated as of June 10, 1998, by and
between the Registrant and certain investors.
10.42(17) Exchange Agreement, dated as of December 10, 1998, by and between
Registrant and certain entities.
10.43(19) Common Stock Purchase Agreement dated as of November 18, 1998.
10.44(19)(20)Employment Agreement dated as of April 1, 1998, by and between
Registrant and John W.S. Chow.
10.45(19)(20)Promissory Note dated as of June 17, 1998, by and between
Registrant and John W.S. Chow.
10.46(20) Development and Commercial Supply Agreement, dated as of December
1, 1998, by and between Registrant and NYComed Inc.
10.47(21) Form of Credit Facility and Note Purchase Agreement, dated as of
April 5, 1999, by and between the Registrant and the Investors
named therein.
10.47A(21) Amendment No. 1 to Credit Facility and Note Purchase Agreement,
dated as of April 13, 1999, by and between the Registrant and the
Investors named in the Credit Facility and Note Purchase Agreement.
10.47B(21) Amendment No. 2 to Credit Facility and Note Purchase Agreement,
dated as of April 30, 1999, by and between the Registrant and the
Investors named in the Credit Facility and Note Purchase Agreement.
23.1** Consent of Ernst & Young LLP, Independent Auditors.
23.2*** Consent of Brobeck, Phleger & Harrison LLP (included in the opinion
filed as Exhibit 5.1).
24.1* Power of Attorney (included under the caption "Signatures").
27.1 (20) Financial Data schedule for period ended December 31, 1998.
27.2 (21) Financial Data schedule for period ended March 31, 1999.
99.1** Form of Letter to Stockholders.
99.2** Form of Question and Answer for Rights Offering.
99.3** Form of Fairness Opinion of Alliant Partners.
- ----------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
II-9
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, File No. 33-55892 which was declared
effective January 26, 1993.
(2) Intentionally omitted.
(3) Incorporated by reference to exhibits filed on July 23, 1993 with
Registrant's Registration Statement on Form S-8, File No. 33-66450.
(4) Incorporated by reference to exhibits filed on November 10, 1993 with
Registrant's Registration Statement on Form S-1, File No. 33-71506.
(5) Intentionally omitted.
(6) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as amended.
(7) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(8) Intentionally omitted.
(9) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, as amended.
(10) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, as amended.
(11) Incorporated by reference to exhibits filed on June 30, 1997 with
Registrant's Registration Statement on Form S-8, File No. 333-30365.
(12) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-3, File No. 333-31843.
(13) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
(14) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-49025.
(15) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-2, File No. 333-59053.
(16) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-3, File No. 333-67023.
(17) Incorporated by reference to exhibits filed on December 11, 1998 with
Registrant's Current Report on Form 8-K.
(18) Confidential treatment has been granted with respect to certain portions
of these agreements.
(19) Management contract or compensation plan.
(20) Incorporated by reference to exhibits filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
(21) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
II-10
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF SHAMAN PHARMACEUTICALS, INC.
a Delaware Corporation
SHAMAN PHARMACEUTICALS, INC., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of this corporation is Shaman Pharmaceuticals, Inc. The
original Certificate of Incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on December 21, 1992.
2. The Amended and Restated Certificate of Incorporation has been
duly adopted by its Board of Directors and stockholders in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
3. The text of the Restated Certificate of Incorporation is hereby
restated to read in its entirety as follows:
ARTICLE I
The name of this corporation is Shaman Pharmaceuticals, Inc.
ARTICLE II
The address of the registered office of the corporation in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under General Corporation Law of Delaware.
ARTICLE IV
A. Classes of Stock. The Corporation is authorized to issue two classes of
shares to be designated, respectively, Common Stock ("Common") and
Preferred Stock ("Preferred"). The total number of shares of Preferred the
corporation shall have authority to issue is 2,000,000 with a par value of
$0.001 per share, and the total number of shares of Common the corporation shall
have authority to issue is 220,000,000 with a par value of $0.001 per share.
Upon the filing of this Amended and Restated Certificate of Incorporation,
each outstanding 20 shares of Common Stock shall be converted into one share of
Common Stock (the "Stock Split"). No fractional shares of Common Stock shall be
issued upon the Stock Split. In lieu of any fractional shares to which a holder
would otherwise be entitled (after aggregating all such shares of Common Stock
to which such holder is entitled), the Corporation shall issue to such holder
one share of Common Stock.
B. Rights, Preferences and Restrictions of Preferred. The Preferred
authorized by this Amended and Restated Certificate of Incorporation may be
issued from time to time in series. The Board of Directors is hereby authorized
to fix or alter the rights, preferences, privileges and restrictions granted to
or imposed upon any authorized series of Preferred, and the number of shares
constituting any such series and the designation thereof, or of any of them.
Subject to compliance with applicable protective voting rights which may be
granted to the holders of the Preferred or series thereof in Certificates of
Designation or in the corporation's Certificate of Incorporation, as amended and
restated from time to time, and requirements and restrictions of applicable law
("Protective Provisions"), the rights, privileges, preferences and restrictions
of any such additional series may be subordinated to, pari passu with
(including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote or written consent), or senior to any of those of any present or future
class or series of Preferred or Common. Subject to compliance with applicable
Protective Provisions, the Board of Directors is also authorized to increase or
decrease the number of shares of any series, prior or subsequent to the issue of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
The number of shares constituting the Series A Preferred Stock,
$0.001 par value per share, shall be Four Hundred Thousand (400,000) shares. The
number of shares constituting Series C Preferred Stock shall be Two Hundred
Thousand (200,000) shares, $0.001 par value per share. The number of shares
constituting the Series D Convertible Preferred Stock (the "Series D Preferred
Stock") shall be Six Thousand Two Hundred Eighty-five (6,285) shares, $0.001 par
value per share and shall not be subject to increase. The Corporation shall not
issue any shares of Series D Preferred Stock after the Issuance Date (defined
below), except that on or prior to May 31, 1999, the corporation may issue up to
2
1,500 shares of Series D Preferred Stock to MMC/GATX in exchange for
indebtedness of the corporation to MMC/GATX on a basis of one share of Series D
Preferred Stock for each $1,000 of such indebtedness. The Board of Directors is
also authorized to decrease number of shares of any series of preferred stock
prior or subsequent to the issue of the Series A Preferred Stock but not below
the number of shares of such series then outstanding. In case the number of
shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
The rights, preferences, privileges, and restrictions granted to and
imposed on the Series A Preferred Stock, the Series C Preferred Stock, and the
Series D Preferred Stock are as set forth below in this Article IV(B).
1. Certain Defined Terms. The following terms shall have the
following meanings as used in this Article IV(B) (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Adjustment Notice" means an Adjustment Notice substantially in the
form set forth in Section 14(f).
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the subject Person. For purposes
of the term "Affiliate," the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to direct or to cause the direction of the management and
policies of a Person, whether through the ownership of securities, by contract
or otherwise.
"Aggregated Person" means, with respect to any holder of shares of
Series D Preferred Stock, any Person whose beneficial ownership of shares of
Common Stock would be aggregated with such holder's beneficial ownership of
shares of Common Stock for purposes of Section 13(d) of the 1934 Act and
Regulation 13D-G thereunder.
"AMEX" means the American Stock Exchange, Inc.
"Arrearage Interest" means interest at the rate of 12% per annum on
any dividend on shares of Series D Preferred Stock which dividend is not paid on
a Dividend Payment Date, whether or not declared, from such Dividend Payment
Date.
"Auditors" means Ernst & Young LLP or such other firm of independent
public accountants of recognized national standing as shall have been engaged by
the corporation to audit its financial statements.
"Auditors' Determination" means a determination requested by the
corporation and signed by the Auditors concurring with the corporation's
conclusion that a requirement of the corporation to redeem, or a right of any
3
holder of shares of Series D Preferred Stock to require redemption of, shares of
Series D Preferred Stock by reason of the occurrence of a specified Optional
Redemption Event which occurs by reason of an event described in clause (1), (2)
or (3) of the definition of Optional Redemption Event would result in the
corporation being required to classify the Series D Preferred Stock as
redeemable preferred stock on a balance sheet of the Corporation in accordance
with Generally Accepted Accounting Principles. The Auditors' Determination shall
(i) set forth in reasonable detail all relevant facts considered by the Auditors
in connection therewith, (ii) set forth all applicable accounting principles and
assumptions used, and (iii) set forth in reasonable detail or attach copies of
all legal, expert and other advice or information used by the Auditors in
reaching their conclusion. To the extent any facts are assumed for purposes of
either the Corporation's conclusion or the Auditor's Determination, the validity
of such conclusion or determination shall depend upon such assumed facts being
true and complete in all material respects.
"Blackout Period" means the period of up to 20 consecutive days after
the date the Corporation notifies the holders of shares of Series D Preferred
Stock that they are required to suspend offers and sales of Registrable
Securities as a result of an event or circumstance described in Section
3.b.(5)(A) of the Exchange Agreement, which period commences after the date
which is 90 days after the date of the Closing and during which period, by
reason of Section 3.b.(5)(B) of the Exchange Agreement, the Corporation is not
required to amend any Registration Statement or to supplement the Prospectus
relating to any Registration Statement; provided, however, that such period may
be up to 30 consecutive days if the Corporation so elects in accordance with
Section 3.b.(5)(B) of the Exchange Agreement, subject to the limitations
provided therein.
"Board of Directors" or "Board" means the Board of Directors of the
Corporation.
"Business Combination Redemption Percentage" means 118% with respect
to a redemption of shares of Series D Preferred Stock in accordance with Section
8(c)(ii)(f).
"Business Combination Redemption Price" means an amount in cash equal
to the product obtained by multiplying (A) the sum of (i) $1,000 plus (ii) an
amount equal to the accrued but unpaid dividends on the share of Series D
Preferred Stock to be redeemed and any Arrearage Interest on dividends thereon
in arrears to the date of payment of the redemption price pursuant to Section
8(c)(ii)(f) times (B) the Business Combination Redemption Percentage.
"Business Day" means (a) in the case of the Series C Preferred Stock,
any day other than a Saturday, Sunday or other day on which commercial banks in
The City of San Francisco are authorized or required by law to remain closed and
(b) in the case of the Series D Preferred Stock, any day other than a Saturday,
Sunday or other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.
4
"Cash and Cash Equivalent Balances" of any Person on any date shall
be determined from such Person's books maintained in accordance with Generally
Accepted Accounting Principles, and means, without duplication, the sum of (1)
the cash accrued by such Person and its subsidiaries on a consolidated basis on
such date and available for use by such Person and its subsidiaries on such date
and (2) all assets which would, on a consolidated balance sheet of such Person
and its subsidiaries prepared as of such date in accordance with Generally
Accepted Accounting Principles, be classified as cash or cash equivalents.
"Common Stock" means the Common Stock, $0.001 par value per share, of
the Corporation or any shares of capital stock into which such stock shall be
changed or reclassified after the Issuance Date.
"Control Notice" means a Control Notice substantially in the form set
forth in Section 14(e).
"Converted Restriction Amount" means on any date of determination a
number of shares of Common Stock equal to 4.9% of the shares of Common Stock
outstanding on such date.
"Corporation Notice" means a Corporation Notice substantially in the
form set forth in Section 14(c).
"Dividend Payment Date" means each February 1, May 1, August 1 and
November 1.
"Exchange Agreement" means the Exchange Agreement, dated as of
December 10, 1998, by and between the Corporation and the several original
holders of the Senior Subordinated Convertible Notes pursuant to which such
Senior Subordinated Convertible Notes will be exchanged for shares of Series D
Preferred Stock.
"Generally Accepted Accounting Principles" for any Person means the
generally accepted accounting principles and practices applied by such Person
from time to time in the preparation of its audited financial statements.
"Holder Notice" means a Holder Notice substantially in the form set
forth in Section 14(d).
"Indebtedness" as used in reference to any Person means all
indebtedness of such Person for borrowed money, the deferred purchase price of
property, goods and services and obligations under leases which are required to
be capitalized in accordance with Generally Accepted Accounting Principles and
shall include all such indebtedness guaranteed in any manner by such Person or
in effect guaranteed by such Person through a contingent agreement to purchase
and all indebtedness for the payment or purchase of which such Person has
contingently agreed to advance or supply funds and all indebtedness secured by
mortgage or other lien upon property owned by such Person, although such Person
5
has not assumed or become liable for the payment of such indebtedness, and, for
all purposes hereof, such indebtedness shall be treated as though it has been
assumed by such Person.
"Issuance Date" means (a) with respect to the Series C Preferred
Stock, the first date of original issuance of any shares of Series C Preferred
Stock and (b) with respect to the Series D Preferred Stock, the date of original
issuance of the shares of Series D Preferred Stock pursuant to the Exchange
Agreement.
"Initial Reserve Amount" means 6,285,000 shares of Common Stock
reserved by the Corporation for issuance upon conversion of the shares of Series
D Preferred Stock.
"Junior Dividend Stock" means, collectively, the Series A Preferred
Stock, the Common Stock and any other class or series of capital stock of the
Corporation ranking junior as to dividends to the Series D Preferred Stock.
"Junior Liquidation Stock" means, collectively, the Series A
Preferred Stock, the Common Stock and any other class or series of capital stock
of the Corporation ranking junior as to liquidation rights to the Series D
Preferred Stock.
"Majority Holders" means at any time the holders of shares of Series
D Preferred Stock which shares constitute a majority of the outstanding shares
of Series D Preferred Stock outstanding at such time.
"Market Price" of any security on any date means the closing bid
price of such security on such date on the Nasdaq or such other securities
exchange or other market on which such security is listed for trading which
constitutes the principal securities market for such security, as reported by
Bloomberg, L.P.
"Measurement Period" means with respect to any Series D Conversion
Date, the period consisting of 12 consecutive Trading Days ending on and
including the Trading Day immediately preceding such Series D Conversion Date.
"Nasdaq" means The Nasdaq National Market or The Nasdaq SmallCap
Market, whichever system lists the Common Stock.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"1933 Act" means the Securities Act of 1933, as amended.
6
"NYSE" means the New York Stock Exchange, Inc.
"Optional Redemption Date" means the date which is three Business
Days after a holder of shares of Series D Preferred Stock who is entitled to
redemption rights under Section 7(c)(ii)(a) and 7(c)(ii)(b) gives a Holder
Notice.
"Optional Redemption Event" means any one of the following events:
1) For any period of five consecutive Trading Days following the
Issuance Date there shall be no reported sale price of the Common Stock on any
of the Nasdaq, the NYSE or the AMEX;
2) The Common Stock ceases to be listed for trading on the Nasdaq,
the NYSE or the AMEX;
3) Any consolidation or merger of the Corporation or any subsidiary
of the Corporation with or into another entity or other business combination
transaction involving the Corporation or any subsidiary of the Corporation
(other than a merger or consolidation of a subsidiary of the Corporation into
the Corporation or a wholly-owned subsidiary of the Corporation) where the
stockholders of the Corporation immediately prior to such transaction do not
collectively own at least 51% of the outstanding voting securities of the
surviving corporation of such transaction immediately following such transaction
or the common stock of such surviving corporation is not listed for trading on
the Nasdaq, the NYSE or the AMEX; or the sale of all or substantially all of the
assets of the Corporation and its subsidiaries;
4) The adoption of any amendment to the Certificate of Incorporation
of the Corporation (other than any certificate designating a series of preferred
stock of the Corporation which does not contravene the rights of the holders of
shares of Series D Preferred Stock) which materially and adversely affects the
rights of the holders of shares of Series D Preferred Stock in respect of their
interest in the Common Stock in a different and more adverse manner than it
affects the rights of holders of Common Stock generally or the taking of any
other action which materially and adversely affects the rights of the holders of
Series D Preferred Stock;
5) The inability of any holder of shares of Series D Preferred Stock
for (x) (i) 20 days (whether or not consecutive) or (ii) if in accordance with
Section 3.b.(5)(B) of the Exchange Agreement the Corporation elects a Blackout
Period of up to 30 consecutive days which commences more than 90 days after the
Issuance Date, such greater number of days as shall equal the number of days the
Blackout Period so elected is in effect (but in no event more than 30 days), in
either the case of such clause (i) or such clause (ii) during the period
commencing on the Issuance Date and ending on the first anniversary of the
Issuance Date or (y) 60 days (whether or not consecutive) subsequent to August
29, 1997, to sell shares of Common Stock issued or issuable upon conversion of
shares of Series D Preferred Stock pursuant to any Registration Statement (1) by
reason of the requirements of the 1933 Act, the 1934 Act or any of the rules or
7
regulations under either thereof or (2) due to such Registration Statement
containing any untrue statement of material fact or omitting to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or any other failure of such Registration Statement to comply
with the rules and regulations of the SEC; or
6) The Corporation shall fail or default in the timely performance of
any material obligation to a holder of shares of Series D Preferred Stock under
the terms of this Amended and Restated Certificate of Incorporation or under the
Exchange Agreement or any other agreement or document entered into in connection
with the issuance of shares of Series D Preferred Stock, as such agreements and
instruments may be amended from time to time.
"Optional Redemption Percentage" means 118%.
"Optional Redemption Price" means an amount in cash equal to the
product obtained by multiplying (a) the sum of (i) $1,000 plus (ii) an amount
equal to the accrued but unpaid dividends on the share of Series D Preferred
Stock to be redeemed and any Arrearage Interest on dividends thereon in arrears
to the applicable Optional Redemption Date times (b) the Optional Redemption
Percentage.
"Parity Dividend Stock" means any class or series or the
Corporation's capital stock ranking, as to dividends, on a parity with the
Series D Preferred Stock.
"Parity Liquidation Stock" means any class or series of the
Corporation's capital stock ranking, as to liquidation rights, on a parity with
the Series D Preferred Stock.
"Permitted Indebtedness" means (i) Indebtedness which is outstanding
and which would be reflected on a balance sheet of the Corporation as of the
Issuance Date prepared in accordance with Generally Accepted Accounting
Principles and (ii) Indebtedness incurred to finance (A) inventory or (B) the
lease or purchase of equipment (which Indebtedness shall be secured by such
equipment) used in the Corporation's business, the outstanding amount thereof
which does not exceed $10,000,000 during the first year after the Issuance Date,
$15,000,000 during the second year after the Issuance Date and $30,000,000
during the third year after the Issuance Date.
"Person" means an individual, partnership, corporation, limited
liability company, trust, incorporated organization, unincorporated association,
joint stock company, government, governmental agency or political subdivision.
"Redemption Date" means December 30, 1998.
"Redemption Notice" means a Redemption Notice substantially in the
form set forth in Section 14(b).
"Redemption Price" means an amount in cash equal to the product
obtained by multiplying (i) the sum of (A) $1,000 plus (B) an amount equal to
8
the accrued but unpaid dividends on such share of Series D Preferred Stock to be
redeemed and any Arrearage Interest on dividends thereon in arrears to the date
of payment of the Redemption Price times (ii) 130%.
"Registrable Securities" means the shares of Common Stock issuable
upon conversion of shares of Series D Preferred Stock and the shares of Common
Stock issuable as dividends on the Series D Preferred Stock, and any stock or
other securities into which or for which the Common Stock may hereafter be
changed, converted or exchanged by the Corporation or its successor, as the case
may be, and any other securities issued to holders of such Common Stock (or such
shares into which or for which such shares are so changed, converted or
exchanged) upon any reclassification, share combination, share subdivision,
share dividend, merger, consolidation or similar transaction or event.
"Registration Statement" shall have the meaning provided in the
Exchange Agreement.
"SEC" means the United States Securities and Exchange Commission.
"Senior Dividend Stock" means the Series C Preferred Stock of the
Corporation and any other class or series of capital stock of the Corporation
ranking senior as to dividends to the Series D Preferred Stock.
"Senior Liquidation Stock" means the Series C Preferred Stock of the
Corporation and any other class or series of capital stock of the Corporation
ranking senior as to liquidation rights to the Series D Preferred Stock.
"Series C Conversion Agent" means Boston EquiServe Limited
Partnership, as Servicing Agent for BankBoston, N.A., or its duly appointed
successor who shall be serving as transfer agent and registrar for the Common
Stock and who shall have been authorized by the Corporation to act as conversion
agent for the Series C Preferred Stock.
"Series C Conversion Date" means (1) the date on which a notice of
conversion of Series C Preferred Stock is actually received by the Series C
Conversion Agent, whether by mail, courier, personal service, telephone line
facsimile transmission or other means, in case of a conversion of shares of
Series C Preferred Stock pursuant to Section 8(b)(i); or (2) the fourth
anniversary of the Issuance Date, in the case of a conversion of shares of
Series C Preferred Stock pursuant to Section 8(b)(ii).
