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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the fiscal year ended December 31, 1997.
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number O-8092
OXIS International, Inc.
A Delaware corporation
I.R.S. Employer Identification No. 94-1620407
6040 N. Cutter Circle, Suite 317
Portland, OR 97217
Telephone: (503) 283-3911
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.50 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant as February 28, 1998 (assuming conversion of all outstanding voting
preferred stock into common stock) was $17,862,000.
Number of shares outstanding of Registrant's common stock as of February 28,
1998: 28,775,324 shares.
Certain of the information required by Part III of this Form 10-K is
incorporated by reference from a portion of the Company's Proxy Statement for
1998 Annual Meeting of Stockholders.
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CONTENTS
<TABLE>
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PART I PAGE
<S> <C> <C>
Item 1. Business............................................. 1
Item 2. Properties........................................... 10
Item 3. Legal Proceedings.................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.. 11
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters.................................. 11
Item 6. Selected Financial Data.............................. 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 13
Item 7 A. Quantitative and Qualitative Disclosures About Market
Risk - Not Applicable
Item 8. Financial Statements and Supplementary Data.......... 18
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............... 42
PART III
Item 10. Directors and Executive Officers of the Registrant... 42
Item 11. Executive Compensation............................... 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management....................................... 42
Item 13. Certain Relationships and Related Transactions....... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................. 43
SIGNATURES.............................................................. 44
EXHIBIT INDEX........................................................... 45
</TABLE>
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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., ("OXIS" or 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.
In February 1998, the Company's Board of Directors approved the restructuring
of the Corporation into two wholly owned subsidiaries, OXIS Health Products,
Inc. and OXIS Therapeutics, Inc. Although the restructuring has not yet been
completed, these subsidiary corporations have been formed. The Company's
international diagnostic business which markets research and commercial
diagnostic assays and fine chemicals to research and clinical laboratories and
other customers will be carried out by OXIS Health Products, Inc. The
Company's drug discovery business focused on new drugs to treat diseases
associated with tissue damage from free radicals and ROS will be carried out
by OXIS Therapeutics, Inc. The Company is in the process of transferring
assets and liabilities to the new subsidiary corporations.
Effective March 18, 1998, Timothy C. Rodell, M.D., formerly Chief Operating
Officer of OXIS International, Inc., was appointed President of OXIS
Therapeutics, Inc.; and Humberto V. Reyes, formerly Senior Vice President of
OXIS International, Inc. was appointed President of OXIS Health Products, Inc.
At the same time, Anna D. Barker, Ph.D., resigned as President and Chief
Executive Officer of OXIS International, Inc., and Ray R. Rogers, Chairman of
OXIS International, Inc., also became its Chief Executive Officer.
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 is
developing lead molecules from three series of small molecular weight
antioxidants. The first of these lead molecules has entered a Phase II
clinical trial, and the second and third are in preclinical development.
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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 eleven assays to measure
oxidative stress.
The Company's thirteen 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.
Through a business acquisition completed December 31, 1997, the Company now
develops, manufactures and sells a variety of medical instruments.
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. Facilities for
development and manufacturing medical instruments are located at 55 Steam
Whistle Drive, Ivyland, PA 18974.
ACQUISITIONS/MERGERS
In September 1994, the Company acquired all of the capital stock of 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 which was 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
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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 IBC 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.
On December 31, 1997, the Company acquired all of the issued and outstanding
capital stock of Innovative Medical Systems Corp. ("IMS"), a Pennsylvania
corporation pursuant to a transaction whereby the Company acquired all of the
outstanding stock of IMS in exchange for 1,000,000 shares of the Company's
common stock issued immediately and additional common shares to be issued.
IMS develops, manufactures, markets and sells medical instruments, including a
laboratory analyzer that is being modified to automate the Company's assays to
measure markers of oxidative stress.
RESEARCH AND DEVELOPMENT
The Company's research and development programs with respect to its
therapeutics business 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 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.
Because of the wide range of diseases and organ systems affected by oxidative
stress and its consequences, no single compound or family of compounds is
likely to be appropriate for all indications. For this reason, OXIS is
developing three families of molecules which are targeted to different disease
indications.
