<PAGE>
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Certain of the statements contained in this report are forward-looking
statements based on current expectations which involve a number of
uncertainties. The events described herein may not occur due to risks
inherent in research and product development, the uncertainty of market
acceptance of Company products, the possible inability to obtain financing,
and other factors. Accordingly, the Company's future activities may differ
materially from those projected in the forward-looking statements.
OXIS International, Inc., (the "Company"), a Delaware corporation, is a
leader in the discovery, development and commercialization of therapeutic
and diagnostic products to diagnose, treat and prevent diseases of
oxidative stress. Oxidative stress occurs when the concentration of free
radicals and reactive oxygen species ("ROS"), highly reactive molecules
produced during oxidative processes, exceed the body's antioxidant defense
mechanisms.
The Company consists of two closely related operating units: an
international diagnostic business which markets research and commercial
diagnostic assays and fine chemicals to research and clinical laboratories;
and a drug discovery business focused on new drugs to treat diseases
associated with tissue damage from free radicals and reactive oxygen
species.
The Company has targeted its drug discovery and development programs to
address diseases that have underlying pathologies based on oxidative
stress, and for which there is currently no optimum treatment. The Company
has identified lead molecules from two series of small molecular weight
antioxidants. The first of these lead molecules has completed Phase I
clinical trials, and the second is in preclinical development. In addition,
the Company is developing a series of earlier stage compounds for the
treatment of cancer.
The Company derives current business revenues from its diagnostic assays
and two fine chemicals, ergothioneine and bovine superoxide dismutase
("bSOD"). The Company's diagnostic products portfolio includes fourteen
commercial therapeutic drug monitoring ("TDM") assays based on fluorescence
polarization immunoassay technology ("FPIA"); twelve drugs of abuse assays
which utilize an enzyme-multiplied immunoassay technique ("EMIT"); and six
assays to measure oxidative stress.
The Company's twelve FDA-cleared therapeutic drug monitoring ("TDM") assays
are sold to clinical and reference laboratories, primarily through a
network of international distributors. The assays for markers of oxidative
stress are sold through international distribution and catalog sales to
basic researchers and clinicians working in oxidative stress research. The
Company's TDM assays are designed to run on Abbott's TDx(R) and TDx/FLx(R)
instruments, while the enzyme immunoassays and colorimetric assays run on a
variety of commercially available instruments.
1
<PAGE>
The Company has invested significant resources to build an early and
substantial patent position on both its antioxidant therapeutic
technologies and selected oxidative stress assays.
The Company's corporate offices are located in a 15,000 sq. ft. facility at
6040 N. Cutter Circle, Suite 317, Portland, OR 97217. Research operations
of the Company are located outside of Paris at Z.A. des Petits Carreaux, 2,
av. des Coquelicots, 94385 Bonneuil-Sur-Marne, Cedex, France.
ACQUISITIONS/MERGERS
In September 1994, the Company acquired Bioxytech S.A. located in Paris,
France, and merged with International BioClinical, Inc. ("IBC"), an Oregon
corporation, and changed its name from DDI Pharmaceuticals, Inc. to OXIS
International, Inc. Bioxytech S.A. was subsequently renamed OXIS
International S.A. ("OXIS S.A."). At the time of the acquisition, OXIS
S.A.'s research and development programs were focused on the synthesis of
novel antioxidant therapeutic molecules and assays to measure markers of
oxidative stress. OXIS S.A. was also selling six research assays for
measuring specific markers of oxidative stress. IBC was selling thirteen
therapeutic drug monitoring ("TDM") assays at the time of its acquisition
by the Company. It was also developing one additional TDM assay and a
(beta)-lactamase rapid detection test, both of which were completed during
1995.
In July 1995, OXIS acquired Therox Pharmaceuticals, Inc. ("Therox"), a
Delaware corporation, through an exchange of stock. Therox was merged into
a subsidiary of the Company. Therox was founded in 1994 by S.R. One,
Limited (the venture investment arm of SmithKline Beecham) and Brantley
Venture Partners II, L.P. Therox was focused on the development of membrane
active antioxidants and molecules that combine antioxidant activity with
other key therapeutic effects. The acquisition provided the Company with
complimentary therapeutic technologies, seven patents and several
relationships with university scientists.
Prior to the acquisitions of Bioxytech S.A. and International BioClinical,
Inc. in 1994, substantially all of the Company's research and development
efforts involved superoxide dismutase ("SOD") and poly-ethylene glycol
("PEG"). The 1994 and 1995 acquisitions substantially expanded the
Company's research and development capabilities in the areas of synthetic
chemistry, biochemistry and diagnostic assay development.
RESEARCH AND DEVELOPMENT
The Company's research and development programs are focused primarily on
the discovery and development of new therapeutic molecules to combat
diseases related to damage from oxidative stress. OXIS believes that the
control or elimination of oxidative stress represents an important but
largely untapped area for drug development. The Company's technical
2
<PAGE>
approach is to supplement the natural defense systems through unique,
synthetic molecules which, because of their pharmacological and/or
distribution properties, will reduce oxidative stress in target cells and
tissues.
The Company has designed and synthesized several series of novel compounds,
including: low-molecular-weight biomimetic antioxidants (Glutathione
Peroxidase Mimics Program) and pro-oxidants (Cancer Therapeutics Program)
that are based on unique selenium chemistry; and lipid soluble antioxidants
and combination enzyme inhibitors/lipid soluble antioxidants (Lipid Soluble
Antioxidants Program). OXIS has demonstrated that certain of its
therapeutic molecules may act via two mechanisms to reduce oxidative stress
in cells: through direct control of oxidative damage; and by decreasing
specific signals that trigger the inflammatory cycle. Both of the Company's
lead therapeutic molecules have been shown to inhibit levels of
NF-(kappa)B, a transcription factor believed to be activated by elevated
concentrations of ROS. NF-(kappa)B is known to activate genes involved in
initiating the inflammatory response. The Company believes that the control
of ROS, and associated decreases in NF-(kappa)B activation, will block the
initiation of the inflammatory response earlier in the cycle than most
drugs currently used to treat certain complex inflammatory diseases.
A brief summary of the Company's synthetic therapeutics research and
development programs follows:
GLUTATHIONE PEROXIDASE MIMICS PROGRAM (GPX). The GPx mimics are small
molecular weight, orally bioavailable compounds that were designed to
catalyze the inactivation of toxic hydroperoxides. These molecules act as
chemical catalysts. The lead molecule, BXT-51072, has demonstrated
significant protection of endothelial cells from direct peroxidase damage
and down regulates various inflammatory mediators and neutrophil adhesion.
An oral formulation of BXT-51072 is being developed for the treatment of
Inflammatory Bowel Disease ("IBD"), with Acute Respiratory Distress
Syndrome ("ARDS") projected to be a secondary indication for the
intravenous formulation of the drug. BXT-51072 has demonstrated activity in
animal models of IBD, and in a porcine model of restenosis. A Phase I
clinical trial was just completed at the end of 1996 and an investigational
new drug application has been filed with the Food and Drug Administration
(the "FDA") for a Phase II study in patients with IBD. This trial is
expected to begin in mid-1997.
A patent on this class of compounds has been issued in France and patent
applications are pending in the United States, Japan, Canada, Australia and
Europe.
LIPID SOLUBLE ANTIOXIDANTS PROGRAM (LSA). The LSA compounds were designed
to combine the antioxidant capabilities of ascorbic acid with the
membrane-protecting effects of vitamin E. The lead molecule from this
series, TX-153, has also shown significant protection of endothelial cells
from direct peroxide damage, and, like BXT-51072, suppresses various
inflammatory mediators and reduces neutrophil adhesion. Although TX-153
apparently acts to control ROS in cells through a different pathway than
the GPx mimics, it also appears to inhibit NF-(kappa)B.
3
<PAGE>
TX-153 is entering preclinical toxicology studies, with Phase I clinical
studies anticipated to begin in 1998.
The Company has four issued U.S. patents, and patent applications pending
in the United States, Mexico, Japan, Canada and Europe on these compounds.
CANCER THERAPEUTICS PROGRAM. The Company has designed compounds which
utilize the destructive nature of free radicals to treat hormone-dependent
cancers by selectively killing tumor cells by activating ROS.
Hormone-dependent cancers such as breast and prostate cancer were chosen as
potential indications for this series of molecules due to the specific
hormone receptors on their cell membranes. Molecules that mimic the enzyme
glutathione oxidase have been synthesized, and two strategies are being
investigated to deliver the molecules to tumor cells and initiate the
production of ROS inside these cells. Specific steroid molecules are being
tested for their ability to target tumor cells, and a prodrug approach is
being used to provide a source of ROS that can be turned on inside the
cell. A lead molecule has not yet been selected for this series. The
indications for this series of drugs include breast and prostate cancer,
but the approach may also be applicable to other tumors.
The Company has filed patent applications on this series of pro-oxidant
molecules in the United States and France.
In addition to its research and development programs in synthetic
antioxidants, OXIS also has conducted research programs in the development
of oxidative stress assays, bovine superoxide dismutase and poly-ethylene
glycol technology. The status of these programs are as follows:
OXIDATIVE STRESS ASSAYS. The Company has developed six research assay kits
for markers of oxidative stress that are designed to ultimately facilitate
diagnosis and optimize therapy of free radical-associated diseases. These
assays also provide developmental synergy for the pharmaceutical research
and development programs by facilitating the assessment of oxidative stress
in laboratory studies and in patients. The Company intends to develop
additional assays for key markers of oxidative stress as part of its
ongoing research and development efforts in oxidative stress diagnostics.
BOVINE SUPEROXIDE DISMUTASE (BSOD). The Company also has extensive
experience in developing, manufacturing and marketing bovine superoxide
dismutase ("bSOD"). Bovine superoxide dismutase has been previously studied
in numerous clinical trials by OXIS and other companies. OXIS is not
currently pursuing an active research program in bSOD, but supplies bulk
bSOD for human use and sells an injectable dosage form of the drug for
veterinary applications under the registered trademark Palosein(R).
POLY-ETHYLENE GLYCOL TECHNOLOGY (PEG). Additionally, the Company has
developed a patented, high-molecular weight PEG technology that extends the
half-life of SOD and other therapeutic proteins. These derivatives reduce
the immunogenicity of and extend the life of
4
<PAGE>
therapeutic proteins in the body . (The Company's PEG has been shown to
extend the life of its bSOD in vivo by 250 times.) The Company has four
issued U.S. patents as well as numerous issued patents world-wide on this
technology. The Company is not currently pursuing an active research
program in PEG technology, but is seeking potential partners for this
technology for possible license or sale.
Overall, the Company has an extensive portfolio of patents that cover its
synthetic antioxidant therapeutic molecules, superoxide dismutase,
polyethylene glycol technology, markers of oxidative stress and fine
chemicals. The Company currently holds fifteen U.S. patents and eight
French patents and has filed for eight additional U.S. patents.
The Company's overall research and development strategy is to discover and
advance its therapeutic molecules through early stage clinical trials to
demonstrate efficacy in the target disease populations. The Company expects
to seek strategic pharmaceutical partners for later stage clinical
development and commercialization of its therapeutics, but, to date, has
not entered into any such partnership.
Much of the Company's success depends on its potential products which are
in research and development and from which no material revenues have yet
been generated. The Company must sucessfully partner, develop, obtain
regulatory approval for and market or sell its potential therapeutic
products to achieve profitable operations. No assurances can be given that
the Company's product development efforts will be successfully completed,
that required regulatory approvals will be obtained, or that any such
products, if developed and introduced will be successfully marketed.
Competition in the pharmaceutical industry is intense, and no assurances
can be given that OXIS' competitors will not develop technologies and
products that are more effective than those being developed by OXIS.
Research and development expenses were $4,908,000, $4,299,000 and
$1,670,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
PRODUCTS
DIAGNOSTIC ASSAYS
Revenues from sales of the Company's assays comprised 49% of 1996 revenues,
and 44% of 1995 revenues.
OXIDATIVE STRESS ASSAYS
The Company has six research assays available for sale which measure key
markers in free radical biochemistry (markers of oxidative stress).
Specifically, these assays measure levels of antioxidant protection,
oxidative alterations, and pro-oxidant activation of specific white blood
cells. OXIS' research assays include:
SOD-525 (superoxide dismutase)
GSH-400 (reduced glutathione)
pl-GPx-EIA (human plasma-specific glutathione
peroxidase)
LPO-586 (lipid peroxidation)
MPO-EIA (human myeloperoxidase)
Lactoferrin-EIA (human lactoferrin).
These assay kits utilize either chemical (colorimetric) or immunoenzymatic
(EIA) reactions that can be read using laboratory spectrophotometers and
microplate readers, respectively. The
5
<PAGE>
Company's assays offer advantages over conventional laboratory methods,
including ease of use, speed, specificity and accuracy.
The assays for markers of oxidative stress are currently being sold to
researchers in Europe, Japan and the United States, primarily through
distributors. The Company estimates that there are more than 3,500
scientists and clinicians who are working directly in research on free
radical biochemistry, and who are potential customers for these research
assays.
Through June 1996, assays for markers of oxidative stress were manufactured
at the Company's facility in France. Since July 1996, these assays have
been manufactured at the Company's facility in Portland, Oregon. All of the
oxidative stress assays are manufactured in batches in anticipation of
customer orders. Orders are generally filled within a few days; therefore,
the Company does not have any significant backlog of orders. The Company
believes that adequate supplies of raw materials are either currently on
hand, available from commercial suppliers or available through development
on a custom basis by commercial contractors, as needed.
The Company's assays for markers of oxidative stress are protected by trade
secrets and patents. Seven French patent applications have been filed with
respect to these assays, two of which have resulted in the issuance of
patents. The oxidative stress assays are sold under the registered
trademark "Bioxytech(R)".
Several companies other than OXIS have developed assays for markers of
oxidative stress. One company offers assays for superoxide dismutase and
glutathione peroxidase which compete directly with the Company's products;
and a few competitive assays for lipid peroxidation are available from
selected companies. The Company believes that the number and range of its
assay kits for markers of oxidative stress is a distinct competitive
advantage.
THERAPEUTIC DRUG MONITORING (TDM) ASSAYS
The Company sells fourteen TDM assays which are based on FPIA technology.
These products are sold under the trade name INNOFLUOR(TM). The Company's
test menu encompasses approximately 90% of the TDM tests performed by
clinical and reference laboratories worldwide. These assays are designed
for use on the Abbott Laboratories TDx(R) and TDx/FLx(R) analyzers.
The TDM products are sold through a combination of direct customer sales
and distributors in the United States, and through a network of
distributors outside the United States, principally in Europe.
The TDM assays are manufactured at the Company's facility in Portland,
Oregon. All of the TDM assays are manufactured in batches in anticipation
of customer orders. Orders are generally filled within a few days;
therefore, the Company does not have any significant backlog of orders. The
Company believes that adequate supplies of raw materials are either
6
<PAGE>
currently on hand, available from commercial suppliers or available through
development on a custom basis by commercial contractors as needed.
The Company has one pending U.S. patent application, in addition to relying
on trade secrets, know-how and trademark laws to protect its TDM assays.
The Company's TDM assays have been sold under the trade name INNOFLUOR(TM)
since the mid-1980s.
Six major diagnostic companies dominate the therapeutic drug monitoring
market. Each of these six companies provides a range of both
instrumentation and assays to clinical laboratories. Of these, Abbott
Laboratories holds the largest market share. OXIS competes most directly
with Abbott Laboratories, because OXIS' assays are designed to be run on
Abbott's analyzers. The Company competes based on high product quality, an
aggressive pricing strategy and technical services. Abbott Laboratories and
certain of the Company's other competitors have substantially greater
financial and other resources than the Company and there can be no
assurances that the Company can effectively compete with Abbott
Laboratories and such other competitors.
THERAPEUTIC PRODUCTS
Revenues from sales of bulk bSOD, royalties on bSOD products sold by
licensees, and sales of Palosein(R), the Company's veterinary bSOD product,
comprised approximately 50% of the Company's total revenues in 1996, 48% in
1995 and 76% in 1994.
BOVINE SOD (BSOD) PRODUCTS
Commercial-scale manufacture and quality control of bulk bSOD, as well as
subsequent quality control and processing of United States Department of
Agriculture-inspected edible beef liver into highly purified bulk bSOD
requires a complex, multi-step process, OXIS has significant knowledge
regarding the manufacture of bSOD that is protected through trade secrets
and proprietary know-how.
The Company has an agreement with Diosynth B.V., a Dutch contract
manufacturer of pharmaceutical ingredients, to manufacture bulk bSOD and
supply it to OXIS under the terms of a license based on the Company's
processes. Diosynth B.V. is an affiliate of AKZO-Nobel N.V., a large, Dutch
multinational chemical and health care company. The Company believes that
its present source of bSOD is adequate for its near-term foreseeable needs.
With the exception of recently developed, patent protected long-acting SOD
derivatives, the Company's older patents protecting the manufacture of bSOD
have expired. Expiration of the Company's patents may enable other
companies to benefit from research and development efforts of the Company,
but such other companies would not receive the benefits of the Company's
unpatented trade secrets and know-how or unpublished preclinical or
clinical data. Such Companies would still be required to expend
considerable resources to conduct preclinical
7
<PAGE>
and clinical studies of their own pharmaceutical preparations of SOD to
gain regulatory approval.
The Company sells bulk bSOD for human use, but does not market dosage forms
of bSOD for human use. Palosein(R) is OXIS' registered trademark for its
veterinary brand of bSOD. Although there are other sources of bSOD and
other laboratory and pilot-scale processes to produce bSOD, the Company
believes that it is the only company manufacturing bSOD on a commercial
scale for pharmaceutical uses.
The Company's Spanish licensee, Tedec-Meiji Farma, S.A., which distributes
bSOD for human use in Spain, has been responsible for a substantial portion
of the Company's revenues in recent years. Sales of bSOD to Tedec-Meiji
were 39% of the Company's revenues in 1996, 16% in 1995 and 18% in 1994.
EMPLOYEES
As of December 31, 1996, the Company had 51 employees (30 in the United
States and 21 in France). Employees of the Company's French subsidiary are
covered by a government-sponsored collective bargaining agreement. None of
the United States employees are subject to a collective bargaining
agreement. The Company has never experienced a work interruption.
FOREIGN OPERATIONS AND EXPORT SALES
For information regarding the Company's foreign operations and export
sales, see Note 10 to the consolidated financial statements.
ITEM 2. PROPERTIES.
The Company occupies, pursuant to leases, office and laboratory space in
Portland, Oregon and near Paris, France.
The Company's Portland, Oregon lease expires in 1997; the lease of the
facility in France expires in 1998.
Although the premises currently occupied are suitable for the Company's
present requirements, other equally suitable premises are readily
available.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
The Company's common stock is traded on the NASDAQ National Market System
using the symbol OXIS.
Recent quarterly prices of the Company's common stock are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 1 25/32 2 1/8 2 11/16 2 2 13/16 3 1/2 4 1/2 2 7/8
Low 1 7/32 1 1/2 1 7/16 1 1/2 1 1/8 2 1/4 1 3/4 1 5/8
</TABLE>
The Company has an estimated 7,800 shareholders, including approximately
3,500 shareholders who have shares in the names of their stockbrokers. The
Company utilizes its assets to develop its business and, consequently, has
never paid a dividend and does not expect to pay dividends in the
foreseeable future.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FOR YEARS ENDED
DECEMBER 31: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total Revenues1/ $ 4,867,000 $ 5,136,000 $ 3,470,000 $ 3,044,000 $2,772,000
--
Net income (loss) $(5,992,000) $(8,892,000)2/ $(5,567,000)3/ $(1,485,000)4/ $ (339,000)
-- -- --
Net income (loss)
per share $ (.47) $ (.82)2/ $ (.88)3/ $ (.30)4/ $ (.07)
-- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total assets $ 7,997,000 $ 9,870,000 $11,194,000 $3,124,000 $4,864,000
Long-term
obligations $ 2,000 $ 1,332,000 $ 376,000 -- --
Common shares
outstanding 13,790,736 12,124,423 9,322,762 4,982,670 4,982,670
</TABLE>
1/ Earned interest not included in revenue.
2/ Includes a charge of $3,329,000 ($.31 per share) for the write off of
certain technology of an acquired company.
3/ Includes a charge of $3,675,000 ($.58 per share) for the write off of
certain technology of acquired companies.
4/ Includes a charge of $1,531,000 ($.31 per share) for control contest
expense.
As explained under the caption "ACQUISITIONS" in Management's Discussion
and Analysis of Financial Condition and Results of Operations below, the
Company made significant acquisitions during 1994 and 1995 that affect the
comparability of the amounts reflected in the table above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
ACQUISITIONS
In September 1994, the Company significantly increased its scientific and
technical staff, patent application portfolio, current product offerings,
research and development programs, research and manufacturing facilities
and its customer base by acquiring Bioxytech S.A. (now "OXIS S.A.") and
International BioClinical, Inc. ("IBC") (together the "1994 acquired
businesses"). Both acquisitions were completed through the exchange of
stock, and were accounted for as purchases; accordingly, the acquired
assets and liabilities were recorded at
10
<PAGE>
their estimated fair values as of the date of acquisition. IBC was merged
into the Company. OXIS S.A. operates as a subsidiary of the Company.
In July 1995, in a transaction which was also accounted for as a purchase,
the Company acquired Therox Pharmaceuticals, Inc. ("Therox") through an
exchange of stock. Therox was merged into a wholly-owned subsidiary of the
Company. The acquisition of Therox provided the Company with a technology
portfolio complementary to its novel therapeutics for treatment of free
radical associated diseases together with university relationships and
seven patents.
Because the acquisitions have been accounted for as purchases, the
Company's consolidated results of operations include the operating results
of the acquired businesses from the dates of acquisition only. Therefore,
the results of operations of the 1994 acquired businesses are included in
the consolidated statements of operations from September 7, 1994, and the
results of Therox's operations are included in the consolidated statements
of operations from July 19, 1995.