9
"Series C Conversion Price" means an amount equal to 85% of the
average Closing Price of the Common Stock for the ten Trading Day period ending
three Trading Days prior to the Series C Conversion Date.
"Series D Conversion Agent" means BankBoston, N.A., or its duly
appointed successor, who shall serve as conversion agent for the Series D
Preferred Stock.
"Series D Conversion Date" means the date on which a Series D
Conversion Notice is actually received by the Series D Conversion Agent, whether
by mail, courier, personal service, telephone line facsimile transmission or
other means, in case of a conversion of shares of Series D Preferred Stock
pursuant to Section 8(c)(i).
"Series D Conversion Notice" means a Notice of Conversion of Series D
Convertible Preferred Stock substantially in the form set forth in Section
14(a).
"Series D Conversion Price" means the lesser of (a) $1.125 per share
(subject to equitable adjustments from time to time on terms reasonably
acceptable to the Majority Holders for (i) stock splits, (ii) stock dividends,
(iii) combinations, (iv) capital reorganizations, (v) issuance to all holders of
Common Stock of rights or warrants to purchase shares of Common Stock, (vi)
distribution by the Corporation to all holders of Common Stock of evidences of
indebtedness of the Corporation or cash (other than regular quarterly cash
dividends), (vii) Tender Offers by the Corporation or any Subsidiary for, or
other repurchases of shares of, Common Stock in one or more transactions which,
individually or in the aggregate, result in the purchase of more than 10% of the
Common Stock outstanding, and (viii) similar events relating to the Common
Stock, in each case which occur, or with respect to which "ex-" trading of the
Common Stock begins, on or after December 9, 1998, and on or before the
applicable Series D Conversion Date) and (b) on any Series D Conversion Date,
90% of the lowest per share Trading Price during the applicable Measurement
Period for such Series D Conversion Date in a trade in which neither the Holder
nor any of its Affiliates was the seller, subject to adjustment in the case of
such clause (a) and clause (b) in accordance with Section 7(c).
"Series D Preferred Stock" means the Series D Convertible Preferred
Stock of the Corporation.
"Stockholder Approval" shall have the meaning provided in the
Exchange Agreement.
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) Nasdaq or (z) such other securities market, which at the time
constitutes the principal securities market for the Common Stock is open for
general trading of securities.
"Trading Price" on any date means the lowest sale price (regular way)
for one share of the Common Stock on such date, on the first applicable among
10
the following: (a) the national securities exchange on which the shares of
Common Stock are listed which constitutes the principal securities market for
the Common Stock, (b) Nasdaq, or (c) such other securities market which
constitutes the principal securities market for the Common Stock, in any such
case as reported by Bloomberg, L.P. or if no such sale prices are so reported,
then the representative bid price of the Common Stock as quoted by a broker or
dealer which is a member firm of the NASD (in each such case subject to
equitable adjustment from time to time on terms reasonably acceptable to the
Majority Holders for (i) stock splits, (ii) stock dividends, (iii) combinations,
(iv) capital reorganizations, (v) issuance to all holders of Common Stock of
rights or warrants to purchase shares of Common Stock at a price per share less
than the Trading Price which would otherwise be applicable, (vi) the
distribution by the Corporation to all holders of Common Stock of evidences of
indebtedness of the Corporation or cash (other than regular quarterly cash
dividends), (vii) Tender Offers by the Corporation or any subsidiary of the
Corporation or other repurchases of shares of Common Stock in one or more
transactions which, individually or in the aggregate, result in the purchase of
more than 10% of the Common Stock outstanding, and (viii) similar events
relating to the Common Stock, in each such case which occur on or after the
Issuance Date); provided, however, that if on any Trading Day there shall be no
reported sale price (regular way) of such security, the "Trading Price" on such
Trading Day shall be the lowest sale price (regular way) of such security on the
Trading Day next preceding such Trading Day on which a sale price (regular way)
for such security has been so reported.
2. Rank. The shares of Series C Preferred Stock shall rank senior
to the Series D Preferred Stock, and both the Series C Preferred Stock and the
Series D Preferred Stock shall rank senior to the Series A Preferred Stock and
the Common Stock and any shares of any other series of Preferred Stock or
any shares of any other class of preferred stock of the Corporation, now or
hereafter issued, as to payment of dividends and distribution of assets upon
liquidation, dissolution, or winding up of the Corporation, whether voluntary or
involuntary. However, the relative rank of the Series D Preferred Stock to
future issuances may be altered by written consent of the Majority Holders in
advance of such issuance.
3. Dividend Rights.
a. Series A Preferred Stock. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, the holders
of the Series A Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors. The Board of Directors shall not pay any dividend to the
holders of the Common Stock unless and until it has paid an equivalent dividend,
on a pro rata per share basis, to the holders of the Series A Preferred Stock.
b. Series C Preferred Stock. The holders of shares of Series C
Preferred Stock shall be entitled to receive, when, as, and if declared by
the Board of Directors out of funds legally available for such purpose,
dividends paid semi-annually on May 31 and November 30 of each year to the
holders of record of such shares on March 31 and September 30 of such year
as follows: (i) a stock-on-stock dividend of $10.00 per annum, paid in
11
arrears, in shares of Common Stock (valued at 85% of the average closing price
of the Common Stock for the ten Trading Day period ending three Trading Days
prior to the date on which the dividend is paid); plus (ii) a cash amount
equaling 0.00005% of the Company's United States net sales, if any, for the
preceding two calendar quarters of its SP-303/Provir product for the treatment
of diarrhea less $5.00 (the value of the semi-annual stock dividend). Dividends
on the shares of Series C Preferred Stock shall be cumulative. If under
Delaware law, the Company is unable to pay the cash amount of the dividends,
then this portion of the dividends shall be payable in shares of Common
Stock (valued at 85% of the average closing price of the Common Stock for the
ten Trading Day period ending three Trading Days prior to the date on which the
dividend is paid).
c. Series D Preferred Stock
(i) The holders of shares of Series D Preferred Stock
shall be entitled to receive, when, as, and if declared by the Board of
Directors out of funds legally available for such purpose, dividends at the rate
of $55 per annum per share, and no more (except as otherwise provided herein),
which shall be fully cumulative, shall accrue without interest (except as
otherwise provided herein as to dividends in arrears) from the date of
original issuance of each share of Series D Preferred Stock and shall be
payable quarterly on each Dividend Payment Date of each year commencing
February 1, 1999 (except that if any such date is not a Business Day, then such
dividend shall be payable on the next succeeding day that is a Business
Day) to holders of record as they appear on the stock books of the Corporation
on such record dates, not more than ten nor less than five days preceding the
payment dates for such dividends, as shall be fixed by the Board.
Notwithstanding any other provision hereof, the rate of dividends on the shares
of Series D Preferred Stock shall be subject to increase in accordance with
Section 7(c)(ii)(b)(iv).
Dividends on the Series D Preferred Stock shall be paid in cash or,
subject to the limitations in Section 3(c)(ii), shares of Common Stock or any
combination of cash and shares of Common Stock, at the option of the Corporation
as hereinafter provided. The amount of the dividends payable per share of Series
D Preferred Stock for each quarterly dividend period shall be computed by
dividing the annual dividend amount by four. The amount of dividends payable for
the initial dividend period and any period shorter than a full quarterly
dividend period shall be computed on the basis of a 360-day year of twelve
30-day months. Dividends not paid on a Dividend Payment Date, whether or not
such dividends have been declared, will bear Arrearage Interest until paid. No
dividends or other distributions, other than dividends payable solely in shares
of any Junior Dividend Stock, shall be paid or set apart for payment on any
shares of Junior Dividend Stock, and no purchase, redemption, or other
acquisition shall be made by the Corporation of any shares of Junior Dividend
Stock unless and until all accrued and unpaid dividends on the Series D
Preferred Stock and Arrearage Interest on dividends in arrears at the rate
specified herein shall have been paid or declared and set apart for payment.
If at any time any dividend on any Senior Dividend Stock shall be in
default, in whole or in part, no dividend shall be paid or declared and set
apart for payment on the Series D Preferred Stock unless and until all accrued
12
and unpaid dividends with respect to the Senior Dividend Stock, including the
full dividends for the then current dividend period, shall have been paid or
declared and set apart for payment, without interest. No full dividends shall be
paid or declared and set apart for payment on any Parity Dividend Stock for any
period unless all accrued but unpaid dividends (and Arrearage Interest on
dividends in arrears) have been, or contemporaneously are, paid or declared and
set apart for such payment on the Series D Preferred Stock. No full dividends
shall be paid or declared and set apart for payment on the Series D Preferred
Stock for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series D Preferred Stock and the Parity Dividend Stock, all dividends paid or
declared and set apart for payment upon shares of Series D Preferred Stock (and
Arrearage Interest on dividends in arrears) and the Parity Dividend Stock shall
be paid or declared and set apart for payment pro rata, so that the amount of
dividends paid or declared and set apart for payment per share on the Series D
Preferred Stock and the Parity Dividend Stock shall in all cases bear to each
other the same ratio that accrued and unpaid dividends per share on the shares
of Series D Preferred Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 3(c) shall
not be deemed to include any stock dividend or distributions made in connection
with any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
(ii) If the Corporation elects in the exercise of its sole
discretion to issue shares of Common Stock in payment of dividends on the
Series D Preferred Stock with respect to any Dividend Payment Date, the
Corporation shall (1) give notice to the holders of the Series D Preferred Stock
at least 14 days prior to the applicable Dividend Payment Date of the
Corporation's election to exercise such right and (2) deliver, or cause to be
delivered, by the third Trading Day after such Dividend Payment Date to each
holder of such shares the number of whole shares of Common Stock arrived at by
dividing the per share Series D Conversion Price (determined as if the
applicable Dividend Payment Date were a Series D Conversion Date) of such shares
of Common Stock into the total amount of cash dividends such holder would be
entitled to receive if the aggregate dividends on the Series D Preferred Stock
held by such holder which are being paid in shares of Common Stock were being
paid in cash; provided, however, that if shares of Common Stock for such
dividend are not delivered to holders of Series D Preferred Stock on or prior to
the third Trading Day after a Dividend Payment Date, then the Corporation shall
not be entitled to pay such dividend in shares of Common Stock and such
dividend, together with Arrearage Interest from the applicable Dividend Payment
Date, shall be payable solely in cash. No fractional shares of Common Stock
shall be issued in payment of dividends. In lieu thereof, the Corporation shall
pay cash in an amount equal to the product of (x) the Trading Price of the
Common Stock for the 12 consecutive Trading Days ending on and including the
Trading Day immediately preceding such Dividend Payment Date times (y) the
fraction of a share of Common Stock which would otherwise be issuable by the
Corporation. The Corporation shall not exercise its right to issue shares of
13
Common Stock in payment of dividends on Series D Preferred Stock if:
(A) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, together with the number
of shares of Common Stock held in the Corporation's treasury, is insufficient to
pay the portion of such dividends to be paid in shares of Common Stock;
(B) the issuance or delivery of shares of Common Stock
as a dividend payment would require registration with or approval of any
governmental authority under any law or regulation, and such registration or
approval has not been effected or obtained;
(C) the shares of Common Stock to be issued as a
dividend payment have not been authorized for listing, upon official notice
of issuance, on any securities exchange or market on which the Common Stock is
then listed; or have not been approved for quotation if the Common Stock is
traded in the over-the-counter market;
(D) the Series D Conversion Price (determined as
if the applicable Dividend Payment Date were a Series D Conversion Date) is less
than the par value of one share of Common Stock;
(E) the shares of Common Stock to be issued as a
dividend (1) cannot be sold or transferred without restriction by holders of
shares of Series D Preferred Stock who receive such shares of Common Stock as a
dividend payment and who are not Affiliates of the Corporation or (2) are no
longer listed on the NYSE, the AMEX or the Nasdaq;
(F) the issuance of shares of Common Stock in payment
of dividends on Series D Preferred Stock held by any holder of shares of
Series D Preferred Stock would result in such holder (including all Aggregated
Persons of such holder) beneficially owning more than 4.9% of the Common Stock,
determined as provided in the proviso to the second sentence of Section 8(c)
(i)(a) or would result in the issuance to such holder (including all Aggregated
Persons of such holder) of an aggregate number of shares of Common Stock upon
conversion of shares of Series D Preferred Stock or in payment of dividends on
shares of Series D Preferred Stock in excess of the 4.9% limitation provided in
Section 8(c)(i)(b);
(G) an Optional Redemption Event shall have occurred
and on the applicable Dividend Payment Date any holder of shares of Series D
Preferred Stock shall be entitled to exercise optional redemption rights
under Section 7(c)(ii) hereof by reason of such Optional Redemption Event or
shall have exercised such optional redemption rights and the Corporation
shall not have paid the applicable Optional Redemption Price.
Shares of Common Stock issued in payment of dividends on Series D
Preferred Stock pursuant to this Section shall be, and for all purposes shall be
deemed to be, validly issued, fully paid and nonassessable shares of Common
14
Stock of the Corporation; the issuance and delivery thereof is hereby
authorized; and the dispatch in full thereof will be, and for all purposes shall
be deemed to be, payment in full of the cumulative dividends to which holders
are entitled on the applicable Dividend Payment Date.
(iii) Neither the Corporation nor any subsidiary of the
Corporation shall (1) make any Tender Offer for outstanding shares of
Common Stock, unless the Corporation contemporaneously therewith makes an offer,
or (2) enter into an agreement regarding a Tender Offer for outstanding shares
of Common Stock by any Person other than the Corporation or any subsidiary of
the Corporation, unless such Person agrees with the Corporation to make an
offer, in either such case to each holder of outstanding shares of Series D
Preferred Stock to purchase for cash at the time of purchase in such Tender
Offer the same percentage of shares of Series D Preferred Stock held by such
holder as the percentage of outstanding shares of Common Stock offered to be
purchased in such Tender Offer at a price per share of Series D Preferred Stock
equal to the greater of (i) the quotient obtained by dividing (a) the sum of (1)
$1,000 plus (2) an amount equal to the accrued but unpaid dividends on such
share of Series D Preferred Stock and any Arrearage Interest on dividends
thereon in arrears to the date of purchase pursuant to this Section 3(c)(iii) by
(b) 0.9 and (ii) an amount equal to the product obtained by multiplying (x) the
number of shares of Common Stock which would, but for the purchase pursuant to
such Tender Offer, be issuable on conversion in accordance with Section 9(a) of
one share of Series D Preferred Stock if a Series D Conversion Notice were given
by the holder of such share of Series D Preferred Stock on the date of purchase
pursuant to such Tender Offer (determined without regard to any limitation on
beneficial ownership contained in the second sentence of Section 8(c)(i)(a) or
in Section 8(c)(i)(b) times (y) the price per share of Common Stock offered in
such Tender Offer.
4. Series D Preferred Stock Capital. The amount to be represented in
the capital account for the Series D Preferred Stock at all times for each
outstanding share of Series D Preferred Stock shall be an amount at least equal
to the sum of (1) $1,000 plus (2) to the extent that the corporation has surplus
in its capital account, an amount equal to the accrued but unpaid dividends on
such share of Series D Preferred Stock and any Arrearage Interest on dividends
thereon in arrears to the date of determination plus (3) to the extent that the
corporation has surplus in its capital account, an amount equal to the product
obtained by multiplying (a) the sum of (1) $1,000 plus (2) an amount equal to
the accrued but unpaid dividends on such share of Series D Preferred Stock and
any Arrearage Interest on dividends thereon in arrears to the date of
determination times (b) 18%. Upon original issuance of each share of Series D
Preferred Stock, an amount equal to $1,000 shall be credited to the Series D
Preferred Stock capital account of the corporation and, to the extent at such
time the corporation has surplus in its capital account, an amount equal to the
amount specified in the preceding clause (3) (or so much thereof as is in
surplus) shall be transferred from surplus to the Series D Preferred Stock
capital account. If at any time the corporation shall have credited to the
Series D Preferred Stock capital account less than the full amount required by
the preceding clauses (1) through (3), then (x) if at any time thereafter the
corporation has surplus in its capital account, the corporation immediately
15
shall transfer surplus to the Series D Preferred Stock capital account to the
extent available and necessary to satisfy the requirements of the preceding
clauses (1) through (3), (y) notwithstanding the particular shares of Series D
Preferred Stock in respect of which an amount in excess of $1,000 per share of
Series D Preferred Stock shall have been transferred to the Series D Preferred
Stock capital account, any amount in excess of $1,000 for each outstanding share
of Series D Preferred Stock shall be treated as Series D Preferred Stock capital
pro rata for all outstanding shares of Series D Preferred Stock and (z) upon any
conversion of a share of Series D Preferred Stock, an amount equal to $0.001 per
share of common stock issued upon such conversion shall be credited to the
common stock capital account and the balance in the Series D Preferred Stock
capital account in respect of such converted share of Series D Preferred Stock
shall be retained in the Series D Preferred Stock capital account, to the extent
required under the preceding clauses (1) through (3). Nothing in this Section
shall require the corporation in a balance sheet prepared in accordance with
generally accepted accounting principles to reflect more than $1,000 per share
in Series D Preferred Stock capital for purposes of such balance sheet, if such
presentation would not be in accordance with generally accepted accounting
principles, so long as the notes to any such balance sheet make adequate
disclosure of the requirements of this Section and the capital accounts of the
corporation for purposes of the general corporation law of the state of
Delaware.
5. Liquidation Preference.
a. In the event of a liquidation, dissolution, or winding up of
the Corporation, whether voluntary or involuntary, the holders of Series C
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution to the holders of the Series D Preferred Stock, the Series A
Preferred Stock, and the Common Stock, out of the assets of the Corporation,
whether such assets constitute stated capital or surplus of any nature, an
amount per share of Series C Preferred Stock equal to $100.00 plus any accrued
and unpaid dividends and no more. In the event that the assets of the
Corporation are insufficient to make the foregoing distribution, then the entire
assets of the Corporation available for distribution shall be distributed
ratably among the holders of the Series C Preferred Stock and any stock on
parity with the Series C Preferred Stock with respect to liquidation rights in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
liquidation price of the shares of the Series C Preferred Stock with respect to
liquidation rights, the holders of such shares shall not be entitled to any
further participation in any distribution of the assets by the Corporation.
b. Upon the completion of the distribution required by Section
5(a) above, if any assets remain in the Corporation, the holders of Series
D Preferred Stock shall be entitled to receive out of such remaining assets of
the Corporation, whether such assets constitute stated capital or surplus of any
nature, an amount per share of Series D Preferred Stock equal to the Liquidation
Preference (as defined above) and no more, before any payment shall be made or
any assets distributed to the holders of Junior Liquidation Stock, provided
however, that such rights shall accrue to the holders of Series D Preferred
16
Stock only in the event that the Corporation's payments with respect to the
liquidation preference of the holders of Senior Liquidation are fully met. After
the liquidation preferences of the Senior Liquidation Stock are fully met, the
entire assets of the Corporation available for distribution shall be distributed
ratably among the holders of the Series D Preferred Stock and any Parity
Liquidation Stock in proportion to the respective preferential amounts to which
each is entitled (but only to the extent of such preferential amounts). After
payment in full of the liquidation price of the shares of the Series D Preferred
Stock and the Parity Liquidation Stock, the holders of such shares shall not be
entitled to any further participation in any distribution of assets by the
Corporation. In the event that the assets of the Corporation are insufficient to
make the foregoing distribution, then the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of the
Series D Preferred Stock and any stock on parity with the Series D Preferred
Stock with respect to liquidation rights in proportion to the respective
preferential amounts to which each is entitled (but only to the extent of such
preferential amounts). With respect to the Series D Preferred Stock, neither a
consolidation or merger of the Corporation with another corporation nor a sale
or transfer of all or part of the Corporation's assets for cash, securities, or
other property in and of itself will be considered a liquidation, dissolution,
or winding up of the Corporation.
c. After payment in full of the liquidation price as set forth
above in Sections 5(a) and 5(b) above, if assets remain in the corporation, the
holders of Series A Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership
thereof, the amount of $8.147 (the "Original Issue Price") per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) plus all accrued or declared but unpaid dividends on such share for each
share of Series A Preferred Stock then held by such holder. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amount, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Series A Preferred Stock
in proportion to the preferential amount each such holder is otherwise entitled
to receive.
d. After payment to the holders of the Series C Preferred Stock,
Series D Preferred Stock, and Series A Preferred Stock of the amounts set forth
in Sections 5(a), (b), and (c), respectively, above, the entire remaining assets
and funds of the Corporation legally available for distribution, if any, shall
be distributed among the holders of the Common Stock and the Series A Preferred
Stock in proportion to the shares of Common Stock then held by them and the
shares of Common Stock which they then have the right to acquire upon conversion
of the shares of Series A Preferred Stock then held by them. The holders of
Series C Preferred Stock and Series D Preferred Stock shall not be entitled to
any further participation in any distribution of assets by the Corporation,
other than payment as set forth in Section 5(a) and 5(b), respectively.