<TABLE>
<CAPTION>
GPx Mimics Lipid Soluble L-ergothioneine
BXT-51072 Antioxidants and analogs
<S> <C> <C>
Inflammatory bowel disease Neurodegenerative Acute respiratory distress syndrome
Acute respiratory distress syndrome Alzheimer disease Transplant
Restenosis Parkinson disease AIDS
Asthma Arthlerosclerosis Nutrition
Skin Cosmetic
</TABLE>
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As shown in the above diagram, the Company is targeting acute and subacute
inflammatory diseases with a family of small molecular weight mimics of the
enzyme glutathione peroxidase ("GPx"). These molecules have been demonstrated
to both block direct oxidative damage in vitro, to block nuclear factor kappa
B ("NFkB") activation at low nanomolar concentrations and to block the
production of numerous cytokines and other molecules which are under the
control of NFkB. These molecules have also been shown in animal models to
block endotoxic shock, restenosis and inflammatory bowel disease.
The second series of molecules is designed to mimic the salutary activity of
vitamin E while addressing its limitations as a pharmaceutical. Vitamin E is
the predominant natural lipid soluble antioxidant in animals and, as such, has
a primary role in the protection of cell membranes from damage from ROS. This
role is critical in cardiovascular and central nervous system disease. The
limitations of vitamin E as an antioxidant are its potency, which is very low,
and its kinetics of membrane incorporation. The OXIS lipid soluble
antioxidants are twenty to forty fold more potent than vitamin E as
antioxidants and are incorporated into membranes a great deal more quickly.
These molecules are currently targeted for development in the area of
cardiovascular and neurodegenerative disease.
The third series of molecules are designed around a natural antioxidant known
as L-ergothioneine. L-ergothioneine itself is a sulfur-containing
antioxidant, related to glutathione, which is a natural product and which is
contained in tissues in the body subjected to significant oxidative stress
such as the lens of the eye, the liver and red blood cells. Unlike
glutathione, l-ergothioneine is stable in aqueous solutions and is well
absorbed orally. Humans do not synthesize l-ergothioneine and therefore
require it in their diet. It has been demonstrated to be depleted in the lens
of the eye in patients with cataracts, and the company is currently
investigating its levels in a number of other disease states including AIDS.
OXIS holds a patent for what it believes to be the only commercially feasible
synthetic process for pure l-ergothioneine. In addition, Company scientists
have synthesized a series of proprietary analogs of l-ergothioneine which are
more potent and which can be developed in areas where a proprietary position
on natural l-ergothioneine is not available.
CURRENT PROJECT STATUS
BXT-51072 AND GPX MIMICS. BXT-51072 is the lead molecule from the Company's
GPx mimics program. In vitro BXT-51072 blocks the direct toxicity of
oxidative stress and has also been shown to inhibit the activation of NFkB and
the production of numerous inflammatory mediators including tumor necrosis
factor ("TNF"), interleukins 6 and 8 (Il-6 and Il-8) and the expression of a
number of cellular adhesion molecules. In animal models, BXT-51072 has shown
that it protects against toxicity from endotoxin, blocks the clinical
manifestations of inflammatory bowel disease and prevents restenosis following
balloon angioplasty.
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STRUCTURE OF BXT-51072
(GRAPHIC APPEARS HERE)
BXT-51072 entered human clinical development and completed a Phase I clinical
trial in late 1996. In that trial, it showed no toxicity and was found to be
well absorbed orally.
BXT-51072 is currently in Phase II clinical trials for ulcerative colitis.
The first part of this Phase II study, which will investigate safety,
pharmacokinetics, and activity is expected to be completed in the first half
of 1998 and data from a second, double-blind, placebo controlled efficacy
phase should be available by early 1999.
The Company is also in the process of initiating a small Phase IB clinical
trial in asthma. Assuming adequate resources, this trial could be completed
in 1998.
LIPID SOLUBLE ANTIOXIDANTS (LSAS). These molecules are currently in
preclinical development for cardiovascular disease and neurodegenerative
disease. The Company has targeted a late 1998 to early 1999 Investigational
new drug application for one of these molecules.
L-ERGOTHIONEINE AND ANALOGS. L-ergothioneine is currently being investigated
in animals for acute respiratory distress syndrome ("ARDS"). Acute and
subacute, non-GLP toxicity studies have been completed and scale-up has
proceeded to the 1 kg level.
L-ergothioneine, as a natural product, is being developed by the Company for
use in cosmetics, food preservation and dietary supplementation.