Costs relating to the acquisitions and the Company's more complex corporate
structure and the increased research and development investments have
placed significant demand on the Company's limited financial resources. See
"Financial Condition, Liquidity and Capital Resources" below.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During 1996 the Company's working capital deficit decreased slightly from
$1,469,000 at December 31, 1995, to $1,405,000 at December 31, 1996. This
decrease in the Company's working capital deficit resulted primarily from
the effect of the net loss for 1996 ($5,992,000 less non-cash charges of
$1,381,000), offset by proceeds from issuance of stock ($4,305,000) and
convertible term notes ($1,000,000).
Cash and cash equivalents declined from $727,000 at December 31, 1995, to
$422,000 at December 31, 1996.
The Company expects to continue to report losses in 1997 as the level of
expenses is expected to continue to exceed revenues. The Company can give
no assurances as to when and if its revenues will exceed its expenses. The
Company must raise additional capital during the first half of 1997.
Failure to raise such additional capital would cause the Company to
severely curtail or cease operations. For more information concerning the
Company's ability to continue as a going concern, see Note 1 to the
consolidated financial statements.
While the Company believes that its new products and technologies show
considerable promise, its ability to realize significant revenues therefrom
is dependent upon the Company's success in developing business alliances
with biotechnology and/or
11
<PAGE>
pharmaceutical companies that have the required resources to develop and
market certain of these products. There is no assurance that the Company's
effort to develop such business alliances will be successful. Although the
Company is currently seeking additional capital (described below), it
cannot predict the source, terms, amount, form, and/or availability of
additional capital to fund its operations to the end of the current year.
During 1996, the Company raised approximately $5,300,000 cash through the
sale of its Series C, Series D and Series E Preferred Stock and common
stock, and convertible term notes. Substantial additional capital will be
required during 1997 to continue operating in accordance with its current
plans. The Company has engaged an agent to assist on a best-efforts basis
to complete a private placement of its common stock. In addition, the
Company has engaged a French investment banker to act as its underwriter
for a planned public offering of its common stock on the newly opened
French stock market, Le Nouveau Marche, subject to obtaining appropriate
authorization from the French stock market regulatory authorities. However,
no assurances can be given that the Company will successfully raise the
needed capital. If the Company is unable to raise additional capital during
the first half of 1997, it would endeavor to extend its ability to continue
in business through the reduction of personnel and facility costs, by
slowing its research and development efforts, and by reducing other
operating costs, however, no assurances can be given that it will be able
to do so.
RESULTS OF OPERATIONS
REVENUES
The Company's sales for the past three years consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Diagnostic and research assays $2,364,000 $2,240,000 $ 645,000
Bovine superoxide dismutase (bSOD)
for research and human use 1,935,000 1,817,000 2,130,000
Palosein/(R)/(bSOD for veterinary use) 480,000 555,000 346,000
Other 23,000 370,000 204,000
---------- ---------- ----------
Total sales $4,802,000 $4,982,000 $3,325,000
========== ========== ==========
</TABLE>
Diagnostic and research assays are products acquired with the acquisitions
of IBC and OXIS S.A. Sales of these products for 1994 represent sales from
September 8 through the end of the year. The entire years' sales of
diagnostic and research assays are included in the Company's sales for 1995
and 1996.
Bulk bSOD sales in 1994 and 1995 included sales to Sanofi Winthrop, Inc.
Sales of bulk bSOD to Sanofi Winthrop ceased in 1995, when Sanofi Winthrop
announced that the clinical trial in which it was using the Company's bSOD
failed to show the desired results. The
12
<PAGE>
decline in sales to Sanofi Winthrop has been offset to a large extent by
increases in sales of bSOD to Tedec-Meiji Farma S.A., the Company's Spanish
licensee.
Future sales of bulk bSOD are largely dependent on the needs of the
Company's Spanish licensee. The Company expects its orders for 1997 from
the Spanish licensee to be less than those for 1996. The Company's sales of
bulk bSOD beyond 1997 are uncertain and difficult to predict and no
assurances can be given with respect thereto.
Sales of Palosein/(R)/, which was reintroduced to the U.S. market in 1993
and is sold primarily to veterinary wholesalers in the United States,
increased from $346,000 in 1994 to $555,000 in 1995 as a result of an
active direct mail marketing campaign, but declined to $480,000 in 1996 due
in part to large stocking orders by distributors in late 1995. The decrease
in other sales was principally the result of the completion of an assay
development contract in early 1996. Royalties and license fees are not
expected to be material in 1997.
COSTS AND EXPENSES
Cost of sales as a percent of product sales declined from 62% in 1994 to
59% in 1995. In 1995 the cost of the Company's diagnostic and research
assays declined slightly as a result of increased volumes, and the cost of
bulk bSOD sales also declined from the 1994 level. In 1996 cost of sales
increased to 63% of product sales. The increase was primarily caused by a
decline in the gross margin on bulk bSOD sales. The Company's cost of sales
includes amortization of technology acquired in 1994 ($239,000 in 1994, and
$737,000 in 1995 and 1996).
Research and development costs increased from $1,670,000 in 1994 to
$4,299,000 in 1995, and $4,908,000 in 1996. The increase in 1995 was
primarily due to the cost of the research and development activities
associated with pharmaceutical technologies acquired in the September 1994
and July 1995 business acquisitions. The increase of $609,000 in 1996 is
the result of increased expenditures relating to preclinical development
work and the Phase I clinical trial on the Company's lead therapeutics
program (glutathione peroxidase mimics) of approximately $1,130,000, and a
$230,000 increase in expenses of the former Therox operations, offset by a
cost reduction of approximately $780,000 from the closure of the Company's
Mountain View, California facility in the fourth quarter of 1995. The
expenses of the Therox operations are included in the 1995 expenses
starting in July 1995; the former Therox laboratory facility was closed in
May 1996.
Sales, general and administrative expenses increased in 1995 to $3,332,000
from $1,652,000 in 1994. The increase in 1995 was due primarily to the
inclusion for the entire year of general and administrative costs of the
businesses acquired in 1994, further increases in sales and marketing costs
relating to Palosein/(R)/ and the new products from the 1994 acquisitions,
and increased legal fees and other expenses relating to the Company's
ongoing need to raise capital and more complex corporate structure.
13
<PAGE>
In 1996, sales, general and administrative expenses decreased by $491,000,
to $2,841,000. Most of the decrease was a decrease in the selling, general
and administrative expenses of the Company's French subsidiary. In the
third quarter of 1996 all of the Company's manufacturing operations were
consolidated in the United States and the French subsidiary became a
research facility. In connection with this restructuring, two
administrative positions have been eliminated and certain other costs which
were previously charged to administrative expenses are now being classified
as research and development costs. The administrative costs of the
Company's French subsidiary decreased $359,000 in 1996 as compared to 1995.
Expenses included charges of $3,675,000 and $3,329,000 to operations for
1994 and 1995, respectively, reflecting the write-off of purchased
in-process technology, as described in Note 3 to the consolidated financial
statements.
INTEREST INCOME AND EXPENSE
Interest income decreased and interest expense increased in 1995 as the
Company liquidated certificates of deposit and borrowed funds pursuant to
short-term and long-term interest bearing obligations to finance increased
research and development efforts.
NET LOSS
The Company incurred net losses in 1994, 1995 and 1996. The 1994 loss
includes a $3,675,000 ($.58 per share) charge to operations for the
write-off of purchased in-process technology related to the acquisitions of
OXIS S.A. and IBC. Similarly, the 1995 loss includes a $3,329,000 ($.31 per
share) charge to operations for the write-off of purchased in-process
technology related to the acquisition of Therox. Excluding these unusual
charges, the Company would have incurred a net loss of $1,892,000, or $.30
per share for 1994; a net loss of $5,563,000, or $.51 per share for 1995,
as compared to a net loss of $5,992,000, or $.47 per share for 1996.
Increased research and development expenditures and selling, general and
administrative expenses from the businesses acquired late in the third
quarter of 1994 and increased research and development expenditures
relating to the acquisition of Therox early in the third quarter of 1995
contributed to the increased losses in 1995 as compared to 1994. The
increased loss for 1996 as compared to 1995 (excluding the unusual charge)
is attributable primarily to the increased research and development costs
relating to the Company's glutathione peroxidase mimics program.
The Company expects to incur a substantial net loss for 1997. If
substantial additional capital is raised through further sales of
securities (See Financial Condition, Liquidity and Capital Resources), the
Company plans to continue to invest in research and development activities
and incur sales, general and administrative expenses in amounts greater
than its anticipated near-term product margins. If the Company is unable to
raise sufficient
14
<PAGE>
additional capital, it will have to cease, or severely curtail, its
operations. In this event, while expenses will be reduced, expense levels,
and the potential write down of various assets, would still be in amounts
greater than anticipated revenues.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 422,000 $ 727,000
Accounts receivable 861,000 823,000
Inventories 591,000 953,000
Prepaid and other 191,000 262,000
---------- ----------
Total current assets 2,065,000 2,765,000
Property and equipment, net 1,327,000 1,092,000
Assets under capital leases, net 309,000 1,198,000
Technology for developed products and
custom assays, net 3,782,000 4,498,000
Other assets 514,000 317,000
---------- ----------
Total assets $7,997,000 $9,870,000
========== ==========
See accompanying notes.
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable $ 1,221,000 $ 1,616,000
Accounts payable 1,386,000 1,182,000
Customer deposits 132,000 250,000
Accrued liabilities 655,000 903,000
Current portion of capital lease obligations 76,000 283,000
-------------- --------------
Total current liabilities 3,470,000 4,234,000
Capital lease obligations -- 47,000
8% convertible subordinated debentures -- 1,255,000
Other liabilities 2,000 30,000
Commitments and contingencies (Notes 1, 3 and 11)
Shareholders' equity:
Preferred stock - $.01 par value; 15,000,000 shares authorized:
Series B - 642,583 shares issued and outstanding at December 31, 1996
and 1995 (liquidation
preference of $1,500,000) 6,000 6,000
Series C - 1,647,157 shares issued and outstanding
at December 31, 1996 17,000 --
Series D - 1,650 shares issued and outstanding
at December 31, 1996 -- --
Series E - 2,200 shares issued and outstanding
at December 31, 1996 -- --
Common stock - $.50 par value; 40,000,000 shares
authorized; 13,790,736 shares issued and outstanding 6,895,000 6,062,000
Additional paid in capital 30,706,000 25,210,000
Accumulated deficit (33,023,000) (27,031,000)
Accumulated translation adjustments (76,000) 57,000
-------------- --------------
Total shareholders' equity 4,525,000 4,304,000
-------------- -------------
Total liabilities and shareholders' equity $ 7,997,000 $ 9,870,000
============== =============
</TABLE>
See accompanying notes.
17
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Sales $ 4,802,000 $ 4,982,000 $ 3,325,000
Royalties and license fees 65,000 154,000 145,000
------------ ------------ -------------
Total revenues 4,867,000 5,136,000 3,470,000
Costs and expenses:
Cost of sales 3,009,000 2,939,000 2,074,000
Research and development 4,908,000 4,299,000 1,670,000
Sales, general and administrative 2,841,000 3,332,000 1,652,000
Purchased in-process technology (Note 3) -- 3,329,000 3,675,000
------------ ------------ -------------
Total costs and expenses 10,758,000 13,899,000 9,071,000
------------ ------------ -------------
Operating loss (5,891,000) (8,763,000) (5,601,000)
Interest income 37,000 42,000 82,000
Interest expense (138,000) (171,000) (48,000)
------------ ------------ -----------
Net loss $ (5,992,000) $ (8,892,000) $(5,567,000)
============ ============ ===========
Net loss per share $ (.47) $ (0.82) $ (0.88)
============ ============ ===========
Weighted average number of shares
used in computation 12,821,544 10,854,149 6,350,097
============ ============ ===========
</TABLE>
See accompanying notes.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating ativities:
Net loss $(5,992,000) $(8,892,000) $(5,567,000)
Adjustments to reconcile net loss to cash provided
by (used for) operating activities:
Depreciation and amortization 1,381,000 1,369,000 551,000
Purchased in-process technology -- 3,329,000 3,675,000
Changes in assets and liabilities:
Accounts receivable (50,000) (70,000) 258,000
Inventories 355,000 (17,000) (186,000)
Other current assets (2,000) 209,000 (19,000)
Accounts payable 220,000 (565,000) 562,000
Customer deposits (118,000) (866,000) 1,116,000
Accrued liabilities (69,000) 251,000 (8,000)
----------- ----------- ------------
Net cash provided by (used for)
operating activities (4,275,000) (5,252,000) 382,000
Cash flows from investing activities:
Redemption of certificates of deposit -- 496,000 884,000
Purchase of equipment (58,000) (99,000) (40,000)
Acquisition and stock issuance costs (Note 3) -- -- (1,361,000)
Cash of businesses acquired (Note 3) -- 143,000 273,000
Additions to patent and deferred financing costs (350,000) -- --
Other (1,000) (136,000) 19,000
----------- ----------- ------------
Net cash provided by (used for)
investing activities (409,000) 404,000 (225,000)
Cash flows from financing activities:
Short-term borrowing 1,061,000 1,366,000 296,000
Proceeds from issuance of long-term debt -- 1,255,000 --
Costs in connection with issuance of long-term debt -- (152,000) --
Proceeds from issuance of stock, net of related cost 4,305,000 3,077,000 --
Repayment of short-term notes (690,000) (340,000) --
Repayment of capital lease obligations and
other liabilities (294,000) (573,000) (275,000)
----------- ----------- ------------
Net cash provided by financing activities 4,382,000 4,633,000 21,000
Effect of exchange rate changes on cash (3,000) 6,000 --
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (305,000) (209,000) 178,000
Cash and cash equivalents - beginning of year 727,000 936,000 758,000
----------- ----------- ------------
Cash and cash equivalents - end of year $ 422,000 $ 727,000 $ 936,000
=========== =========== ============
</TABLE>
See accompanying notes.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Supplemental schedule of noncash operating and
financing activities:
Inventory purchase with deferred payment terms -- $250,000 --
Common stock issued as incentive to purchase notes -- $156,000 --
Issuance of Series C Preferred Stock in exchange
for cancellation of notes $ 844,000 -- --
Conversion of 8% Convertible Subordinated Debentures
into Common Stock $1,312,000 -- --
Conversion of Series C and D Preferred Stock into
Common Stock $ 515,000 -- --
</TABLE>
See accompanying notes.
20
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ------------ paid-in
Shares Amount Shares Amount capital
<S> <C> <C> <C> <C> <C>
Balances,
January 1, 1994 4,982,670 $ 2,491,000 $12,863,000
Series A preferred and
common shares issued in
connection with 1994
business combinations
(Note 3) 40,000 $ -- 4,340,092 2,170,000 7,367,000
Accumulated
translation adjustments
Net loss
---------- ------- ---------- ---------- ----------
Balances,
December 31, 1994 40,000 -- 9,322,762 4,661,000 20,230,000
Shares issued in
connection with short-
term notes 93,300 47,000 109,000
Sale of common shares 1,227,625 614,000 1,089,000
Conversion of Series A
preferred shares to
common (40,000) -- 40,000 20,000 (20,000)
Shares issued in
connection with 1995
business combination
(Note 3) 1,440,736 720,000 2,633,000
Series B preferred shares
issued (Note 3) 642,583 6,000 1,169,000
Accumulated translation
adjustments
Net loss
---------- ------- ---------- ---------- ----------
Balances,
December 31, 1995 642,583 6,000 12,124,423 6,062,000 25,210,000
Sale of Series C preferred
shares for cash 1,125,590 11,000 1,225,000
Series C preferred shares
issued in exchange for
cancellation of notes 648,490 7,000 837,000
Sale of Series D
preferred shares 2,000 -- 1,939,000
<CAPTION>
Accumulated Total
Accumulated translation shareholders'
deficit adjustments equity
------- ----------- ------
<S> <C> <C> <C>
Balances,
January 1, 1994 $(12,572,000) $ 2,782,000
Series A preferred and
common shares issued in
connection with 1994
business combinations
(Note 3) 9,537,000
Accumulated translation
adjustments $(53,000) (53,000)
Net loss (5,567,000) (5,567,000)
----------- ------- ----------
Balances,
December 31, 1994 (18,139,000) (53,000) 6,699,000
Shares issued in
connection with short-
term notes 156,000
Sale of common shares 1,703,000
Conversion of Series A
preferred shares to
common --
Shares issued in
connection with 1995
business combination
(Note 3) 3,353,000
Series B preferred shares
issued (Note 3) 1,175,000
Accumulated translation
adjustments 110,000 110,000
Net loss (8,892,000) (8,892,000)
----------- ------- ----------
Balances,
December 31, 1995 (27,031,000) 57,000 4,304,000
Sale of Series C preferred
shares for cash 1,236,000
Series C preferred shares
issued in exchange for
cancellation of notes 844,000
Sale of Series D
preferred shares 1,939,000
</TABLE>
21
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Common shares issued
upon conversion of
debentures 1,050,217 525,000
Conversion of Series C
preferred shares to
common stock (126,923) (1,000) 136,924 69,000
Conversion of Series D
preferred shares to
common stock (350) -- 360,839 180,000
Sale of Series E preferred
and common shares for
cash 2,200 -- 55,000 27,000
Other issuances of common
shares 63,333 32,000
Accumulated translation
adjustments
Net Loss
--------- ------- ---------- ----------
Balances,
December 31, 1996 2,293,590 $23,000 13,790,736 $6,895,000
========= ======= ========== ==========
<CAPTION>
Additional Accumulated Total
paid-in Accumulated translation shareholders'
capital deficit adjustments equity
<S> <C> <C> <C> <C>
Common shares issued
upon conversion of
debentures 787,000 1,312,000
Conversion of Series C
preferred shares to
common stock (68,000) --
Conversion of Series D
preferred shares to
common stock (180,000) --
Sale of Series E preferred
and common shares for
cash 923,000 950,000
Other issuances of common
shares 33,000 65,000
Accumulated translation
adjustments (133,000) (133,000)
Net Loss (5,992,000) (5,992,000)
----------- ------------ --------- ----------
Balances,
December 31, 1996 $30,706,000 $(33,023,000) $ (76,000) $4,525,000
=========== ============ ========= ==========
</TABLE>
See accompanying notes.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
OXIS International, Inc. (the "Company") develops, manufactures and markets
selected therapeutic and diagnostic products. The Company's research and
development efforts are concentrated principally in the development of
products to diagnose, treat and prevent diseases associated with free
radicals and reactive oxygen species. The Company is headquartered in
Portland, Oregon and operates a research and development facility near
Paris, France.
The Company has historically licensed and sold pharmaceutical forms of
superoxide dismutase (SOD) for human and veterinary use. In 1994, with the
acquisitions of businesses as described in Note 3, the Company began
selling therapeutic drug monitoring assays and research assays to measure
markers of oxidative stress.
Therapeutic drug monitoring assays are manufactured by the Company in the
United States and are sold to hospital clinical laboratories and reference
laboratories by an in-house sales force and a network of distributors both
within and outside the United States. Assays to measure markers of
oxidative stress are manufactured by the Company in the United States (in
France prior to July, 1996) and are sold directly to researchers and to
distributors for resale to researchers, primarily in Europe, the United
States and Japan.
These financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred
losses in each of the last three years, and at December 31, 1996, the
Company's current liabilities exceeded its current assets by $1,405,000.
These factors, among others, may indicate that the Company may be unable to
continue as a going concern for a reasonable period of time. These
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that may be necessary should the Company
be unable to continue as a going concern. The Company's continuation as a
going concern is contingent upon its ability to obtain additional
financing, and to generate revenue and cash flow to meet its obligations on
a timely basis.
During 1996, the Company raised approximately $5,300,000 cash through the
sale of its Series C, Series D and Series E Preferred Stock and common
stock, and convertible term notes. The Company expects that additional
capital will be required during 1997 to continue operating in accordance
with its current plans. The Company has engaged an agent to assist on a
best-efforts basis to complete a private placement of its common stock. In
addition, the Company has engaged a French investment banker to act as its
underwriter for a planned public offering of its common stock on the newly
opened French stock market, Le Nouveau
23
<PAGE>
Marche, subject to obtaining appropriate authorization from the French
stock market regulatory authorities. If the Company is unable to raise
additional capital it intends to curtail its operations through the
reduction of personnel and facility costs and by reducing its research and
development efforts. If the Company were to be unable to sufficiently
curtail its costs in such a situation, it might be forced to seek
protection of the courts through reorganization, bankruptcy or insolvency
proceedings.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying balance sheets include the
accounts of the Company as well as its subsidiaries. The results of
operations of the Company's French subsidiary since its purchase by the
Company on September 7, 1994, are included in the accompanying statements
of operations and cash flows. The functional currency of the Company's
French subsidiary is the French franc. The French subsidiary's assets and
liabilities are translated at the exchange rate at the end of the year, and
its statement of operations is translated at the average exchange rates
during the period for which its revenues and expenses are included in the
consolidated statement of operations. Gains or losses resulting from
foreign currency translation are accumulated as a separate component of
shareholders' equity. All significant intercompany balances and
transactions are eliminated in consolidation.
CASH EQUIVALENTS consist of money market accounts with commercial banks.
INVENTORIES are stated at the lower of cost or market. Cost has been
determined by using the first-in, first-out and specific identification
methods. Inventories at December 31, 1996 and 1995, consisted of the
following:
1996 1995
Raw materials $148,000 $173,000
Work in process 200,000 354,000
Finished goods 243,000 426,000
-------- --------
Total $591,000 $953,000
======== ========
PROPERTY AND EQUIPMENT is stated at cost, or, in the case of property and
equipment acquired in transactions accounted for by the purchase method, at
the estimated fair market value at the date of the acquisition (which is
then considered to be the Company's cost). Depreciation of equipment is
computed using the straight-line method over estimated useful lives of
three to ten years. Leasehold improvements are amortized over the shorter
of five years or the remaining lease term. Assets acquired under capital
leases are being amortized over estimated useful lives of four to ten
years.