17
e. With respect to the Series A Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock (except as limited with respect to
Series D Preferred Stock as set forth in Section 5(b) above),(i) any acquisition
of the Corporation by means of merger or other form of corporate reorganization
in which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary (other than a mere reincorporation transaction) or (ii)
a sale of all or substantially all of the assets of the Corporation or
(iii) any other transaction or series of related transactions by the
Corporation in which in excess of 50% of the Corporation's voting power is
transferred, shall be treated as a liquidation, dissolution or winding up of the
Corporation and shall entitle the holders of Series C Preferred Stock and Series
A Preferred Stock to receive at the closing thereof the amount as specified in
Section 5(a) and Section 5(c), respectively.
f. With respect to the holders of Series A Preferred Stock and
Series C Preferred Stock, whenever the distribution provided for the holders of
the Series A Preferred Stock in this Section 5 shall be payable in securities or
property other than cash, the value of such distribution shall be as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability:
(A) If traded on a securities exchange, the value shall
be deemed to be the average of the closing prices of the securities on such
exchange over the 30-day period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
are applicable) over the 30-day period ending three (3) days prior to the
closing; and
(C) If there is no active public market, the value
shall be the fair market value thereof, as determined in good faith by the
Board of Directors of the Corporation.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (i) (A), (B) or (C) to reflect the approximate fair
market value thereof, as determined in good faith by the Board of Directors of
the Corporation.
(iii) In the event of any bona-fide dispute between the
Corporation and one or more holders of the Series A Preferred Stock as to
any fair market value determination under clauses (i)(C) or (ii) above, such
dispute shall be resolved through binding arbitration under the rules of the
American Arbitration Association, with the arbitration panel consisting of
persons familiar with the valuation of public and private entities and such
18
panel being advised, as to such valuation issues, by an investment bank of
nationally recognized standing, the costs thereof to be borne by the
non-prevailing party.
6. No Sinking Fund. The shares of Series D Preferred Stock shall
not be entitled to the benefits of any sinking fund for the redemption or
repurchase of shares of Series D Preferred Stock.
7. Redemption.
(a) Series A Preferred Stock. The Series A Preferred Stock
is not redeemable.
(b) Series C Preferred Stock. The Series C Preferred Stock
is not redeemable.
(c) Series D Preferred Stock. The Series D Preferred Stock
is subject to the following redemption provisions:
(i) Redemption at Option of Corporation.
(A) Optional Redemption.
(1) So long as (x) the Corporation shall be in
compliance in all material respects with its obligations to the holders of
the Series D Preferred Stock (including, without limitation, its obligations
under the Exchange Agreement and this Amended and Restated Certificate of
Incorporation) and (y) on the date the Corporation gives the Redemption Notice
and on the Redemption Date, the Corporation has Cash and Cash Equivalent
Balances (excluding investment securities) which are sufficient, after taking
into account the Corporation's cash requirements during the period from the date
the Redemption Notice is given to the Redemption Date, to pay the Redemption
Price of the shares of Series D Preferred Stock to be redeemed, the Corporation
shall have the right to redeem all or any part of the outstanding shares of
Series D Preferred Stock pursuant to this Section 7(c)(i)(A) at the Redemption
Price. In order to exercise its right of redemption under this Section 7(c)(i)
(A), the Corporation shall give a Redemption Notice to the holders of shares of
Series D Preferred Stock not less than 20 or more than 30 days prior to the
Redemption Date.
(2) On the Redemption Date (or such later date
as a holder of shares of Series D Preferred Stock shall surrender to the
Corporation the certificate(s) for the shares of Series D Preferred Stock
redeemed), the Corporation shall pay to or upon the order of each holder of
shares of Series D Preferred Stock by wire transfer of immediately available
funds to such account as shall be specified for such purpose by such holder in
an amount equal to the Redemption Price of all of such holder's shares of Series
D Preferred Stock to be redeemed. A holder of shares of Series D Preferred Stock
which are redeemed pursuant to this Section 7(c) (i)(A) shall not be entitled to
payment of the Redemption Price of such shares of Series D Preferred Stock until
such holder shall have surrendered the certificate(s) for such shares of Series
19
D Preferred Stock to the Corporation or, in the case of the loss, theft or
destruction of any such certificate, given indemnity in accordance with Section
13. If the Corporation shall fail to pay the Redemption Price of any shares of
Series D Preferred Stock in full when due, then the amount thereof shall bear
interest to the extent not prohibited by applicable law at the rate of 12% per
annum from the due date thereof until paid in full.
(3) Notwithstanding the giving of a Redemption
Notice, each holder of shares of Series D Preferred Stock shall be entitled to
convert in accordance with Section 8(c) any shares of Series D Preferred Stock
which are to be redeemed at any time prior to (1) the Redemption Date or (2) if
the Corporation fails to pay the Redemption Price in full to such holder on the
Redemption Date, the date on which the Corporation pays the Redemption Price
in full to such holder for all shares of Series D Preferred Stock to be redeemed
from such holder.
(4) Any redemption of shares of Series D Preferred
Stock pursuant to this Section 7(c)(i)(A) shall be made as nearly as
practical pro rata from all holders of shares of Series D Preferred Stock
outstanding, subject to reduction of the shares of Series D Preferred Stock to
be redeemed from any holder by reason of conversions of shares of Series D
Preferred Stock of such holder between the date the Redemption Notice is given
and the Redemption Date.
(5) Upon receipt by the Corporation from a holder
of shares of Series D Preferred Stock of certificates for shares of Series D
Preferred Stock evidencing a greater number of shares of Series D Preferred
Stock than the number of shares of Series D Preferred Stock to be redeemed in
accordance with this Section 7(c)(i)(A), the Corporation shall, within three
Trading Days after such surrender, issue and deliver to or upon the order of
such holder a new certificate for the balance of shares of Series D Preferred
Stock, if any.
(B) No Other Redemption at the Option of the
Corporation. Except as otherwise specifically provided in Section 7(a), the
Corporation shall not have any right to redeem any shares of Series D
Preferred Stock at the option of the Corporation.
(ii) Redemption Upon an Optional Redemption Event.
(a) Redemption Right Upon Optional Redemption Event.
If an Optional Redemption Event occurs, then each holder of shares of Series D
Preferred Stock shall have the right, at such holder's option, to require
the Corporation to redeem all of such holder's shares of Series D Preferred
Stock, or any portion thereof, on the date that is three Business Days after
the date of the Holder Notice given with respect to such Optional Redemption
Event. Each holder of shares of Series D Preferred Stock shall have the right
to require the Corporation to redeem all or any such portion of such holder's
shares of Series D Preferred Stock if an Optional Redemption Event occurs at
any time while any of such holder's shares of Series D Preferred Stock are
20
outstanding at a price per share of Series D Preferred Stock equal to the
Optional Redemption Price.
(b) Notices; Method of Exercising Optional Redemption
Rights, Etc.
(i) On or before the fifth Business Day after the
occurrence of an Optional Redemption Event, the Corporation shall give to each
holder of outstanding shares of Series D Preferred Stock a Corporation
Notice of the occurrence of such Optional Redemption Event and of the redemption
right set forth herein arising as a result thereof.
The Corporation Notice shall set forth:
(A) the date by which the optional redemption
right must be exercised, which date shall be at least 30 days after the date
such Corporation Notice is given, and
(B) a description of the procedure (set forth
below) which each such holder must follow to exercise such holder's optional
redemption right.
No failure of the Corporation to give a Corporation
Notice or defect therein shall limit the right of any holder of shares of Series
D Preferred Stock to exercise the optional redemption right or affect the
validity of the proceedings for the redemption of such holder's shares of
Series D Preferred Stock.
(ii) To exercise its optional redemption right,
each holder of outstanding shares of Series D Preferred Stock shall deliver to
the Corporation on or before the thirtieth day after a Corporation Notice is
given to such holder (or if no Corporation Notice has been given to such holder,
within forty days after such holder first learns of the Optional Redemption
Event) a Holder Notice to the Corporation setting forth the name of such
holder and the number of such holder's shares of Series D Preferred Stock to
be redeemed. A Holder Notice may be revoked by such holder giving such Holder
Notice by giving notice of such revocation to the Corporation at any time prior
to the time the Corporation pays the Optional Redemption Price to such holder.
(iii) If a holder of shares of Series D Preferred
Stock shall have given a Holder Notice, on the date which is three Business
Days after the date such Holder Notice is given (or such later date as such
holder surrenders such holder's certificates for the shares of Series D
Preferred Stock redeemed) the Corporation shall make payment in immediately
available funds of the applicable Optional Redemption Price to such account as
specified by such holder in writing to the Corporation at least one Business Day
prior to the applicable redemption date. A holder of shares of Series D
Preferred Stock which are redeemed pursuant to this Section shall not be
entitled to payment of the Optional Redemption Price of such shares of Series D
Preferred Stock until such holder shall have surrendered the certificate(s)
21
for such shares of Series D Preferred Stock to the Corporation or, in the case
of the loss, theft or destruction of any such certificate, given indemnity in
accordance with Section 11.
(iv) Notwithstanding any other provision of this
Amended and Restated Certificate of Incorporation, if an Optional Redemption
Event occurs by reason of the occurrence of an event described in clause (1),
(2) or (3) of the definition of the term Optional Redemption Event, and such
occurrence is by reason of events which are not solely within the control of
the Corporation, the Corporation shall have the right to give a Control
Notice to the holders of shares of Series D Preferred Stock at any time after
such Optional Redemption Event occurs and prior to the earlier of (1) the date
on which all holders of shares of Series D Preferred Stock who had the right
(other than as limited by this Section 7(c)(ii)(b)) to require redemption of
any shares of Series D Preferred Stock by reason of the occurrence of such
Optional Redemption Event no longer have such right and (2) the applicable
Optional Redemption Date by reason of the earliest Holder Notice given by any
holder of shares of Series D Preferred Stock by reason of such Optional
Redemption Event. If the Corporation timely gives such Control Notice and an
Adjustment Notice (which may be combined in a single notice) to the holders
of shares of Series D Preferred Stock, then in lieu of payment of the Optional
Redemption Price by reason of any such Optional Redemption Event and commencing
on the first date on which such Optional Redemption Event occurs the following
adjustments shall take effect:
(A) In the case of an Optional Redemption Event
described in clause (1) of the definition of the term Optional Redemption Event,
for a period of 180 days after the occurrence of such Optional Redemption Event
(i) the Series D Conversion Price will be 80% of the amount which the Series D
Conversion Price would otherwise be and (ii) the cumulative dividend shall
accrue on each share of the Series D Preferred Stock at the rate of $180 per
annum.
(B) In the case of an Optional Redemption Event
described in clause (2) of the definition of the term Optional Redemption Event,
for so long as such Optional Redemption Event continues (i) the Series D
Conversion Price will be 80% of the amount which the Series D Conversion
Price would otherwise be and (ii) the cumulative dividend shall accrue on
each share of Series D Preferred Stock at the rate of $180 per annum.
(C) In the case of an Optional Redemption Event
described in clause (3) of the definition of the term Optional Redemption Event,
for so long as any shares of Preferred Stock are outstanding (i) the Series D
Conversion Price will be 70% of the amount which the Series D Conversion Price
would otherwise be and (ii) the cumulative dividend shall accrue on each
share of Series D Preferred Stock at the rate of $300 per annum.
For purposes of this Section 7(c)(ii)(b)(iv), an Optional Redemption
Event described in clause (1), (2) or (3) of the definition of the term Optional
Redemption Event shall be deemed to have occurred by reason of events which are
not solely within the control of the Corporation if a requirement of the
22
Corporation to redeem, or a right of any holder of shares of Series D Preferred
Stock to require redemption of, shares of Series D Preferred Stock by reason
thereof would result in the Corporation being required to classify the Series D
Preferred Stock as redeemable preferred stock on a balance sheet of the
Corporation prepared in accordance with Generally Accepted Accounting
Principles, and, in the case of an Optional Redemption Event described in clause
(3) of the definition of the term Optional Redemption Event, the Board or the
stockholders of the Corporation do not have the right to approve or disapprove
the transactions resulting in such event.
(d) Other.
(1) If the Corporation fails to pay in full when due
the Optional Redemption Price for the number of shares of Series D Preferred
Stock specified in a Holder Notice, then the amount thereof shall bear interest
to the extent not prohibited by applicable law at the rate of 12% per annum
from the due date thereof until paid in full.
(2) In connection with a redemption pursuant to
these Sections 7(c)(ii) of less than all of the shares of Series D
Preferred Stock evidenced by a particular certificate, promptly, but in no event
later than three Business Days after surrender of such certificate to the
Corporation, the Corporation shall issue and deliver to such holder a
replacement certificate for the shares of Series D Preferred Stock evidenced by
such certificate which have not been redeemed.
(3) A Holder Notice given by a holder of shares of
Series D Preferred Stock shall be deemed for all purposes to be in proper form
unless the Corporation notifies such holder in writing within three Business
Days after such Holder Notice has been given (which notice shall specify all
defects in the Holder Notice), and any Holder Notice containing any such defect
shall nonetheless be effective on the date given if such holder promptly
undertakes in writing to correct all such defects. Notwithstanding the absence
of any such undertaking from such holder, no such claim of error shall limit or
delay performance of the Corporation's obligation to redeem all shares of Series
D Preferred Stock not in dispute.
8. Conversion.
a. Series A Preferred Stock. The holders of Series A Preferred
Stock have conversion rights as follows:
(i) Right to Convert. Each share of Series A Preferred
Stock shall be convertible into one share of Common Stock, as adjusted for
any stock dividends, combinations or splits with respect to such shares,
provided, however, that the minimum number of shares which may be converted at
anyone time shall be 75,000 shares or such lesser number of shares as shall be
then outstanding.
23
(ii) Automatic Conversion. Each share of Series A Preferred
Stock shall automatically be converted into Common Stock, upon the earlier to
occur of:
(A) immediately in the event that at any time prior
to July 23, 1999, the closing sale price (the "Closing Sale Price") of the
Corporation's Common Stock (as listed on the Nasdaq National Market) has for
a period of sixty (60) consecutive trading days exceeded the Original Issue
Price, which event shall be disclosed to each holder of the Series A
Preferred Stock by written notification from the Corporation, in which
event each share of Series A Preferred Stock shall automatically be
converted into one share of Common Stock, as appropriately adjusted for any
stock dividends, combinations or splits with respect to such shares of Common
Stock; or
(B) July 23, 1999, in which event each share of Series
A Preferred Stock shall automatically be converted into such number of shares
of Common Stock as equals the Original Issue Price divided by the
weighted-average Closing Sale Price for the sixty (60) consecutive trading days
ending two days prior to July 23, 1999, but in no event more than the Original
Issue Price divided by $6.00, in each case as appropriately adjusted for any
stock dividends, combinations or splits with respect to such shares of Common
Stock.
(iii) Mechanics of Conversion. Before any holder of Series
A Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of this Corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice by mail, postage
prepaid, or by facsimile, confirmed by mail, to this Corporation at its
principal corporate office, of the election to convert the same and shall state
therein the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. This Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of the Series A
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
Series A Preferred Stock to be converted, or in the case of automatic conversion
pursuant to Section 8(a)(ii), ten (10) days following written notification as
provided in Section 8(a)(ii), and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock as of
such date.
(iv) Adjustments to Conversion Ratio for Stock Dividends
and for Combinations or Subdivisions of Common Stock. In the event that this
Corporation at any time or from time to time after the purchase date of the
Series A Preferred shall declare or pay, without consideration, any dividend on
the Common Stock payable in Common Stock or in any right to acquire Common
Stock for no consideration, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise than by payment of a
dividend in Common Stock or in any right to acquire Common Stock), or in the
24
event the outstanding shares of Common Stock shall be combined or consolidated,
by reclassification or otherwise, into a lesser number of shares of Common
Stock, then the number of shares of Common Stock into which the Series A
Preferred Stock can be converted shall be proportionately decreased or
increased, as appropriate. In the event that this Corporation shall declare or
pay, without consideration, any dividend on the Common Stock payable in any
right to acquire Common Stock for no consideration then the Corporation shall be
deemed to have made a dividend payable in Common Stock in an amount of shares
equal to the maximum number of shares issuable upon exercise of such rights to
acquire Common Stock.
(v) Adjustments for Reclassification and Reorganization.
If the Common Stock issuable upon conversion of the Series A Preferred Stock
shall be changed into the same or a different number of shares of any other
class or classes of stock, whether by capital reorganization, reclassification
or otherwise (other than a subdivision or combination of shares provided for in
Section 8(a)(iv) above or a merger or other reorganization referred to in
Section 5(f) above), the number of shares of such other class or classes of
stock into which the Series A Preferred Stock shall be convertible shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Series A Preferred
Stock shall be convertible into, in lieu of the number of shares of Common Stock
which the holders would otherwise have been entitled to receive, a number of
shares of such other class or classes of stock equivalent to the number of
shares of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series A Preferred Stock immediately before that change.
(vi) No Impairment. This Corporation will not,
by amendment of its Certificate or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 8(a)(iv) and in the taking of
all such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock against
impairment.
25
(vii) No Fractional Shares and Certificate as to
Adjustments.
(a) No fractional shares shall be issued upon
conversion of the Series A Preferred Stock, and the number of shares of
Common Stock to be issued shall be rounded to the nearest whole share. Whether
or not fractional shares are issuable upon such conversion shall be determined
on the basis of the total number of Series A Preferred Stock the holder is at
the time converting into Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
(b) Upon the occurrence of each adjustment or
readjustment of the number of shares of Common Stock into which the Series A
Preferred Stock can be converted pursuant to this Section 8(a)(iv), this
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the conversion ratio at the time in effect, and (C) the number
of shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of the Series A Preferred Stock.
(viii) Notices of Record Date. In the event of any
taking by this Corporation of a record of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to
receive any dividend (other than a cash dividend) or other distribution,
any right to subscribe for, purchase or otherwise acquire any shares of stock
of any class or any other securities or property, or to receive any other right,
this Corporation shall mail to each holder of Series A Preferred Stock, at
least twenty (20) days prior to the date specified therein, a notice specifying
the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, and the amount and character of such dividend,
distribution or right.
(ix) Reservation of Stock Issuable Upon Conversion. This
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the Series A Preferred Stock such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all the then outstanding Series A Preferred Stock,
in addition to such other remedies as shall be available to the holder of such
Series A Preferred Stock, this Corporation will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
26
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes.
(x) Notices. Any notice required by the provisions
of this Section 8(a)(iv) to be given to the holders of Series A Preferred
Stock shall be deemed given if deposited in the United States mail, postage
prepaid, and addressed to each holder of record at his address appearing on the
books of this Corporation.
b. Series C Preferred Stock. The holders of Series C
Preferred Stock have conversion rights as follows:
(i) Conversion at the Option of the Holder.
At any time at the option of the holder, Commencing twelve (12) months after the
Issuance Date, the holders of the Series C Preferred Stock may convert at any
time all or from time to time any part of their outstanding shares of Series C
Preferred Stock into that number of fully paid and nonassessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) as equals the greater of (A) 16.6667 shares of Common Stock or (B) such
number of shares of Common Stock as equals $100.00 divided by the Series C
Conversion Price on the applicable Series C Conversion Date.
(ii) Mandatory Conversion. Each share of Series C
Preferred Stock shall automatically convert, on the fourth anniversary of the
Issuance Date, into that number of fully paid and nonassessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) as equals the greater of (A) 16.6667 shares of Common Stock or (B) such
number of shares of Common Stock as equals $100.00 divided by the Series C
Conversion Price on the applicable Series C Conversion Date.