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 eight 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. The Company is in the
process of developing an instrument system to support certain of the assays
for markers of oxidative stress.
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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). The Company is not currently pursuing
an active research program in PEG technology, but this technology is still
available for license or sale. During 1997 the Company entered into a
nonexclusive licensing arrangement giving Enzon, Inc. the right to use certain
of its PEG technologies.
Overall, the Company has an extensive portfolio of patents that cover its
synthetic antioxidant therapeutic molecules, superoxide dismutase,
polyethylene glycol technology, assays for markers of oxidative stress and
fine chemicals. The Company currently holds fifteen U.S. patents and nine
French patents and has filed for seven 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 and no assurances can be given that it will enter 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 successfully 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 competed, that required regulatory
approvals will be obtained, or that any such products, if developed and
introduced will be successfully marketed. Furthermore, no assurances can be
given that the Company will be able to raise the working capital necessary to
continue to advance its research and development programs. 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 $4,319,000, $4,908,000 and $4,299,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
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PRODUCTS
DIAGNOSTIC PRODUCTS
Revenues from sales of the Company's diagnostic products comprised 49% of its
revenues in both 1997 and 1996, and 44% of its 1995 revenues.
OXIDATIVE STRESS RESEARCH PRODUCTS. The Company has twenty-four research
products available for sale that include:
Assays for markers of oxidative stress
Spin traps
Antibodies
Proteins
Specialty chemicals
Controls
The primary technology foundation for the research product line are eleven
assay test kits 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)
c-GPx-340 (cellular glutathione peroxidase)
GR-340 (glutathione reductase)
8-Isoprostane (8 epi-prostagladin F2alpha)
Nitric Oxide
Nitric Oxide, Non enzymatic
These assay kits utilize either chemical (colorimetric) or immunoenzymatic
(EIA) reactions that can be read using laboratory spectrophotometers and
microplate readers, respectively. The 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.
Eight of the Company's research assays are manufactured at the facility in
Portland, Oregon. The others are manufactured pursuant to private label
agreements.
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The Company's assays for markers of oxidative stress are generally protected
by trade secrets, and to a more limited extent, 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 and offer assays that compete directly with the Company's
assays for superoxide dismutase, cellular glutathione peroxidase, reduced
glutathione, lipid peroxidation and glutathione reductase.
THERAPEUTIC DRUG MONITORING (TDM) ASSAYS. The Company sells fourteen TDM
assays which are based on FPIA (fluorescent polarization immunoassay)
technology. These products are sold under the trade name INNOFLUORO(TM). The
Company's test menu encompasses approximately 90% of the routine TDM tests
performed by clinical and reference laboratories worldwide. These assays are
designed for use on the Abbott Laboratories TDx(R) and TDx/FL/x/(R) analyzers.
In May 1997, the Company launched in the U.S. a new anti-convulsant assay for
the measurement of the drug TOPAMAX(R) developed and marketed by McNeil
Pharmaceutical. TOPAMAX(R) is one of the newer classes of drugs developed to
treat difficult cases of epilepsy.
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.
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.
All of the research products and 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
for its diagnostic products. 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.
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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 42% of the Company's total revenues in 1997, 50% in
1996 and 48% in 1995.
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 and clinical studies of their own pharmaceutical preparations of
SOD to gain regulatory approval.
The Company sells bulk bSOD for human use outside the United States, but does
not market dosage forms of bSOD for human use. The Company does not currently
intend to seek approval for human use of bSOD in the United States for any
indication, and only intends to sell bulk bSOD to the extent that there is a
demand for it. 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 31%
of the Company's revenues in 1997, 39% in 1996 and 16% in 1995. No assurances
can be given that the Company will continue selling bSOD to Tedec-Meiji or any
other party.
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MEDICAL INSTRUMENTS
With the acquisition of IMS, effective December 31, 1997, the Company acquired
staff, facilities and equipment to develop and manufacture medical
instruments. Instruments currently being manufactured by IMS include tissue
processors, automated stainers and a hemodynamic monitoring system. IMS
generally manufactures product to fill specific orders, and, as of December
31, 1997, had a backlog of orders of approximately $1,400,000. While the
Company believes such orders to be firm, orders from customers are generally
cancelable.
EMPLOYEES
As of December 31, 1997, the Company had 85 employees (65 in the United States
and 20 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 9 to the consolidated financial statements.
ITEM 2. PROPERTIES.