24
<PAGE>
Property and equipment at December 31, 1996 and 1995, consisted of the
following:
1996 1995
Furniture and office equipment $ 369,000 $ 346,000
Laboratory and manufacturing
equipment 2,495,000 707,000
Automobile 15,000 15,000
Leasehold improvements 766,000 806,000
----------- ----------
Property and equipment, at cost 3,645,000 1,874,000
Accumulated depreciation and
amortization (2,318,000) (782,000)
----------- -----------
Property and equipment, net $ 1,327,000 $1,092,000
=========== ==========
During 1996 certain equipment under capital lease was purchased, and the
cost and accumulated amortization of that equipment was reclassified to
property and equipment.
TECHNOLOGY - Technology for developed products and custom assays, which was
acquired in the 1994 business combinations described in Note 3, is being
amortized over estimated useful lives of seven to ten years. Accumulated
amortization of technology for developed products and custom assays was
$1,682,000 as of December 31, 1996 and $973,000 as of December 31, 1995.
The Company periodically reviews net cash flows from sales of products and
projections of net cash flows from sales of products on an undiscounted
basis to assess recovery of intangible assets.
STOCK OPTIONS - The Company applies the intrinsic value based method
described in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", in accounting for its stock incentive plan.
REVENUE RECOGNITION - The Company recognizes product sales upon shipment of
the product to the customer.
INCOME TAXES - Deferred income taxes, reflecting the net tax effects of
temporary differences between the carrying amount of assets and liabilities
recognized for financial reporting purposes and the amounts recognized for
income tax purposes, are based on tax laws currently enacted. A valuation
allowance is established when necessary to reduce deferred tax assets to
the amount expected to be realized.
NET LOSS PER SHARE - Net loss per share is computed based upon the average
number of common shares outstanding and, if dilutive, the incremental
shares issuable upon the assumed exercise of stock options or warrants and
the assumed conversion of convertible debentures and preferred stock.
25
<PAGE>
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of sales and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount reported in the
balance sheet for cash and cash equivalents, accounts receivable, notes
payable, customer deposits and accrued liabilities approximates fair value
due to the short-term nature of the accounts. The carrying amount reported
in the balance sheet for secured convertible term notes and 8% convertible
subordinated debentures approximates fair value because the terms of the
notes and debentures were determined and the notes and debentures were sold
shortly before the dates of the balance sheets in which they appear.
3. BUSINESS COMBINATIONS
On September 7, 1994, the Company acquired Bioxytech S.A., a French
company, and International BioClinical, Inc. ("IBC"), an Oregon
corporation. The name of Bioxytech S.A. was subsequently changed to OXIS
International S.A. ("OXIS S.A."). OXIS S.A. was acquired through an
exchange of shares that resulted in the Company owning in excess of 99% of
the outstanding stock of OXIS S.A., which thus became a subsidiary of the
Company. IBC was acquired through a merger with and into the Company, which
(1) terminated the separate existence of IBC by merging it into the
Company, and (2) resulted in the conversion of the outstanding stock of IBC
into stock of the Company. Two of the Company's directors were also
directors and major shareholders of IBC.
In exchange for the Bioxytech S.A. shares, the Company issued a total of
2,341,599 shares of the Company's common stock and 40,000 shares of the
Company's non-voting preferred stock (which have subsequently been
converted into 40,000 shares of common stock). In addition, the Bioxytech
S.A. shareholders may receive up to 107,670 shares of the Company's capital
stock if they meet certain participation levels in a contemplated private
placement of equity securities of the Company.
The merger of IBC with and into the Company resulted in the conversion of
IBC's common stock into 1,998,493 shares of the Company's common stock.
The acquisitions of OXIS S.A. and IBC have been accounted for as purchases
and, accordingly, the acquired assets and liabilities were recorded at
their estimated fair market values as of the date of acquisition. The
aggregate purchase price of $9,811,000 (4,380,092 shares issued times the
average per share closing price of the Company's common stock for the five
days ended September 8, 1994, discounted 30% for certain trading
restrictions and less costs of $274,000 directly attributable to issuance
of stock in connection with the acquisitions) plus direct costs for the
acquisitions of $881,000 have been allocated to the
26
<PAGE>
assets and liabilities acquired. The Company also issued options to
purchase 214,700 shares of the Company's common stock in connection with
the acquisitions. No value was assigned to these options because the
exercise price of the options was in excess of the market value of the
common stock.
The total cost of the acquisitions of Bioxytech and IBC has been allocated
to the assets acquired and liabilities assumed as follows:
<TABLE>
<CAPTION>
OXIS S.A. IBC Total
--------- --- -----
<S> <C> <C> <C>
Cash $ 150,000 $ 123,000 $ 273,000
Other assets 369,000 611,000 980,000
Property, equipment and capitalized
leases 2,434,000 294,000 2,728,000
Technology for developed products and
custom assay development capabilities 1,503,000 3,995,000 5,498,000
Technology for in-process products 3,368,000 307,000 3,675,000
Less liabilities assumed (2,011,000) (451,000) (2,462,000)
----------- ----------- -----------
Total acquisition cost $ 5,813,000 $ 4,879,000 $10,692,000
=========== =========== ===========
</TABLE>
The Company's consolidated results of operations include the operating
results of the acquired companies since the acquisitions.
Approximately $3,675,000 ($.58 per share) of the total purchase price
represented technology relating to research and development projects that
were in process by the acquired companies that had no alternative future
use other than the completion of these projects. In accordance with
generally accepted accounting principles, these costs have been charged to
operations immediately upon completion of the acquisitions.
The following table summarizes the unaudited pro forma combined results of
operations for the year ended December 31, 1994 as if the acquisitions had
occurred at the beginning of the year:
1994
Total revenues $ 5,809,000
Net loss $(4,742,000)
Net loss per share (based on 9,322,762
shares outstanding) $ (.51)
27
<PAGE>
The above table includes, on an unaudited pro forma basis, the Company's
financial information for the year ended December 31, 1994, combined with
the financial information of OXIS S.A. and IBC for the same twelve-month
period. The above table excludes the one-time $3,675,000 charge for
purchased in-process technology arising from the acquisitions.
The unaudited pro forma combined results of operations are presented for
illustrative purposes only and are not necessarily indicative of the
operating results that would have occurred had the acquisitions been
consummated at the beginning of the period presented, nor are they
necessarily indicative of future operating results.
On July 19, 1995, the Company consummated the acquisition of Therox
Pharmaceuticals, Inc. ("Therox") pursuant to a transaction wherein Therox
was merged with and into a wholly-owned subsidiary of the Company. Therox
was a Philadelphia-based start-up company focused on the development of
therapeutics to treat diseases associated with damage from free radicals.
The Company issued 1,440,736 shares of its common stock to Therox
stockholders in exchange for all of the Therox capital stock. In addition,
the acquisition agreement provides for payment of up to $2,000,000 by the
Company to the Therox stockholders based on the successful
commercialization of the Therox technologies.
The acquisition of Therox has been recorded as a purchase and, accordingly,
the acquired assets and liabilities were recorded at their estimated fair
values as of the date of acquisition. The aggregate purchase price of
$3,353,000 (1,440,736 shares issued times the average per share closing
price of the Company's common stock for the five days ended July 20, 1995,
discounted 30% for certain trading restrictions) has been allocated to the
assets and liabilities acquired.
The cost of the acquisition of Therox has been allocated to the assets
acquired and liabilities assumed as follows:
Cash $ 143,000
Equipment 16,000
Technology for in-process products 3,329,000
Other assets 23,000
Less liabilities assumed (158,000)
----------
Acquisition cost $3,353,000
==========
The Company's consolidated results of operations include the operating
results of the acquired company since the acquisition.
Approximately $3,329,000 of the purchase price represented technology
related to research and development projects that are in process and that
has no alternative future use other than the completion of these projects.
Accordingly, these costs have been charged to operations immediately upon
completion of the acquisition.
28
<PAGE>
The following table presents the unaudited pro forma combined results of
operations for the years ended December 31, 1995 and 1994 as if the
acquisition had occurred at the beginning of the periods presented:
1995 1994
---- ----
Total revenues $ 5,136,000 $ 3,470,000
Net loss $(5,990,000) $(6,088,000)
Net loss per share (based
on 12,124,423 shares outstanding) $ (.49) $ (.50)
The above table includes, on an unaudited pro forma basis, the Company's
financial information for the years ended December 31, 1995 and 1994,
combined with the financial information of Therox for the same periods. The
above table excludes the one-time $3,329,000 charge for purchased
in-process technology arising from the 1995 acquisition, but includes
non-recurring costs of $3,675,000 for purchased in-process technology from
the Company's September 1994 business acquisitions.
The unaudited pro forma combined results of operations are presented for
illustrative purposes only and are not necessarily indicative of the
operating results that would have occurred had the acquisition been
consummated at the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
Simultaneously with the Therox acquisition, a Series B Preferred Stock
Purchase Agreement was entered into between the Company and two venture
capital firms (S.R. One, Limited and Brantley Venture Partners II, L.P.)
which were major stockholders of Therox. Pursuant to this agreement, the
Company sold 642,583 shares of its Series B Preferred Stock for an
aggregate price of $1,500,000.
Costs of approximately $325,000 directly attributable to the issuance of
the Series B Preferred Stock and the common stock issued in the Therox
acquisition have been recorded as a reduction in the proceeds from the
issuance of the shares.
29
<PAGE>
4. NOTES PAYABLE
Notes payable at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Secured convertible term notes $1,000,000 $ --
8% notes payable to certain shareholders who are former
Bioxytech S.A. shareholders, due February 5, 1996, secured
by assets relating to certain of the Company's diagnostic
products -- 766,000
Note payable to Sanofi S.A., due May 4, 1996, interest at prime
plus 2% (10-1/2% as of December 31, 1995), secured by all of
the Company's assets -- 600,000
Liability, without interest, under inventory purchase agreement,
due May 1997 or earlier if 75% of the related inventory
is sold 200,000 250,000
Other 21,000 --
---------- ----------
$1,221,000 $1,616,000
========== ==========
</TABLE>
In October 1996, the Company sold $1,000,000 of secured convertible term
notes with warrants to two of the Company's current shareholders. The notes
bear interest at 10% per annum, are due in June 1997, and are initially
convertible into common stock at a price of $1.4125 per share. The warrants
issued entitle the holders to purchase up to 300,000 shares of common
stock, initially at an exercise price of $1.58 per share. The conversion
rate of the convertible term notes and the exercise price of the warrants
are subject to change under certain circumstances. The due date of the
notes can be extended at the option of the Company for 120 days upon
issuance of additional warrants to the holders. The convertible term notes
are secured by assets relating to the Company's clinical diagnostic
products.
As described in Note 7, in May 1996, the 8% notes payable were canceled in
exchange for issuance of Series C
Preferred Stock.
5. CAPITALIZED LEASES
The Company's French subsidiary leases certain equipment, furniture and
fixtures under capital leases. As of December 31, 1996, remaining minimum
lease payments on these capital leases were approximately $48,000, all due
in 1997.
30
<PAGE>
Leased assets, which consist principally of laboratory and office
equipment, are reported in the December 31, 1996, balance sheet at $622,000
less accumulated amortization of $313,000.
6. 8% CONVERTIBLE SUBORDINATED DEBENTURES
In November and December 1995, the Company completed a private placement
pursuant to which $1,255,000 of its 8% Convertible Subordinated Debentures
were issued. The debentures were unsecured and were subordinated to other
obligations of the Company up to an aggregate of $3,000,000.
The debentures were convertible into shares of the Company's common stock
at the option of the holders. Any time after six months following closing
of the private placement, the Company had the right to require conversion
of the debentures. In June 1996, $1,255,000 principal plus accrued interest
of $57,000 on the Company's 8% Convertible Subordinated Debentures were
converted into 1,050,217 shares of common stock.
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK - Terms of the preferred stock are to be fixed by the Board
of Directors at such time as the preferred stock is issued. The 40,000
shares of Series A Preferred Stock issued during 1994 were nonvoting and
were converted to common stock on a one share for one share basis during
1995. The 642,583 shares of Series B Preferred Stock are convertible into
common stock on a one-for-one basis and have the same voting rights as the
common stock. The Series B Preferred Stock has certain preferential rights
with respect to liquidation and dividends.
During the first six months of 1996, the Company issued 1,125,590 shares of
its Series C Preferred Stock for net cash proceeds of $1,236,000. In
addition, in May 1996, the Company issued 648,490 shares of its Series C
Preferred stock in exchange for the cancellation of $766,000 principal plus
accrued interest of $78,000 on 8% notes payable to former shareholders of
the Company's French subsidiary. The shares of Series C Preferred Stock are
convertible into shares of the Company's common stock at the option of the
holders at any time. The conversion ratio is based on the average closing
bid price of the common stock for the fifteen consecutive trading days
ending on the date immediately preceding the date notice of conversion is
given, but cannot be less than one nor more than 1.4444 common shares for
each Series C Preferred share. The conversion ratio may be adjusted under
certain circumstances, and the Company has the right to automatically
convert the Series C Preferred Stock into common stock under certain
circumstances. Each share of Series C Preferred Stock is entitled to the
number of votes equal to 1.30 divided by the average closing bid price of
the Company's common stock during the fifteen consecutive trading days
immediately prior to the date such shares of Series C Preferred Stock were
purchased.
31
<PAGE>
In May 1996, the Company issued 2,000 shares of its Series D Preferred
Stock and warrants to purchase 810,126 shares of common stock for net cash
proceeds of $1,939,000. The Series D Preferred Stock entitles the holder
thereof to convert its shares into a number of shares of common stock
determined by dividing the stated value of the Series D Preferred Stock
(i.e., $1,000 per share), plus a premium in the amount of 8% per annum of
the stated value from the date of issuance, by a conversion price equal to
the lesser of (i) $2.30 and (ii) 75% of the average of the closing bid
prices for shares of common stock for the five trading days immediately
prior to conversion, but limited to a maximum of 2,424,884 shares of common
stock. The holders of Series D Preferred Stock have no voting power, except
as specifically provided by Delaware General Corporation Law.
In December 1996, the Company issued 2,200 shares of its Series E Preferred
Stock and 55,000 shares of common stock for net cash proceeds of $950,000.
The Series E Preferred Stock entitles the holder thereof, after the earlier
of (i) April 9, 1997 or (ii) 30 days following the closing of a public
offering by the Company, to receive in exchange for its shares of Series E
Preferred Stock, a number of shares of common stock determined by dividing
the stated value of the Series E Preferred Stock (i.e., $500 per share)
("Series E Stated Value"), by a conversion price equal to the lesser of (i)
$2.00 and (ii) 75% of the average of the closing bid prices for shares of
common stock for the five consecutive trading days ending one trading day
prior to conversion, subject to adjustment upon the occurrence of certain
dilutive events. However, the maximum number of shares of common stock
issuable upon conversion of the Series E Preferred Stock plus the number of
shares of common stock issued in connection with the sale of the Series E
Preferred Stock is 2,733,799 shares (subject to adjustment upon the
occurrence of certain dilutive events).
Pursuant to the terms of the Series E Preferred Stock, each holder thereof
can only acquire shares of common stock upon conversion of the Series E
Preferred Stock to the extent that the number of shares of common stock
thereby issuable, together with a number of shares of common stock then
held by such holder and its affiliates (not including shares of common
stock underlying converted shares of Series E Preferred Stock) would not
exceed 4.9% of the then outstanding common stock.
The Series E Preferred Stock has no voting power except as provided under
the Delaware General Corporation Law.
STOCK WARRANTS - In prior years, the Company issued warrants to purchase
shares of common stock to certain officers and key employees (none of whom
any longer hold a position with the Company) and to former directors. These
warrants are exercisable at $2.875 per share and expire through 1999. At
December 31, 1996 and 1995, warrants to purchase 1,012,500 shares were
outstanding and exercisable. No warrants were exercised during 1994, 1995
or 1996.
In connection with the issuance of common stock, 8% Convertible
Subordinated Debentures, and Series B, C and E Preferred Stock, the Company
has issued to its placement agents
32
<PAGE>
warrants to purchase 614,573 shares of common stock at prices ranging from
$1.375 to $3.25 per share. The warrants all remained outstanding and were
exercisable at December 31, 1996.
A warrant to purchase 810,126 common shares at $3.09 per share was issued
to the purchaser of the Company's Series D Preferred Stock. The warrant was
immediately exercisable and remained outstanding as of December 31, 1996.
Warrants to purchase 300,000 common shares at $1.58 per share were issued
to the purchasers of the secured convertible term notes in October 1996.
The warrants were immediately exercisable and remained outstanding as of
December 31, 1996.
STOCK OPTIONS - The Company has a stock incentive plan under which
2,200,000 shares of the Company's common stock are reserved for issuance.
The plan permits granting stock options to acquire shares of the Company's
common stock, awarding stock bonuses of the Company's common stock, and
granting stock appreciation rights. Options granted pursuant to the Plan
have a maximum term of ten years; vesting is determined by the Company's
Compensation Committee. Options granted through 1996 have had vesting
requirements of up to three years. Options granted and outstanding under
the plan are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 382,900 $2.93 90,000 $3.44 -- --
Granted 1,090,000 $1.57 317,900 $2.73 90,000 $3.44
Exercised (3,333) $1.69 -- -- -- --
Forfeitures (49,067) $2.17 (25,000) $2.25 -- --
--------- ----- ------- ----- ------ -----
Outstanding at end
of year 1,420,500 $1.92 382,900 $2.93 90,000 $3.44
========= ======= ======
Exercisable at end
of year 619,331 $2.29 219,294 $3.18 75,000 $3.50
======= ======= ======
</TABLE>
The number of shares under option, weighted average exercise price and
weighted average remaining contractual life of all options outstanding as
of December 31, 1996, by range of exercise price was as follows:
33
<PAGE>
Weighted Weighted
Range of average average
exercise exercise remaining
price Shares price life
$1.31 - $1.69 1,050,000 $1.55 9.5 years
$2.25 - $2.28 125,500 $2.26 7.7 years
$3.00 - $3.50 245,000 $3.31 8.1 years
The number of shares under option and weighted average exercise price of
options exercisable as of December 31, 1996, by range of exercise price was
as follows:
Weighted
Range of average
exercise exercise
price Shares price
$1.31 - $1.69 293,999 $1.48
$2.25 - $2.28 93,666 $2.26
$3.00 - $3.50 231,666 $3.33
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", in accounting for its stock incentive plan.
Accordingly, since the exercise price of all options issued under the plan
has been less than or equal to the fair market value of the stock at the
date of issue of the options, no compensation cost has been recognized for
options granted under the plan. Had compensation cost for options granted
under the plan been determined based on the fair value at the grant dates
in a manner consistent with the method determined under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the net loss and net loss per share for 1996 and 1995 would
have been increased to the pro forma amounts indicated below:
1996 1995
Net loss:
As reported $(5,992,000) $(8,892,000)
Pro forma $(6,389,000) $(9,210,000)
Net loss per share:
As reported $ (.47) $ (.82)
Pro forma $ (.50) $ (.85)
For the purpose of computing the pro forma expense, the fair value of each
option is estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions used for grants in both 1996
and 1995: a dividend yield of zero percent;
34
<PAGE>
expected volatility of 75%; risk-free interest rate of 6%; and expected
lives of three years. The weighted average fair value as of the option date
was computed to be $.83 per share for options issued during 1996 and $1.53
per share for options issued during 1995.
8. INCOME TAXES
INCOME TAX PROVISION - Income tax provisions were not necessary in 1996,
1995 and 1994 due to net losses.
DEFERRED TAXES - Deferred taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) operating losses and tax credit carryforwards.
The tax effects of significant items comprising the Company's deferred
taxes as of December 31 were as follows:
<TABLE>
<CAPTION>
United States taxes: 1996 1995
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforward
and capitalized research and development
expenses $5,194,000 $4,829,000
Federal R&D tax credit carryforward 522,000 495,000
State net operating loss carryforward and capitalized
research and development expenses 211,000 125,000
Deferred tax liabilities - book basis in excess
of noncurrent assets acquired in the
acquisition of IBC (1,102,000) (1,338,000)
----------- ----------
Net deferred tax assets 4,825,000 4,111,000
Valuation allowance (4,825,000) (4,111,000)
----------- ----------
Net deferred taxes $ -- $ --
=========== ==========
French taxes: 1996 1995
Deferred tax assets:
Net operating loss carryforward $5,426,000 $5,721,000
Impact of temporary differences (211,000) (225,000)
------------ -----------
Total 5,215,000 5,496,000
Valuation allowance (5,215,000) (5,496,000)
------------ ----------
Net deferred taxes $ -- $ --
============ ===========
</TABLE>
Temporary differences for French taxes result primarily from leases treated
as operating leases for French tax reporting and as capital leases in the
consolidated financial statements.
35
<PAGE>
The tax benefits ($5,136,000) of the net operating losses of $15,410,000
which existed at the date of acquisition (September 7, 1994) of the French
subsidiary will be recorded as a reduction of the net unamortized balance
of property, equipment, capitalized lease assets and intangible assets of
$2,421,000 when and if realized, and the remaining benefit will be recorded
as a reduction of income tax expense.
Statement of Financial Accounting Standards No. 109 requires that the tax
benefit of net operating losses, temporary differences and credit
carryforwards be recorded as an asset to the extent that management
assesses that realization is "more likely than not." Realization of the
future tax benefits is dependent on the Company's ability to generate
sufficient taxable income within the carryforward period. Because of the
Company's recent history of operating losses, management has provided a
valuation allowance for its net deferred tax assets.
TAX CARRYFORWARDS - At December 31, 1996, the Company had net operating
loss carryforwards of approximately $3,995,000 to reduce United States
federal taxable income in future years, and research and development tax
credit carryforwards of $522,000 to reduce United States federal taxes in
future years. In addition, the Company's French subsidiary had operating
loss carryforwards of $14,801,000 (76,812,000 French francs) to reduce
French taxable income in future years. These carryforwards expire as
follows:
United States R&D tax French
net operating credit operating loss
Year of expiration loss carryforward carryforward carryforward
1997 $2,670,000 $ 1,200,000
1998 208,000 1,240,000
1999 111,000 220,000
2000 -- 6,000
2001 23,000 $123,000 --
2002-2011 983,000 399,000 --
No expiration -- -- 12,135,000
---------- -------- -----------
$3,995,000 $522,000 $14,801,000
========== ======== ===========
Utilization of the United States tax carryforwards is subject to certain
restrictions in the event of a significant change (as defined in Internal
Revenue Service guidelines) in ownership of the Company.