(iii) Mechanics of Conversion. Before any holder of
Series C Preferred Stock shall be entitled to convert the same into shares
of Common Stock, he shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Series C Conversion Agent, and shall give
written notice by mail, postage prepaid, or by facsimile, confirmed by mail, to
the Series C Conversion Agent at its principal corporate office, of the election
27
to convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. This
Corporation shall, as soon as practicable thereafter, issue and deliver or cause
to be issued and delivered to such holder of the Series C Preferred Stock, or to
the nominee or nominees of such holder, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the applicable Conversion Date, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date; provided, however, that a holder of
Series C Preferred Stock shall not be entitled to receive the shares of Common
Stock issuable upon any such conversion of shares of Series C Preferred Stock
until such holder surrenders to the Corporation or the Transfer Agent the
certificate for the shares of Series C Preferred Stock so converted.
(iv) Adjustments to Conversion Ratio for Stock
Dividends and for Combinations or Subdivisions of Common Stock. In the
event that this Corporation at any time or from time to time after the purchase
date of the Series C Preferred shall declare or pay, without consideration, any
dividend on the Common Stock payable in Common Stock or in any right to acquire
Common Stock for no consideration, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise than by payment of a
dividend in Common Stock or in any right to acquire Common Stock), or in the
event the outstanding shares of Common Stock shall be combined or consolidated,
by reclassification or otherwise, into a lesser number of shares of Common
Stock, then the number of shares of Common Stock into which the Series C
Preferred Stock can or shall be converted, to the extent such number is
determined under either Section 8(b)(i)(A) or 8(b)(ii)(A), shall be
proportionately decreased or increased, as appropriate. In the event that this
Corporation shall declare or pay, without consideration, any dividend on the
Common Stock payable in any right to acquire Common Stock for no consideration
then the Corporation shall be deemed to have made a dividend payable in Common
Stock in an amount of shares equal to the maximum number of shares issuable upon
exercise of such rights to acquire Common Stock.
(v) Adjustments for Reclassification and Reorganization.
If the Common Stock issuable upon conversion of the Series C Preferred
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
provided for in Section 8(b)(ii) above or a merger or other reorganization
referred to in Section 4(f) above), the number of shares of such other class or
classes of stock into which the Series C Preferred Stock shall be convertible
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Series C Preferred
Stock shall be convertible into, in lieu of the number of shares of Common Stock
which the holders would otherwise have been entitled to receive, a number of
shares of such other class or classes of stock equivalent to the number of
shares of Common Stock that would have been subject to receipt by the holders
28
upon conversion of the Series C Preferred Stock immediately before that change.
(vi) No Impairment. This Corporation will not, by amendment
of its Certificate or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 8(b) and in the taking of all such action as
may be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series C Preferred Stock against impairment.
(vii) No Fractional Shares and Certificate as to
Adjustments.
(A) No fractional shares shall be issued upon
conversion of the Series C Preferred Stock, but, in lieu of any fraction of
a share of Common Stock which would otherwise be issuable in respect of the
aggregate number of shares of Series C Preferred Stock surrendered for
conversion at one time by the same holder, the Corporation shall pay in cash to
such holder at the time of issuance of shares of Common Stock in connection with
such conversion an amount equal to the product of (i) an amount equal to the
average closing price of a share of Common Stock for the 10 Trading Day period
ending three Trading Days prior to the Conversion Date times (ii) such fraction
of a share of Common Stock. Whether or not fractional shares are issuable upon
such conversion shall be determined on the basis of the total number of Series C
Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
(B) Upon the occurrence of each
adjustment or readjustment of the number of shares of Common Stock into which
the Series C Preferred Stock can be converted pursuant to this Section 8(b),
this Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and, upon the written request
at any time of any holder of Series C Preferred Stock, prepare and furnish to
such holder of Series C Preferred Stock a certificate setting forth (A) such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based, (B) the conversion ratio at the time in
effect, and (C) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion of the
Series C Preferred Stock.
(viii) Notices of Record Date. In the event of any taking
by this Corporation of a record of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
Corporation shall mail to each holder of Series C Preferred Stock, at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
29
distribution or right, and the amount and character of such dividend,
distribution or right.
(ix) Reservation of Stock Issuable Upon Conversion. This
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of (i)
effecting the conversion of the Series C Preferred Stock and (ii) of effecting
the issuance of any shares of Common Stock issuable upon any stock-for-stock
dividend declared on the Series C Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to (a) effect the
conversion of all outstanding shares of the Series C Preferred Stock and (b) to
effect the issuance of any shares of Common Stock issuable upon any
stock-for-stock dividend declared on the Series C Preferred Stock; and if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to (x) effect the conversion of all the then outstanding Series C
Preferred Stock or (y) effect the issuance of any shares of Common Stock
issuable upon any stock-for-stock dividend declared on the Series C Preferred
Stock, then, in addition to such other remedies as shall be available to the
holder of such Series C Preferred Stock, this Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
(x) Notices. Any notice required by the provisions of this
Section 8(b)to be given to the holders of Series C Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of this
Corporation.
(xi) Notwithstanding any other provision of this
Certificate of Incorporation, in no event shall any holder of shares of
Series C Preferred Stock be entitled to convert any shares of Series C
Preferred Stock in excess of that number of shares of Series C Preferred Stock
upon conversion of which the sum of (1) the number of shares of Common Stock
beneficially owed by such (including shares of Common Stock beneficially owned
by all Aggregated Persons of such holder) (other than shares of Common Stock
deemed beneficially owned by such holder or any Aggregated Person of such holder
through the ownership of (x) unconverted shares of Series C Preferred Stock and
(y) the unconverted or unexercised portion of any instrument which contains
limitations similar to those set forth in this sentence) and (2) the number of
shares of Common Stock issuable upon the conversion of the number of shares of
Series C Preferred STock with respect to which the determination in this
sentence is being made, would result in beneficial ownership by such holder and
all Aggregated Person of such holder of more than 4.9% of the outstanding shares
of Common Stock. For purposes of the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the 1934 Act
and Regulation 13D-G thereunder, except as otherwise provided in clause (1) of
the immediately preceding sentence. For purpose of the second preceding
sentence, the Corporation shall be entitled to rely, and shall be fully
protected in relying, on any statement or representation made by a holder of
shares of Series C Preferred Stock to the Corporation in connection with a
30
particular conversion, without any obligation, on the part of the Corporation to
make any inquiry or investigation or to examine its records or the records of
any transfer agent for the Common Stock and without any liability of the
Corporation with respect thereto.
c. Series D Preferred Stock. The holders of Series D Preferred
Stock shall have conversion rights as follows:
(i) Conversion at the Option of the Holder.
(a) Conversion Right. The holders of the Series D
Preferred Stock may convert at any time all or from time to time any part of
their outstanding shares of Series D Preferred Stock into fully paid and
nonassessable shares of Common Stock and such other securities and property as
hereinafter provided. Commencing on the Issuance Date, and at any time
thereafter, each share of Series D Preferred Stock may be converted at the
office of the Corporation or at such additional office or offices, if any, as
the Board of Directors may designate, into such number of fully paid and
nonassessable shares of Common Stock (calculated as to each conversion to the
nearest 1/100th of a share) determined by dividing (x) the sum of (i) $1,000
plus (ii) an amount equal to the accrued but unpaid dividends on the share of
Series D Preferred Stock being converted and any Arrearage Interest on dividends
thereon in arrears to the applicable Series D Conversion Date by (y) the Series
D Conversion Price on the applicable Series D Conversion Date; provided,
however, that in no event shall any holder of shares of Series D Preferred Stock
be entitled to convert any shares of Series D Preferred Stock in excess of that
number of shares of Series D Preferred Stock upon conversion of which the sum of
(1) the number of shares of Common Stock beneficially owned by such holder
(including shares of Common Stock beneficially owned by all Aggregated Persons
of such holder) (other than shares of Common Stock deemed beneficially owned by
such holder or any Aggregated Person of such holder through the ownership of (x)
unconverted shares of Series D Preferred Stock and (y) the unconverted or
unexercised portion of any instrument which contains limitations similar to
those set forth in this sentence) and (2) the number of shares of Common Stock
issuable upon the conversion of the number of shares of Series D Preferred Stock
with respect to which the determination in this proviso is being made, would
result in beneficial ownership by such holder and all Aggregated Persons of such
holder of more than 4.9% of the outstanding shares of Common Stock.
(b) Certain Limitations on Conversion Rights.
Notwithstanding any other provision of this Amended and Restated
Certificate of Incorporation, in no event shall any holder of shares of Series D
Preferred Stock be entitled on any date to convert a number of shares of Series
D Preferred Stock in excess of that number of shares of Series D Preferred Stock
upon conversion of which such holder and any Aggregated Person of such holder
would have acquired, through conversion of shares of Series D Preferred Stock or
otherwise, a number of shares of Common Stock in excess of the Converted
Restriction Amount during the 30-day period ending on and including the date of
the determination being made pursuant to this Section 8(c)(i)(b) (other than
shares of Common Stock deemed beneficially owned by such holder or any
31
Aggregated Person of such holder through the ownership of (x) unconverted shares
of Series D Preferred Stock and (y) the unconverted or unexercised portion of
any instrument which contains limitations similar to those set forth in this
sentence).
(c) Beneficial Ownership. For purposes of the
provision to the second sentence of Section 8(c)(i)(b)and for purposes of
Section 8(c)(i)(b), (x) beneficial ownership shall be determined in accordance
with Section 13(d) of the 1934 Act and Regulation 13D-G thereunder, except as
otherwise provided in clause (1) of the proviso to the second sentence of
Section 8(c)(i)(b) or as provided in Section 8(c)(i)(b) and (y) the Corporation
shall be entitled to rely, and shall be fully protected in relying, on any
statement or representation made by a holder of shares of Series D Preferred
Stock to the Corporation in connection with a particular conversion, without any
obligation on the part of the Corporation to make any inquiry or investigation
or to examine its records or the records of any transfer agent for the Common
Stock and without any liability of the Corporation with respect thereto.
(ii) Other Provisions.
(a) The holders of shares of Series D Preferred
Stock at the close of business on the record date for any dividend payment to
holders of Series D Preferred Stock shall be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof after the record date for such dividend
payment date or the Corporation's default in payment of the dividend due on such
dividend payment date; provided, however, that the holder of shares of Series D
Preferred Stock converted during the period between the close of business on any
record date for a dividend payment and the opening of business on the
corresponding dividend payment date must pay to the Corporation, within five
days after receipt by such holder, an amount equal to the dividend payable on
such shares on such dividend payment date if such dividend is paid by the
Corporation to such holder. A holder of shares of Series D Preferred Stock on a
record date for a dividend payment who (or whose transferee) converts any of
such shares into shares of Common Stock on or after such dividend payment date
will receive the dividend payable by the Corporation on such shares of Series D
Preferred Stock on such dividend payment date, and the converting holder need
not make any payment of the amount of such dividend in connection with such
conversion of shares of Series D Preferred Stock. Except as provided above, no
adjustment shall be made in respect of cash dividends on Common Stock or Series
D Preferred Stock that may be accrued and unpaid at the date of conversion of
shares of Series D Preferred Stock.
(b) The right of the holders of Series D Preferred
Stock to convert their shares shall be exercised by delivering(which may be made
by telephone line facsimile transmission, which shall be conclusively deemed for
all purposes of this Amended and Restated Certificate of Incorporation to have
been given on the date sent if the sender shall have received electronic
confirmation of the receipt by the Series D Conversion Agent of such facsimile
transmission) to the Series D Conversion Agent a Series D Conversion Notice at
the address or telephone line facsimile number provided in the form of Series D
Conversion Notice set forth in Section 14(a) (or such other address or facsimile
32
number of the Series D Conversion Agent as shall be provided by the Corporation
by notice to the holders of the shares of Series D Preferred Stock), with a copy
to the Corporation at its address or telephone line facsimile number provided in
or pursuant to Section 12; provided, however, that any failure or delay in
giving a copy of a Series D Conversion Notice to the Corporation shall not
affect the validity of or Series D Conversion Date for such Series D Conversion
Notice. The number of shares of Common Stock to be issued upon each conversion
of shares of Series D Preferred Stock shall be the number set forth in the
applicable Series D Conversion Notice, which number shall be conclusive absent
manifest error. The Corporation shall notify a holder who has given a Series D
Conversion Notice of any claim of manifest error within three Trading Days after
such holder gives such Series D Conversion Notice, and no such claim of error
shall limit or delay performance of the Corporation's obligation to issue upon
such conversion the number of shares of Common Stock which are not in dispute. A
Series D Conversion Notice shall be deemed for all purposes to be in proper form
unless the Corporation notifies a holder of shares of Series D Preferred Stock
being converted within three Trading Days after a Series D Conversion Notice has
been given (which notice shall specify all defects in such Series D Conversion
Notice), and any Series D Conversion Notice containing any such defect shall
nonetheless be effective on the date given if the converting holder agrees to
correct all such defects promptly.
(c) If a holder of Series D Preferred Stock elects
to convert any shares of Series D Preferred Stock in accordance with Section
8(c)(i), such holder shall not be required to surrender the certificate(s)
representing such shares of Series D Preferred Stock physically to the
Corporation unless all of the shares of Series D Preferred Stock represented
thereby are so converted. Each holder of shares of Series D Preferred Stock and
the Corporation shall maintain records showing the number of shares so converted
and the dates of such conversions or shall use such other method, satisfactory
to such holder and the Corporation, so as to not require physical surrender of
such certificates upon each such conversion. In the event of any dispute or
discrepancy, such records of the Corporation shall be controlling and
determinative in the absence of manifest error. Notwithstanding the foregoing,
if any shares of Series D Preferred Stock evidenced by a particular certificate
therefor are converted as aforesaid, the holder of Series D Preferred Stock may
not transfer the certificate(s) representing such shares of Series D Preferred
Stock unless such holder first physically surrenders such certificate(s) to the
Corporation, whereupon the Corporation will forthwith issue and deliver upon the
order of such holder of shares of Series D Preferred Stock new certificate(s) of
like tenor, registered as such holder of shares of Series D Preferred Stock
(upon payment by such holder of shares of Series D Preferred Stock of any
applicable transfer taxes) may request, representing in the aggregate the
remaining number of shares of Series D Preferred Stock represented by such
certificate(s). Each holder of shares of Series D Preferred Stock, by acceptance
of a certificate for such shares, acknowledges and agrees that (1) by reason of
the provisions of this paragraph, following conversion of any shares of Series D
Preferred Stock represented by such certificate, the number of shares of Series
D Preferred Stock represented by such certificate may be less than the number of
shares stated on such certificate and (2) the Corporation may place one or more
legends on the certificates for shares of Series D Preferred Stock which refers
to or describes the provisions of this paragraph. The Corporation may by notice
to any holder of shares of Series D Preferred Stock require such holder to
33
surrender the certificate(s) for such holder's shares of Series D Preferred
Stock in exchange for issuance by the Corporation of one or more new
certificates for the number of shares evidenced by the certificate(s) so
surrendered.
(d) The Corporation shall pay any transfer tax
arising in connection with any conversion of shares of Series D Preferred stock
except that the Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue and delivery
upon conversion of shares of Common Stock or other securities or property in a
name other than that of the holder of the shares of the Series D Preferred Stock
being converted, and the Corporation shall not be required to issue or deliver
any such shares or other securities or property unless and until the Person or
Persons requesting the issuance thereof shall have paid to the Corporation the
amount of any such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid. A holder of shares of Series D
Preferred Stock who converts such shares shall be responsible for the amount of
any withholding tax payable in connection with such conversion.
(e) (1) The Corporation shall duly reserve and at
all times prior to the Stockholder Approval will continue to reserve 6,285,000
shares of its authorized and unissued Common Stock, free from preemptive rights,
for issuance upon conversion of the shares of Series D Preferred Stock (subject
to reduction from time to time for shares of Common Stock issued upon conversion
of shares of Series D Preferred Stock). From and after the date of the
Stockholder Approval, the Corporation will duly reserve, free from preemptive
rights, for issuance upon conversion of the shares of Series D Preferred Stock a
number of shares of its authorized and issued Common Stock equal to 175% of the
number of shares of Common Stock which would be issuable on conversion of all
authorized shares of Series D Preferred Stock on the Issuance Date if all of
such shares of Series D Preferred Stock were outstanding on such date
(determined without regard to the limitations on conversion continued in Section
8(c)(i), subject to reduction from time to time for shares of Common Stock
issued upon conversion of shares of Series D Preferred Stock. The Corporation
(and any successor corporation) shall take all action necessary so that a number
of shares of the authorized but unissued Common Stock (or common stock in the
case of any successor corporation) equal to the number of shares of Common Stock
(or such common stock) issuable upon conversion of the Series D Preferred Stock
outstanding, determined without regard to any limitation on beneficial ownership
contained in Section 8(c)(i), are at all times reserved by the Corporation (or
any successor corporation), free from preemptive rights, for such conversion,
subject to the provisions of the next succeeding paragraph. If the Corporation
shall issue any securities or make any change in its capital structure which
would change the number of shares of Common Stock into which each share of the
Series D Preferred Stock shall be convertible as herein provided, the
Corporation shall at the same time also make proper provision so that thereafter
there shall be a sufficient number of shares of Common Stock authorized and
reserved, free from preemptive rights, for conversion of the outstanding Series
D Preferred Stock on the new basis. If at any time the number of authorized but
unissued shares of Common Stock shall be insufficient to permit the Corporation
to reserve such number of shares of Common Stock, the Corporation promptly shall
34
seek such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient to meet such requirement.
(2) The Initial Reserve Amount
shall be allocated among the shares of Series D Preferred Stock at the time of
initial issuance thereof pro rata based on the total number of authorized shares
of Series D Preferred Stock provided in Article IV(B). Each certificate for
shares of Series D Preferred Stock initially issued shall bear a notation as to
the number of shares constituting the portion of the Initial Reserve Amount
allocated to the shares of Series D Preferred Stock represented by such
certificate for purposes of conversion thereof. Upon surrender of any
certificate for shares of Series D Preferred Stock for transfer or
re-registration thereof (or, at the option of the holder of such certificate,
for conversion pursuant to Section 8(c)(i) of less than all of the shares of
Series D Preferred Stock represented thereby), the Corporation shall make a
notation on the new certificate issued upon such transfer or re-registration or
evidencing such unconverted shares, as the case may be, as to the number of
shares of Common Stock from the Initial Reserve Amount remaining available for
conversion of the shares of Series D Preferred Stock evidenced by such new
certificate. If any certificate for shares of Series D Preferred Stock is
surrendered for division into two or more certificates representing an aggregate
number of shares of Series D Preferred Stock equal to the number of shares of
Series D Preferred Stock represented by the certificate so surrendered (as
reduced by any contemporaneous conversion of shares of Series D Preferred Stock
represented by the certificate so surrendered), each certificate issued on such
division shall bear a notation of the portion of the Initial Reserve Amount
allocated thereto determined by pro rata allocation of the remaining portion of
the Initial Reserve Amount allocated to the certificate so surrendered. If any
shares of Series D Preferred Stock represented by a single certificate are
converted in full pursuant to Sections 8(c), all of the portion of the Initial
Reserve Amount allocated to such shares of Series D Preferred Stock which
remains unissued after such conversion shall be re-allocated pro rata to the
outstanding shares of Series D Preferred Stock held of record by the holder of
record at the close of business on the date of such conversion of the shares of
Series D Preferred Stock so converted, and if there shall be no other shares of
Series D Preferred Stock held of record by such holder at the close of business
on such date, then such portion of the Initial Reserve Amount shall be allocated
pro rata among the shares of Series D Preferred Stock outstanding at the close
of business on such date. The provisions of this Section 8(c)(ii)(E) shall be
inapplicable after the Stockholder Approval is obtained. If shares of Series D
Preferred Stock are not issued to MMC/GATX in accordance with this Article
IV(B), the shares from the Initial Reserve Amount which were available for
allocation to such shares of Series D Preferred Stock shall be allocated to the
issued shares of Series D Preferred Stock pro rata based on the amounts thereof
initially issued.