The Company occupies, pursuant to leases expiring in 1998, office and
laboratory space in Portland, Oregon and near Paris, France.
IMS, acquired by the Company on December 31, 1997, owns a 45,000 square foot
building on approximately four acres located near Philadelphia, Pennsylvania.
This facility houses the Company's medical instrument development and
manufacturing business. The land and building are subject to a mortgage
securing a note in the amount of $1,535,000.
Although the premises currently occupied are suitable for the Company's
present requirements, the Company believes that other equally suitable
premises are readily available.
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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. The Company has received correspondence
from a representative of the holder of its Series D Preferred Stock, stating
that the Series D Preferred holder is entitled to certain interest and other
payments and other rights with respect to the remaining Series D Preferred
Stock which is not convertible into common stock.
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, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
The Company's common stock is traded on The NASDAQ Stock Market and the French
stock market, Le Nouveau Marche under the symbol OXIS.
Recent quarterly high and low prices of the Company's common stock on the
NASDAQ Stock Market are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- ---------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 29/32 25/32 1 3/8 1 17/32 1 25/32 2 1/8 2 11/16 2
Low 5/16 7/16 19/32 29/32 1 7/32 1 1/2 1 7/16 1 1/2
</TABLE>
The Company has an estimated 6,800 stockholders, including approximately 2,700
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.
The Company has been notified by the NASDAQ Stock Market, Inc. that, because
the bid price of its common stock is less than $1.00, its common stock is
currently not in compliance with the NASDAQ Marketplace Rule 4450 (a) (5)
relating to the NASDAQ minimum bid price requirements. The Company has been
informed by the NASDAQ that it has until May 28, 1998, to regain compliance
with this standard. The Company may regain compliance if the bid price for
its common
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stock closes at or above the minimum requirement for at least ten (10)
consecutive trade days. If the security does not regain compliance within 90
days, NASDAQ will issue a delisting letter which will identify the review
procedures available to the Company. The Company may request a review at or
before that time, which, the NASDAQ has stated, will stay delisting until a
hearing occurs. If the common stock of the Company ceases to be listed on the
NASDAQ, such failure to be listed could have a material adverse effect on the
transferability of the Company's common stock, and may have a material adverse
effect on the value of the common stock as well.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FOR YEARS ENDED
DECEMBER 31: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total Revenues/1// $ 5,059,000 $ 4,867,000 $ 5,136,000 $ 3,470,000 $ 3,044,000
Net loss $(5,151,000) $(5,992,000) $(8,892,000)/2// $(5,567,000)/3// $(1,485,000)/4//
Net loss
per share - basic $ (.23) $ (.47) $ (.82)/2// $ (.88)/3// $ (.30)/4//
<CAPTION>
AS OF DECEMBER 31: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total assets $12,575,000 $ 7,997,000 $ 9,870,000 $11,194,000 $ 3,124,000
Long-term
obligations $ 1,570,000 $ 2,000 $ 1,332,000 $ 376,000 --
Common shares
outstanding 28,596,320 13,790,736 12,124,423 9,322,762 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, 1995 and 1997 that affect the
comparability of the amounts reflected in the table above.
12
<PAGE>
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"). IBC was merged into the Company. OXIS S.A. operates as a
subsidiary of the Company.
In July 1995, 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.
On December 31, 1997, the Company acquired Innovative Medical Systems Corp.
("IMS"). IMS develops, manufactures, markets and sells medical equipment.
The acquisitions of all four companies described above were completed through
the exchange of stock and were accounted for as purchases; accordingly, the
acquired assets and liabilities were recorded at their estimated fair values
as of the dates of the acquisitions.
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, the results of
Therox's operations are included in the consolidated statements of operations
from July 19, 1995, and the results of IMS' operations will only be included
in the Company's consolidated statement of operations beginning January 1,
1998.
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.
13
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position improved during 1997 to $958,000 as of
December 31, 1997 from a deficit of $1,405,000 as of December 31, 1996. This
increase in working capital resulted primarily from the proceeds from issuance
of common stock of $6,215,000 plus $203,000 in net working capital resulting
from the acquisition of IMS, offset by the effect of the net loss for 1997
($5,151,000 less non-cash charges of $1,224,000).
Cash and cash equivalents increased from $422,000 at December 31, 1996, to
$1,290,000 at December 31, 1997.