36
<PAGE>
9. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
One domestic customer and one foreign licensee have each accounted for
significant portions of the Company's revenues during the past three years.
The percentages of total revenues derived from sales to, and royalties
from, these major customers are as follows:
1996 1995 1994
Domestic customer -- 18% 35%
Spanish licensee 39% 16% 18%
The Company's domestic customer to whom sales of bovine superoxide
dismutase ("bSOD") accounted for 18% and 35% of the Company's revenues in
1995 and 1994, respectively, announced in the fourth quarter of 1995 that
the clinical trial in which it was using bSOD purchased from the Company
failed to show the desired results, and sales of bSOD to this customer have
ceased.
The Company limits its foreign exchange risk by buying and selling bulk
bSOD in a single currency, the Dutch guilder. The Company maintains a bank
account in The Netherlands for receipt and disbursement of Dutch guilders
and had the equivalent of $1,000 and $81,000 in that account at December
31, 1996 and 1995, respectively. Foreign currency transaction gains and
losses were not material.
10. GEOGRAPHIC AREA INFORMATION
The Company operates in a single industry segment: the development,
manufacture and marketing of therapeutic and diagnostic products. The
Company's foreign operations consist of research and development and
manufacturing facilities and certain marketing activities conducted by the
Company's subsidiary in France. Sales and costs associated with bSOD
manufactured in the Netherlands are considered to be United States
operations, since the contract to manufacture bSOD and all related sales
activities are administered in the United States. Similarly, royalties from
foreign customers that relate to bSOD-based products are considered to be
export sales from the United States, since the product was developed in the
United States.
Sales, operating income and identifiable assets, classified by the major
geographic areas in which the Company operates, are as follows:
37
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States $ 1,303,000 $ 2,686,000 $ 2,053,000
Export sales from the U.S. 3,185,000 1,878,000 1,257,000
France 379,000 572,000 160,000
----------- ----------- -----------
Total $ 4,867,000 $ 5,136,000 $ 3,470,000
=========== =========== ===========
Operating loss:
United States $(2,874,000) $(5,653,000) $(1,410,000)
France (3,017,000) (3,110,000) (4,191,000)
----------- ----------- -----------
Total $(5,891,000) $(8,763,000) $(5,601,000)
=========== =========== ===========
Identifiable assets:
United States $ 5,110,000 $ 7,824,000 $ 9,587,000
France 2,942,000 3,866,000 2,570,000
Eliminations (55,000) (1,820,000) (963,000)
----------- ---------- -----------
Total $ 7,997,000 $ 9,870,000 $11,194,000
=========== =========== ===========
</TABLE>
11. LEASE COMMITMENTS
The Company leases its facilities in Oregon under an operating lease that
expires in 1997, and leases its facilities in France under an operating
lease that expires in 1998. Future lease payments are scheduled as follows:
1997 $313,000
1998 217,000
Rental expense included in the accompanying statements of operations was
$519,000 in 1996, $492,000 in 1995 and $193,000 in 1994.
12. 401(K) SAVINGS PLAN
The Company has a 401(k) saving plan (the "Plan") which covers all United
States employees who meet certain minimum age and service requirements. The
Company's matching contribution to the Plan for each year is 100% of the
first $1,000 of each employee's salary deferral and 33-1/3% of the next
$3,000 of salary deferral. The Company's contributions have not been
material.
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
OXIS International, Inc.:
We have audited the accompanying consolidated balance sheets of OXIS
International, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the management
of OXIS International, Inc. 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 consolidated
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, such consolidated financial statements present fairly, in
all material respects, the financial position of OXIS International, Inc.
and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements for the year ended December 31, 1996,
have been prepared assuming that the Company will continue as a going
concern. The Company is engaged in developing, manufacturing and marketing
selected therapeutic and diagnostic products. As discussed in Note 1 to the
financial statements, the Company has incurred losses in each of the last
three years, and at December 31, 1996, the Company's
current liabilities exceeded its current assets by $1,405,000, raising
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
March 7, 1997
Portland, Oregon
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated herein by reference
from the material contained under the caption "Proposal No. 1-Election of
Directors" in the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference from the material contained under the caption "Compensation of
Executive Officers" in the Company's definitive proxy statement to be filed
with the Commission pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by
reference from the material contained under the caption "Proposal No.
1-Election of Directors" in the Company's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated herein by
reference from the material contained under the caption "Proposal No.
1-Election of Directors" in the Company's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
See pages 16 to 39.
2. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not applicable or the
required information is included in the financial statements and notes
thereto.
3. EXHIBITS
See Exhibit Index - page 43.
(b) Reports on Form 8-K.
Two reports on Form 8-K were filed by the
Company during the fourth quarter of 1996. The first, filed on
November 4, 1996, reported the issuance of $1,000,000 in secured
convertible term notes and the engagement of an investment banker
to act as underwriter for a public offering of common stock on a
French stock market. The second, filed December 30, 1996, reported
a private placement of Series E Preferred Stock and common stock
for an aggregate of $1,100,000.
(c) Exhibits specified by item 601 of Regulation S-K.
See Exhibit Index - page 43.
(d) Financial statement schedules required by Regulation S-K are omitted because
they are not applicable or the required information is included in the financial
statements and notes hereto.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 25, 1997
OXIS INTERNATIONAL, INC.
Registrant
By: /s/ Anna D. Barker
---------------------------------------
Anna D. Barker
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon S. Pitcher
---------------------------------------
Jon S. Pitcher
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors on behalf of the Registrant.
/s/ Anna D. Barker March 25, 1997 /s/ Timothy G. Biro March 25, 1997
- --------------------------------------- --------------------------------------
Anna D. Barker Date Timothy G. Biro Date
/s/ Stuart S. Lang March 25, 1997 /s/ Gerald D. Mayer March 25, 1997
- --------------------------------------- --------------------------------------
Stuart S. Lang. Date Gerald D. Mayer Date
/s/ James D. McCamant March 25, 1997 /s/ David Needham March 25, 1997
- --------------------------------------- --------------------------------------
James D. McCamant Date David Needham Date
/s/ Ray R. Rogers March 25, 1997 /s/ A.R. Sitaraman March 25, 1997
- --------------------------------------- --------------------------------------
Ray R. Rogers Date A.R. Sitaraman Date
42
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
<S> <C> <C> <C>
2 (a) Agreement and Plan of Reorganization and Merger between
OXIS International, Inc., OXIS Acquisition Corporation
and Therox Pharmaceuticals, Inc. Dated July 18, 1995 (1)
2 (b) Amendment No. 1 to Agreement and Plan for Reorganization
and Merger between OXIS International, Inc., OXIS Acquisition
Corporation and Therox Pharmaceuticals, Inc. (2)
3 (a) Second Restated Certificate of Incorporation as filed
September 10, 1996 45
3 (b) Certificate of Designations, Preferences, and Rights of Series E
Preferred Stock of the Company (3)
3 (c) Bylaws of the Company as amended on June 15, 1994 (4)
4 (a) Securities Purchase Agreement, Registration Rights Agreement
and Security Agreement (5)
10 (a) 1987 Stock Purchase Warrants (6)
10 (b) 1988 Stock Purchase Warrants (7)
10 (c) Lease agreement between Bioxytech S.A. and Sofibus (8)
10 (d) OXIS International, Inc. Series B Preferred Stock Purchase Agreement
dated July 18, 1995 (9)
10 (e) Factoring (security) Agreement dated September 6, 1996 between
Silicon Valley Financial Services and OXIS International, Inc. 77
21 (a) Subsidiaries of OXIS International, Inc. 91
23 (a) Independent Auditors' Consent 92
27 (a) Financial data schedule 93
</TABLE>
43
<PAGE>
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 19, 1995.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
1995 - Exhibit 2 (b).
(3) Incorporated by reference to the Company's Form 8-K Current Report dated
December 30, 1996.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994.
(5) Incorporated by reference to the Company's Form 8-K Current Report dated
November 4, 1996.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
1992 - Exhibit 10(b).
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
1992 - Exhibit 10(c).
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
1994.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
44
<PAGE>
EXHIBIT 3 (A)
SECOND RESTATED CERTIFICATE OF INCORPORATION OF
OXIS INTERNATIONAL, INC.
UNDER SECTION 242 AND SECTION 245 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
We, RAY R. ROGERS, Chairman of the Board, and JON S. PITCHER,
Secretary, of OXIS INTERNATIONAL, INC., a Delaware corporation organized and
existing under the General Corporation Law of the State of Delaware, HEREBY
CERTIFY that:
1. The name of the corporation is OXIS INTERNATIONAL, INC.
2. The original Certificate of Incorporation was filed under the name of
Diagnostic Data, Inc. on October 15, 1973.
3. On March 11, 1985, the corporation changed the name of the corporation
to DDI Pharmaceuticals, Inc., and another name change to OXIS
INTERNATIONAL, INC. was effected on September 7, 1994.
4. This Second Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the corporation's
original Certificate of Incorporation.
5. This Second Restated Certificate of Incorporation has been duly adopted
in accordance with Section 242 and Section 245 of the General
Corporation Law of the State of Delaware and the text of such Second
Restated Certificate of Incorporation is as follows:
45
<PAGE>
SECOND RESTATED CERTIFICATE OF INCORPORATION
OF
OXIS INTERNATIONAL, INC.
FIRST: The name of the corporation (hereinafter called "Company" or
"Corporation") is OXIS INTERNATIONAL, INC.
SECOND: The registered office of the Company in the State of Delaware
is located at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801, in the County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Company is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH:
I. COMMON STOCK
---------------
The Company is authorized to issue a total of Forty Million
(40,000,000) shares of Common Stock, each of which shares of Common Stock has a
par value of Fifty Cents ($0.50). Dividends may be paid on the Common Stock as
and when declared by the Board of Directors, out of any funds of the Company
legally available for the payment of such dividends, and each share of Common
Stock will be entitled to one vote on all matters on which such stock is
entitled to vote. All duly authorized One Dollar ($1.00) par value shares
outstanding shall be deemed shares having a par value of Fifty Cents ($0.50).
II. PREFERRED STOCK
-------------------
The Company is authorized to issue a total of Fifteen Million
(15,000,000) shares of Preferred Stock ($0.01 par value), each of which shares
of Preferred Stock may be issued in one or more series of stock within the class
of Preferred Stock. Each series may have such voting powers, full or limited, or
no voting powers, and such designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue of such stock adopted by the Board of
Directors pursuant to authority hereby expressly vested in it by the provisions
of this Second Restated Certificate of Incorporation.
A. SERIES A PREFERRED STOCK. A series of the class of Preferred
-------------------------
Stock of the Company shall be hereby created, and the shares of such series
shall be designated as "Series A Preferred Stock." The number of shares of the
class of Preferred Stock shall be 100,000, and the preferences and rights of the
shares of such series shall be the same as the rights of the shares of Common
Stock of the Company except that the shares of such series shall have no voting
power and that in the event of any liquidation, dissolution, or winding up of
the Company, the holders of the Series A Preferred Stock shall be entitled to
receive prior to and in preference to any
46
<PAGE>
distribution of any assets or surplus funds of the Company to the holders of
Common Stock by reason of their ownership thereof, the amount of $.01 per share.
If at any time and from time to time any holder of shares of Series A Preferred
Stock owns less than 4.99% of the then outstanding shares of the Common Stock of
the Company, a portion of such holder's shares of Series A Preferred Stock shall
automatically convert into shares of the Company's Common Stock (on the basis of
one share of Series A Preferred Stock converting into one fully paid and
nonassessable share of Common Stock of the Company) until such holder owns 4.99%
of the then outstanding shares of the Company's Common Stock.
B. SERIES B PREFERRED STOCK. A series of the class of Preferred
------------------------------
Stock of the Company shall be hereby created, and the shares of such series
shall be designated as "Series B Preferred Stock", par value $0.01 per share.
The number of shares constituting such series shall be 642,583 and the rights,
preferences, privileges and restrictions granted to or imposed upon the Series B
Preferred Stock are as follows:
1. Series B Dividends.
-------------------
(a) The holders of outstanding Series B Preferred Stock shall
be entitled to receive in any fiscal year, when, as and if declared by the Board
of Directors, out of any assets at the time legally available therefor,
dividends at the rate of $0.115 per share of Series B Preferred Stock per annum
before any dividend or distribution (other than pursuant to Section B.4) is paid
on Common Stock. Such dividend or distribution may be payable annually or
otherwise as the Board of Directors may from time to time determine. Dividends
or distributions (other than dividends payable solely in shares of Common Stock
or distributions pursuant to Section B.4) of up to $0.115 per share may be
declared and paid upon shares of Common Stock in any fiscal year of the
Corporation only if dividends shall have been paid on and declared and set apart
upon all shares of Series B Preferred Stock at such annual rate in such year.
After dividends or distributions of $0.115 per share have been declared and paid
on the Common Stock in any fiscal year, all further dividends and distributions
during such fiscal year shall be distributed among the holders of the Common
Stock and the Series B 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 B Preferred Stock then
held by them. The right to such dividends on shares of Series B Preferred Stock
shall not be cumulative and no right shall accrue to holders of shares of Series
B Preferred Stock by reason of the fact that dividends on said shares are not
declared in any prior year, nor shall any undeclared or unpaid dividend bear or
accrue interest.
2. Series B Voting Rights.
-----------------------
(a) Each holder of shares of Series B Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such holder's shares of Series B Preferred Stock could be converted
on the record date for the vote or consent of stockholders and, except as
otherwise provided herein, shall have voting rights and powers equal to the
voting rights and powers of the Common Stock. The holder of each share of Series
B Preferred Stock shall be entitled to notice of any stockholders' meeting in
accordance with the
47
<PAGE>
Bylaws of the Corporation and shall vote with holders of the Common Stock upon
the election of directors and upon any other matter submitted to a vote of
stockholders, except those matters required by law to be submitted to a class or
series vote and except as otherwise provided in Section B.2(b)hereof. Fractional
votes by the holders of Series B Preferred Stock shall not, however, be
permitted and any fractional voting rights resulting from the above formula
(after aggregating all shares into which shares of Series B Preferred Stock held
by each holder could be converted) shall be rounded to the nearest whole number.
(b) The number of directors shall be set as provided in the
Bylaws of the Corporation. So long as any shares of Series B Preferred Stock
remain outstanding, the holders of the Series B Preferred Stock outstanding
shall vote together with the Common Stock as a single class with respect to the
election of directors.
3. Series B Conversion. The holders of Series B Preferred Stock
-------------------
shall have conversion rights as follows (the "Conversion Rights");
(a) Right to Convert. Each share of Series B Preferred Stock
----------------
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share at the office of the Corporation or any transfer
agent for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $2.33433 by the Series B Conversion
Price, determined as hereinafter provided, in effect on the date the certificate
is surrendered for conversion. The price at which shares of Common Stock shall
be deliverable upon conversion of shares of the Series B Preferred Stock (the
"Series B Conversion Price") shall initially be $2.33433 per share of Common
Stock. Such initial Series B Conversion Price shall be adjusted as hereinafter
provided.
(b) Automatic Conversion. Each share of Series B Preferred
--------------------
Stock shall automatically be converted into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing $2.33433 by
the Series B Conversion Price, in effect on the date of the receipt by the
Corporation of the written consent to, or request for, such conversion from
holders of at least three-fourths (3/4) of the Series B Preferred Stock then
outstanding.
(c) Mechanics of Conversion.
-----------------------
(i) Before any holder of Series B 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
Corporation or of any transfer agent for such stock, and shall give written
notice to the Corporation at such office that he elects to convert the same and
shall state therein the name or names in which he wishes the certificate or
certificates for shares of Common Stock to be issued. The Corporation shall, as
soon as practicable thereafter, issue and deliver at such office to such holder
of Series B Preferred Stock, a certificate or certificates for the number of
shares of Common Stock to which he 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 surrender of the shares of Series B Preferred Stock to
be converted, and the person or persons entitled to receive the shares of Common
Stock issuable
48
<PAGE>
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
(ii) If a voluntary conversion is made in connection
with an underwritten offering of securities pursuant to a registration statement
filed pursuant to the Securities Act of 1933, as amended (the "Securities Act"),
the conversion may, at the option of any holder tendering shares of Series B
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive the Common Stock upon conversion of the Series
B Preferred Stock shall not be deemed to have converted such Series B Preferred
Stock until immediately prior to the closing of such sale of securities.
(d) Adjustments for Stock Dividends, Subdivisions, or Split-
---------------------------------------------------------
ups of Common Stock. If the number of shares of Common Stock outstanding at any
- --------------------
time after the filing of the original Certificate of Designation with respect to
the Series B Preferred Stock (July 19, 1995) is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, effective at the close of business upon the record date
fixed for the determination of holders of Common Stock entitled to receive such
stock dividend, subdivision or split-up, the Conversion Price for the Series B
Preferred Stock shall be appropriately decreased so that the number of shares of
Common Stock issuable on conversion of each share of Series B Preferred Stock
shall be increased in proportion to such increase of outstanding shares of
Common Stock.
(e) Adjustments for Combinations of Common Stock. If the
--------------------------------------------
number of shares of Common Stock outstanding at any time after the filing of the
original Certificate of Designation with respect to the Series B Preferred Stock
(July 19, 1995) is decreased by a combination of the outstanding shares of
Common Stock, then, effective at the close of business upon the record date of
such combination, the Conversion Price for the Series B Preferred Stock shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of Series B Preferred Stock shall be decreased in
proportion to such decrease in outstanding shares of Common Stock.
(f) Adjustments for Other Distributions. In the event the
-----------------------------------
Corporation at any time or from time to time makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock, then and in each such event provision shall be made so that the
holders of Series B Preferred Stock shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable thereupon, the
amount of securities of the Corporation which they would have received had their
Series B Preferred Stock been converted into Common Stock on the date of such
event and had they thereafter, during the period from the date of such event to
and including the date of conversion, retained such securities receivable by
them as aforesaid during such period, subject to all other adjustments called
for during such period under this Section B.3(f) with respect to the rights of
the holders of the Series B Preferred Stock.
49
<PAGE>
(g) Adjustments for Reorganizations, Reclassifications, etc.
--------------------------------------------------------
If the Common Stock issuable upon conversion of the Series B Preferred Stock
shall be changed into the same or a different number of shares of any other
class or classes of stock or other securities or property, whether by
reclassification, a merger or consolidation of this Corporation with or into any
other corporation or corporations, or a sale of all or substantially all of the
assets of this Corporation, or otherwise, the Conversion Price then in effect
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Series B 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 or securities or other property
equivalent to the number of shares of Common Stock that would have been subject
to receipt by the holders upon conversion of the Series B Preferred Stock
immediately before such event; and, in any such case, appropriate adjustment (as
determined by the Board) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
holders of the Series B Preferred Stock, to the end that the provisions set
forth herein (including provisions with respect to changes in and other
adjustments of the Conversion Price) shall thereafter be applicable, as nearly
as may be reasonable, in relation to any shares of stock or other property
thereafter deliverable upon the conversion of the Series B Preferred Stock.
(h) Certificates as to Adjustments. Upon the occurrence of
------------------------------
each adjustment or readjustment of the Series B Conversion Price pursuant to
this Section B.3, the 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 B Preferred Stock a certificate executed by the
Corporation's President or Chief Financial Officer setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series B Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustments and
readjustments, (B) the Conversion Price for such Series B Preferred Stock 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 B Preferred Stock.
(i) Notices of Record Date. In the event that the Corporation
----------------------
shall propose at any time: (a) to declare any special dividend or distribution
upon its Common Stock, whether in cash, property, stock or other securities,
whether or not out of earnings or earned surplus; (b) to offer for subscription
pro rata to the holders of any class or series of its stock any additional
shares of stock of any class or series or other rights; (c) to effect any
reclassification or recapitalization of its Common Stock outstanding involving a
change in the Common Stock; or (d) to merge or consolidate with or into any
other corporation (other than a mere reincorporation transaction), or sell,
lease or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; then, in connection with each such event, the Corporation
shall send to the holders of Series B Preferred Stock:
(i) at least twenty (20) days' prior written notice of
the date on which a record shall be taken for such dividend, distribution or
subscription rights (and
50
<PAGE>
specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; and
(ii) In the case of the matters referred to in (c) and (d)
above, at least twenty (20) days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event).
(j) 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 shares of the Series B 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 B 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 then outstanding shares of the
Series B 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 purpose, including, without limitation, engaging in its best efforts to
obtain the requisite stockholder approval of any necessary amendment to the
Certificate of Incorporation.
(k) Fractional Shares. No fractional share shall be issued
------------------
upon the conversion of any share or shares of Series B Preferred Stock. All
shares of Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series B Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of any fractional share. If, after the aforementioned aggregation,
the conversion would result in the issuance of a fraction of a share of Common
Stock, the Corporation shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion (as determined in good
faith by the board of directors of the Corporation).
(l) Notices. Any notice required by the provisions of this
--------
Section B.3 to be given to the holders of shares of Series B Preferred Stock
shall be deemed given on the date of delivery if delivered by hand delivery or
by facsimile, or, if deposited in the United States mail (registered or
certified), postage prepaid, and addressed to each holder of record at his or
its address appearing on the books of the Corporation.
4. Series B Liquidation Preferences.
---------------------------------
(a) In the event of any liquidation, dissolution or winding up
of the Corporation whether voluntary or involuntary, the holders of the Series B
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 Common Stock or any other shares of this corporation other than
Series B Preferred Stock by reason of their ownership thereof, the amount of
$2.33433 per share (as adjusted for any stock dividends, combinations or splits
with respect to such shares), plus all declared or accrued but unpaid, dividends
on such share, for each share of Series B Preferred Stock then held by them. If
upon the occurrence of such event, the assets and funds
51
<PAGE>
thus distributed among the holders of the Series B 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 B Preferred Stock in proportion to the preferential amount each such
holder is otherwise entitled to receive.