(f) (1) In case of any consolidation or merger of
the Corporation with any other corporation (other than a wholly-owned
subsidiary of the Corporation) in which the Corporation is not the surviving
corporation, or in case of any sale or transfer of all or substantially all of
the assets of the Corporation, or in the case of any share exchange pursuant to
35
which all of the outstanding shares of Common Stock are converted into other
securities or property, the Corporation shall make appropriate provision or
cause appropriate provision to be made so that each holder of shares of Series D
Preferred Stock then outstanding shall have the right thereafter to convert such
shares of Series D Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of shares of Common Stock into which
such shares of Series D Preferred Stock could have been converted immediately
prior to the effective date of such consolidation, merger, sale, transfer, or
share exchange and on a basis which preserves the economic benefits of the
conversion rights of the holders of shares of Series D Preferred Stock on a
basis as nearly as practical as such rights exist hereunder prior thereto. If,
in connection with any such consolidation, merger, sale, transfer, or share
exchange, each holder of shares of Common Stock is entitled to elect to receive
securities, cash, or other assets upon completion of such transaction, the
Corporation shall provide or cause to be provided to each holder of Series D
Preferred Stock the right to elect prior to the completion of such transaction
the securities, cash, or other assets into which the Series D Preferred Stock
held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions applicable to
holders of the Common Stock (including, without limitation, notice of the right
to elect, limitations on the period in which such election shall be made, and
the effect of failing to exercise the election). Notwithstanding the foregoing,
in connection with any such merger, consolidation, sale, transfer or exchange,
the Corporation shall have the right, in lieu of making provision for
preservation of economic benefits of the conversion rights of the holders of
shares of Series D Preferred Stock, to redeem all outstanding shares of Series D
Preferred Stock immediately after completion of such transaction at a redemption
price per share of Series D Preferred Stock in cash equal to the Business
Combination Redemption Price. Such right of redemption shall be exercised by
notice from the Corporation to the holders of shares of Series D Preferred Stock
stating that the Corporation is exercising its redemption right under this
Section 8(c)(ii)(f), which notice shall be given at least 20 days and not more
than 30 days prior to completion of such transaction and shall specify that such
redemption shall occur on the Business Day immediately following the date of
completion of such transaction. On the date specified in such notice (or such
later date as a holder of shares of Series D Preferred Stock surrenders such
holder's certificates for shares of Series D Preferred Stock redeemed) the
Corporation shall make payment in immediately available funds of the applicable
Business Combination Redemption Price to each holder of shares of Series D
Preferred Stock to be redeemed to such account as specified by such holder in
writing to the Corporation at least one Business Day prior to such payment of
the Business Combination Redemption Price. A holder of shares of Series D
Preferred Stock which are redeemed pursuant to this Section 8(c)(ii)(f) shall
not be entitled to payment of the Business Combination Redemption Price of such
shares of Series D Preferred Stock until such holder shall have surrendered the
certificate(s) for such shares of Series D Preferred Stock to the Corporation
or, in the case of the loss, theft or destruction of any such certificate, given
indemnity in accordance with Section 14. If the Corporation shall fail to pay
the Business Combination Redemption Price of any shares of Series D Preferred
Stock in full when due, then the amount thereof shall bear interest to the
extent not prohibited by applicable law at the rate of 12% per annum from the
due date thereof until paid in full. Notwithstanding the giving of a notice of
36
redemption pursuant to this Section 8(c)(ii)(f), each holder of shares of Series
D Preferred Stock shall be entitled to convert in accordance with this Section
8(c)(ii)(f) any shares of Series D Preferred Stock which are to be redeemed at
any time prior to (1) the redemption date specified in the notice of redemption
or (2) if the Corporation fails to pay the Business Combination Redemption Price
in full to such holder when due, the date on which the Corporation pays the
Business Combination Redemption Price in full to such holder for all shares of
Series D Preferred Stock to be redeemed from such holder. The Corporation shall
not effect any such transaction unless it shall have complied with the
provisions of this paragraph. The above provisions shall similarly apply to
successive consolidations, mergers, sales, transfers, or share exchanges.
(2) Whenever the Corporation shall
propose to take any of the actions specified in this Section 8(c)(ii)(f)(2), the
Corporation shall cause a notice to be mailed, at least 20 days prior to the
date on which the books of the Corporation will close or on which the security
holders entitled to participate in such transaction will be determined, to the
holders of record of the outstanding Series D Preferred Stock on the date of
such notice. Such notice shall specify the action proposed to be taken by the
Corporation and the date as of which holders of record of the Common Stock shall
participate in any such actions or be entitled to exchange their Common Stock
for securities or other property, as the case may be.
(g) Upon receipt by the Series D Conversion
Agent from a holder of shares of Series D Preferred Stock of a Series D
Conversion Notice, the Corporation shall issue and deliver or cause to be issued
and delivered to or upon the order of such holder certificates for the Common
Stock issuable upon such conversion by the close of business on the third
Trading Day after such Series D Conversion Notice is received, and as of the
close of business on the date of such receipt such holder (or such holder's
assignee) shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, and all rights with respect to the shares of
Series D Preferred Stock so converted shall forthwith terminate except the right
to receive the Common Stock or other securities, cash, or other assets, as
herein provided, on such conversion. If a holder of Series D Preferred Stock
shall have given a Series D Conversion Notice in accordance with the terms of
this Amended and Restated Certificate of Incorporation, the Corporation's
obligation to issue and deliver the certificates for Common Stock issuable upon
such conversion shall be absolute and unconditional, irrespective of any action
or inaction by the converting holder to enforce the same, any waiver or consent
with respect to any provision thereof, the recovery of any judgment against any
Person or any action to enforce the same, any failure or delay in the
enforcement of any other obligation of the Corporation to the holder of record,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the holder or any other Person of any obligation to
the Corporation, or any violation or alleged violation of law by such holder or
any other Person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Corporation to such holder in connection
with such conversion; provided, however, that nothing herein shall limit or
prejudice the right of the Corporation to pursue any such claim in any other
manner permitted by applicable law.
37
The occurrence of an event which requires an equitable adjustment of
the Trading Price as contemplated by the definition thereof in Section 1 shall
in no way restrict or delay the right of any holder of shares of Series D
Preferred Stock to receive shares of Common Stock upon conversion of shares of
Series D Preferred Stock, and the Corporation shall use its best efforts to
implement each such adjustment on terms reasonably acceptable to the Majority
Holders within two Trading Days after such occurrence.
If the Corporation fails to issue and deliver the certificates for
the Common Stock to the holder converting shares of Series D Preferred Stock as
and when required to do so, in addition to any other liabilities the Corporation
may have hereunder and under applicable law (1) the Corporation shall pay or
reimburse such holder on demand for all out-of-pocket expenses, including,
without limitation, reasonable fees and expenses of legal counsel, incurred by
such holder as a result of such failure, (2) the Series D Conversion Price
applicable to such conversion shall be reduced by one-tenth of a percentage
point from the Series D Conversion Price otherwise applicable to such conversion
for each Trading Day during the period from the date the Corporation was
required to deliver such shares of Common Stock to the date the Corporation so
delivers such shares of Common Stock; provided, however, that in no event shall
any such reduction be made for any Trading Day in such period which is after the
date which is 120 days after the date the Corporation was required to deliver
such shares of Common Stock in connection with such conversion, and (3) such
holder may by written notice or oral notice (promptly confirmed in writing)
given at any time prior to delivery to such holder of the certificates for the
shares of Common Stock issuable upon such conversion of shares of Series D
Preferred Stock, rescind such conversion, whereupon such holder shall have the
right to convert such shares of Series D Preferred Stock thereafter in
accordance herewith; provided, however, that the Corporation shall not be liable
to any holder of shares of Series D Preferred Stock under the preceding clause
(1) or clause (2) to the extent the failure of the Corporation to deliver or to
cause to be delivered such shares of Common Stock results from fire, flood,
storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving
facilities of a common carrier, acts of God, or any similar event outside the
control of the Corporation (it being understood that the action or failure to
act of the Series D Conversion Agent shall not be deemed an event outside the
control of the Corporation except to the extent resulting from fire, flood,
storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving
facilities of a common carrier, acts of God, the bankruptcy, liquidation or
reorganization of the Series D Conversion Agent under any bankruptcy, insolvency
or other similar law or any similar event outside the control of the Series D
Conversion Agent). A holder of shares of Series D Preferred Stock who has given
a Series D Conversion Notice shall notify the Corporation in writing (or by
telephone conversation, confirmed in writing) as promptly as practicable after
becoming aware that shares of Common Stock issued upon such conversion have not
been received as provided in this Section 8(c)(vii).
(h) No fractional shares. No fractional shares of
Common Stock shall be issued upon conversion of Series D Preferred Stock but, in
lieu of any fraction of a share of Common Stock and the related right which
would otherwise be issuable in respect of the aggregate number of shares of
Series D Preferred Stock surrendered for conversion at one time by the same
38
holder, the Corporation shall pay in cash to such holder at the time of issuance
of shares of Common Stock in connection with such conversion an amount equal to
the product of (A) the arithmetic average of the Market Price of a share of
Common Stock on the three consecutive Trading Days ending on the Trading Day
immediately preceding the Series D Conversion Date times (B) such fraction of a
share of Common Stock
9. Voting Rights.
Except as otherwise required by law or expressly provided herein,
each share of Series A Preferred Stock and Series C Preferred Stock shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock (except as otherwise expressly provided herein or as required by law,
voting together with the Common Stock as a single class) and shall be entitled
to notice of any stockholders' meeting in accordance with the Bylaws of the
Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Series A Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock held by each holder could be converted) shall be
rounded to the nearest whole number (with one-half being rounded upward).
Each holder of shares of Series A Preferred Stock shall be entitled
to the number of votes equal to the number of shares of Common Stock into which
such shares of Series A Preferred Stock could then be converted. Each holder of
shares of Series C Preferred Stock shall be entitled (i) during the first year
after the issuance thereof to six votes for each one share held and (ii)
thereafter, to one vote for each share of Common Stock into which such share of
Series C Preferred Stock is convertible on the record date for the matter to be
voted upon. Each holder of Common Stock shall be entitled to one vote for each
share of Common Stock held.
Except as otherwise required by law or expressly provided herein,
shares of Series D Preferred Stock shall not be entitled to vote on any matter.
a. Series D Voting Rights and Restrictions.
(1) Certificate of Incorporation; Certain Stock. The
affirmative vote or written consent of the Majority Holders, voting
separately as a class, will be required for (i) any amendment, alteration, or
repeal, whether by merger or consolidation or otherwise, of the Corporation's
Certificate of Incorporation if the amendment, alteration, or repeal materially
and adversely affects the rights, preferences or privileges of the Series D
Preferred Stock, or (ii) the creation or issuance of any Senior Dividend Stock
or Senior Liquidation Stock; provided, however, that any increase in the
authorized Preferred Stock of the Corporation or the creation and issuance of
any stock which is both Junior Dividend and Junior Liquidation Stock shall not
be deemed to affect materially and adversely such rights, preferences or
privileges and any such increase or creation and issuance may be made without
any such vote by the holders of Series D Preferred Stock except as otherwise
required by law; and provided further, however, that no such amendment,
alteration or repeal shall (A) reduce the Optional Redemption Price, Redemption
Price or the amount payable
39
to a holder of shares of Series D Preferred Stock pursuant to Section 3(c)(iii),
(B) reduce the percentage in, or otherwise change the definition of Majority
Holders, (C) change the method of calculating the Series D Conversion Price in a
manner adverse to the holders of shares of Series D Preferred Stock or reduce
the number of shares of Common Stock issuable upon any conversion of shares of
Series D Preferred Stock, or (D) amend, modify or repeal any provision of this
Section 9(a)(1), unless in each such case referred to in the preceding clauses
(A) through (D) such amendment, modification or repeal has been approved by the
affirmative vote or written consent of the holders of all outstanding shares of
Series D Preferred Stock, voting separately or as a class.
(2) Repurchases of Series D Preferred Stock. The
Corporation shall not repurchase or otherwise acquire any shares of Series
D Preferred Stock (other than pursuant to Section 7(c)(i) unless the Corporation
offers to repurchase or otherwise acquire simultaneously a pro rata portion of
each holder's shares of Series D Preferred Stock for cash at the same price per
share.
(3) Other. So long as any shares of Series D Preferred
Stock are outstanding:
(a) Limitation on Indebtedness. The Corporation will
not itself, and will not permit any subsidiary of the Corporation to, create,
assume, incur, in any manner become liable in respect of, including, without
limitation, by reason of any business combination transaction, or suffer to
exist (all of which are referred to herein as "incurring"), any Indebtedness
other than Permitted Indebtedness.
(b) Payment of Obligations. The Corporation will pay
and discharge, and will cause each subsidiary of the Corporation to pay and
discharge, all their respective material obligations and liabilities, including,
without limitation, tax liabilities, except where the same may be contested in
good faith by appropriate proceedings.
(c) Maintenance of Property; Insurance.
(i) The Corporation will keep, and will cause
each subsidiary of the Corporation to keep, all material property useful and
necessary in its business in good working order and condition, ordinary wear and
tear excepted
(ii) The Corporation will maintain, and will cause
each subsidiary of the Corporation to maintain, with financially sound and
responsible insurance companies, insurance in at least such amounts and against
such risks as are usually insured against in the same geographic region by
companies of comparable size that are engaged in the same or a similar business,
subject to customary deductibles.
(d) Conduct of Business and Maintenance of Existence.
The Corporation will continue, and will cause each subsidiary of the
40
Corporation to continue, to engage in business of the same general type as
conducted by the Corporation and such subsidiaries on December 9, 1998, the date
the Certificate of Designation for the Series D Preferred Stock was filed with
the Secretary of State of Delaware, and will preserve, renew and keep in full
force and effect, and will cause each subsidiary of the Corporation to preserve,
renew and keep in full force and effect, their respective corporate existence
and their respective material rights, privileges and franchises necessary or
desirable in the normal conduct of business.
(e) Compliance with Laws. The Corporation will comply,
and will cause each subsidiary of the Corporation to comply, in all material
respects with all applicable laws, ordinances, rules, regulations, decisions,
orders and requirements of governmental authorities and courts (including,
without limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate proceedings or (ii) where non-compliance
therewith could not reasonably be expected to have a material adverse effect on
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Corporation and its subsidiaries taken as a
whole.
(f) Investment Company Act. The Corporation will
not be or become an open-end investment trust, unit investment trust or
face-amount certificate company that is or is required to be registered under
Section 8 of the Investment Company Act of 1940, as amended, or any successor
provision.
(g) Transactions with Affiliates. The Corporation will
not, and will not permit any subsidiary of the Corporation to, directly or
indirectly, pay any funds to or for the account of, make any investment (whether
by acquisition of stock or Indebtedness, by loan, advance, transfer of property,
guarantee or other agreement to pay, purchase or service, directly or
indirectly, any Indebtedness, or otherwise) in, lease, sell, transfer or
otherwise dispose of any assets, tangible or intangible, to, or participate in,
or effect any transaction in connection with, any joint enterprise or other
joint arrangement with, any Affiliate of the Corporation, except, on terms to
the Corporation or such subsidiary no less favorable than terms that could be
obtained by the Corporation or such subsidiary from a Person that is not an
Affiliate of the Corporation, as determined in good faith by the Board of
Directors.
10. Status of Converted or Redeemed Stock. In the event any Series A
Preferred Stock or Series C Preferred Stock shall be converted pursuant to
Section 8(a) or 8(b), respectively, hereof, the shares so converted shall be
promptly cancelled after the conversion thereof. All such shares shall upon
their cancellation become authorized but unissued shares of Preferred Stock and
may be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors, subject to the conditions
and restrictions on issuance set forth herein.
11. Outstanding Shares. For purposes of the Certificate of
Designation for the Series D Convertible Preferred Stock filed on December 9,
1998, all shares of Series D Preferred Stock shall be deemed outstanding
41
except (i) from the date a Series D Conversion Notice is given by a holder of
Series D Preferred Stock, all shares of Series D Preferred Stock converted into
Common Stock and (ii) from the date of registration of transfer, all shares of
Series D Preferred Stock held of record by the Corporation or any subsidiary or
Affiliate (as defined herein) of the Corporation (other than any original holder
of shares of Series D Preferred Stock) and (iii) from the applicable Redemption
Date, Optional Redemption Date or date of redemption pursuant to Section
8(c)(ii)(f), all shares of Series D Preferred Stock which are redeemed, so long
as in each case the Redemption Price, Optional Redemption Price or Business
Combination Redemption Price, as the case may be, of such shares of Series D
Preferred Stock shall have been paid by the Corporation as and when due
hereunder.
12. Notices. Any notices required or permitted to be given under the
terms of this Certificate of Incorporation shall be in writing and shall be
delivered personally (which shall include telephone line facsimile transmission)
or by courier, and shall be deemed given upon receipt, (a) in the case of the
Corporation, addressed to the Corporation at 213 East Grand Avenue, South San
Francisco, California 94080, Attention: President and Chief Executive Officer
(telephone line facsimile transmission number (650) 873-8367), or (b) in the
case of any holder of shares of Series D Preferred Stock, at such holder's
address or telephone line facsimile transmission number shown on the stock books
maintained by the Corporation with respect to the Series D Preferred Stock or
such other address as the Corporation shall have provided by notice to the
holders of shares of Series D Preferred Stock in accordance with this Section or
any holder of shares of Series D Preferred Stock shall have provided to the
Corporation in accordance with this Section.
13. Replacement of Certificates. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of
Series C Preferred Stock or Series D Preferred Stock and (1) in the case of
loss, theft or destruction, of indemnity from the record holder of the
certificate for such shares of Series C Preferred Stock or Series D Preferred
Stock reasonably satisfactory in form to the Corporation (and without the
requirement to post any bond or other security) or (2) in the case of
mutilation, upon surrender and cancellation of the certificate for such shares
of Series C Preferred Stock or Series D Preferred Stock, the Corporation will
execute and deliver to such holder a new certificate for such shares of Series C
Preferred Stock or Series D Preferred Stock without charge to such holder.
42
14. Forms of Notices.
a. Notice of Conversion of Series D Convertible Preferred Stock.
NOTICE OF CONVERSION
OF
SERIES D CONVERTIBLE PREFERRED STOCK
OF
SHAMAN PHARMACEUTICALS, INC.
TO: BankBoston, N.A.,
as Conversion Agent
150 Royall Street
Canton, Massachusetts 02021
Attention: Client Administration
Facsimile No.: (781) 575-2549
cc: Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, California 94080
Attention: Chief Financial Officer
Facsimile No.: (650) 873-8367
(1) Pursuant to the terms of the Series D Convertible Preferred Stock
(the "Preferred Stock"), of Shaman Pharmaceuticals, Inc., a Delaware corporation
(the "Corporation"), the undersigned (the "Holder") hereby elects to convert
_______________ shares of the Preferred Stock, including accrued and unpaid
dividends per share of $________ and Arrearage Interest per share of $________
into shares of Common Stock, $0.001 par value (the "Common Stock"), of the
Corporation, at a Series D Conversion Price per share of Common Stock of
$________ or such other securities into which the Preferred Stock is currently
convertible. Capitalized terms used in this Notice and not otherwise defined
herein have the respective meanings provided in the Amended and Restated
Certificate of Incorporation.
(2) The number of shares of Common Stock issuable upon the conversion
of the shares of Preferred Stock to which this Notice relates is
__________________________.
(3) Check (and complete, if applicable) one of the
following:
/__/ (A) Set forth below or on a schedule which accompanies this
Notice are the Trading Prices during the Measurement Period
applicable to this Notice and an indication of the Trading Price used
to determine the Series D Conversion Price set forth above.
43
Date Trading Price
1. __________________________ $____________________
2. __________________________ $____________________
3. __________________________ $____________________
4. __________________________ $____________________
5. __________________________ $____________________
6. __________________________ $____________________
7. __________________________ $____________________
8. __________________________ $____________________
9. __________________________ $____________________
10. __________________________ $____________________
11. __________________________ $____________________
12. __________________________ $____________________
/__/ (B) The conversion to which this Notice relates is based on the
fixed Series D Conversion Price specified in clause (a) of the
definition of such term in the Amended and Restated Certificate of
Incorporation.
(4) Please issue certificates for the number of shares of Common
Stock or other securities into which such number of shares of Preferred Stock is
convertible in the name(s) specified immediately below or, if additional space
is necessary, on an attachment hereto:
_________________________________ _________________________________
Name Name
_________________________________ _________________________________
Address Address
_________________________________ _________________________________
SS or Tax ID Number SS or Tax ID Number
44
(5) The undersigned hereby represents to the Corporation that the
exercise of conversion rights contained in this Notice does not violate the
provisions of Section 8(b) of this Amended and Restated Certificate of
Incorporation relating to beneficial ownership in excess of 4.9% of the Common
Stock.