However, the Company expects to continue to report losses in 1998 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 1998. 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 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 (as 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.
As described in Note 6 to the consolidated financial statements, during 1997,
the Company raised approximately $5,964,000 cash through the sale of its
common stock in a public offering to European investors. Substantial
additional capital will be required during 1998 to continue operating in
accordance with management's current plans. If sufficient capital is raised
during 1998, the Company expects that research and development expenditures
for 1998 will be similar to the 1997 amount. The Company has engaged agents
to assist on a best-efforts basis to complete a private placement of its
common stock. 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 1998, it would endeavor to extend
its ability to continue in business through the substantial reduction of
personnel and facility costs particularly in the therapeutics business, by
slowing research and development efforts, and by reducing other operating
costs; however, no assurances can be given that it will be able to do so. 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.
14
<PAGE>
INFORMATION SYSTEMS AND THE YEAR 2000
As is the case with most other companies using computers in their operations,
the Company is in the process of addressing the Year 2000 problem. The
Company is currently engaged in a project to review computer software to
determine whether its programs will consistently and properly recognize the
Year 2000. Certain of the Company's systems include hardware and packaged
software recently purchased from vendors who have represented that these
systems are already Year 2000 compliant. The Company plans to replace certain
other hardware and packaged software during the next year regardless of the
Year 2000 problem.
The Company will utilize both internal and external resources to reprogram or
replace and test all of its software for Year 2000 compliance, and the Company
expects to complete the project in early 1999. The cost for this project is
not expected to have a material effect on the Company's consolidated financial
statements.
RESULTS OF OPERATIONS
REVENUES
The Company's sales for the past three years consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Diagnostic and research assays $2,495,000 $2,364,000 $2,240,000
Bovine superoxide dismutase (bSOD)
for research and human use 1,559,000 1,935,000 1,817,000
Palosein(R) (bSOD for veterinary use) 542,000 480,000 555,000
Other 254,000 23,000 370,000
---------- ---------- ----------
Total sales $4,850,000 $4,802,000 $4,982,000
========== ========== ==========
</TABLE>
Diagnostic and research assay sales volumes have increased modestly in each of
the last two years, resulting in a 6% increases in sales in 1996 and 1997.
Bulk bSOD sales in 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 decline in sales to Sanofi Winthrop has been offset by
increases in sales of bSOD to Tedec-Meiji Farma S.A., the Company's Spanish
licensee. The decrease in bulk bSOD sales in 1997 as compared to 1996 was due
primarily to the decline in the value of the Dutch guilder (the currency in
which the sales have been made) as compared to the U.S. dollar. Future sales
of bulk bSOD are largely dependent on the needs of the Company's Spanish
licensee which are uncertain and difficult to predict and no assurances can be
given that the Company will continue to sell bulk bSOD to its Spanish
licensee.
15
<PAGE>
Sales of Palosein(R), which is sold primarily to veterinary wholesalers in the
United States and Europe, declined from $555,000 in 1995 to $480,000 in 1996
due in part to large stocking orders by distributors in late 1995.
Palosein(R) sales increased by $62,000, to $542,000 in 1997 as a result of an
increase in volume, particularly in export sales.
The decrease in other sales in 1995 was principally the result of the
completion of an assay development contract in early 1996. Other sales
increased in 1997 primarily due to sales of ergothioneine, a fine chemical
synthesized in the Company's French research facility.
COSTS AND EXPENSES
Cost of sales as a percent of product sales increased to 63% in 1996 from 59%
in 1995. Cost of sales increased further in 1997, to 66% of product sales.
The increases in both years were primarily caused by declines in the gross
margin on bulk bSOD sales. The Company's cost of sales includes amortization
of technology acquired in 1994 (amortization of $737,000 in 1995 and 1996 and
$705,000 in 1997).
Research and development costs increased from $4,299,000 in 1995, to
$4,908,000 in 1996. 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. Research and development
costs decreased by $589,000 in 1997, to $4,319,000. This reduction in
expenses was due primarily to reductions in expenses of the Company's French
subsidiary.
Sales, general and administrative expenses decreased by $491,000, from
$3,332,000 in 1995 to $2,841,000 in 1996, and declined by an additional
$223,000, to $2,618,000 in 1997. Most of the decreases resulted from a
reduction 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 have subsequently
been classified as research and development costs. The administrative costs
of the Company's French subsidiary decreased $359,000 in 1996 as compared to
1995, and decreased an additional $348,000 in 1997.