(b) After the payment to the holders of the Series B Preferred
Stock of the amounts set forth in Section B.4(a) above, the holders of the
Common 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 other capital stock of the Company by reason of their ownership
thereof, an aggregate distribution equal to the total consideration received by
the Corporation for the sale and issuance of all issued and outstanding Series B
Preferred Stock, with each holder of Common Stock participating on a pro rata
basis based on the number of shares of Common Stock they own. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Common Stock shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amount, then all assets and funds of
the Corporation legally available for distribution after the payment to the
holders of the Series B Preferred Stock of the amounts set forth in Section
B.4(a) shall be distributed ratably among the holders of the Common Stock in
proportion to the preferential amount each such holder is otherwise entitled to
receive.
(c) After payments to (i) the holders of the Series B
Preferred Stock of the amounts set forth in Section B.4(a) above, and (ii) the
holders of the Common Stock of the amounts set forth in Section B.4(b) 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 B 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 B Preferred Stock then held
by them.
5. Series B Protective Provisions. In addition to any other
-------------------------------
rights provided by law, so long as any share of Series B Preferred Stock shall
be outstanding, the Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of the majority of the
outstanding shares of Series B Preferred Stock voting separately as a separate
class, take any action which alters or changes any of the rights, privileges or
preferences of the Series B Preferred Stock, including without limitation
increasing or decreasing the aggregate number of authorized shares of such
series other than an increase incident to a stock split.
C. SERIES C PREFERRED STOCK. A series of the class of Preferred
-------------------------
Stock of the Company shall be hereby created, and the shares of such series
shall be designated as "Series C Preferred Stock", par value $0.01 per share.
The number of shares constituting such series shall be 3,076,923 and the rights,
preferences, privileges and restrictions granted to or imposed upon the Series C
Preferred Stock are as follows:
1. Series C Dividends.
-------------------
52
<PAGE>
(a) The holders of outstanding Series C Preferred Stock shall
be entitled to receive in any fiscal year, when, as and if declared by the Board
of Directors, after the payment of dividends on Series B Preferred Stock, out of
any assets at the time legally available therefor, dividends in amounts
determined by the Corporation's Board of Directors before any other dividend or
distribution (other than pursuant to Section C.4, or distributions with respect
to the Series B Preferred Stock) is paid on Common Stock. Such dividend or
distribution may be payable annually or otherwise as the Board of Directors may
from time to time determine. The right to such dividends on shares of Series C
Preferred Stock shall not be cumulative and no right shall accrue to holders of
shares of Series C Preferred Stock by reason of the fact that dividends on said
shares are not declared in any prior year, nor shall any undeclared or unpaid
dividend bear or accrue interest.
2. Series C Voting Rights. Each holder of shares of Series C
-----------------------
Preferred Stock shall be entitled to the number of votes equal to the number of
shares of Common Stock into which such holder's shares of Series C Preferred
Stock could be converted on the record date for the vote or consent of
stockholders multiplied by the Voting Power Fraction and, except as otherwise
provided herein, shall have voting rights and powers equal to the voting rights
and powers of the Common Stock. The Voting Power Fraction shall equal $1.30
divided by the average closing bid price of the Company's Common Stock during
the 15 consecutive trading days immediately prior to the date the Series C
Preferred was purchased (the "Average Closing Price"); but in no event shall be
greater than one (1). The holder of each share of Series C Preferred Stock shall
be entitled to notice of any stockholders' meeting in accordance with the Bylaws
of the Corporation and shall vote with holders of the Common Stock upon the
election of directors and upon any other matter submitted to a vote of
stockholders, except those matters required by law to be submitted to a class or
series vote. Fractional votes by the holders of Series C Preferred Stock shall
not, however, be permitted and any fractional voting rights resulting from the
above formula (after aggregating all shares into which shares of Series C
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number.
3. Series C Conversion. The holders of Series C Preferred Stock
--------------------
shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series C Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share at the office of the Corporation or any transfer
agent for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $1.30 by the Series C Conversion
Price, determined as hereinafter provided, in effect on the date the certificate
is surrendered for conversion. The Series C Conversion Price shall initially be
$1.30. Such initial Series C Conversion Price shall be adjusted as hereinafter
provided.
(b) Mechanics of Conversion.
------------------------
(i) 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
Corporation or of any transfer agent for
53
<PAGE>
such stock, and shall give written notice to the Corporation at such office that
he elects to convert the same and shall state therein the name or names in which
he wishes the certificate or certificates for shares of Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series C Preferred Stock, a certificate
or certificates for the number of shares of Common Stock to which he 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 surrender of the
shares of Series C Preferred Stock to be converted, 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 on such date.
(ii) If a voluntary conversion is made in connection with
an underwritten offering of securities pursuant to a registration statement
filed pursuant to the Securities Act of 1933, as amended (the "Securities Act"),
the conversion may, at the option of any holder tendering shares of Series C
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive the Common Stock upon conversion of the Series
C Preferred Stock shall not be deemed to have converted such Series C Preferred
Stock until immediately prior to the closing of such sale of securities.
(c) Adjustments for Stock Dividends, Subdivisions, or Split-
--------------------------------------------------------
ups of Common Stock. If the number of shares of Common Stock outstanding at any
- --------------------
time after the filing of the original Certificate of Designation with respect to
the Series C Preferred Stock (February 8, 1996) is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, effective at the close of business upon the record date
fixed for the determination of holders of Common Stock entitled to receive such
stock dividend, subdivision or split-up, the Series C Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of Series C Preferred Stock shall be increased in
proportion to such increase of outstanding shares of Common Stock.
(d) Adjustments for Combinations of Common Stock. If the
---------------------------------------------
number of shares of Common Stock outstanding at any time after the filing of the
original Certificate of Designation with respect to the Series C Preferred Stock
(February 8, 1996) is decreased by a combination of the outstanding shares of
Common Stock, then, effective at the close of business upon the record date of
such combination, the Series C Conversion Price shall be appropriately increased
so that the number of shares of Common Stock issuable on conversion of each
share of Series C Preferred Stock shall be decreased in proportion to such
decrease in outstanding shares of Common Stock.
(e) Adjustments for Other Distributions. In the event the
------------------------------------
Corporation at any time or from time to time makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock, then and in each such event provision shall be made so that the
holders of Series C Preferred Stock shall receive upon conversion thereof, in
addition to the
54
<PAGE>
number of shares of Common Stock receivable thereupon, the amount of securities
of the Corporation which they would have received had their Series C Preferred
Stock been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
date of conversion, retained such securities receivable by them as aforesaid
during such period, subject to all other adjustments called for during such
period under this Section C.3(e) with respect to the rights of the holders of
the Series C Preferred Stock.
(f) Adjustments for Reorganizations, Reclassifications, etc.
-------------------------------------------------------
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 or other securities or property, whether by
reclassification, a merger or consolidation of this Corporation with or into any
other corporation or corporations, or a sale of all or substantially all of the
assets of this Corporation, or otherwise, the Series C Conversion Price then in
effect shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such 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 or securities or other property
equivalent to the number of shares of Common Stock that would have been subject
to receipt by the holders upon conversion of the Series C Preferred Stock
immediately before such event; and, in any such case, appropriate adjustment (as
determined by the Board) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
holders of the Series C Preferred Stock, to the end that the provisions set
forth herein (including provisions with respect to changes in and other
adjustments of the Series C Conversion Price) shall thereafter be applicable, as
nearly as may be reasonable, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Series C Preferred
Stock.
(g) Certain Other Adjustment. If at any time after six (6)
------------------------
months following the consummation ("Closing") of the sale of Series C Preferred
Stock purchased pursuant to those certain Subscription and Purchase Agreements
between the Corporation and each holder of such Series C Preferred Stock (such
Closing having occurred on May 9, 1996), any such holder converts the Series C
Preferred Stock, then the Series C Conversion Price applicable to such holder's
shares shall be the lesser of (i) $1.30, or (ii) the greater of (x) .90 or (y)
80% of the average closing bid price of the Common Stock for the fifteen (15)
consecutive trading days ending on the date immediately preceding the date
notice of conversion is given. The Series C Conversion Price may only adjust
once for each holder.
(h) Company's Right to Automatically Convert. If at any time
----------------------------------------
after eight (8) months following the Closing the average closing bid price of
the Corporation's Common Stock for 15 consecutive trading days as quoted on the
Nasdaq National Market is equal to or greater than $2.60, the Corporation shall
thereafter have the right to automatically convert the Series C Preferred Stock
into such number of shares of Common Stock as is determined by dividing $1.30 by
the then applicable Series C Conversion Price by notice given to such holders of
Series C Preferred Stock.
55
<PAGE>
(i) Certificates as to Adjustments. Upon the occurrence of
------------------------------
each adjustment of the Series C Conversion Price pursuant to this Section C.3,
the Corporation at its expense shall promptly compute such adjustment in
accordance with the terms hereof and prepare and furnish to each applicable
holder of Series C Preferred Stock a certificate executed by the Corporation's
President or Chief Financial Officer setting forth such computation of
adjustment.
(j) Notices of Record Date. In the event that the Corporation
----------------------
shall propose at any time: (a) to declare any special dividend or distribution
upon its Common Stock, whether in cash, property, stock or other securities,
whether or not out of earnings or earned surplus; (b) to offer for subscription
pro rata to the holders of any class or series of its stock any additional
shares of stock of any class or series or other rights; (c) to effect any
reclassification or recapitalization of its Common Stock outstanding involving a
change in the Common Stock; or (d) to merge or consolidate with or into any
other corporation (other than a mere reincorporation transaction), or sell,
lease or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; then, in connection with each such event, the Corporation
shall send to the holders of Series C Preferred Stock:
(i) at least twenty (20) days' prior written notice of the
date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote, if any, in
respect of the matters referred to in (c) and (d) above; and
(ii) in the case of the matters referred to in (c) and (d)
above, at least twenty (20) days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event).
(k) 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 shares of the Series C 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 C 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 then outstanding shares of the
Series C 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 purpose, including, without limitation, engaging in its best efforts to
obtain the requisite stockholder approval of any necessary amendment to the
Certificate of Incorporation.
(l) Fractional Shares. No fractional share shall be issued
-----------------
upon the conversion of any share or shares of Series C Preferred Stock. All
shares of Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series C Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of any fractional share. If, after the aforementioned
56
<PAGE>
aggregation, the conversion would result in the issuance of a fraction of a
share of Common Stock, the Corporation shall, in lieu of issuing any fractional
share, pay the holder otherwise entitled to such fraction a sum in cash equal to
the fair market value of such fraction on the date of conversion (as determined
in good faith by the board of directors of the Corporation).
(m) Notices. Any notice required by the provisions of this
-------
Section C.3 to be given to the holders of shares of Series C Preferred Stock
shall be deemed given on the date of delivery if delivered by hand delivery or
by facsimile, or, if deposited in the United States mail (registered or
certified), postage prepaid, and addressed to each holder of record at his or
its address appearing on the books of the Corporation.
4. Series C Liquidation Preferences. In the event of any
--------------------------------
liquidation, dissolution or winding up of the Corporation whether voluntary or
involuntary, the holders of the Series C Preferred Stock shall participate on an
equal basis with the holders of the Common Stock (as if the Series C Preferred
Stock had converted into Common Stock) in any distribution of any of the assets
or surplus funds of the Corporation.
5. Series C Protective Provisions. In addition to any other
------------------------------
rights provided by law, so long as any share of Series C Preferred Stock shall
be outstanding, the Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of the majority of the
outstanding shares of Series C Preferred Stock voting separately as a separate
class, take any action which alters or changes any of the rights, privileges or
preferences of the Series C Preferred Stock, including without limitation
increasing or decreasing the aggregate number of authorized shares of such
series other than an increase incident to a stock split.
D. SERIES D PREFERRED STOCK. A series of the class of Preferred Stock
------------------------
of the Company shall be hereby created, and the shares of such series shall be
designated as "Series D Preferred Stock", par value $0.01 per shares. The number
of shares constituting such series shall be 2,000 and the stated value shall be
One Thousand Dollars ($1,000) per share (the "Stated Value").
1. Rank With Respect to Liquidation Event. In the event of any
--------------------------------------
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of Series D Preferred
Stock shall participate on an equal basis with (i) the holders of the
Corporation's Common Stock, par value $.50 per share (the "Common Stock"), as if
the Series D Preferred Stock had converted into Common Stock; (ii) the holders
of the Corporation's Series C Preferred Stock, par value $.01 per share (the
"Series C Preferred Stock"); and (iii) the holders of any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series D Preferred Stock obtained in accordance with Section 7
hereof) which specifically, by its terms, ranks pari passu with the Series D
Preferred Stock (collectively, with the Common Stock and the Series C Preferred
Stock, "Pari Passu Securities").
2. No Dividends,
------------
57
<PAGE>
The Series D Preferred Stock will bear no dividends, and the holders of
the Series D Preferred Stock shall not be entitled to receive dividends on the
Series D Preferred Stock.
3. Cash Redemption of Premium by Corporation; Redemption of
--------------------------------------------------------
Series D Preferred Stock.
- ------------------------
(a) The Corporation shall have the right, in its sole
discretion, upon receipt of a Notice of Conversion pursuant to Section 4(d) or
in the event of a Mandatory Conversion effected in accordance with Section 5
hereof, to redeem all or any portion of the Premium (as defined in Section 4(a)
below) subject to such conversion for a sum of cash equal to the amount of the
Premium being so redeemed. All cash redemption payments hereunder shall be paid
in lawful money of the United States of America at such address for the holder
as appears on the record books of the Corporation (or at such other address as
such holder shall hereafter give to the Corporation by written notice). In the
event the Corporation elects, pursuant to this Section 3(a), to redeem all or
any portion of the Premium in cash and fails to pay such holder the applicable
redemption amount to which such holder is entitled by depositing a check in the
U.S. Mail to such holder within seven (7) business days of receipt by the
Corporation of a Conversion Notice (in the case of a redemption in connection
with an Optional Conversion) or May 15, 2001 (in the case of a redemption in
connection with a Mandatory Conversion), the Corporation shall thereafter
forfeit its right to redeem such Premium in cash and such Premium shall
thereafter be converted into shares of Common Stock in accordance with Section 4
hereof.
(b) Each holder of Series D Preferred Stock shall have the
right to require the Corporation to provide advance notice to such holder
stating whether the Corporation will elect to redeem all or any portion of the
Premium in cash pursuant to the Corporation's redemption rights discussed in
Section D.3(a) as set forth herein. A holder may exercise such right from time
to time by sending notice (an "Election Notice") to the Corporation, by
facsimile, requesting that the Corporation disclose to such holder whether the
Corporation would elect to redeem any portion of the Premium for cash in lieu of
issuing Common Stock in accordance with Section 4 hereof if such holder were to
exercise his, her or its right of conversion pursuant to Section 4. The
Corporation shall, no later than the fifth (5th) business day following receipt
of an Election Notice, disclose to such holder, whether the Corporation would
elect to redeem any portion of a Premium in connection with a conversion
pursuant to a Conversion Notice delivered over the subsequent ten (10) business
day period. If the Corporation does not respond to such holder within such five
(5) business day period via facsimile, the Corporation shall, with respect to
any conversion pursuant to a Conversion Notice delivered within the subsequent
ten (10) business day period, forfeit its right to redeem such Premium in
accordance with Section D.3(a) and shall be required to convert such Premium
into shares of Common Stock in accordance with Section 4 hereof.
(c) Except as provided in Section D.3 and Section D.4 hereof,
the Series D Preferred Stock is not subject to redemption.
(d) Commencing May 15, 1998, at any time that the average of
the closing bid prices for the Common Stock on NASDAQ, or on the principal
securities exchange
58
<PAGE>
or other securities market on which the Common Stock is being traded, for the
twenty (20) consecutive Trading Days ending one Trading Day prior to the date
the Corporation provides the holders a Redemption Notice (as defined herein)
under this Section D.3 is equal to or greater than 200% of the closing bid price
for the Common Stock on NASDAQ (or on the principal securities exchange or other
securities market on which the Common Stock is being traded) on the Closing Date
(as defined herein) (the "Optional Redemption Threshold Price"), the Corporation
shall have the right, in its sole discretion, to redeem ("Redemption at
Corporation's Election") any or all of the Series D Preferred Stock at the
Redemption Price (as defined herein), in accordance with the redemption
procedures set forth below; provided, however, that if the average closing bid
price of the Common Stock for any ten (10) consecutive Trading Days after a
Redemption Notice is less than 75% of the Optional Redemption Threshold Price,
the Corporation's Redemption Notice shall thereafter be rendered null and void
and the Corporation shall not have the right to redeem the Series D Preferred
Stock pursuant to the terms of this Section D.3 unless and until it delivers
another Redemption Notice to the holders of the Series D Preferred Stock in
accordance with the provisions of this Section D.3. "Trading Day" shall mean any
day on which the Common Stock is traded for any period on NASDAQ, or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded. If the Corporation elects to redeem some, but not
all, of the Series D Preferred Stock, the Corporation shall redeem a pro-rata
amount from each holder of Series D Preferred Stock. Holders of Series D
Preferred Stock may convert all or any part of their shares of Series D
Preferred Stock into Common Stock by delivering a Notice of Conversion (as
defined herein) to the Corporation at any time prior to the Effective Date of
Redemption (as defined herein).
(e) The "Redemption Price" with respect to each share of
Series D Preferred Stock shall mean the amount equal to the sum of (i) the
Stated Value thereof plus (ii) the amount equal to eight (8%) percent per annum
of such Stated Value for the period beginning on the issuance of such share and
ending on the Effective Date of Redemption hereunder.
(f) The Corporation shall effect each redemption under this
Section D.3 by giving at least ninety (90) days (subject to extension as set
forth below) prior written notice (the "Redemption Notice") to (i) the holders
of Series D Preferred Stock selected for redemption at the address and facsimile
number of such holder appearing in the Corporation's register for the Series D
Preferred Stock and (ii) the Transfer Agent, which Redemption Notice shall be
deemed to have been delivered three (3) business days after the Corporation's
mailing (by overnight courier, with a copy by facsimile) of such notice. Such
Redemption Notice shall indicate the number of shares of the holder's Series D
Preferred Stock that have been selected for redemption, the date which such
redemption is to become effective (the "Effective Date of Redemption") and the
Redemption Price. The Corporation shall not be entitled to send any Redemption
Notice and begin the redemption procedure unless it has (i) the full amount of
the Redemption Price, in cash, available in a demand or other immediately
available account in a bank or similar financial institution or (ii) immediately
available credit facilities, in the full amount of the Redemption Price, with a
bank or similar financial institution on the date the Redemption Notice is
delivered to the applicable holder. Notwithstanding the foregoing, the ninety
(90) day notice period referred to herein shall be extended with respect to any
holder of Series D Preferred Stock by such number of days after the date of the
Redemption Notice as such
59
<PAGE>
holder is not permitted to sell all of its Series D Preferred Stock pursuant to
an effective registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (or a successor statute)
(the "1933 Act") or pursuant to Rule 144(k) under the 1933 Act.
The Redemption Price shall be paid to the holder of the Series D
Preferred Stock being redeemed within 10 business days of the Effective Date of
Redemption; provided, however, that the Corporation shall not be obligated to
deliver any portion of the Redemption Price until either the certificates
evidencing the Series D Preferred Stock being redeemed are delivered to the
office of the Corporation or the Transfer Agent, or the holder notifies the
Corporation or the Transfer Agent that such certificates have been lost, stolen
or destroyed and delivers the documentation in accordance with Section D.4(d)
hereof. Notwithstanding anything herein to the contrary, in the event that the
certificates evidencing the Series D Preferred Stock redeemed are not delivered
to the Corporation or the Transfer Agent prior to the 10th business day
following the Effective Date of Redemption, the redemption of the Series D
Preferred Stock pursuant to this Section D.3 shall still be deemed effective as
of the Effective Date of Redemption and the Redemption Price shall be paid to
the holder of Series D Preferred Stock redeemed within 5 business days of the
date the certificates evidencing the Series D Preferred Stock redeemed are
actually delivered to the Corporation or the Transfer Agent.
(g) If of any of the following events (each, a "Mandatory
Redemption Event") shall occur:
(i) Conversion and the Shares. The Corporation fails to
-------------------------
issue shares of Common Stock (subject to the limitations set forth in Section
D.4(g)) to the holders of Series D Preferred Stock upon exercise by the holders
of their conversion rights in accordance with the terms of this Certificate of
Designation (for a period of at least sixty (60) days if such failure is solely
as a result of the circumstances governed by Section D.4(e) below and the
Corporation is using all commercially reasonable efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable), fails to
transfer any certificate for shares of Common Stock issued to the holders upon
conversion of the Series D Preferred Stock and when required by Section D of the
Second Restated Certificate of Incorporation or the Registration Rights
Agreement, dated as of May 15, 1996, by and among the Corporation and the other
signatories thereto (the "Registration Rights Agreement") (or shares of Common
Stock issuable upon exercise of the warrants (the "Warrants") issued pursuant to
the Securities Purchase Agreement, dated as of May 15, 1996, by and between the
Corporation and the other signatory thereto (the "Purchase Agreement") in
accordance with the Warrants), or fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the holders of Series D
Preferred Stock upon conversion of the Series D Preferred Stock as and when
required by this Second Restated Certificate of Incorporation, the Purchase
Agreement or the Registration Rights Agreement (or shares of Common Stock
issuable upon exercise of the Warrants in accordance with the Warrants) and any
such failure shall continue uncured for twenty (20) business days after the
Corporation shall have been notified thereof in writing by the holder;
60
<PAGE>
(ii) Failure to Register. The Corporation fails to obtain
-------------------
effectiveness with the Securities and Exchange Commission (the "SEC") of the
Registration Statement (as defined in the Registration Rights Agreement) prior
to November 15, 1996 (other than because of issues raised by the SEC arising
from the transactions contemplated by the Purchase Agreement or because of a
change in the policy, procedures, interpretations, positions, practice or rules
of the SEC made public after the date hereof so long as, in either case, the
Corporation is using all commercially reasonable efforts to achieve the
effectiveness of such Registration Statement) or lapses in effect (or sales
otherwise cannot be made thereunder) for more than thirty (30) consecutive days
or sixty (60) days in any twelve (12) month period after such Registration
Statement becomes effective;
(iii) Receiver or Trustee. The Corporation or any
-------------------
subsidiary of the Corporation shall make an assignment for the benefit of
creditors, or apply for or consent to the appointment of a receiver or trustee
for it or for all or substantially all of its property or business; or such a
receiver or trustee shall otherwise be appointed;
(iv) Bankruptcy. Bankruptcy, insolvency, reorganization
----------
or liquidation proceedings or other proceedings for relief under any bankruptcy
law or any law for the relief of debtors shall be instituted by or against the
Corporation or any subsidiary of the Corporation.