(6) If the shares of Common Stock issuable upon conversion of the
Preferred Stock have not been registered for resale under the 1933 Act, as
amended (the "1933 Act") and are not being offered or sold pursuant to Rule 144
under the 1933 Act (or any successor or replacement rule or provision), the
Holder represents and warrants that (i) the shares of Common Stock not so
registered are being acquired for the account of the Holder for investment, and
not with a view to, or for resale in connection with, the public distribution
thereof other than pursuant to registration under the 1933 Act or an exemption
from registration under the 1933 Act, and that the Holder has no present
intention of distributing or reselling the shares of Common Stock not so
registered other than pursuant to registration under the 1933 Act or an
exemption from registration under the 1933 Act and (ii) the Holder is an
"accredited investor" as defined in Regulation D under the 1933 Act. The Holder
further agrees that (A) the shares of Common Stock not so registered shall not
be sold or transferred unless (i) they first shall have been registered under
the 1933 Act, (ii) the Corporation first shall have been furnished with an
opinion of legal counsel reasonably satisfactory to the Corporation to the
effect that such sale or transfer is exempt from the registration requirements
of the 1933 Act or (iii) such shares are offered or sold pursuant to Rule 144
under the 1933 Act (or any successor or replacement rule or provision), and (B)
until such shares are registered for resale under the 1933 Act, the Corporation
may place a legend on the certificate(s) for the shares of Common Stock not so
registered to that effect and place a stop-transfer restriction in its records
relating to the shares of Common Stock not so registered, all in accordance with
the Exchange Agreement by which the Holder is bound.
Date _________________________ ________________________________
Signature of Holder
(Must be signed exactly as name
appears on the Preferred Stock Certificate.)
45
b. Form of Redemption Notice.
REDEMPTION NOTICE
(Section 7(a) of Amended and Restated Certificate of
Incorporation)
TO: _____________________________
(Name of Holder)
(1) Pursuant to the terms of the Series D Convertible Preferred Stock
(the "Preferred Stock"), Shaman Pharmaceuticals, Inc., a Delaware corporation
(the "Corporation"), hereby notifies the above-named holder (the "Holder") that
the Corporation is exercising its right to redeem _____________ shares of
Preferred Stock held by the Holder in accordance with Section 7(a) of the
Amended and Restated Certificate of Incorporation:
(2) The Redemption Date is December 30, 1998.
(3) The Redemption Price per share of Preferred Stock
is $_________.
(4) Upon surrender to the Corporation of the certificate(s) for the
shares of Preferred Stock to be redeemed (but in no event earlier than the
Redemption Date), the Corporation will make payment of the applicable Redemption
Price in accordance with the Amended and Restated Certificate of Incorporation.
(5) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Amended and Restated Certificate of
Incorporation.
SHAMAN PHARMACEUTICALS, INC.
By _______________________________
Title:
46
c. Form of Corporation Notice.
CORPORATION NOTICE
(Section 7(c)(i) of Amended and Restated Certificate of
Incorporation)
TO: _____________________________
(Name of Holder)
(1) An Optional Redemption Event described in the Amended and
Restated Certificate of Incorporation (the "Amended and Restated Certificate of
Incorporation") of Series D Convertible Preferred Stock, par value $0.001 per
share (the "Preferred Stock"), of Shaman Pharmaceuticals, Inc., a Delaware
corporation (the "Corporation"), occurred on _____________________, _______. As
a result of such Optional Redemption Event, the above-named holder (the
"Holder") is entitled to exercise its optional redemption rights pursuant to
Section 7(c)(ii) of the Amended and Restated Certificate of Incorporation.
(2) The Holder's optional redemption right must be
exercised on or before
__________________,__________.
(3) At or before the date set forth in the preceding paragraph (2),
the Holder must deliver to the Corporation:
(a) a Holder Notice, in the form set forth in Section
14(d) of the Amended and Restated Certificate of
Incorporation; and
(b) the certificates for the shares of Preferred Stock
to be redeemed, duly endorsed for transfer to the
Corporation the shares to be redeemed.
(4) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Amended and Restated Certificate of
Incorporation.
Date _________________________ SHAMAN PHARMACEUTICALS, INC.
By__________________________
Title:
47
d. Form of Holder Notice.
HOLDER NOTICE
(Section 7(c)(ii) of Amended and Restated Certificate of
Incorporation)
TO: SHAMAN PHARMACEUTICALS, INC.
(1) Pursuant to the terms of the Series D Convertible Preferred
Stock, par value $0.001 per share (the "Preferred Stock"), of Shaman
Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"), the
undersigned hereby elects to exercise its right to require redemption by the
Corporation pursuant to Sections 7(c)(ii)(a) and 7(c)(ii)(b) of the Amended and
Restated Certificate of Incorporation of _______________ shares of Preferred
Stock at an Optional Redemption Price per share in cash equal to the product
obtained by multiplying (a) the sum of (i) $1,000 plus (ii) an amount equal to
$___________ for the accrued but unpaid dividends on each share of Series D
Preferred Stock to be redeemed and any Arrearage Interest on dividends thereon
in arrears to the date of redemption times (b) 118% .
(2) The aggregate Optional Redemption Price of all shares of
Preferred Stock to be redeemed from the undersigned is $_____________.
(3) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Amended and Restated Certificate of
Incorporation.
Date: _______________________ NAME OF HOLDER:
By____________________________
Signature of Registered Holder
(Must be signed exactly as name
appears on the stock certificate.)
48
e. Form of Control Notice.
CONTROL NOTICE
(Section 7(c)(iv) of Amended and Restated Certificate of
Incorporation)
TO: _____________________________
(Name of Holder)
(1) Pursuant to the terms of the Series D Convertible Preferred
Stock, par value $0.001 per share (the "Preferred Stock"), Shaman
Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"), hereby
notifies the above-named holder (the "Holder") that in accordance with the
Amended and Restated Certificate of Incorporation and by reason of events which
are not solely within the control of the Corporation, on _____________(fill in
date) an Optional Redemption Event subject to Section 7(c)(ii)(b)(iv) of the
Amended and Restated Certificate of Incorporation occurred.
(2) Attached to this Notice is an Auditors' Determination with
respect to the occurrence referred to in paragraph (1).
(3) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Amended and Restated Certificate of
Incorporation.
Date: _________________________ SHAMAN PHARMACEUTICALS, INC.
By________________________________
Title:
49
f. Form of Adjustment Notice.
ADJUSTMENT NOTICE
(Section 7(c)(iv) of Amended and Restated Certificate of
Incorporation)
VIA FACSIMILE
TO: ____________________________
(Name of Holder)
(1) Pursuant to the terms of the Series D Convertible Preferred
Stock, par value $0.001 per share (the "Preferred Stock"), Shaman
Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"), confirms to
the above-named holder (the "Holder") of shares of Preferred Stock that on
_______________ (fill in date) the Corporation gave the Holder and each other
holder of shares of Preferred Stock a Control Notice in accordance with the
Amended and Restated Certificate of Incorporation of the Preferred Stock (the
"Amended and Restated Certificate of Incorporation"), and hereby notifies the
Holder of the adjustments set forth below.
(2) Effective on _________(fill in date), the Series D Conversion
Price of the Preferred Stock is ____% (fill in percentage) of the amount the
Series D Conversion Price would otherwise be without regard to adjustments
pursuant to Section 7(c)(ii)(b)(iv) of the Amended and Restated Certificate of
Incorporation.
(3) Effective on _________(fill in date), cumulative dividends shall
accrue on each outstanding share of Preferred Stock in the amount of $__________
per annum.
(4) The foregoing adjustments to the Series D Conversion Price and
the cumulative annual dividend amount will continue in effect until a subsequent
Adjustment Notice is given to the Holder.
(5) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Amended and Restated Certificate of
Incorporation.
Date _________________________ SHAMAN PHARMACEUTICALS, INC.
By___________________________
Title:
50
C. Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Redemption. The Common is not redeemable.
3. Voting Rights. The holder of each share of Common shall have
the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with this Amended and Restated Certificate of
Incorporation and the Bylaws of this corporation, and shall be entitled to vote
upon such matters and in such manner as may be provided by law.
4. Residual Rights. All rights accruing to the outstanding
shares of the corporation not expressly provided for to the contrary herein
shall be vested in the Common.
ARTICLE V
Except as otherwise provided in this Amended and Restated Certificate
of Incorporation, in furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind from time to time any or all of the Bylaws of the
corporation.
ARTICLE VI
The number of directors of the corporation shall be fixed from time
to time by a Bylaw or amendment thereof duly adopted by the Board of Directors
or by the stockholders.
The Board of Directors shall be and is divided into two classes,
Class I and Class II. Such classes shall be as nearly equal in number of
directors as possible. Each director shall serve for a term ending on the second
annual meeting following the annual meeting at which such director was elected.
The foregoing notwithstanding, each director shall serve until his successor
shall have been duly elected and qualified, unless he shall resign, become
disqualified, disabled or shall otherwise be removed. Any director or the entire
Board of Directors may be removed, with or without cause, by the holders of a
majority of the shares entitled to vote at an election of directors.
At each annual election, directors chosen to succeed those whose
terms then expire shall be of the same class as the directors they succeed,
unless by reason of any intervening changes in the authorized number of
51
directors, the Board shall designate one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality of number of directors among the classes.
Notwithstanding the rule that the two classes shall be as nearly
equal in number of directors as possible, in the event of any change in the
authorized number of directors each director then continuing to serve as such
shall nevertheless continue as a director of the class of which he is a member
until the expiration of his current term, or his prior death, resignation or
removal. If any newly created directorship may, consistently with the rule that
the two classes shall be as nearly equal in number of directors as possible, be
allocated to one of two classes, the Board shall allocate it to that of the
available classes whose term of office is due to expire at the earliest date
following such allocation.
ARTICLE VII
Elections of directors need not be by written ballot unless the
Bylaws of the corporation shall so provide.
ARTICLE VIII
Meetings of stockholders may be held within or outside of the State
of Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
ARTICLE IX
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is hereafter amended
to authorize, with the approval of the corporation's stockholders, further
reductions in the liability of the corporation's directors for breach of
fiduciary duty, then a director of the corporation shall not be liable for any
such breach to the fullest extent permitted by the Delaware General Corporation
Law as so amended. Any repeal or modification of the foregoing provisions of
this Article IX by the stockholders of the corporation shall not adversely
affect any right or protection of a director of the corporation existing at the
time of such repeal or modification.
52
ARTICLE X
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed by the President and the Secretary of the
corporation this 21st day of June, 1999.
SHAMAN PHARMACEUTICALS, INC.
By: /s/ Lisa A. Conte
------------------------
Lisa A. Conte, President
53
EXHIBIT 4.1
SHAMAN PHARMACEUTICALS, INC.
CERTIFICATE OF DESIGNATION
OF
SERIES R CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
Shaman Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"),
in accordance with the provisions of Section 103 of the General Corporation Law
of the State of Delaware DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors of the
Corporation (the "Board of Directors" or the "Board") by paragraph (B) of
Article IV of the Corporation's Amended and Restated Certificate of
Incorporation (the "Certificate"), the Board of Directors have adopted the
following recitals and resolutions creating a series of the Corporation's
Preferred Stock, $0.001 par value, which series is designated "Series R
Convertible Preferred Stock":
WHEREAS, the Certificate provides for a class of shares known as
Preferred Stock, issuable from time to time in one or more series; and
WHEREAS, the Board of Directors of the Corporation is authorized by
the Certificate to determine the powers, rights, preferences, qualifications,
limitations and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock, to fix the number of shares constituting any such
series, and to determine the designation thereof; and
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to determine and fix the powers, rights, preferences, qualifications,
limitations and restrictions relating to a new series of Preferred Stock,
designated Series R Convertible Preferred Stock, and the number of shares
constituting such series.
NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority vested
in the Board of Directors in accordance with the provisions of the Certificate,
the Board of Directors does hereby create a series of Preferred Stock, par value
$0.001 per share (hereinafter called the "Preferred Stock"), of the Corporation,
and the Board of Directors hereby fixes and determines the designation of, the
number of shares constituting, and the powers, rights, preferences, privileges
and restrictions relating to, such series of Preferred Stock as follows:
SERIES R CONVERTIBLE PREFERRED STOCK
1. Certain Defined Terms.
(a) All the agreements or instruments defined in this
Certificate of Designation shall mean such agreements or instruments as the same
may from time to time be supplemented or amended or the terms thereof waived or
modified to the extent permitted by, and in accordance with, the terms thereof
and of this Certificate of Designation.
(b) The following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Closing Price" means, as of any date, the closing bid price of the
Common Stock on such date on the principal securities market on which the Common
Stock is traded; provided, however, that if the Common Stock is not traded on
any public market, the "Closing Price" shall be the price of the Common Stock as
is determined by the Board of Directors of the Corporation in its discretion.
"Common Stock" means the Common Stock, $0.001 par value per share, of
the Corporation or any shares of capital stock into which such stock shall be
changed or reclassified after the Initial Issuance Date.
"Conversion Date" means February 1, 2000.
"Conversion Price" means an amount equal to the lower of (i) $___, or
(ii) a per share price that is equal to 10% of the average Closing Price of the
Corporation's Common Stock for the 10 Trading Days ending three Trading Days
prior to February 1, 2000.
"Initial Issuance Date" means the first date of original issuance of
any shares of Series R Preferred Stock.
"OTC Bulletin Board" means the electronic inter-dealer quotation
system operated by the National Association of Securities Dealers, Inc. for
securities not quoted on the Nasdaq National Market or the Nasdaq SmallCap
Market.
"Person" means an individual, partnership, corporation, limited
liability company, trust, incorporated organization, unincorporated association,
joint stock company, government, governmental agency or political subdivision.
"Senior Liquidation Stock" means the Series A Preferred Stock, the
Series C Preferred Stock, and the Series D Preferred Stock and any other class
2
or series of capital stock of the Corporation ranking senior as to liquidation
rights to the Series R Preferred Stock.
"Series A Preferred Stock" means the Series A Convertible Preferred
Stock of the Corporation.
"Series C Preferred Stock" means the Series C Convertible Preferred
Stock of the Corporation.
"Series D Preferred Stock" means the Series D Convertible Preferred
Stock of the Corporation.
"Series R Preferred Stock" means the Series R Convertible Preferred
Stock of the Corporation.
"Trading Day" means a day on whichever of (x) the OTC Bulletin Board,
(y) the national securities exchange or (z) the Nasdaq National Market or the
Nasdaq SmallCap Market, which at the time constitutes the principal securities
market for the Common Stock is open for general trading of securities.
"Transfer Agent" means BankBoston, N.A., or its duly appointed
successor who shall be serving as transfer agent and registrar for the Common
Stock and who shall have been authorized by the Corporation to act as conversion
agent for the Series R Preferred Stock.
2. Designation and Amount. The shares of such series of Preferred
Stock shall be designated as "Series R Convertible Preferred Stock", and the
number of shares constituting the Series R Preferred Stock shall be 1,300,000.
3. Rank. The Series R Preferred Stock shall rank junior to the Series
A Preferred Stock, the Series C Preferred Stock, and the Series D Preferred
Stock of the Corporation, and to any shares of any other series of preferred
stock of the Corporation now issued or hereafter issued, but equal to the Common
Stock of the Corporation, as to payment of dividends. The Series R Preferred
Stock shall rank junior to the Series A Preferred Stock, the Series C Preferred
Stock, and the Series D Preferred Stock, and to any shares of any other series
of preferred stock of the Corporation now issued or hereafter issued, but senior
to the Common Stock of the Corporation, as to distribution of assets upon
liquidation, dissolution, or winding up of the Corporation, whether voluntary or
involuntary.
4. Dividends and Distributions. The holders of shares of Series R
Preferred Stock shall be entitled to participate ratably with the holders of
Common Stock in any dividends, when, as, and if declared by the Board of
Directors out of funds legally available for such purposes, as if such holders
of Series R Preferred Stock had converted their Series R Preferred Stock into
Common Stock as of the record date of the dividend. For purposes of this Section
4 only, the Conversion Price of the Series R Preferred Stock shall be $____ per
3
share, in calculating the number of shares of Common Stock into which the Series
R Preferred Stock is convertible.
5. Liquidation Preference.
(a) In the event of a liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, the holders of Series R Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
to the holders of Common Stock, out of the assets of the Corporation, whether
such assets constitute stated capital or surplus of any nature, an amount per
share of Series R Preferred Stock equal to $15.00 per share plus any declared
and unpaid dividends, and no more (the "Series R Liquidation Price"); provided,
however, that the holders of Series R Preferred Stock shall receive such Series
R Liquidation Price only in the event that the Corporation's payments with
respect to the liquidation preference of the holders of Senior Liquidation Stock
are fully met. After the liquidation preferences of the Senior Liquidation Stock
are fully met, the entire assets of the Corporation available for distribution
shall be distributed ratably among the Series R Preferred Stock until they have
received their Series R Liquidation Price in full. After payment in full of the
Series R Liquidation Price on the shares of the Series R Preferred Stock, the
holders of such shares shall not be entitled to any further participation in any
distribution of assets of the Corporation.
(b) For purposes of this Section 5, (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary (other than a mere reincorporation transaction) or (ii) a sale
of all or substantially all of the assets of the Corporation shall be treated as
a liquidation, dissolution or winding up of the Corporation and shall entitle
the holders of Series R Preferred Stock to receive at the closing thereof the
amount as specified in Section 5(a) above.
6. Redemption. The Series R Preferred Stock is not redeemable.
7. Conversion.
(a) Mandatory Conversion. On the Conversion Date, each share of
Series R Preferred Stock shall automatically be converted into that number of
fully paid and nonassessable shares of Common Stock (calculated as to each
conversion to the nearest 1/100th of a share) as is determined by dividing
$15.00 by the Conversion Price at the time in effect.
(b) Mechanics of Conversion. Before any holder of Series R Preferred
Stock shall be entitled to receive the shares of Common Stock issuable upon
conversion of the Series R Preferred Stock, such holder shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Transfer Agent, and shall send a written statement by mail, postage prepaid, or
by facsimile, confirmed by mail, to the Transfer Agent at its principal
corporate office, setting forth therein the name or names in which the
4
certificate or certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver or cause
to be issued and delivered to such holder of the Series R Preferred Stock, or to
the nominee or nominees of such holder, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the Conversion Date, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date; provided, however, that a holder of Series R
Preferred Stock shall not be entitled to receive the shares of Common Stock
issuable upon any such conversion of shares of Series R Preferred Stock until
such holder surrenders to the Corporation or the Transfer Agent the certificate
or certificates for the shares of Series R Preferred Stock so converted.
(c) Adjustments for Reclassification and Reorganization. Prior to the
Conversion Date, if the Common Stock issuable upon conversion of the Series R
Preferred Stock shall be changed into the same or a different number of shares
of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a merger or other reorganization
referred to in Section 5(b) above), the number of shares of such other class or
classes of stock into which the Series R Preferred Stock shall be convertible
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Series R Preferred
Stock shall be convertible into, in lieu of the number of shares of Common Stock
which the holders would otherwise have been entitled to receive, a number of
shares of such other class or classes of stock equivalent to the number of
shares of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series R Preferred Stock immediately before that change.
(d) No Impairment. The Corporation will not, by amendment of its
Certificate or through any reorganization, recapitalization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 7 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series R Preferred Stock against impairment.
(e) No Fractional Shares. No fractional shares shall be issued upon
conversion of the Series R Preferred Stock, but, in lieu of any fraction of a
share of Common Stock which would otherwise be issuable in respect of the
aggregate number of shares of Series R Preferred Stock surrendered for
conversion by the same holder, the Corporation shall pay in cash to such holder
at the time of issuance of shares of Common Stock in connection with such
conversion an amount equal to the product of the Conversion Price multiplied by
such fraction of a share of Common Stock.
5
(f) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
Series R Preferred Stock such number of shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
the Series R Preferred Stock, and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all the then outstanding Series R Preferred Stock, then, in addition to such
other remedies as shall be available to the holders of the Series R Preferred
Stock, the Corporation will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purposes.
8. Voting Rights. Except as otherwise required by law or expressly
provided herein, each share of Series R Preferred Stock shall have voting rights
and powers equal to the voting rights and powers of the Common Stock, voting
together with the Common Stock as a single class, and shall be entitled to
notice of any stockholders' meeting in accordance with the Bylaws of the
Corporation. Each share of Series R Preferred Stock shall be entitled to one
hundred votes.