Expenses included a charge of $3,329,000 to operations for 1995, reflecting
the write-off of purchased in-process technology, as described in Note 3 to
the consolidated financial statements.
16
<PAGE>
NET LOSS
The Company incurred net losses in 1995, 1996 and 1997, and does not expect to
be profitable in the foreseeable future. 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 this
unusual charge, the Company would have incurred a net loss $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 and a net loss of $5,151,000, or $.23 per share for 1997.
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. Decreases in
research and development and sales, general and administrative expenses
resulted in the decrease in the net loss for 1997. The decrease in net loss
per share in 1997 is primarily due to the increase in the weighted average
number of shares outstanding.
The Company expects to incur a substantial net loss for 1998. 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
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.
See Note 2 to the consolidated financial statements regarding new accounting
pronouncements issued but not yet adopted.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses in each of the last
three years, and at December 31, 1997, the Company had an accumulated deficit
of $38,174,000, 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 13, 1998
Portland, Oregon
18
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,290,000 $ 422,000
Accounts receivable 2,011,000 861,000
Inventories 1,828,000 591,000
Prepaid and other 79,000 191,000
----------- ----------
Total current assets 5,208,000 2,065,000
Property, plant and equipment, net 3,968,000 1,327,000
Assets under capital leases, net -- 309,000
Technology for developed products and
custom assays, net 3,065,000 3,782,000
Other assets 334,000 514,000
----------- ----------
Total assets $12,575,000 $7,997,000
=========== ==========
</TABLE>
See accompanying notes.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,423,000 $ 1,221,000
Accounts payable 1,553,000 1,386,000
Customer deposits -- 132,000
Accrued payroll, payroll taxes and other 1,181,000 655,000
Current portion of long-term debt 93,000 76,000
------------ ------------
Total current liabilities 4,250,000 3,470,000
Long-term debt due after one year 1,570,000 2,000
Commitments and contingencies (Notes 1, 3 and 10)
Shareholders' equity:
Preferred stock - $.01 par value; 15,000,000 shares
authorized:
Series B - 642,583 shares issued and outstanding
at December 31, 1997 and 1996 (liquidation
preference of $1,500,000) 6,000 6,000
Series C - 1,021,697 shares issued and outstanding
at December 31, 1997 (1,647,157 at December 31, 1996) 11,000 17,000
Series D - 750 shares issued and outstanding
at December 31, 1997 (1,650 at December 31, 1996) -- --
Series E - no shares issued and outstanding
at December 31, 1997 (2,200 at December 31, 1996) -- --
Common stock - $.50 par value; 50,000,000 shares
authorized; 28,596,320 shares issued and outstanding
at December 31, 1997 (13,790,736 at December 31, 1996) 14,298,000 6,895,000
Additional paid in capital 30,868,000 30,706,000
Accumulated deficit (38,174,000) (33,023,000)
Accumulated translation adjustments (254,000) (76,000)
------------ ------------
Total shareholders' equity 6,755,000 4,525,000
------------ ------------
Total liabilities and shareholders' equity $ 12,575,000 $ 7,997,000
============ ============
</TABLE>
See accompanying notes.