Then, upon the occurrence and during the continuation of any Mandatory
Redemption Event specified in subparagraphs (i) or (ii), at the option of the
holders of at least 50% of the then outstanding shares of Series D Preferred
Stock by written notice (the "Mandatory Redemption Notice") to the Corporation
of such Mandatory Redemption Event, the Corporation shall, and upon the
occurrence of any Mandatory Redemption Event specified in subparagraphs (iii) or
(iv), purchase the holder's shares of Series D Preferred Stock for an amount per
share equal to 125% multiplied by the Redemption Price in effect at the time of
the redemption hereunder.
Subject to the limitations contained in Section D.4(g), if the
Corporation fails to pay the Mandatory Redemption Amount for each share within
five (5) business days of written notice that such amount is due and payable,
then each holder of Series D Preferred Stock shall have the right at any time,
so long as the Mandatory Redemption Event continues to require the Corporation,
upon written notice, to immediately issue (in accordance with the terms of
Section D.4 below), in lieu of the Mandatory Redemption Amount, with respect to
each outstanding share of Series D Preferred Stock held by such holder, the
number of shares of Common Stock of the Corporation equal to the Mandatory
Redemption Amount divided by the Conversion Price then in effect.
4. Conversion at the Option of the Holder.
--------------------------------------
(a) Each holder of shares of Series D Preferred Stock may,
at its option at any time and from time to time (whether or not the Corporation
has sent an Optional Conversion Notice to the holders of Series D Preferred
Stock pursuant to Section D.3), upon surrender of the certificates therefor,
convert any or all of its shares of Series D Preferred Stock into Common Stock
as follows (an "Optional Conversion"). Each share of Series D Preferred
61
<PAGE>
Stock shall be convertible into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing (x) the sum of (I) the
Stated Value thereof, plus (II) unless the Corporation has timely redeemed such
Premium in cash in accordance with Section D.3, an amount equal to eight percent
(8%) per annum of such Stated Value for the period beginning on the date of
issuance of such share and ending on the Conversion Date (the "Premium"), by (y)
the then effective Conversion Price (as defined below); provided, however, that
in no event shall holders of shares of Series D Preferred Stock be entitled to
convert any such shares in excess of that number of shares upon conversion of
which the sum of (x) the number of shares of Common Stock beneficially owned by
the holder and its affiliates (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unconverted portion of
the shares of Series D Preferred Stock and the unexercised portion of the
Warrants) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of Series D Preferred Stock with respect to which the
determination of this proviso is being made would result in beneficial ownership
by the holder and its affiliates of more than 4.9% of the outstanding shares of
Common Stock. For purposes of the second proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13 D-G
thereunder, except as otherwise provided in clause (x) of such proviso.
(b) The "Conversion Price" shall be the lesser of (i) the
Applicable Percentage (as hereinafter defined) of the average of the closing bid
prices for the Common Stock on the NASDAQ National Market ("NASDAQ"), or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded, for the five (5) consecutive Trading Days (as
defined below) ending one Trading Day prior to the date (the "Conversion Date")
the Conversion Notice is sent by a holder to the Corporation via facsimile (the
"Variable Conversion Price"), and (ii) the average of the closing bid prices for
the Common Stock on NASDAQ for the five (5) consecutive Trading Days ending on
the Closing Date under the Purchase Agreement (the "Closing Date") (the "Fixed
Conversion Price") (subject to equitable adjustments from time to time pursuant
to the antidilution provisions of Section D.4(c) below). Applicable Percentage
means (i) 100%, if the Conversion Date is within forty (40) days after the
Closing Date, and (ii) 90%, if the Conversion Date is within eighty (80) days,
but more than forty (40) days, after the Closing Date, and (iii) 75%, if the
Conversion Date is more than eighty (80) days after the Closing Date.
(c) The Conversion Price shall be subject to adjustment
from time to time as follows:
(i) Adjustment to Fixed Conversion Price Due to Stock
-------------------------------------------------
Split, Stock Dividend, Etc. If at any time when the Series D Preferred Stock is
- --------------------------
issued and outstanding, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, or other similar event, the Fixed
Conversion Price shall be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a reverse stock split,
combination or reclassification of shares, or other similar event, the Fixed
Conversion Price shall be proportionately increased. In such event the
Corporation shall notify the Transfer Agent of such change on or before the
effective date thereof.
62
<PAGE>
(ii) Adjustment to Variable Conversion Price. If at any
---------------------------------------
time when Series D Preferred Stock is issued and outstanding, the number of
outstanding shares of Common Stock is increased or decreased by a stock split,
stock dividend, combination, reclassification or other similar event, which
event shall have taken place during the reference period for determination of
the Conversion Price for any Optional Conversion or Mandatory Conversion of the
Series D Preferred Stock, then the Variable Conversion Price shall be calculated
giving appropriate effect to the stock split, stock dividend, combination,
reclassification or other similar event for all five (5) Trading Days
immediately preceding the Conversion Date.
(iii) Adjustment Due to Merger, Consolidation, Etc. If,
--------------------------------------------
at any time when Series D Preferred Stock is issued and outstanding and prior to
the conversion of all Series D Preferred Stock, there shall be (i) any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination), (ii) any
consolidation or merger of the Corporation with any other corporation (other
than a merger in which the Corporation is the surviving or continuing
corporation and its capital stock is unchanged), (iii) any sale or transfer of
all or substantially all of the assets of the Corporation or (iv) any share
exchange pursuant to which all of the outstanding shares of Common Stock are
converted into other securities or property, then the holders of Series D
Preferred Stock shall, upon being given at least thirty (30) days prior written
notice of such transaction, thereafter have the right to purchase and receive
upon conversion of Series D Preferred Stock, upon the basis and upon the terms
and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such shares of stock and/or
securities or other property as may be issued or payable with respect to or in
exchange for the number of shares of Common Stock immediately theretofore
purchasable and receivable upon the conversion of Series D Preferred Stock held
by such holders had such merger, consolidation, exchange of shares,
recapitalization, reorganization or other similar event not taken place and in
any such case appropriate provisions shall be made with respect to the rights
and interests of the holders of the Series D Preferred Stock to the end that the
provisions hereof (including, without limitation, provisions for adjustment of
the Conversion Price and of the number of shares issuable upon conversion of the
Series D Preferred Stock) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the conversion thereof. The Corporation shall not effect any
transaction described in this subsection (c) unless (i) each holder of Series D
Preferred Stock has received written notice of such transaction at least thirty
(30) days prior thereto and in no event later than ten (10) days prior to the
record date for the determination of shareholders entitled to vote with respect
thereto, and (ii) the provisions of this paragraph have been complied with. The
above provisions shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
(iv) No Fractional Shares. If any adjustment under this
--------------------
Section D.4(c) would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion
shall be the next higher number of shares.
63
<PAGE>
(d) In order to convert Series D Preferred Stock into full
shares of Common Stock, a holder shall: (i) fax a copy of the fully executed
notice of conversion in the form attached hereto as Exhibit A ("Notice of
---------
Conversion") to the Corporation at the office of the Corporation for the Series
D Preferred Stock that the holder elects to convert the same, which notice shall
specify the number of shares of Series D Preferred Stock to be converted, the
applicable Conversion Price and a calculation of the number of shares of Common
Stock issuable upon such conversion (together with a copy of the first page of
each certificate to be converted) prior to Midnight, New York City time (the
"Conversion Notice Deadline") on the date of conversion specified on the Notice
of Conversion; and (ii) surrender the original certificates representing the
Series D Preferred Stock being converted (the "Preferred Stock Certificates"),
duly endorsed, along with a copy of the Notice of Conversion as soon as
practicable thereafter to the office of the Corporation for the Series D
Preferred Stock; provided, however, that the Corporation shall not be obligated
to issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless either the Preferred Stock Certificates are delivered to the
Corporation as provided above, or the holder notifies the Corporation that such
certificates have been lost, stolen or destroyed (subject to the requirements of
subparagraph (i) below). In the case of a dispute as to the calculation of the
Conversion Price, the Corporation shall promptly issue such number of shares of
Common Stock that are not disputed in accordance with subparagraph (ii) below.
The Corporation shall submit the disputed calculations to its outside accountant
via facsimile within three (3) business days of receipt of the Notice of
Conversion. The accountant shall audit the calculations and notify the
Corporation and the holder of the results no later than 48 hours from the time
it receives the disputed calculations. The accountant's calculation shall be
deemed conclusive absent manifest error.
(i) Lost or Stolen Certificates. Upon receipt by the
---------------------------
Corporation of evidence of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing shares of Series D Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity or security
reasonably satisfactory to the Corporation, and upon surrender and cancellation
of the Preferred Stock Certificate(s), if mutilated, the Corporation shall
execute and deliver new Preferred Stock Certificate(s) of like tenor and date.
However, the Corporation shall not be obligated to reissue such lost or stolen
Preferred Stock Certificate(s) if the holder contemporaneously requests the
Corporation to convert such Series D Preferred Stock.
(ii) Delivery of Common Stock Upon Conversion. Upon the
----------------------------------------
surrender of certificates as described above from a holder of Series D Preferred
Stock accompanied by a Notice of Conversion, the Corporation shall issue and,
within two (2) business days (the "Delivery Period") after such surrender (or,
in the case of lost, stolen or destroyed certificates, after provision of
agreement and indemnification pursuant to subparagraph (i) above), deliver to or
upon the order of the holder (i) that number of shares of Common Stock for the
portion of the shares of Series D Preferred Stock converted as shall be
determined in accordance herewith and (ii) a certificate representing the
balance of the shares of Series D Preferred Stock not converted, if any. In
addition to any other remedies available to the holder, including actual damages
and/or equitable relief, the Corporation shall pay to a holder $250 in cash for
the first day beyond such Delivery Period that the Corporation fails to deliver
Common Stock issuable upon surrender of shares of Series D Preferred Stock with
a Notice of Conversion
64
<PAGE>
and $500 per day in cash for each day thereafter until such time as the earlier
of the date that the Corporation has delivered all such Common Stock and the
tenth day beyond such Delivery Period. Such cash amount shall be paid to such
holder by the fifth day of the month following the month in which it has
accrued. In the event the Corporation fails to deliver such Common Stock prior
to the expiration of the ten (10) business day period after the Delivery Period
for any reason (whether due to a requirement of law or a stock exchange or
otherwise), such holder shall be entitled to (in addition to any other remedies
available to the holder) Conversion Default Payments in accordance with Section
D.4(e) hereof beginning on the expiration of such ten (10) business day period.
(iii) No Fractional Shares. If any conversion of Series D
--------------------
Preferred Stock would result in a fractional share of Common Stock or the right
to acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion of
the Series D Preferred Stock shall be the next higher number of shares.
(iv) Conversion Date. The "Conversion Date" shall be the
---------------
date specified in the Notice of Conversion, provided (i) that the advance copy
of the Notice of Conversion is faxed to the Corporation before Midnight, New
York City time, on the Conversion Date, and (ii) that the original Preferred
Stock Certificate(s), duly endorsed, are surrendered along with a copy of the
Notice of Conversion as soon as practicable thereafter to the office of the
Corporation or the Transfer Agent for the Series D Preferred Stock. The person
or persons entitled to receive the shares of Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such securities as of the Conversion Date and all rights with respect to the
shares of Series D Preferred Stock surrendered shall forthwith terminate except
the right to receive the shares of Common Stock or other securities or property
issuable on such conversion.
(e) A number of shares of the authorized but unissued Common
Stock sufficient to provide for the conversion of the Series D Preferred Stock
outstanding at the then current Conversion Price shall at all times be reserved
by the Corporation, free from preemptive rights, for such conversion or
exercise. 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 at
the then current Conversion Price, 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 a holder of shares of Series D Preferred Stock submits a Conversion
Notice, the Corporation does not have sufficient authorized but unissued shares
of Common Stock available to effect such conversion in accordance with the
provisions of this Section 4 (a "Conversion Default"), the Corporation shall
issue to the holder all of the shares of Common Stock which are available to
effect such conversion (including, with the Holder's written consent, any shares
underlying outstanding Warrants ("Borrowed Shares")). The number of shares of
Series D Preferred Stock included in the Notice of Conversion which exceeds the
amount which is then convertible into available shares of Common Stock
(including Borrowed
65
<PAGE>
Shares, if any) (the "Excess Amount") shall, notwithstanding anything to the
contrary contained herein, not be convertible into Common Stock in accordance
with the terms hereof until (and at the holder's option at any time after) the
date additional shares of Common Stock are authorized by the Corporation to
permit such conversion, at which time the Conversion Price in respect thereof
shall be the lesser of (i) the Conversion Price on the Conversion Date Default
(as defined below) and (ii) the Conversion Price on the Conversion Date elected
by the holder in respect thereof. The Corporation shall pay to the holder
payments ("Conversion Default Payments") for a Conversion Default in the amount
of (N/365), multiplied by the sum of the Stated Value with respect to each share
of Series D Preferred Stock, multiplied by the Default Amount (as defined below)
on the first day of the Conversion Default (the "Conversion Default Date"),
multiplied by .25, where (i) N = the number of days from the Conversion Default
Date to the earlier of (A) the date (the "Authorization Date") that the
Corporation authorizes a sufficient number of shares of Common Stock to effect
conversion of the full number of shares of Series D Preferred Stock and (B) the
date such share of Series D Preferred Stock is redeemed in accordance with
Section D.4(d) and (ii) "Default Amount" means the Excess Amount plus the number
of shares of Series D Preferred Stock that would not be convertible as a result
of this Section D.4(e) but for the Borrowed Shares. The Corporation shall send
notice to the holder of the authorization of additional shares of Common Stock,
the Authorization Date and the amount of holder's accrued Conversion Default
Payments. The accrued Conversion Default Payments for each calendar month shall
be paid in cash or, subject to the limitations contained in Section D.4(g),
shall be convertible into Common Stock at the Conversion Price, at the holder's
option, as follows:
(i) In the event holder elects to take such payment in
cash, cash payment shall be made to holder by the fifth day of the month
following the month in which it has accrued; and
(ii) In the event holder elects to take such payment in
Common Stock, the holder may convert such payment amount into Common Stock at
the Conversion Price (as in effect at the time of Conversion) at any time after
the fifth day of the month following the month in which it has accrued in
accordance with the terms of this Section 4.
1. Nothing herein shall limit the holder's right to
pursue actual damages for the Corporation's failure to maintain a
sufficient number of authorized shares of Common Stock, and each holder
shall have the right to pursue all remedies available at law or in
equity (including a decree of specific performance and/or injunctive
relief).
(f) Upon the occurrence of each adjustment or readjustment of
the Conversion Price pursuant to this Section 4, the 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 D
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series D Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the
66
<PAGE>
number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon conversion of a share of
Series D Preferred Stock.
(g) Notwithstanding anything contained herein to the
contrary, in no event shall the aggregate number of shares of Common Stock
issuable upon conversion or redemption of, or otherwise issuable with respect
to, all of the Series D Preferred Stock issued by the Corporation pursuant to
the Purchase Agreement (including, without limitation, all shares of Common
Stock issued with respect to such Series D Preferred Stock pursuant to Section
D.3 and Section D.4(e) hereof, but without taking into account any shares of
Common Stock issuable upon exercise of Warrants) plus all shares of Common Stock
issuable pursuant to Section 2(c) of the Registration Rights Agreement exceed
2,424,884 (subject to equitable adjustments from time to time pursuant to the
antidilution provisions of Section D.4(c) above). In the event the Corporation
is prohibited from issuing shares of Common Stock as a result of the operation
of this Section D.4(g), the provisions of Section 3, subparagraph (ii) of
Section D.4(d) and Section D.4(e) shall apply to the extent applicable.
5. Mandatory Conversion.
--------------------
Each share of Series D Preferred Stock issued and outstanding on May
15, 2001, automatically shall be converted into shares of Common Stock on such
date at the then effective Conversion Price in accordance with the provisions of
Section D.4 hereof (the "Mandatory Conversion").
6. Voting Rights.
-------------
The holders of the Series D Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
("DGCL"), and in this Section D.6, and in Section D.7 below.
Notwithstanding the above, the Corporation shall provide each holder of
Series D Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least ten (10) days prior to the record date
specified therein (or 30 days prior to the consummation of the transaction or
event, whichever is earlier), of the date on which any such record is to be
taken for the purpose of such dividend, distribution, right or other event, and
a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
67
<PAGE>
To the extent that under the DGCL the vote of the holders of the
Series D Preferred Stock, voting separately as a class or series as applicable,
is required to authorize a given action of the Corporation, the affirmative vote
or consent of the holders of at least a majority of the shares of the Series D
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series D Preferred Stock
(except as otherwise may be required under the DGCL) shall constitute the
approval of such action by the class. To the extent that under the DGCL holders
of the Series D Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series D Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series D Preferred Stock shall be entitled to
notice of (and copies of proxy materials and other information sent to
shareholders) all shareholder meetings or written consents with respect to which
they would be entitled to vote, which notice would be provided pursuant to the
Corporation's by-laws and the DGCL.
7. Protection Provision.
--------------------
So long as shares of Series D Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the DGCL) of the holders of at least a majority of the
then outstanding shares of Series D Preferred Stock:
(a) alter or change the rights, preferences or privileges of
the Series D Preferred Stock or any other class or series of capital stock of
the Corporation so as to affect adversely the Series D Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series D Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation ("Senior Securities");
(c) create any new class or series of capital stock ranking
pari passu with the Series D Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Section D.1 hereof, "Pari Passu Securities");
(d) increase the authorized number of shares of Series D
Preferred Stock.
(e) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series D Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended); or
(f) issue after the Closing Date any Senior Securities or Pari
Passu Securities (other than Common Stock).
68
<PAGE>
In the event holders of at least a majority of the then outstanding
shares of Series D Preferred Stock agree to allow the Corporation to alter or
change the rights, preferences or privileges of the shares of Series D Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series D Preferred
Stock, then the Corporation will deliver notice of such approved change to the
holders of the Series D Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of twenty (20) days to convert pursuant to the terms of this
Section D of the Second Restated Certificate of Incorporation of the Corporation
as they exist prior to such alteration or change or continue to hold their
shares of Series D Preferred Stock.
8. Notices.
-------
Each holders of Series D Preferred Stock shall send a copy of all
notices to be given to the Corporation under this Section D of the Second
Restated Certificate of Incorporation to such one (1) counsel as the Corporation
may designate in writing at least five (5) business days prior to such holder
sending such notice. For purposes of this Section D.8, the initial counsel
designated by the Corporation for receiving copies of notices under this Section
D of the Second Restated Certificate of Incorporation shall be Jackson Tufts
Cole & Black, LLP, 60 South Market Street, San Jose, California 95113,
Attention: Richard Scudellari, Telecopier (408) 998-4889.
FIFTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, alter or
repeal the by-laws of the Company, subject always to the right of the
stockholders entitled to vote with respect thereto to adopt additional by-laws
and to alter or repeal by-laws adopted by the Board of Directors, and to provide
in connection therewith that any by-law adopted or altered by the stockholders
may be altered or repealed only by a vote of a designated proportion of the
stockholders.
SIXTH:
(A) If with respect to any of the following transactions, a
stockholder vote is required by law or by any other rules or policies to which
the Company may then be subject, the affirmative vote of two-thirds of the
outstanding stock entitled to vote thereon, given in person or by proxy, at a
meeting called for the purpose shall be necessary.
(a) To approve (i) the lease, sale, exchange, transfer or
other disposition by the Company of all or substantially all, of its
assets or business to a related company, or an affiliate of a related
company, or (ii) the consolidation of the Company with or its merger
into a related company or an affiliate of a related company, or (iii)
the merger into the Company or a subsidiary of the Company of a related
company or an affiliate of a related company, or (iv) an acquisition of
substantially all of the assets of a corporation or of the securities
representing such assets, in which the Company, or any subsidiary of
the Company, is the acquiring corporation and voting shares of the
Company are issued or transferred to a related company or an affiliate
of a related company, or to stockholders of a related company, or an
affiliate of a related company, or an associated person.
69
<PAGE>
(b) To approve any agreement, contract, or other
arrangement with a related company or an affiliate of a related
company, or an associated person providing for any of the transactions
described in subparagraph (a) above; or
(c) To effect any amendment of the Certificate of
Incorporation which changes the provisions of this Article Sixth:
1. For the purpose of this Article Sixth, (i) a
"related company" in respect of a given transaction, shall be any
person, partnership, corporation, or firm (except a subsidiary of the
Company at least a majority of whose stock is owned by the Company)
which, together with its affiliates and associated persons owns of
record or beneficially, directly or indirectly, in excess of 10% of the
outstanding shares of the Company, entitled to vote upon such
transaction, as of the record date used to determine the stockholders
of the Company entitled to vote upon such transaction; (ii) an
"affiliate" of a related company shall be any individual, joint
venture, trust, partnership, or corporation which, directly or
indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, the related company;
and (iii) an "associated person" of a related company shall be any
officer or director or any beneficial owner, directly or indirectly, of
10% or more of any class of equity security of such related company or
any of its affiliates.
The determination of the Board of Directors of the Company, based on
information known to the Board of Directors and made in good faith, shall be
conclusive as to whether any person, partnership, corporation or firm is a
related company or affiliate or associated person as defined in this Article
Sixth.