9. Replacement of Certificates. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of Series R
Preferred Stock and (1) in the case of loss, theft or destruction, of indemnity
from the record holder of the certificate for such shares of Series R Preferred
Stock reasonably satisfactory to the Corporation or (2) in the case of
mutilation, upon surrender and cancellation of the certificate for such shares
of Series R Preferred Stock, the Corporation will execute and deliver to such
holder a new certificate for such shares of Series R Preferred Stock without
charge to such holder.
10. Status of Converted or Repurchased Stock. All shares of Series R
Preferred Stock converted pursuant to Section 7 hereof shall be promptly
canceled after the conversion thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock and may be
reissued as part of a new series of Preferred Stock to be created by resolution
or resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
6
* * *
RESOLVED FURTHER, that the Chairman of the Board, the Chief Executive
Officer, the President or any Vice President, or the Secretary, the Chief
Financial Officer, the Treasurer, or any Assistant Secretary or Assistant
Treasurer of this Corporation are each authorized to execute, verify, and file a
Certificate of Designation of Preferences in accordance with Delaware law.
IN WITNESS WHEREOF, Shaman Pharmaceuticals, Inc. has caused this
Certificate of Designation to be signed by one of its officers thereunto duly
authorized as of the ____ day of June, 1999.
SHAMAN PHARMACEUTICALS, INC.
By: ____________________________________
Name: Lisa Conte
Title: President and Chief Executive Officer
7
EXHIBIT 4.4
THE OFFER EXPIRES AT 5:00 P.M., EASTERN DAYLIGHT SAVINGS TIME ON
AUGUST____ 1999
SHAMAN PHARMACEUTICALS, INC.
Subscription Agreement
Shaman Pharmaceuticals, Inc. (the "Company") is conducting a rights offering
("Offering") which entitles holders of the Company's common stock, $0.001 par
value per share (the "Common Stock"), as of the close of business on
____________ ,1999 (the "Record Date") to purchase ______ shares of Series R
Convertible Preferred Stock, $0.001 par value per share ("Series R Preferred
Stock") for each share of Common Stock held on the Record Date at a subscription
price of $15.00 per share (the "Basic Subscription Privilege"). There is a
minimum subscription of 7 shares of Series R Preferred Stock, or $105.00. If any
shares of Series R Preferred Stock are not purchased by other stockholders
pursuant to their Basic Subscription Privileges (the "Excess Shares"), any
stockholder purchasing all of the shares of Series R Preferred Stock available
to it under its Basic Subscription Privilege may also purchase an additional
number of the Excess Shares, if so specified in these subscription documents,
subject to proration (the "Over-Subscription Privilege"). The rights are
non-transferable, and therefore may not be transferred or sold. The rights will
not be admitted for trading on any securities exchange or market; however, the
Series R Preferred Stock will be listed for trading on the OTC Bulletin Board
under the symbol "SHMNO." The terms and conditions of this Offering are set
forth more fully in the prospectus dated ____, 1999 ("Prospectus"), which is
incorporated herein by reference and copies of which are available upon request
from Shareholder Communications Corporation toll free at (800) 546-8622.
METHOD OF EXERCISE OF RIGHTS
TO SUBSCRIBE FOR SHARES OF SERIES R PREFERRED STOCK, A STOCKHOLDER MUST
COMPLETE AND EXECUTE THIS SUBSCRIPTION AGREEMENT ON THE BACK AND PRESENT IT,
TOGETHER WITH A MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED
STATES OF AMERICA AND PAYABLE TO "EQUISERVE, INC., AS SUBSCRIPTION AGENT" FOR AN
AMOUNT EQUAL TO THE NUMBER OF SHARES SUBSCRIBED FOR MULTIPLIED BY $15.00, TO
EQUISERVE, INC., AS SUBSCRIPTION AGENT, PRIOR TO 5:00 P.M., EASTERN DAYLIGHT
SAVINGS TIME, ON AUGUST ____, 1999 (THE "EXPIRATION DATE"). WE RESERVE THE RIGHT
TO REJECT YOUR SUBSCRIPTION IF YOU DO NOT EXERCISE YOUR RIGHTS TO SUBSCRIBE
PRIOR TO THE EXPIRATION DATE. ANY SUBSCRIPTION FOR SHARES OF SERIES R PREFERRED
STOCK IN THE RIGHTS OFFERING MADE HEREBY IS IRREVOCABLE.
Please complete all applicable information and return to:
EQUISERVE, INC.
- -------------------------------------------------------------------------------
By First Class Mail By Hand By Overnight Courier
EquiServe Securities Transfer & EquiServe
Corporate Actions Reporting Services, Inc. Corporate Actions
P.O. Box 9573 c/o EquiServe 40 Campanelli Drive
Boston, MA 02205-9573 100 William Street Galleria Braintree, MA 02184
U.S.A. New York, NY 10038 U.S.A.
U.S.A.
- -------------------------------------------------------------------------------
DELIVERY OF THIS SUBSCRIPTION CERTIFICATE TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
Any questions regarding this Subscription Certificate and the Offer may be
directed to the Information Agent,
Shareholder Communications Corporation, toll free at (800) 546-8622.
Account #:
Control #:
Number of Shares owned:
Number of Rights issued:
CUSIP#: 819319 30 2
(continued on back)
============================================================================
PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY
============================================================================
SECTION 1: OFFERING INSTRUCTIONS (check the appropriate boxes)
IF YOU WISH TO SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
[ ] I apply for ALL of my entitlement of Series R Preferred Stock shares
pursuant to the Basic Subscription
$ 15.00
___________________ x __________ = $______________ payment.
(number of shares) (per share)
[ ] In addition, I apply for Series R Preferred Stock shares pursuant to the
Over-Subscription Privilege*
$ 15.00
___________________ x __________ = $______________ payment.
(number of shares) (per share)
IF YOU DO NOT WISH TO APPLY FOR YOUR FULL ENTITLEMENT (minimum of 7 Shares,
or $105.00):
[ ] I apply for $ 15.00
__________________ x __________ = $__________ payment.
(number of shares) (per share)
METHOD OF PAYMENT:
[ ] Check or money order payable to "EQUISERVE, INC., as Subscription
Agent"; or
IF YOU DO NOT WISH TO EXERCISE YOUR RIGHT TO SUBSCRIBE:
Please disregard this mailing.
============================================================================
SECTION 2: SUBSCRIPTION AUTHORIZATION
I acknowledge that I have received the Prospectus for this Offering and
I hereby irrevocably subscribe for the number of Series R Preferred Stock
shares indicated above on the terms and conditions specified in the
Prospectus relating to the Basic Subscription and the Over-Subscription
Privilege.
I hereby agree that if the aggregate amount enclosed is insufficient to
purchase your full entitlement, or if the number of shares being subscribed
for is not specified, the holder of this Subscription Agreement shall be
deemed to have subscribed for the maximum amount of shares that could be
subscribed for upon payment of such amount, subject to the minimum
subscription amount of 7 shares of Series R Preferred Stock, or $105.00. If
the number of shares to be subscribed for pursuant to the Over-Subscription
Privilege is not specified and the amount of funds enclosed exceeds in the
aggregate the subscription price for all shares represented by this
Subscription Agreement (the "Subscription Excess@), the holder of this
Subscription Agreement shall be deemed to have exercised the
Over-Subscription Privilege to purchase, to the extent available, that number
of whole shares of Series R Preferred Stock equal to the quotient obtained by
dividing the Subscription Excess by the subscription price, subject to the
limit on the number of shares as the holder may purchase pursuant to the
Over-Subscription Privilege. To the extent any portion of the aggregate
subscription price enclosed remains after the foregoing procedures, such
funds shall be returned to the subscriber without interest as soon as
practicable.
If the undersigned does not make payment of any amounts due, the
Company reserves the right to (i) find other purchasers for the
subscribed-for and unpaid-for shares; (ii) apply any payment actually
received by it toward the purchase of the greatest number of shares which
could be acquired by the undersigned upon exercise of the undersigned's
rights; and/or (iii) exercise any and all other rights and remedies to which
it may be entitled.
Signature of Subscriber(s):_______________________ ______________________
__________________________________________________ ______________________
__________________________________________________ ______________________
Address (if different than that listed on this Telephone number
Subscription Agreement)** (including area code)
==============================================================================
* You can participate in the Over-Subscription Privilege only if you have
subscribed for your full entitlement of new shares pursuant to the Basic
Subscription.
** If you wish to have your shares delivered to an address other than that
listed on this Subscription Agreement you must have your signature
guaranteed. Appropriate signature guarantors include: banks and savings
associations, credit unions, member firms of a national securities exchange,
municipal securities dealers and government securities dealers. Please
provide the delivery address above and note if it is a permanent change.
EXHIBIT 4.5
Form of Instructions to Stockholders
SHAMAN PHARMACEUTICALS, INC.
RIGHTS OFFERING
INSTRUCTIONS FOR COMPLETING THE SUBSCRIPTION AGREEMENT
The enclosed Subscription Agreement entitles you to purchase the number of
shares of Series R Convertible Preferred Stock, $0.001 par value per share (the
"Series R Preferred Stock"), of Shaman Pharmaceuticals, Inc. (the "Company") as
set forth in the Subscription Agreement. There is a minimum subscription of 7
shares of Series R Preferred Stock, or $105.00.
To subscribe for shares of Series R Preferred Stock, you must present to
BankBoston, N.A. (the "Subscription Agent") prior to 5:00 p.m., Eastern Daylight
Savings Time, on _______________________, 1999 (the "Expiration Date"), a
properly completed and executed Subscription Agreement and a money order or
check drawn on a bank located in the United States of America and payable to
"BankBoston, N.A., as Subscription Agent", for an amount equal to the number of
shares subscribed for multiplied by $15.00, the subscription price.
As soon as practical following the date on which the Company has accepted
your Basic Subscription Privilege amount (which may occur at any time prior to
the Expiration Date) and after payment for any shares of Series R Preferred
Stock subscribed for has cleared (which clearance may take up to 15 days from
receipt of the payment), subscribers will receive from the Subscription Agent
stock certificates for the number of shares of Series R Preferred Stock acquired
under the Basic Subscription Privilege. We may accept your Basic Subscription
Privilege amount prior to accepting your Over-Subscription Privilege amount. In
that event, the Subscription Agent will retain the Over-Subscription Privilege
amount in escrow until the Expiration Date.
The Company will determine the portion of the Over-Subscription Privilege
amounts to be accepted for each stockholder as soon as practicable after the
Expiration Date, and will issue stock certificates and, if applicable, any
refund amounts, to the stockholders at that time. The Company estimates that
this process may take two weeks or longer following the Expiration Date. In the
event of over-subscription of this offering, the Company will allocate the
Over-Subscription Privilege amounts to be accepted for each stockholder pro
rata, in proportion to the maximum number of shares that each stockholder
requests to purchase above his or her Basic Subscription Privilege amount.
EXHIBIT 4.6
Form of Letter to Common Stockholders of Record
SHAMAN PHARMACEUTICALS, INC.
213 East Grand Avenue
South San Francisco, California 94080
____________,1999
Dear Stockholder:
On behalf of the Board of Directors of Shaman Pharmaceuticals, Inc. (the
"Company"), we are pleased to provide details on the Company's rights offering
to purchase shares of the Company's Series R Convertible Preferred Stock, $0.001
par value per share (the "Series R Preferred Stock"). The shares of Series R
Preferred Stock are being offered at the subscription price of $15.00 per share.
There is a minimum subscription of 7 shares of Series R Preferred Stock, or
$105.00.
Each beneficial owner of the Company's Common Stock on _______________,
1999 has the right to purchase _____ shares of Series R Preferred Stock for each
share of the Common Stock that they owned on _______________, 1999.
Enclosed are copies of the following documents:
1. the Prospectus;
2. the Instructions for Completing the Subscription Agreement;
3. the Subscription Agreement; and
4. a return envelope addressed to BankBoston, N.A., the
Subscription Agent.
The enclosed Prospectus describes the rights offering and the procedures
to follow if you choose to exercise your rights. Please read the Prospectus and
other enclosed materials carefully.
Your prompt action is requested. The rights offering will expire at 5:00
p.m., on _______________________, 1999, unless extended by the Company in
its sole discretion (the "Expiration Date").
To exercise your rights, a properly completed and executed Subscription
Agreement and payment in full for all of the shares purchased must be delivered
to the Subscription Agent as indicated in the Prospectus prior to 5:00 p.m.,
Eastern Daylight Savings Time, on the Expiration Date.
Additional copies of the enclosed materials may be obtained from
Shareholder Communications Corporation. Their toll-free telephone number is
(800) 546-8622.
We are pleased to offer you this opportunity and hope that you will
consider a further investment in the Company.
Sincerely,
Shaman Pharmaceuticals, Inc.
EXHIBIT 4.7
Form of Letter to Banks and Brokers
SHAMAN PHARMACEUTICALS, INC.
213 East Grand Avenue
South San Francisco, California 94080
__________,1999
To Securities Dealers, Commercial Banks, Trust Companies and Other Nominees:
RE: RIGHTS OFFERING FOR SHARES OF SERIES R CONVERTIBLE
PREFERRED STOCK OF SHAMAN PHARMACEUTICALS, INC.
Shaman Pharmaceuticals, Inc. (the "Company") is offering, upon the
terms and subject to the conditions set forth in the enclosed Prospectus dated
_______________, 1999 (the "Prospectus"), rights to purchase shares of its
Series R Convertible Preferred Stock, $0.001 par value per share (the ASeries R
Preferred Stock@), to holders of record ("Holders") of its Common Stock on
_______, 1999 (the "Record Date"). There is a minimum subscription of 7 shares
of Series R Preferred Stock, or $105.00.
Pursuant to the rights offering, each Holder will have the right to
purchase _______ shares of Series R Preferred Stock for each share of Common
Stock held by such Holder on the Record Date, at the subscription price of
$15.00 per share.
We are asking you to contact your clients, for whom you hold shares of
Common Stock registered in your name or in the name of your nominee or who hold
shares of Common Stock registered in their own names, to obtain instructions as
to whether your clients would like you to purchase shares of our common stock
pursuant to the rights offering.
Enclosed are copies of the following documents:
1. the Prospectus;
2. "Instructions for Completing the Subscription Agreement";
3. the Subscription Agreement;
4. a form of a letter which may be sent to your clients for
whose accounts you hold shares of Common Stock registered
in your name or the name of your nominee; and
5. a return envelope addressed to BankBoston, N.A., the
Subscription Agent.
Your prompt action is requested. The rights offering will expire at 5:00
p.m., Eastern Daylight Savings Time, on ______, 1999, unless extended by the
Company in its sole discretion (the "Expiration Date").
To participate in the rights offering, properly completed and executed
Subscription Agreements and payments in full for all shares of Series R
Preferred Stock purchased must be delivered to the Subscription Agent as
indicated in the Subscription Agreement and the Prospectus prior to 5:00 p.m.,
Eastern Daylight Savings Time, on the Expiration Date.
Additional copies of the enclosed materials may be obtained from
Shareholder Communications Corporation. Their telephone number is (212)
805-7113.
Very truly yours,
SHAMAN PHARMACEUTICALS, INC.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON
AS AN AGENT OF THE COMPANY OR THE SUBSCRIPTION AGENT, OR AUTHORIZE YOU OR ANY
OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF EITHER OF THEM WITH RESPECT TO
THE RIGHTS OFFERING, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS.
EXHIBIT 4.8
Form of Letter to Beneficial Common Stockholders
SHAMAN PHARMACEUTICALS, INC.
RIGHTS OFFERING
To Our Clients:
Enclosed for your consideration is a prospectus, dated ______________,
1999 (the "Prospectus"), and an instruction form (the "Instruction Form")
relating to the rights offering by Shaman Pharmaceuticals, Inc. (the "Company")
of rights to purchase shares of its Series R Convertible Preferred Stock, $0.001
par value per share ("Series R Preferred Stock"), to holders of record
("Holders") of Common Stock on ___________, 1999 (the "Record Date"). There is a
minimum subscription of 7 shares of Series R Preferred Stock, or $105.00.
Pursuant to the rights offering, each Holder is entitled to purchase
________ shares of Series R Preferred Stock for each share of Common Stock held
by such Holder on the Record Date, at the subscription price of $15.00 per share
(the "Basic Subscription Privilege"). Holders are entitled to subscribe for all
or any portion of the shares underlying their Basic Subscription Privilege.
Holders also have the right (the "Over-Subscription Privilege"), subject
to proration, to subscribe for shares of the Series R Preferred Stock available
after satisfaction of all subscriptions pursuant to Basic Subscription
Privileges ("Excess Shares"), at the subscription price of $15.00 per share. If
there are insufficient Excess Shares to satisfy all exercised Over-Subscription
Privileges, Excess Shares will be allocated pro rata among all the Holders
exercising Over-Subscription Privileges, in proportion to the number of shares
each such Holder has offered to purchase above his or her respective Basic
Subscription Privilege. A Holder's election to exercise the Over-Subscription
Privilege must be made at the time such Holder exercises the Basic Subscription
Privilege in full.
The materials enclosed are being forwarded to you as the beneficial owner
of shares of Common Stock carried by us in your account but not registered in
your name. Exercises of subscription rights may only be made by us as the Holder
of record and pursuant to your instructions.
Accordingly, we request instructions as to whether you wish us to
subscribe for any shares of Series R Preferred Stock for which you are entitled
to subscribe pursuant to the terms and conditions set forth in the enclosed
Prospectus. HOWEVER, WE URGE YOU TO READ THESE DOCUMENTS CAREFULLY BEFORE
INSTRUCTING US TO EXERCISE ANY SUBSCRIPTION RIGHTS.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to exercise the subscription rights on your behalf in
accordance with the provisions of the rights offering. The rights offering will
expire at 5:00 p.m., Eastern Daylight Savings Time, on _______________, 1999,
unless extended by the Company in its sole discretion. ONCE YOU HAVE EXERCISED
YOUR SUBSCRIPTION RIGHTS, YOU MAY NOT REVOKE YOUR ELECTION FOR ANY REASON.
If you wish to have us exercise, on your behalf, your right to purchase
shares of Series R Preferred Stock for which you are entitled to subscribe,
please so instruct us by completing, executing, detaching and returning to us,
and not the Subscription Agent, the attached Instruction Form along with proper
payment for the number of shares for which you are subscribing at the
subscription price.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE OFFERING SHOULD BE
DIRECTED TO SHAREHOLDER COMMUNICATIONS CORPORATION, AT THE FOLLOWING TELEPHONE
NUMBER: (800) 546-8622.
Shaman Pharmaceuticals, Inc.
Instructions To Subscribe for Series R Convertible Preferred Stock
Pursuant to Rights Offering
The undersigned acknowledges receipt of your letter and the enclosed
materials referred to therein relating to the offering of rights to purchase
shares of Series R Convertible Preferred Stock, $0.001 par value per share (the
"Series R Preferred Stock"), of Shaman Pharmaceuticals, Inc. (the "Company").
This will instruct you on whether to purchase the Series R Preferred Stock
distributed with respect to the Company's Common Stock held by you for the
account of the undersigned, pursuant to the terms and conditions set forth in
the Prospectus.
________ Please do not exercise my rights to purchase shares of Series R
Preferred Stock of the Company.
________ Please exercise my rights to purchase ____________shares of the
Series R Preferred Stock of the Company as set forth below:
NUMBER OF SUBSCRIPTION
SHARES PRICE PAYMENT
---------------- ------------ --------------
Basic Subscription Privilege: ________________ X $15.00 $ _____________
Over-Subscription Privilege: ________________ X $15.00 $ _____________
TOTAL PAYMENT REQUIRED ________________ $ _____________
Payment in the following amount is enclosed: $____________________
Signature(s) of Beneficial Owner:
Date:________________________ ________________________________________
Address:_____________________ Print Name:_____________________________
______________________________ Title or Capacity
(if applicable):________________________
______________________________
Telephone (day):________________________
Telephone (evening):____________________
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 11, 1999 (except for Note 10, as to which the
date is June 22, 1999), in Amendment No. 2 to the Registration Statement (Form
S-1) and related Prospectus of Shaman Pharmaceuticals, Inc. for the registration
of 1,000,000 shares of its Series R Convertible Preferred Stock, 1,000,000
rights to purchase its Series R Convertible Preferred Stock, and 75,000,000
shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
June 23, 1999
EXHIBIT 99.1
[Shaman Pharmaceuticals, Inc. Letterhead]
June ___, 1999
To our Stockholders:
Enclosed with this letter are a prospectus and other documents relating to
Shaman and our offering of Series R Preferred Stock. You as a stockholder of
Shaman are invited to participate in the offering described in these materials.