20
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Sales $ 4,850,000 $ 4,802,000 $ 4,982,000
Royalties and license fees 209,000 65,000 154,000
----------- ----------- -----------
Total revenues 5,059,000 4,867,000 5,136,000
Costs and expenses:
Cost of sales 3,200,000 3,009,000 2,939,000
Research and development 4,319,000 4,908,000 4,299,000
Sales, general and administrative 2,618,000 2,841,000 3,332,000
Purchased in-process technology (Note 3) -- -- 3,329,000
----------- ----------- -----------
Total costs and expenses 10,137,000 10,758,000 13,899,000
----------- ----------- -----------
Operating loss (5,078,000) (5,891,000) (8,763,000)
Interest income 78,000 37,000 42,000
Interest expense (151,000) (138,000) (171,000)
----------- ----------- -----------
Net loss $(5,151,000) $(5,992,000) $(8,892,000)
=========== =========== ===========
Net loss per share - basic $(.23) $(.47) $(0.82)
=========== =========== ===========
Weighted average number of shares
used in computation - basic 21,947,119 12,821,544 10,854,149
=========== =========== ===========
</TABLE>
See accompanying notes.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,151,000) $(5,992,000) $(8,892,000)
Adjustments to reconcile net loss to cash
used for operating activities:
Depreciation and amortization 1,224,000 1,381,000 1,369,000
Purchased in-process technology -- -- 3,329,000
Changes in assets and liabilities (net of business acquisitions):
Accounts receivable (881,000) (50,000) (70,000)
Inventories (152,000) 355,000 (17,000)
Prepaid and other current assets 132,000 (2,000) 209,000
Accounts payable (178,000) 220,000 (565,000)
Customer deposits (132,000) (118,000) (866,000)
Accrued liabilities 291,000 (69,000) 251,000
----------- ----------- -----------
Net cash used for operating activities (4,847,000) (4,275,000) (5,252,000)
Cash flows from investing activities:
Redemption of certificates of deposit -- -- 496,000
Purchase of equipment (70,000) (58,000) (99,000)
Cash of businesses acquired (Note 3) 7,000 -- 143,000
Additions to patents and other assets (50,000) (99,000) --
Other -- (1,000) (136,000)
----------- ----------- -----------
Net cash provided by (used for)
investing activities (113,000) (158,000) 404,000
Cash flows from financing activities:
Short-term borrowing 872,000 1,061,000 1,366,000
Proceeds from issuance of long-term debt -- -- 1,255,000
Costs in connection with issuance of long-term debt -- -- (152,000)
Deferred financing costs -- (251,000) --
Proceeds from issuance of stock, net of related cost 6,215,000 4,305,000 3,077,000
Repayment of short-term notes (1,113,000) (690,000) (340,000)
Repayment of capital lease obligations and
other liabilities (71,000) (294,000) (573,000)
----------- ----------- -----------
Net cash provided by financing activities 5,903,000 4,131,000 4,633,000
Effect of exchange rate changes on cash (75,000) (3,000) 6,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 868,000 (305,000) (209,000)
Cash and cash equivalents - beginning of year 422,000 727,000 936,000
----------- ----------- -----------
Cash and cash equivalents - end of year $ 1,290,000 $ 422,000 $ 727,000
=========== =========== ===========
</TABLE>
See accompanying notes.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<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 Preferred Stock into Common Stock $2,527,000 $ 515,000 --
Common stock issued or to be issued in business
acquisitions, net of cash acquired $1,552,000 -- $3,210,000
</TABLE>
See accompanying notes.
23
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Accumulated Total
--------------- ------------ paid-in Accumulated translation shareholders'
Shares Amount Shares Amount capital deficit adjustments equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
Janueary 1, 1995 40,000 9,322,762 $4,661,000 $20,230,000 $(18,139,000) $(53,000) $ 6,699,000
Shares issued in
connection with short-
term notes 93,300 47,000 109,000 156,000
Sale of common shares 1,227,625 614,000 1,089,000 1,703,000
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 3,353,000
Series B preferred shares
issued (Note 3) 642,583 $ 6,000 1,169,000 1,175,000
Accumulated translation
adjustments 110,000 110,000
Net loss (8,892,000) (8,892,000)
--------- -------- ---------- ---------- ----------- ------------ -------- -----------
Balances,
December 31, 1995 642,583 6,000 12,124,423 6,062,000 25,210,000 (27,031,000) 57,000 4,304,000
Sale of Series C preferred
shares for cash 1,125,590 11,000 1,225,000 1,236,000
Series C preferred shares
issued in exchange for
concellation of notes 648,490 7,000 837,000 844,000
Sale of Series D
preferred shares 2,000 - 1,939,000 1,939,000
Common shares issued
upon conversion of
debentures 1,050,217 525,000 787,000 1,312,000
Conversion of Series C
preferred shares to
common stock (126,923) (1,000) 136,924 69,000 (68,000) -
Conversion of Series D
preferred shares to
common stock (350) - 360,839 180,000 (180,000) -
</TABLE>
24
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Accumulated Total
--------------- ------------ paid-in Accumulated translation shareholders'
Shares Amount Shares Amount capital deficit adjustments equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of Series E preferred
and common shares for
cash 2,200 - 55,000 27,000 923,000 950,000
Other issuances of common
shares 63,333 32,000 33,000 65,000
Accumulated translation
adjustments (133,000) (133,000)
Net loss (5,992,000) (5,992,000)
--------- -------- ---------- ----------- ----------- ------------ -------- -----------
Balances,
December 31, 1996 2,293,590 23,000 13,790,736 6,895,000 30,706,000 (33,023,000) (76,000) 4,525,000