(B) If the provisions of this Article Sixth are applicable to a
transaction and if the provisions of Section 262 of the Delaware General
Corporation Law, or any similar provision hereinafter enacted, would be
applicable thereto but for the provisions of subparagraph (k) thereof, then the
stockholders of the Company shall be entitled to the rights granted by Section
262 of the Delaware General Corporation Law or any similar provision hereafter
enacted notwithstanding the exemptions contained in subparagraph (k) of such
section.
(C) If the provisions of this Article Sixth are applicable to a
transaction, but the provisions of Section 262 of the Delaware General
Corporation Law are not applicable thereto, notwithstanding the elimination of
the exemptions contained in subparagraph (k) of such Section, then a holder of
dissenting shares with respect to such transaction shall be entitled to receive
from the Company, payment for the value of his stock on the effective date of
the transaction, excluding any appreciation or depreciation in value from the
expectation or accomplishment of the transaction.
(a) To qualify as a holder of dissenting shares, a
stockholder shall, before the taking of the vote on the transaction,
file with the Company a written objection to such proposed transaction.
Following the effective date of such transaction, the Company shall
notify each stockholder who has filed such written objection and whose
shares were not voted in favor of the transaction, that the transaction
has become
70
<PAGE>
effective. The notice shall be sent by registered or certified mail,
return receipt requested, addressed to the stockholder at his address
as it appears on the records of the Company. Such stockholder shall,
within 20 days after the mailing of the notice, demand, in writing,
from the Company, payment of the value of his stock. The demand shall
state the number and class of shares held of record by the stockholder
which he demands that the Company purchase and shall contain a request
that the Company state what it claims to be the fair market value of
these shares. In addition, within 20 days after the date of mailing of
such notice, such stockholder shall submit to the Company at its
principal office or at the office of any transfer agent thereof, his
certificate representing the shares which he demands that the Company
purchase to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for a certificate of appropriate
denomination to be so stamped or endorsed. Upon subsequent transfers of
such dissenting shares on the books of the Company, the new
certificates issued therefor shall bear a like statement, together with
the name of the original dissenting holder of the shares.
(b) As used in this paragraph (C) "dissenting shares" means
shares which come within all the following descriptions:
1. Which were held of record on the date for the
determination of stockholders entitled to vote at the meeting at which
the transaction was approved and the holder thereof filed written
objection thereto with the Company before the taking of the vote
thereon and did not vote in favor thereof.
2. Which the holder has demanded that the Company purchase
at their fair market value in accordance with subparagraph (a) above.
3. Which the holder has submitted for endorsement in
accordance with subparagraph (a) above.
(c) Within five days after receipt of a copy of a demand for
purchase of shares as dissenting shares, the Company shall, by
registered or certified mail, return receipt requested, addressed to
the stockholder at his address as it appears on the records of the
Company, mail a written offer to purchase the shares if they are
determined to be dissenting shares, at a price deemed by the Company to
represent their fair market value.
(d) Payment of the fair market value of the dissenting shares
shall be made within 30 days after the amount thereof has been agreed
upon, upon surrender of the certificates therefor unless provided
otherwise by agreement.
(e) If the Company shall deny that the shares are dissenting
shares, or the Company shall fail to make an offer for the shares, or
the Company and the stockholder fail to agree upon the fair market
value of the shares, the Company or any stockholder demanding purchase
of his shares as dissenting shares, within four months after the date
upon which the Company mailed notice that the transaction was
effective, but not thereafter, may make written demand to the American
Arbitration Association,
71
<PAGE>
Los Angeles, California, for a determination of the value of the
dissenting shares or of whether the shares are dissenting shares, or
both, in accordance with the Commercial Arbitration Rules of such
Association, which arbitration shall be conducted in Los Angeles,
California. If such arbitration is commenced by the Company, there
shall be named therein all stockholders who have theretofore qualified
as dissenting stockholders. If such arbitration is commenced by any one
or more of such stockholders, the Company shall be permitted to join
therein all stockholders who have theretofore qualified as dissenting
stockholders. The arbitration shall be conducted before a panel of
three arbitrators selected in accordance with the Commercial
Arbitration Rules of the America Arbitration Association, and such
panel of arbitrators shall determine those stockholders who have
complied with the provisions of this Paragraph (C), and who have become
entitled to the valuation of any payment for their shares and the value
of such dissenting shares. Each stockholder who is a party to such
arbitration, and the Company, shall be afforded reasonable opportunity
to submit pertinent evidence on the value of the shares. Upon the
determination of the value of the stock and of the stockholders
entitled to payment therefor by the panel of arbitrators, such panel of
arbitrators shall direct the payment of such value to the stockholders
entitled thereto by the Company upon transfer to it of the certificates
representing such stock, which determination may be enforced by a court
of competent jurisdiction in the State of New York.
(f) The costs of the arbitration shall be assessed or
apportioned as the panel of arbitrators considers equitable.
(g) All action required or permitted to be taken by the
panel of arbitrators shall be taken by the majority decision of the
members of the panel of arbitrators.
(h) Except as expressly limited in this Paragraph (C),
holders of dissenting shares continue to have all the rights and
privileges incident to those shares until the fair market value of
their shares is agreed upon or determined. A holder of dissenting
shares may not withdraw his dissent or demand for payment unless the
Company, by its Board of Directors, consents thereto.
(i) Dissenting shares lose their status as dissenting
shares, and the holders thereof cease to be entitled to require the
Company to purchase their shares upon the happening of any of the
following
1. The Company abandons the transaction which the
dissenting stockholder did not approve.
2. The shares are surrendered for conversion into
shares of another class in accordance with the Certificate of
Incorporation, or transferred prior to their submission for endorsement
in accordance with subparagraph (a) above.
3. The holder of the dissenting shares and the Company
do not agree upon the status of the shares as dissenting shares and
upon the purchase price of the
72
<PAGE>
shares, and the holder of the dissenting shares does not file a written
demand for arbitration or intervene in an arbitration or is not made a
party to an arbitration in respect to dissenting shares within four
months after the date on which the notice of the effective date of the
transaction is mailed to the stockholders.
(j) If litigation is instituted to test the sufficiency or
regularity of the votes of the stockholders in authorizing a
transaction, the proceeding for compensation of any holder of
dissenting shares shall be suspended until final determination of such
litigation.
SEVENTH: The Company shall indemnify any and all persons whom it has
the power to indemnify pursuant to the General Corporation Law of Delaware
against any and all expenses, judgments, fines, amounts paid in settlement, and
any other liabilities to the fullest extent permitted by such law and may at the
discretion of the Board of Directors, purchase and maintain insurance, at its
expense, to protect itself and such persons against any expense, judgment, fine,
amount paid in settlement or other liability, whether or not the Company would
have the power to so indemnify such person under the General Corporation Law of
Delaware.
EIGHTH: A director of the Company shall not be personally liable to the
Company 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 Company 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 an improper personal benefit. If
the Delaware General Corporation Law is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Company shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of this Article by the stockholders of the Company
shall not adversely affect any right or protection of a director of the Company
existing at the time of such repeal or modification.
73
<PAGE>
IN WITNESS WHEREOF, OXIS INTERNATIONAL ,INC., a Delaware corporation
has caused this Second Restated Certificate of Incorporation to be signed by its
Chairman of the Board and attested by its Secretary, this _____ day of August,
1996.
OXIS INTERNATIONAL, INC., a
Delaware corporation
-------------------------------
Ray R. Rogers,
Chairman of the Board
ATTEST:
By: _______________________
Jon S. Pitcher,
Secretary
74
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the Registered Holder
in order to Convert the Series D Preferred Stock)
The undersigned hereby irrevocably elects to convert shares of Series D
Preferred Stock, represented by stock certificate No.(s). (the "Preferred Stock
Certificates") into shares of common stock ("Common Stock") of OXIS
International, Inc. (the "Corporation") according to the conditions of the
Corporation's Certificate of Incorporation with respect to Series D Preferred
Stock, as of the date written below. If securities are to be issued in the name
of a person other than the undersigned, the undersigned will pay all transfer
taxes payable with respect thereto and is delivering herewith such certificates.
No fee will be charged to the Holder for any conversion, except for transfer
taxes, if any. A copy of each Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by
the undersigned of the securities issuable to the undersigned upon conversion of
Series D Preferred Stock shall be made pursuant to registration of the
securities under the Securities Act of 1933, as amended (the "Act"), or pursuant
to an exemption from registration under the Act.
Date of Conversion:_______________________________
Applicable Conversion Price:______________________
Number of Shares of
Common Stock to be Issued:________________________
Signature:________________________________________
Name:_____________________________________________
Address:__________________________________________
* The Corporation is not required to issue shares of Common Stock until the
original Series D Preferred Stock Certificate(s) (or evidence of loss, theft or
desctruction thereof) to be converted are received by the Corporation or its
Transfer Agent. the Corporation shall issue and deliver
75
<PAGE>
shares of Common Stock to an overnight courier not later than two (2) business
days following receipt of the original Preferred Stock Certificate(s) to be
converted, and shall make payments pursuant to the Certificate of Incorporation
for the number of business days such issuance and delivery is late.
76
<PAGE>
EXHIBIT 10 (E)
SILICON VALLEY FINANCIAL SERVICES
A Division of Silicon Valley Bank
3003 Tasman Drive
Santa Clara, Ca. 95054
(408)654-1000 - Fax (408)980-6410
FACTORING AGREEMENT
This Factoring Agreement (the "Agreement) is made on the SIXTH day of
SEPTEMBER, 1996, by and between Silicon Valley Financial Services (a division of
Silicon Valley Bank) ("Buyer") having a place of business at the address
specified above and OXIS INTERNATIONAL, INC., A DELAWARE corporation, (the
"Parent"), and its wholly owned subsidiary, OXIS ACQUISITION CORPORATION (the
"Subsidiary"). The Parent and the Subsidiary are jointly referred to herein as
the "Seller" having its principal place of business and chief executive office
at
Street Address: 6040 N. Cutter Circle, Suite 317
City: Portland
County: Multnomah
State: Oregon
Zip code: 97271
Fax: 94-1620407
1. DEFINITIONS. When used herein, the following terms shall have the following
meanings.
1.1. "Account Balance" shall mean, on any given day, the gross amount
of all Purchased Receivables unpaid on that day.
1.2. "Account Debtor" shall have the meaning set forth in the
California Uniform Commercial Code and shall include any person
liable on any Purchased Receivable, including without limitation,
any guarantor of the Purchased Receivable and any issuer of a
letter of credit or banker's acceptance.
1.3. "Adjustments" shall mean all discounts, allowances, returns,
disputes, counterclaims, offsets, defense, rights of recoupment,
rights of return, warranty claims, or short payments, asserted by
or on behalf of any Account Debtor with respect to any Purchased
Receivable.
1.4. "Administrative Fee" shall have the meaning as set forth in
Section 3.3 hereof.
1.5. "Advance" shall have the meaning set forth in Section 2.2 hereof.
1.6. "Collateral" shall have the meaning set forth in Section 8 hereof.
1.7. "Collections" shall mean all good funds received by Buyer from or
on the behalf of an Account Debtor with respect to Purchased
Receivables.
1.8. "Compliance Certificate" shall mean a certificate, in a form
provided by Buyer to Seller, which contains the certification of
the chief financial officer of Seller that, among other things,
the representations and warranties set forth in this Agreement are
true and correct as of the date such certificate is delivered.
77
<PAGE>
1.9. "Event of Default" shall have the meaning set forth in Section 9
hereof.
1.10. "Finance Charges" shall have the meaning set forth in Section 3.2
hereof.
1.11. "Invoice Transmittal" shall mean a writing signed by an authorized
representative of Seller which accurately identifies the
receivables which Buyer, at its election, may purchase, and
includes for each such receivable the correct amount owed by the
Account Debtor, the name and address of the Account Debtor, the
invoice number, the invoice date and the account code.
1.12. "Obligations" shall mean all advances, financial accommodations,
liabilities, obligations, covenants and duties owing, arising, due
or payable by Seller to Buyer of any kind or nature, present or
future, arising under or in connection with this Agreement or
under any other document, instrument or agreement, whether or not
evidenced by any note, guarantee or other instrument, whether
arising on account or by overdraft, whether direct or indirect
(including those acquired by assignment) absolute or contingent,
primary or secondary, due or to become due, now owing or hereafter
arising, and however acquired; including, without limitation, all
Advances, Finance Charges, Administrative Fees, interest,
Repurchase Amounts, fees, expenses, professional fees and
attorneys' fees and other sums chargeable to Seller hereunder or
otherwise.
1.13. "Purchased Receivable" shall mean all those accounts, receivables,
chattel paper, instruments, contract rights, documents, general
intangibles, letters of credit, drafts, bankers acceptances, and
rights to payment, and all proceeds thereof (all of the foregoing
being referred to as "receivables") arising out of the invoices
and other agreements identified on or delivered with any Invoice
Transmittal delivered by Seller to Buyer which Buyer elects to
purchase and for which Buyer makes an Advance.
1.14. "Refund" shall have the meaning set forth in Section 3.5 hereof.
1.15. "Reserve" shall have the meaning set forth in Sections 2.4 hereof.
1.16. "Repurchase Amount" shall have the meaning set forth in Section
4.2 hereof.
1.17. "Reconciliation Date" shall mean the last calendar day of each
Reconciliation Period.
1.18. "Reconciliation Period" shall mean each calendar month of the
year.
2. PURCHASE AND SALE OF RECEIVABLE.
2.1. OFFER TO SELL RECEIVABLES. During the term hereof, and provided
that there does not then exist any Event of Default or any event
that with notice, lapse of time or otherwise would constitute an
Event of Default, Seller may request that Buyer purchase
receivables and Buyer may, in its sole discretion, elect to
purchase receivables. Seller shall deliver to Buyer an Invoice
Transmittal with respect to any receivable for which a request for
purchase is made. An authorized representative of Seller shall
sign each Invoice Transmittal delivered to Buyer. Buyer shall be
entitled to rely on all the information provided by Seller to
Buyer on or with the Invoice Transmittal and to rely on the
signature on any Invoice Transmittal as an authorized signature of
Seller.
78
<PAGE>
2.2. ACCEPTANCE OF RECEIVABLES. Buyer shall have no obligation to
purchase any receivable listed on an Invoice Transmittal. Buyer
may exercise its sole discretion in approving the credit of each
Account Debtor before buying any receivable. Upon acceptance by
Buyer of all or any of the receivables described on any Invoice
Transmittal, Buyer shall pay to Seller 80 (%) percent of the face
amount of each receivable Buyer desires------to purchase. Such
payment shall be the "Advance" with respect to such receivable.
Buyer may, from time to time, in its sole discretion, change the
percentage of the Advance. Upon Buyer's acceptance of the
receivable and payment to Seller of the Advance, the receivable
shall become a "Purchased Receivable." It shall be a condition to
each advance that (i) all of the representations and warranties
set forth in Section 6 of this Agreement be true and correct on
and as of the date of the related Invoice Transmittal and on and
as of the date of such Advance as though made at and as of each
such date, and (ii) no Event of Default or any event or condition
that with notice, lapse of time or otherwise would constitute an
Event of Default shall have occurred and be continuing, or would
result from such Advance. Notwithstanding the foregoing, in no
event shall the aggregate amount of all Purchased Receivables
outstanding at any time exceed FIVE HUNDRED THOUSAND AND
NO/100**** Dollars ($500,000.00).
2.3. EFFECTIVENESS OF SALE TO BUYER. Effective upon Buyers' payment of
an Advance, and for and in consideration thereof and in
consideration of the covenants of this Agreement, Seller hereby
absolutely sells, transfers and assigns to Buyer, all of Seller's
right, title and interest in and to each Purchased Receivable and
all monies due or which may become due on or with respect to such
Purchased Receivable. Buyer shall be the absolute owner of each
Purchased Receivable. Buyer shall have, with respect to any goods
related to the Purchased Receivable, all the rights and remedies
of an unpaid seller under the California Uniform Commercial Code
and other applicable law, including the rights of replevin, claim
and delivery, reclamation and stoppage in transit.
2.4. ESTABLISHMENT OF A RESERVE. Upon the purchase by Buyer of each
Purchased Receivable, Buyer shall establish a reserve. The reserve
shall be the amount by which the face amount of the Purchased
Receivable exceeds the advance on that Purchased Receivable (the
"Reserve"); provided, the Reserve with respect to all Purchased
Receivables outstanding at any one time shall be an amount not
less than 20(%) percent of the Account Balance at that time and
may be set at a higher percentage at Buyer's sole discretion. The
reserve shall be a book balance maintained on the records of Buyer
and shall not be a segregated fund.
3. COLLECTIONS, CHARGES AND REMITTANCES.
3.1. COLLECTIONS. Upon receipt by Buyer of Collections, Buyer shall
promptly credit such Collections to Seller's Account Balance on a
daily basis; provided, that if Seller is in default under this
Agreement, Buyer shall apply all Collections to Seller's
Obligations hereunder in such order and manner as Buyer may
determine. If an item
79
<PAGE>
of collection is not honored or Buyer does not receive good funds
for any reason, the amount shall be included in the Account
Balance as if the Collections had not been received and Finance
Charges under Section 3.2 shall accrue thereon.
3.2. FINANCE CHARGES. On each Reconciliation Date Seller shall pay to
Buyer a finance charge in an amount equal to 2.0(%) percent per
month of the average daily Account Balance outstanding during the
applicable Reconciliation Period (the "Finance Charges"). Buyer
shall deduct the accrued Finance Charges from the Reserve as set
forth in Section 3.5 below.
3.3. ADMINISTRATIVE FEE. On each Reconciliation Date Seller shall pay
to Buyer an Administrative Fee equal to 1.0 (%) percent of the
face amount of each Purchased Receivable first purchased during
that Reconciliation Period (the "Administrative Fee"). Buyer shall
deduct the Administrative Fee from the Reserve as set forth in
Section 3.5 below.
3.4. ACCOUNTING. Buyer shall prepare and send to Seller after the close
of business for each Reconciliation Period, an accounting of the
transactions for that Reconciliation Period, including the amount
of all Purchased Receivables, all Collections, and Adjustments,
Finance Charges, and the Administrative Fee. The accounting shall
be deemed correct and conclusive unless Seller makes written
objection to Buyer within thrity (30) days after the Buyer mails
the accounting to Seller.
3.5. REFUND TO SELLER. Provided that there does not exist an Event of
Default or any condition that with notice, lapse of time or
otherwise would constitute an Event of Default, Buyer shall refund
to Seller by check after the Reconciliation Date, the amount, if
any, which Buyer owes to Seller at the end of the Reconciliation
Period according to the accounting prepared by Buyer for the
Reconciliation Period (the "Refund"). The Refund shall be an
amount equal to:
(A) (1) The Reserve as of the beginning of that Reconciliation
Period, PLUS
(2) the Reserve created for each Purchased Receivable
purchased during that Reconciliation Period, MINUS
(B) The total for that Reconciliations Period of:
(1) the Administrative Fee;
(2) Finance Charges;
(3) Adjustments;
(4) Repurchase Amounts, to the extent Buyer has agreed to
accept payment thereof by deduction from the Refund;
(5) the Reserve for the Account Balance as of the first day of
the following Reconciliation Period in the minimum percentage
set forth in Section 2.4 hereof; and
(6) all amounts due, including professional fees and expenses,
as set forth Section 12 for which oral or written demand has
been made by Buyer to Seller during that Reconciliation Period
to the extent Buyer has agreed to accept payment thereof by
deduction from the Refund.
80
<PAGE>
In the event the formula set forth in this Section 3.5 results in an amount
due to Buyer from Seller, Seller shall make such payment in the same manner
as set forth in Section 4.3 hereof for repurchases. If the formula set
forth in this Section 3.5 results in an amount due to Seller from Buyer,
Buyer shall make such payment by check, subject to Buyer's rights under
Section 4.3 and Buyer's rights of offset and recoupment.
4. RECOURSE AND REPURCHASE OBLIGATIONS.
4.1 RECOURSE. Buyer's acquisition of Purchased Receivables from Seller
shall be with full recourse against Seller. In the event the
Obligations exceed the amount of Purchased Receivables and
collateral, Seller shall be liable for any deficiency.
4.2 SELLER'S AGREEMENT TO REPURCHASE. Seller agrees to pay to Buyer
on demand, the full face amount, or any unpaid portion, of any
Purchased
Receivable:
(A) which remains unpaid ninety (90) calendar days after the
invoice date; or
(B) which is owed by any Account Debtor who has filed, or has had
filed against it, any bankruptcy case, assignment for the
benefit of creditors, receivership, or insolvency proceeding
or who is generally not paying its debts as such debts become
due; or
(C) with respect to which there has been any breach of warranty of
representation set forth in Section 6 hereof or any breach of
any covenant contained in this Agreement; or
(D) with respect to which the Account Debtor asserts any discount,
allowance, return, dispute, counterclaim, offset, defense,
right of recoupment, right of return, warranty claim, or short
payment;
together with all reasonable attorneys' and professional fees and
expenses and all court costs incurred by Buyer in collecting such
Purchased Receivable and/or enforcing its rights under, or
collecting amounts owned by Seller in connection with, this
Agreement (collectively, the "Repurchase Amount").
4.3. SELLER'S PAYMENT OF THE REPURCHASE AMOUNT OR OTHER AMOUNTS DUE
BUYER. When any Repurchase Amount or other amount owing to Buyer
becomes due, Buyer shall inform Seller of the manner of payment
which may be any one or more of the following in Buyer's sole
discretion: (a) in cash immediately upon demand therefor; (b) by
delivery of substitute invoices and an Invoice Transmittal
acceptable to Buyer which shall thereupon become Purchased
Receivables; (c) by adjustment to the Reserve pursuant to Section
3.5 hereof; (d) by deduction from or offset against the amount
that otherwise would be forwarded to Seller in respect of any
further Advances that may be made by Buyer; or (f) by any
combination of the foregoing as Buyer may from time to time
choose.