As you know, in January 1999, we incurred a delay from the FDA that is normal
course of business for large pharmaceutical companies, yet often presents an
insurmountable obstacle for emerging biotech companies.
Shaman, however, did not succumb. Fortunately, we own proprietary technologies
that can be applied to other pathways of bringing healthcare alternatives and
wellness practices to consumers. So, on February 1, 1999, we reorganized our
operations and embarked on our new botanical dietary supplement business, which
we have named ShamanBotanicals.com. A key differentiating factor of this
business is that while it is regulated by the FDA, it is not an application
process, and therefore we can plan with greater certainty for the market
introduction of our products.
Our mission is to discover, develop, and commercialize proprietary, branded
dietary supplements for unmet healthcare needs through community building
initiatives via the Internet and other appropriate focused distribution
channels. We anticipate launching our first product, SB-300, in the third
quarter of 1999. This product normalizes excess water flow in the bowel and
promotes the formation of stools, and will be targeted to those afflicted with
both acute and chronic diarrhea.
We will need additional capital to realize these goals. We are also acutely
aware that, given the current price of our common stock, financing Shaman with
equity from outside investors at this time would dramatically dilute our current
common stockholders. Hence, we have determined that a rights offering to our
current stockholders is the most responsible mechanism for raising capital in a
way that will allow our current stockholders to retain their percentage
ownership in Shaman if they choose to participate in the rights offering. We are
committed to making our new botanicals business a success, and we hope that you
will consider investing in our future.
We urge you to read the enclosed prospectus and related materials carefully
before making any decision to invest.
Sincerely,
- -------------------------------------
Lisa A. Conte,
President and Chief Executive Officer
EXHIBIT 99.2
Shaman Pharmaceuticals
Q&A for Rights Offering
TO SPEAK TO A REPRESENTATIVE ON OUR INVESTOR HOTLINE,
PLEASE DIAL 1-800-546-8622 between the hours of 9:00 am and 11:00 pm EDT.
BANKS AND BROKERS SHOULD CALL 1-212 805-7113
Shaman is undertaking a Rights Offering, and has filed a registration statement
with the SEC covering the issuance of the Series R Preferred Stock to its common
shareholders of record as of _______. The Company plans to offer to common
stockholders on a pro rata basis shares with a value of $15,000,000 in preferred
shares designated as Series R Preferred Stock.
The goals of this Rights Offering are:
* To protect the pro rata ownership of our current common shareholders in the
face of significant potential future dilution. Based on the structure of
the offering, those common shareholders who participate in the Rights
Offering will not be further diluted on a pro rata basis regardless of how
many common shares are outstanding upon conversion of currently held
Preferred Stock;
* To raise funding for our Botanicals operations, and specifically, the
launch of our first product later this summer.
Q&A
I didn't get a prospectus, why? How do I get one?
If the stock is held in your name (in other words you were issued a stock
certificate), then please contact: BankBoston, N.A., c/o Boston EquiServe, P.O.
Box 8040, Boston, MA 02266-8040; Telephone: (781)575-3170; Fax: (781)828-8813.
If the stock is held in a "street name" (the brokerage firm holds the shares of
your stock as part of your brokerage account), then you should contact your
broker.
Can I talk to someone at the Company?
We would be happy to answer your questions about the proposed Rights Offering.
Please telephone our investor hotline at 1-800-546-8622 between the hours of
9:00 am and 11:00 pm EDT.
Why is this so complicated? Isn't there an easier way to raise money?
The Board of Directors and management have put a process in place, that while
somewhat more complicated that other kinds of fundraising, gives the existing
shareholders an opportunity to participate in the financing and protect their
ownership position in the Company, while allowing the Company to raise the
capital necessary to implement its plans.
This offering should protect the ownership position of existing common
shareholders who choose to participate in the face of significant dilution
potential from our current preferred shareholders and particularly the Series C
Preferred when it converts into common stock beginning later this summer. By
raising a relatively small amount of money (up to $15 million), the shareholders
who participate in the offering can leverage off over $150 million which has
been invested in the company to date. Using the technology and know how that was
developed in the pharmaceutical business, the Company hopes to turn that into a
viable near term opportunity in the botanical dietary supplement business.
Additionally, those shareholders who participate in the offering will also
benefit from whatever outlicensing revenue that is generated from the
pharmaceuticals business.
What is a rights offering? What are the "rights" I'm getting?
You are getting the right to purchase preferred stock, the amount based upon
your existing ownership position. Those existing shareholders who choose to
participate at their pro rata amount will retain the same percentage ownership
afterwards.
You may also participate above your pro rata right for the portion of the
offering which is not otherwise subscribed to.
Who gets to participate?
All holders of common stock as of the record date --________, 1999.
How many shares may I purchase and at what price?
A total of 1,000,000 shares will be offered. You will receive the right to
purchase one share of Preferred R for $15.00 per share for every ___ shares of
common stock you hold, subject to a minimum purchase of $105. For example, if
you owned 500 shares of Shaman common stock as of the record date you would be
entitled to purchase ____shares of Preferred R for a total purchase price of
$____.
If you exercise your right in full you will have the opportunity to buy
additional shares of Preferred R stock at $15.00 per share. You would indicate
on the subscription certificate the additional shares you would like to
purchase. If eligible shareholders request to make additional purchases of more
than the number of shares available to satisfy such requests, then the shares of
stock available from unsubscribed rights immediately prior to the close of the
rights offering will be prorated among those shareholders who exercise their
right in full and elect to purchase additional shares of stock.
What happens if I own less than ___shares of common stock today-will I still be
able to participate in the rights offering?
Yes. A shareholder who owns less than ___shares of common stock on the date of
record would be given the right to purchase the minimum amount of Preferred R-7
shares which would cost $105.
How can people who are not shareholders of record participate?
Only existing shareholders get the right to participate. Initially, shareholders
receive the right to buy their pro rata amount. If other existing shareholders
do not participate, then you can purchase more than your pro rata amount.
What if some shareholders don't fully subscribe/buy the shares they are allowed?
At the time of the offering, shareholders will be able to indicate a purchase
amount over their pro rata, should some shareholder not fully subscribe. If
these oversubscription amounts exceed the amount available, then it will be
offered pro rata based on commitments.
Can I/someone else buy those shares? How will this work?
A shareholder can request to purchase any amount; only your pro rata share can
be assured.
2
If I request shares over and above my pro rata subscription, and so does
everyone else, how do you decide who gets the extra shares?
If everyone signs up for their pro rata then there will not be any extra shares
available. If some shareholders purchase less than their pro rata amount then
there will be some extra shares available. These will be allocated based upon
commitments. Those who commit to the largest amount of extra shares will receive
the largest percentage of the pool available.
How long will the rights offering last?
You will be able to exercise your rights until 5:00 PM EDT on ______. If you do
not exercise your rights prior to then, they will expire. We may, at our
discretion, decide to extend the rights offering.
After I exercise my rights, can I change my mind?
No. Once you send in your subscription certificate and payment, you cannot
revoke the exercise of your rights even if you later learn more information
about the company. You should not exercise your rights unless you are certain
that you wish to purchase our Preferred stock.
Is there a minimum number of shares that must be sold as a condition to closing
the rights offering?
No. We have not established any minimum number of rights that must be exercised
as a condition to our accepting exercised rights. Consequently no minimum amount
of proceeds is required to consummate the rights offering. A number of existing
shareholders provided a bridge loan capacity to the company and it is expected
that $____out of the total amount of $____will convert into the Series R
Preferred.
How do I exercise my rights?
You must properly complete the attached subscription certificates and forward it
by mail, hand or overnight express mail courier (or following guaranteed
delivery procedures) together with the proper payment on or prior to 5:00 pm EDT
on ____ at the address appearing on page_____. If the mail is used to forward
subscription certificates, it is recommended that insured, registered mail be
used.
What if I hold Shaman common stock with a broker or through others?
If your Shaman common stock is held with a broker, dealer, commercial bank,
trust, or other nominee, or you hold it personally and would prefer to have such
institutions effect transactions relating to the rights on your behalf, you
should contact the appropriate institution or nominee and request it to effect
the transaction for you. You should be aware that brokers or other nominee
holders may establish deadlines for receiving instructions from beneficial
holders significantly in advance of the date which we have established for the
expiration of the rights.
When will I receive my new shares?
If you purchase shares of our Preferred R stock in the rights offering, we will
send you certificates representing those shares as soon as practical after the
expiration of the rights offering.
How much money will you receive from the rights offering?
The amount of the net proceeds that we receive from the rights offering will
depend upon the number of rights exercised. If all the rights are exercised we
expect our gross proceeds from the rights offering to be approximately
$15,000,000. Regardless of how many rights are exercised, the offering expenses
are estimated to be approximately $300,000.
3
Isn't this just going to dilute me further? Why not?
If the company does not do a rights offering the current shareholders will be
subject to significant and unavoidable dilution from the Series C investors (who
have converted their holdings into Preferred R stock) when they convert to
common stock, which can begin as of August 18, 1999. Those shareholders who
participate to their pro rata amount will be better protected from this
dilution. On the other hand, shareholders who decide not to participate at all,
or participate at less than their pro rata amount will be subject to potentially
significant dilution.
How does this protect me from the current and future dilution coming from the
conversion of the Series C & D preferred stock?
It is expected that all of the Series D and most if not all of the remaining
Series C will have converted prior to the rights offering conversion date.
Furthermore, the rights offering (Series R Preferred) will convert into shares
of common based upon a formula, which takes into account a reduction in price
should there be additional dilution from the Series C and D conversion.
What is the relative liquidation preference of this new Series R stock versus
the Series C & D?
The series R is below the Series A,C and D in liquidation preference.
If they still have higher liquidation preference, how am I protected if the
company goes under?
The Series R would be ahead of the common shareholders in the case of a
liquidation. However, in the case of a liquidation, Series R shareholders would
only receive funds once the creditors are paid in full and the Series A, C and D
shareholders receive their payments.
Why do I have to pay more money just to keep my same relative position?
This is the way in which rights offerings work. You are given the opportunity to
purchase shares of stock at a discounted price relative to the market. However,
the shares cannot be given for free. The company needs adequate capital to
continue operations, without it the company cannot stay in business. Given the
relatively low current price of the stock and the significant dilution that will
occur as the remaining Series C & Series D converts into common stock, there do
not appear to be other viable means of raising new capital that will be better
for existing common shareholders. The Series R offering has been designed so
that existing common shareholders who decide to participate in their pro rata
should maintain their ownership position.
What happens to me/my shares/the value of my shares if I don't participate?
If you decide not to participate your shares will remain the same; however the
total number of shares outstanding will likely increase significantly and your
percent ownership of the company will go down. We have no way to predict what
will happen to the value of your shares over the long term, though over the
short term the value will likely go down. We suggest that you discuss this with
a trained professional.
How can you raise $15 million for shares in a company that is only has a value
of $7 million?
It is management's belief that the current share price/value of the company
reflect the uncertainty as to the company's near term cash crunch and lack of
knowledge of the value of the company's technology and capabilities as it is
applied to the botanicals industry. The company has received a great deal of
interest in purchasing some of its technology which would tend to validate this
position.
Furthermore, the company has had a number of institutional investors who have
expressed interest in investing in the Series R round. We believe that these
investors see beyond the current financial crunch and believe that the company
can build a successful business. Investors who participate in the Series R
financing will be investing in a company that will leverage the technology that
was developed over the past 10 years at a cost in excess of $150 million. The
management of the company believes that it can build a substantial business in
4
the botanical dietary supplements business utilizing much of the technology
which has already been developed by the company for the pharmaceutical business,
with the added benefits of potential revenue from outlicensing the
pharmaceutical uses for the technology.
Why do I get preferred shares?
The Preferred stock provides near term protection for investors should the
common stock price be negatively affected by the Series C and D conversion and
subsequent trading activity. At a later time when this conversion is largely
completed, your preferred shares will convert into shares of common which will
help maintain your percentage ownership, assuming that you have participated to
your pro rata amount.
How are these preferred shares different from the common shares I already own?
As mentioned earlier, they have several features that are different: the stock
has a liquidation preference ahead of the common stock and it protects an
investor should the stock price decrease during a defined window after the
preferred stock is issued and before it must be converted into common stock.
Are these liquid/tradable? If so, where do they trade, and when do they start
trading?
We expect that the Preferred R stock will trade on the Nasdaq OTC Bulletin Board
as does the common stock. We expect that the Series R stock will begin to trade
after the shares are issued, which will be shortly after the rights offering is
completed on _____, unless it has been extended.
How/when do these preferred shares convert into common stock? Is that my choice?
See above.
Why do I have to wait until a future date to convert? Why February 1, 2000?
The date of February 1, 2000 was set so that there would be sufficient time for
the stock price to settle after most if not all the Series C converted. The
company will complete the conversion to common stock after February 1, 2000,
based upon a 90% discount, as described below.
What is the formula for conversion?
Each share of Preferred will convert into common shares at a price equal to 0.1
times the weighted average price for common stock over a ten day period. This
formula provides that a preferred shareholder can convert into common stock at a
90% discount to market. The market stock price will be based upon a the 10 day
average closing price of the stock ending three trading days prior to the
conversion date of February 1, 2000 or the closing 10 day average bid price
ending three trading days prior to the date of record, whichever is lower.
Why was the multiple of 0.1 chosen?
The Board determined that this was the price that would attract existing
investors to participate.
Isn't there some incentive for the unconverted Series C to not convert and wait
for the Series R to convert?
We do not know with certainty what the Series C investors will do. It remains
the belief of management and the Board that the Series C investors will choose
to convert as soon as they are able to, which is after August 18, 1999.
5
What happens if I sell my common stock after the record date (______), but
before the rights offering; do I get to keep the right to purchase my pro rata
share? What if I bought my stock after ________, can I participate in the rights
offering?
If you sell your stock after ________but before the rights offering you can
still purchase your pro rata amount. If you bought the stock after _____ you
will not have the right to participate in the rights offering.
Can I sell or transfer my rights? No.
How would someone arbitrage on this deal?
If an investor believed that the stock price might go down that investor could
"short' the stock, which is perfectly legal.
Isn't it possible someone could get a controlling interest if they bought up a
lot of the extra shares? How will you avoid a major change in control?
The company had taken prudent steps to reduce the possibility of someone gaining
control of the company. Only existing common shareholders will have the right to
participate.
The company also has some provisions in its bylaws which make it difficult for
someone to gain control of the company without management and the Board's
approval; however the investor base could change significantly.
After the reverse split the common stock will be worth approximately $2.50. How
can you sell the Series R Preferred stock for $15.00 per share?
The conversion is at a 90% discount to market based upon investment dollars in
Series R, not based upon the number of shares. The price of the Series R
Preferred Stock is not directly related to the price into which it converts to
common stock. In fact, assuming that the common stock is priced at $2.50 at the
time of the Series R conversion into common stock, each share of Preferred that
was purchased would buy 60 shares of common stock, since the Preferred stock
will purchase common shares at 10% of the price of common stock (ie. $0.25 per
share).
The Board and management along with some of the larger institutional investors
in Shaman lent the company money? Why and what did they get for doing so?
The company potentially needed additional cash before the rights offering might
be completed. In discussion with several large institutional shareholders in
Shaman, they agreed in principle to provide a loan commitment to the company.
One of the requirements was that the Board and senior management participate,
which they have. Those investors will be repaid out of the rights offering
proceeds or, in most cases, convert their loan into the Series R Preferred
stock. The company agreed to pay this group of investors interest as well as
provide them with a warrant to purchase 50% of the amount of their loan in
Preferred R stock at the same price as other shareholders who buy the stock.
This type of bridge financing arrangement is typically done for companies which
are undertaking a financing.
How many shares will be outstanding on February 1, 2000 after the conversion of
the Series R?
We don't know how many shares will be outstanding at that point in time. It will
vary based upon stock price and how much of the Series C has already converted
into common stock. The Series R investors will be protected from dilution that
will occur between the Rights Offering and February 1, 2000. Regardless of the
number of shares of common stock or the stock price on February 1, 2000, the
investors who participate in the rights offering for their pro rata will be
reconstituted as to their ownership of the common stock on February 2, 2000.
6
Who can I talk to if I have more questions?
We have appointed Shareholder Communications Corporation as our information
agent for the rights offering. If you have any questions about the rights
offering, including questions about subscription procedures or if you would like
additional copies of this prospectus or other documents, please call (800)
546-8622. Banks and brokers should call (212) 805-7113.
Questions about stock transfers and receipt of subscriptions should be directed
to BankBoston, N.A. which can be reached at 781-575-3170.
7
EXHIBIT 99.3
ALLIANT PARTNERS LETTERHEAD
June _____, 1999
Board of Directors
Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, CA 94080-4812
You have requested our opinion as to the fairness, from a financial point
of view, to all of the shareholders (Existing Preferred and Common as well as
the Shareholders participating in the Preferred Stock Series R Rights Offering)
of Shaman Pharmaceuticals, Inc. ("Shaman"), of the Preferred Stock Series R
Rights Offering (the "Rights Offering") by Shaman. As contemplated by the
Registration Statement on Form S-1, No. 333-78115, and the related Prospectus,
dated June ___, 1999, Shaman shall distribute up to 1,000,000 Rights (the
"Rights") to Purchase 1,000,000 Shares of Preferred Stock Series R Convertible
Shares at $15 per Share. The conversion price of the Preferred Stock Series R
Shares is the lesser of ___, which is equal to 10% of the Average Closing Price
of Shaman's common stock reported on the OTC Bulletin Board for the 10 trading
days ending three days prior to the dated of this prospectus, or the price that
is equal to 10% of the Average Closing Price of Shaman's stock for the 10
trading days ending three days prior to February 1, 2000. The Preferred Stock
Series R stock will automatically convert into Common Stock on but not before
February 1, 2000. Based on the 10 day Average Closing Price Ending June ___,
1999 of $___ per share, the Preferred Stock Series R will represent __% of the
Post-Rights Offering Fully-Converted Shares Outstanding. In addition, the
Preferred Stock Series R has dividend rights, to the extent any dividends are
declared, a liquidation preference of $15.00 per Share, 100 Votes per Share, and
is not redeemable. Alliant Partners examined, and assessed this Rights Offering
and its impact on Shaman's financial position, their capital structure, their
shareholder ownership interest, and their business and shareholder risk.
For purposes of the opinion set forth herein, we have:
(i) reviewed financial statements and other information of Shaman;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning Shaman prepared by the management of
Shaman;
(iii) analyzed certain financial projections prepared by the management
of Shaman;
(iv) discussed the past and current operations, financial condition, and
the prospects of Shaman with senior executives of Shaman;
(v) discussed with the senior management of Shaman the strategic
objectives of the Rights Offering and the strategic alternatives
available to Shaman;
(vi) compared the financial performance of Shaman with that of certain
other comparable publicly-traded companies and the prices paid for
securities in those publicly traded companies;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(viii) analyzed other comparable company financing structures to examine
changes in historical ownership interest and subsequent financing
alternatives;
(ix) reviewed the Registration Statement on Form S-1, No. 333-78115, and
the related Prospectus, and certain related documents; and
(x) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the financial projections of Shaman, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgements of the future financial performance
of Shaman. The financial and other information regarding Shaman reviewed by
Alliant Partners in connection with the rendering of this opinion was limited to
information provided by Shaman's management and certain discussions with
Shaman's senior management regarding Shaman's financial condition and prospects
and their strategic objectives of the Rights Offering as well as the strategic
alternatives available to Shaman. In addition, we have assumed that the Rights
Offering will be consummated in accordance with the terms set forth in the
Registration Statement Form S-1, No. 333-78115, including, among other things,
that the Rights Offering will be a tax-free transaction to Shaman shareholders.
We have not made any independent valuation or appraisal of the assets or
liabilities of Shaman, nor have we been furnished with any such appraisals. Our
opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of the date hereof.
Our opinion addresses only the fairness of the transaction, from a
financial point of view, to the shareholders of Shaman, and we do not express
any views on any other terms of the Rights Offering. Specifically, our opinion
does not address Shaman's underlying business decision to effect the Rights
Offering.
Based upon and subject to the foregoing, and based upon such other matters
as we consider relevant, it is out opinion that, as of the date hereof, the
Preferred Stock Series R Rights Offering issue by Shaman pursuant to the
Registration Statement on Form S-1, No. 333-78115 is fair, from a financial
point of view, to the Shaman shareholders.
Very truly yours,
Alliant Partners