By Lisa Seachrist

Washington Editor

In an attempt to raise enough cash to bring its first botanical dietary supplement to market and protect its current shareholders from massive dilution, Shaman Pharmaceuticals Inc. is offering $15 million in Series R convertible preferred stock to its stockholders of record.

The move will allow current company stockholders to retain their pro rata ownership in the face of $11 million worth of convertible notes coming due on Aug. 18. South San Francisco-based Shaman has approximately 2.5 million shares currently outstanding, following its recent reverse stock split. The stock (OTC:SHMND) closed unchanged Monday at 54 cents per share.

"This is a very creative financing," said Lisa Conte, president and CEO of Shaman. "The main reason we are raising money is for the commercialization of SB Normal Stool Formula and to continue the research and development of the rest of our pipeline."

Under the terms of the offering, Shaman will sell up to 1 million shares of Series R convertible preferred shares at $15 per share, netting the company up to $15 million. Only common stockholders of record on July 14, 1999, will be eligible to participate. They will receive the right to purchase seven preferred shares for about every 22 shares of common stock they owned on that date.

The offering will terminate on August 23, 1999, unless Shaman chooses to extend it until Sept. 7.

The shares will be convertible on Feb. 1, 2000, into common stock at a 90 percent discount or 10 cents per share, whichever is lower. Because there are $11 million in convertible notes coming due on Aug. 18 at a 15 percent discount to the market, Shaman stockholders face an unlimited dilution potential without the rights offering.

"The philosophy is to protect the shareholders," Conte said. "By offering a dramatic discount we can raise that little bit of cash that we need and protect the current stockholders from losing their stake in the company. Under the circumstances, it makes sense."

Conte said Shaman is on track to begin marketing its dietary supplement, SB Normal Stool Formula, on its web site July 30. In September, the company plans to market the supplement at select pharmacies that fill high numbers of AIDS drug prescriptions.

SB Normal Stool Formula is an active extract of the croton plant found in Latin America that will be marketed by Shaman Botanicals, a privately held, wholly owned subsidiary of Shaman.

Before its focus on dietary supplements, Shaman developed single-entity drug products from active ingredients in tropical plants and trees traditionally used as medicinal herbs in South America, Africa and Southeast Asia. Its most advanced product, Provir, was a single entity derived from the extract of the croton plant. Rather than attacking infectious microbes or inhibiting gastrointestinal activity, Provir targeted the underlying cellular mechanism for diarrhea by blocking chloride secretion.

Provir had received "fast track" designation from the FDA and late last year the company released positive Phase III results. However, the agency decided to require more clinical testing of the drug, and Shaman decided to develop the croton extract as a dietary supplement rather than try to finance an additional clinical trial. (See BioWorld Today, June 6, 1999, p. 1.)

SB Normal Stool Formula will be regulated by the agency as a dietary supplement.

Conte said that in February Shaman plans to clean up its books following the conversion of the Series R preferred stock, perhaps conducting a reverse stock split and seeking relisting on Nasdaq.