4.4. SELLER'S AGREEMENT TO REPURCHASE RECEIVABLES. Upon and after the
occurrence of an Event of Default, Seller shall, upon Buyer's
demand (or, in the case of an Event of Default under Section 9(B),
immediately without notice or demand from Buyer) repurchase all
the Purchased Receivables then outstanding, or such portion
thereof as Buyer may demand. Such demand may, at Buyer's option,
include and Seller shall
81
<PAGE>
pay to Buyer Immediately upon demand, cash in an amount equal to
the Advance with respect to each Purchased Receivable then
outstanding together will all accrued Finance Charges,
Adjustments, Administrative Fees, attorney's and professional
fees, court costs and expenses as provided for herein, and any
other Obligations. Upon receipt of payment in full of the
Obligations, Buyers shall immediately instruct Account Debtors to
pay Seller directly, and return to Seller any Refund due to
Seller. For the purpose of calculating any Refund due under this
Section only, the Reconciliation Date shall be deemed to be the
date Buyer receives payment in good funds of all the Obligations
as provided in this Section 4.4.
5. POWER OF ATTORNEY. Seller does hereby irrevocably appoint Buyer and its
successors and assigns as Seller's true and lawful attorney in fact, and
hereby authorizes Buyer, regardless of whether there has been as Event of
Default, (a) to sell, assign, transfer, pledge, compromise, or discharge
the whole or any part of the Purchased Receivables; (b) to demand, collect,
receive, sue, and give releases to any Account Debtor for the monies due or
which may become due upon or with respect to the Purchased Receivables and
to compromise, prosecute, or defend any action, claim, case or proceeding
relating to the Purchased Receivables, including the filing of a claim or
the voting of such claims in any bankruptcy case, all in Buyer's name or
Seller's name, as Buyer may choose (c) to prepare, file and sign Seller's
name in any notice, claim, assignment, demand, draft, or notice of or
satisfaction of lien or mechanics' lien or similar document with respect to
Purchased Receivables;(d) to notify all Account Debtors with respect to the
Purchased Receivables to pay directly;(e) to receive, open and dispose of
all mail addressed to Seller for the purpose of collecting the Purchased
Receivables;(f) to endorse Seller's name on any check or other forms of
payment on the Purchased Receivables; (g) to execute on behalf of Seller
any and all instruments, documents, financing statements and the like to
perfect Buyer's interest in the Purchased Receivables and Collateral; and
(h) to do all acts and things necessary or expedient, in furtherance of any
such purposes. If Buyer receives a check or item which is payment for both
a Purchased Receivable and another receivable, the funds shall first be
applied to the Purchased Receivable and, so long as there does not exist an
Event of Default or an event that with notice, lapse of time or otherwise
would constitute an Event of Default, the excess shall be remitted to
Seller. Upon the occurrence and continuation of an event of Default, all of
power of attorney rights granted by Seller to Buyer hereunder shall be
applicable with respect to all Purchased Receivables and all Collateral.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS
6.1 RECEIVABLES' WARRANTIES, REPRESENTATIONS AND COVENANTS. To induce
Buyer to buy receivables and to render its services to Seller, and
with full knowledge that the truth and accuracy of the following
are being relied upon by the Buyer in determining whether to
accept receivables as Purchased Receivables, Seller represents,
warrants, covenants and agrees, with respect to each Invoice
Transmittal delivered to Buyer and each receivable described
therein, that:
82
<PAGE>
(A) Seller is the absolute owner of each receivable set forth in
the Invoice Transmittal and legal rights to sell, transfer and
assign such receivables;
(B) The correct amount of each receivables is as set forth in the
Invoice Transmittal and is not in dispute;
(C) The payment of each receivable is not contingent upon the
fulfillment of any obligation or contract, past or future and
any and all obligations required of the Seller have been
fulfilled as of the date of the Invoice Transmittal;
(D) Each receivable set forth on the Invoice Transmittal is based
on an actual sale and delivery of goods and/or services
actually rendered, is presently due and owing to Seller, is
not past due or in default, has not been previously sold,
assigned, transferred, or pledged, and is free of any and all
liens, security interests and encumbrances other than liens,
security interests or encumbrances in favor of Buyer or any
other division or affiliate of Silicon Valley Bank;
(E) There are no defenses, offsets, or counterclaims against any
of the receivables, and no agreement has been made under which
the Account Debtor may claim any deduction or discount, except
as otherwise stated in the Invoice Transmittal;
(F) Each Purchased Receivable shall be the property of the Buyer
and shall be collected by Buyer, but if for any reason it
should be paid to the Seller, Seller shall promptly notify
Buyer of such payment, shall hold checks, drafts, or monies so
received in trust for the benefit of Buyer, and shall promptly
transfer and deliver the same to the Buyer;
(G) Buyer shall have the right of endorsement, and also the right
to require endorsement by Seller, on all payments received in
connection with each Purchased Receivable and any proceeds of
Collateral;
(H) Seller, and to Seller's best knowledge , each Account Debtor
set forth in the Invoice Transmittal, are and shall remain
solvent as that term is defined in the United States
bankruptcy Code and the California Uniform Commercial Code,
and no such Account Debtor has filed or had filed against it a
voluntary petition for relief under the United States
Bankruptcy Code;
(I) Each Account Debtor named on the Invoice Transmittal will not
object to the payment for, or the quality or the quantity of
the subject matter of, the receivable and is liable for the
amount set forth on the Invoice Transmittal;
(J) Each Account Debtor shall promptly be notified, after
acceptance by Buyer, that the Purchased Receivable has been
transferred to and is payable to Buyer, and Seller shall not
take or permit any action to countermand such notification;
and
(K) All receivables forwarded to and accepted by Buyer after the
date hereof, and thereby becoming Purchased Receivables, shall
comply with each and every one of the foregoing
representations, warranties, covenants and agreements referred
to above in this Section 6.1
6.2 ADDITIONAL WARRANTIES, REPRESENTATIONS AND COVENANTS. In addition
to the foregoing warranties, representation and covenants, to
induce Buyer to buy
83
<PAGE>
receivables and to render its services to Seller, hereby Seller
represents, warrants, covenants and agrees that:
(A) Seller will not assign, transfer, sell, or grant, or permit
any lien or security interest any Purchased Receivables or
Collateral to or favor of any other party, without Buyer's
prior written consent;
(B) The Seller's name, form of organization, chief executive
office, and the place where records concerning all Purchased
Receivables and Collateral are kept is set forth at the
beginning of this Agreement, Collateral is located only at the
location set forth in the beginning of this Agreement, or, if
located at any additional location, as set forth on a schedule
attached to this Agreement, and Seller will give Buyer at
least thirty (30) days prior written notice if such name,
organization, chief executive office or other locations of
Collateral or records concerning Purchased Receivables or
Collateral is changed or added and shall execute any documents
necessary to perfect Buyer's interest in the Purchased
Receivables and the Collateral;
(C) Seller shall(i) pay all of its normal gross payroll for
employees, and all federal and state taxes, as and when due,
including without limitation all payroll and withholding taxes
and state sales taxes; (ii) deliver at any time and from time
to time at Buyer's request, evidence satisfactory to Buyer
that all such amounts have been paid to the proper taxing
authorities: and; (iii) if requested by Buyer, pay its payroll
and related taxes through the bank or any independent payroll
service acceptable Buyer.
(D) Seller has not, as of the time Seller delivers to Buyer an
Invoice Transmittal or as of the time Seller accepts any
Advance from Buyer, filed a voluntary petition for relief
under the United States Bankruptcy Code or had filed against
it an involuntary petition for relief:
(E) If Seller owns, holds or has any interest in, any copyrights
(whether registered, or unregistered), and licenses of any of
the foregoing, such interest has been disclosed to Buyer and
specifically listed and identified on a schedule to this
Agreement, and Seller shall immediately notify Buyer if Seller
hereafter obtains any interest in any additional copyrights,
or licenses that are significant in value or are material it
the conduct of its business; and
(F) Seller shall provide Buyer with a Compliance Certificate (i)
on a quarterly basis to be received by Buyer no later than the
fifth calendar day following each calendar quarter, and; (ii)
on a more frequent or other basis if and as requested by
Buyer.
7. ADJUSTMENTS. In the event of a breach of any of the representations
warranties or covenants set forth in Section 6.1, or in the event any
Adjustment or dispute is asserted by any Account Debtor, Seller shall
promptly advise Buyer and shall, subject to the Buyer's approval, resolve
such disputes and advise Buyer of any adjustments. Unless the disputed
Purchased Receivable is repurchased by Seller and the full Repurchase
Amount is paid, Buyer shall remain the absolute owner of any Purchased
Receivable which is subject to Adjustment or
84
<PAGE>
repurchased under Section 4.2 hereof, and any rejected, returned, or
recovered personal property, with the right to take possession thereof at
any time. If such possession is not taken by Buyer, Seller is to resell it
for the Buyer's account at Seller's expense with the proceeds made payable
to Buyer. While Seller retains possession of said returned goods, Seller
shall segregate said goods and mark them "property of Silicon Valley
Financial Services."
8. SECURITY INTEREST. To secure the prompt payment and performance to Buyer of
all Obligations, Seller hereby grants to Buyer a continuing lien upon and
security interest in all of Seller's now existing or hereafter arising
rights and interest in the following, whether now owned or existing or
hereafter created, acquired, or arising and wherever located (collectively,
the "Collateral"):
(A) All accounts, receivables, contract rights, chattel paper,
instruments, documents, letters of credit, bankers
acceptances, drafts, checks, cash, securities, and general
intangibles ( including, without limitation, all claims,
causes of action, deposit accounts, guaranties, rights in and
claims under insurance policies ( including rights to premium
refunds), rights to tax refunds, copyrights, rights in and
under license agreements and all other intellectual property
excluding patents and trademarks);
(B) All Inventory, including Seller's rights to any returned or
rejected goods, with respect to which Buyer shall have all the
rights of any unpaid seller, including the rights of repelvin,
claim and delivery, reclamation, and stoppage in transit;
(C) All monies, refunds and other amounts due Seller, including,
without limitation, amounts due Seller under this Agreement (
including Seller's right of offset and recoupment);
(D) All equipment, machinery, furniture, furnishing, fixtures,
tools, supplies and motor vehicles;
(E) All farm products, crops, timber, minerals and the like
(including oil and gas);
(F) All accessions to, substitutions for, and replacements of all
of the foregoing;
(G) All books and records pertaining to all of the foregoing; and
(H) All proceeds of the foregoing, whether due to voluntary or
involuntary disposition, including insurance proceeds.
Seller is not authorized to sell, assign, transfer or otherwise convey any
Collateral without Buyer's prior written consent, except for the sale of
finished inventory in the Seller's usual course of business. Seller agrees
to sign UCC financing statements, in a form acceptable to Buyer, and any
other instruments and documents requested by Buyer to evidence, perfect, or
protect the interests of Buyer in the Collateral. Seller agrees to deliver
to Buyer the originals of all instruments, chattel paper and documents
evidencing or related to Purchased Receivables and Collateral.
9. DEFAULT. The occurrence of any one or more of the following shall
constitute an Event of Default here under.
(A) Seller fails to pay any amount owed to Buyer as and when due;
85
<PAGE>
(B) There shall be commenced by or against Seller any voluntary or
involuntary case under the United States Bankruptcy Code, or
any assignment for the benefit of creditors, or appointment of
a receiver or custodian for any of its assets;
(C) Seller shall become insolvent in that its debts are greater
than the fair value of its assets, or Seller is generally not
paying its debts as they become due or is left with
unreasonably small capital;
(D) Any involuntary lien, garnishment, attachment or the like is
issued against or attaches to the Purchased Receivables or any
Collateral;
(E) Seller shall breach any covenant, agreement, warranty, or
representation set forth herein, and the same is not cured to
Buyer's satisfaction within ten (10) days after Buyer has
given Seller oral or written notice thereof; provided, that if
such breach is incapable of being cured it shall constitute an
immediate default hereunder;
(F) Seller is not in compliance with, or otherwise is in default
under, any term of any document, instrument or agreement
evidencing a debt, obligation or liability of any kind or
character of Seller, now or hereafter existing, in favor of
Buyer or any division or affiliate of Silicon Valley Bank,
regardless of whether such debt, obligation or liability is
direct or indirect, primary or secondary, joint, several or
joint and several, or fixed or contingent, together with any
and all renewals and extensions of such debts, obligations and
liabilities, or any part thereof;
(G) An event of default shall occur under any guaranty executed by
any guarantor of the Obligations of Seller to Buyer under this
Agreement, or any material provision of any such guaranty
shall for any reason cease to be valid or enforceable or any
such guaranty shall be repudiated or terminated, including by
operation of law;
(H) A default or event of default shall occur under any agreement
between Seller and any creditor of Seller that has entered
into a subordination agreement with Buyer; or
(I) Any creditor that has entered into a subordination agreement
with Buyer shall breach any of the terms or not comply with
such subordination agreement.
10. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default, (1)
without implying any obligation to buy receivables, Buyer may cease buying
receivables or extending any financial accommodations to Seller; (2) all or
a portion of the Obligations shall be, at the option and upon demand by
Buyer, or with respect to an Event of Default described in Section 9(B),
automatically and without notice or demand, due and payable in full; and
(3) Buyer shall have and may exercise all the rights and remedies under
this Agreement and under applicable law, including the rights and remedies
of a secured party under the California Uniform Commercial Code all the
power of attorney rights described in Section 5 with respect to all
Collateral, and the right to collect, dispose of, sell, lease, use, and
realize upon all Purchased Receivables and all Collateral in any commercial
reasonable manner. Seller and Buyer agree that any notice of sale required
to be given to Seller shall be deemed to be reasonable if given five (5)
days prior to the date on or after which the sale may be held.
86
<PAGE>
In the event that the Obligations are accelerated hereunder, Seller shall
repurchase all of the Purchased Receivables as set forth in Section 4.4.
11. ACCRUAL OF INTEREST. If any amount owed by Seller hereunder is not paid
when due, including, without limitation, amounts due under Section 3.5,
Repurchase Amounts, amounts due under Section 12, and any other
Obligations, such amounts shall bear interest at a per annum rate equal to
the per annum rate of the Finance Charges until the earlier of (i) payment
in good funds or (ii) entry of a final judgment thereof, at which time the
principal amount of any money judgment remaining unsatisfied shall accrue
interest at the highest rate allowed by applicable law.
12. FEES, COSTS AND EXPENSES; INDEMNIFICATION. The Seller will pay to Buyer
immediately upon demand all fees, costs and expenses (including fees of
attorneys and professionals and their costs and expenses) that Buyer incurs
or may from time to time impose in connection with any of the following:
(a) preparing, negotiating, administering, and enforcing this Agreement or
any other agreement executed in connection herewith, including any
amendments, waivers or consents in connection with any of the foregoing,
(b) any litigation or dispute (whether instituted by Buyer, Seller or any
other person) in any way relating to the Purchased Receivables, the
Collateral, this agreement or any other agreement executed in connection
herewith or therewith, (d) enforcing any rights against Seller or any
guarantor, or any Account Debtor, (e) protecting or enforcing its interest
in the Purchased Receivables or the Collateral, (f) collecting the
Purchased Receivables and the Obligations, and (g) the representation of
Buyer in connection with any bankruptcy case or insolvency proceedings
involving Seller, any Purchased Receivable, the Collateral, any Account
Debtor, or any guarantor. Seller shall indemnify and hold Buyer harmless
from and against any and all claims, actions, damages, costs, expenses, and
liabilities of any nature whatsoever arising in connection with any of the
foregoing.
13. SEVERABILITY, WAIVER, AND CHOICE OF LAW. In the event that any provision of
this Agreement is deemed invalid by reason of law, this Agreement will be
construed as not containing such provision and the remainder of the
Agreement shall remain in full force and effect. Buyer retains all of its
rights, even if it makes an Advance after default. If Buyer waives a
default, it may enforce a later default. Any consent or waiver under, or
amendment of, this Agreement must be in writing. Nothing contained herein,
or any action taken or not taken by Buyer at any time, shall be construed
at any time to be indicative of any obligation or willingness on the part
of Buyer to amend this Agreement or to grant to Seller any waivers or
consents. This Agreement has been transmitted by Seller to Buyer at Buyer's
office in the State of California and has been executed and accepted by
Buyer in the State of California. This Agreement shall be governed by and
interpreted in accordance with the internal laws of the State of
California.
87
<PAGE>
14. ACCOUNT COLLECTION SERVICES. Certain Account Debtors may require or prefer
that all of Seller's receivables be paid to the same address and/or party,
or Seller and Buyer may agree that all receivables with respect to certain
Account Debtors be paid to one party. In such event Buyer and Seller may
agree that Buyer shall collect all receivables whether owned by Seller or
Buyer and (provided that there does not then exist an Event of Default or
event that with notice, lapse or time or otherwise would constitute an
Event of Default, and subject to Buyer's rights in the Collateral) Buyer
agrees to remit to Seller the amount of the receivables collections it
receives with respect to receivables other than Purchased Receivables. It
is understood and agreed by Seller that this Section does not impose any
affirmative duty on Buyer to do any act other than to turn over such
amounts. All such receivables and collections are Collateral and in the
event of Seller's default hereunder, Buyer shall have no duty to remit
collections of Collateral and may apply such collections to the obligations
hereunder and Buyer shall have the rights of a secured party under the
California Uniform Commercial Code.
15. NOTICES. All notices shall be given to Buyer and Seller at the addresses or
faxes set forth on the first page of this Agreement and shall be deemed to
have been delivered and received: (a) if mailed, three(3) calendar days
after deposited in the United Stated mail, first class, postage pre-paid,
(b) one (1) calendar day after deposit with an overnight mail or messenger
service; or (c) on the same date of confirmed transmission if sent by hand
delivery, telecopy, telefax or telex.
16. JURY TRIAL. SELLER AND BUYER EACH HEREBY (a) WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL ON ANY CLAIM OR ACTION ARISING OUT OF OR IN CONNECTION WITH
THIS AGREEMENT, ANY RELATED AGREEMENTS, OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY; (b) RECOGNIZE AND AGREE THAT THE FOREGOING
WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT; AND (c) REPRESENT AND WARRANT THAT IT HAS REVIEWED THIS WAIVER,
HAS DETERMINED FOR ITSELF THE NECESSITY TO REVIEW THE SAME WITH ITS LEGAL
COUNSEL, AND KNOWINGLY AND VOLUNTARILY WAIVES ALL RIGHTS TO A JURY TRIAL.
17. TERM AND TERMINATION. The term of this Agreement shall be for one (1) year
from the date hereof, and from year to year thereafter unless terminated in
writing by Buyer or Seller. Seller and Buyer shall each have the right to
terminate this Agreement at any time. Notwithstanding the foregoing, any
termination of this Agreement shall not affect Buyer's security interest in
the Collateral and Buyer's ownership of the Purchased Receivables and this
Agreement shall continue to be effective and Buyer's rights and remedies
hereunder shall survive such termination, until all transactions entered
into and Obligations incurred hereunder or in connection herewith have been
completed and satisfied in full.
88
<PAGE>
18. TITLES AND SECTION HEADINGS. The titles and section headings used herein
are for convenience only and shall not be used in interpreting this
Agreement.
19. OTHER AGREEMENTS. The terms and provision of this Agreement shall not
adversely affect the rights of Buyer or any other division or affiliate of
Silicon Valley Bank under any other document, instrument or agreement. The
terms of such other documents, instruments and agreements shall remain in
full force and effect notwithstanding the execution of this Agreement. In
the event of a conflict between any provision of this Agreement and any
provision of any other document, instrument or agreement between Seller on
the one hand, and Buyer or any other division or affiliate of Silicon Valey
Bank on the other hand, Buyer shall determine in its sole discretion which
provision shall apply. Seller acknowledges specifically that any security
agreements, liens and/or security interests currently securing payment of
any obligations of Seller owing to Buyer or any other division or affiliate
of Silicon Valley Bank also secure Seller's obligations under Agreement,
and are valid and subsisting and are not adversely affected by execution of
this Agreement. Seller further acknowledges that (a) any collateral under
other outstanding security agreements or other documents between Seller and
Buyer or any other division or affiliate of Silicon Valley Bank secures the
obligations of Seller under this Agreement and (b) a default by Seller
under this Agreement constitutes a default under other outstanding
agreements between Seller and Buyer or any other division or affiliate of
Silicon Valley Bank.
89
<PAGE>
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement on the day and
year above written.
SELLER: OXIS INTERNATIONAL, INC. SELLER: OXIS ACQUISITION CORPORATION
By s/Jon S. Pitcher By s/Jon S. Pitcher
---------------------- --------------------
Title C.F.O. and Secretary Title C.F.O.
---------------------- --------------------
BUYER: SILICON VALLEY FINANCIAL SERVICES
A division of Silicon Valley Bank
By
------------------------------
Title
---------------------------
90
<PAGE>
EXHIBIT 21 (A)
SUBSIDIARIES OF OXIS INTERNATIONAL, INC.
As of December 31, 1996, the Company's subsidiaries were as follows:
Name Jurisdiction of incorporation
---- -----------------------------
OXIS International S.A. France
OXIS Acquisition Corporation Delaware
OXIS Isle of Man Limited Isle of Man
91
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-64451 on Form S-8 and in Registration Statements Nos. 33-61087, 333-5921, and
333-18041 on Form S-3 of our report dated March 7, 1997 (which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
Company's ability to continue as a going concern) appearing in this Annual
Report on Form 10-K of OXIS International, Inc. for the year ended December 31,
1996.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 25, 1997
92
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 422,000
<SECURITIES> 0
<RECEIVABLES> 861,000
<ALLOWANCES> 0
<INVENTORY> 591,000
<CURRENT-ASSETS> 2,065,000
<PP&E> 1,327,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,997,000
<CURRENT-LIABILITIES> 3,470,000
<BONDS> 0
0
23,000
<COMMON> 6,895,000
<OTHER-SE> (76,000)
<TOTAL-LIABILITY-AND-EQUITY> 7,997,000
<SALES> 4,802,000
<TOTAL-REVENUES> 4,867,000
<CGS> 3,009,000
<TOTAL-COSTS> 3,009,000
<OTHER-EXPENSES> 4,908,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138,000
<INCOME-PRETAX> (5,992,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,992,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,992,000)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> 0
</TABLE>