Conversion of Series C
preferred shares to common (625,460) (6,000) 869,625 435,000 (429,000) -
Conversion of Series D
preferred shares to common (900) - 1,884,804 942,000 (942,000) -
Conversion of Series E
preferred shares to common (2,200) - 1,981,100 991,000 (991,000) -
Public offering of common
shares (Note 6) 9,000,000 4,500,000 1,464,000 5,964,000
Shares issued in connection
with 1997 business
combination (Note 3) 1,000,000 500,000 1,059,000 1,559,000
Other issuance of common
stock 70,055 35,000 1,000 36,000
Accumulated translation
adjustments (178,000) (178,000)
Net loss (5,151,000) (5,151,000)
--------- -------- ---------- ----------- ----------- ------------ --------- -----------
Balances,
December 31, 1997 1,665,030 $17,000 28,596,320 $14,298,000 $30,868,000 $(38,174,000) $(254,000) $ 6,755,000
========= ======== ========== =========== =========== ============ ========= ===========
</TABLE>
See accompanying notes.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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. As described in Note 3, on December 31, 1997, the Company acquired a
manufacturer of medical equipment located near Philadelphia, Pennsylvania.
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. The
Company also sells pharmaceutical forms of superoxide dismutase (SOD) for
human and veterinary use.
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, 1997 had an accumulated deficit of
$38,174,000. 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 1997, the Company raised approximately $5,964,000 net of expenses
through the sale of its common stock. The Company expects that additional
capital will be required during 1998 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. If the
Company is unable to raise additional capital during the first half of 1998
it intends to curtail its operations through the reduction of personnel and
facility costs and by reducing its research and development efforts; however,
no assurances can be given that it will be able to do so. 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.
26
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying financial statements include
the accounts of the Company as well as its subsidiaries. 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 each year. 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, 1997 and 1996, consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Raw materials $1,319,000 $148,000
Work in process 344,000 200,000
Finished goods 165,000 243,000
---------- --------
Total $1,828,000 $591,000
========== ========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT is stated at cost, or, in the case of property,
plant 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.
27
<PAGE>
Property, plant and equipment at December 31, 1997 and 1996, consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 220,000 $ --
Building and improvements 1,780,000 --
Furniture and office equipment 457,000 369,000
Laboratory and manufacturing
equipment 3,608,000 2,510,000
Leasehold improvements 669,000 766,000
----------- -----------
Property, plant and equipment,
at cost 6,734,000 3,645,000
Accumulated depreciation and
amortization (2,766,000) (2,318,000)
----------- -----------
Property, plant and equipment,
net $ 3,968,000 $ 1,327,000
=========== ===========
</TABLE>
During 1996 and 1997 certain equipment under capital lease was purchased, and
the cost and accumulated amortization of that equipment was reclassified to
property, plant and equipment.
TECHNOLOGY - Technology for developed products and custom assays, acquired in
business combinations, is being amortized over estimated useful lives of seven
to ten years. Accumulated amortization of technology for developed products
and custom assays was $2,334,000 as of December 31, 1997, and $1,682,000 as of
December 31, 1996. 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.
28
<PAGE>
NET LOSS PER SHARE - Net loss per share is computed based upon the weighted
average number of common shares outstanding ("basic") and, if dilutive, the
incremental shares issuable upon the assumed exercise of stock options or
warrants and the assumed conversion of preferred stock ("dilutive"). Due to
the net losses in each of the last three years, the computation of dilutive
net loss per share is antidilutive and is not presented.
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 accounts payable 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 approximates fair value
because the terms of the notes were determined and the notes and debentures
were sold shortly before the dates of the balance sheets in which they
appear.
NEW ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT ADOPTED - In June 1997, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No.
130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
Statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
Statement is effective for fiscal years beginning after December 15, 1997.
The Company has not completed its analysis of which segments it will report
on.
3. BUSINESS COMBINATIONS
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
29
<PAGE>
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. As of December 31, 1997, no
additional payments have been made.
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 was
$3,353,000 of which approximately $3,329,000 represented technology related to
research and development projects that were in process and that had 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.
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 (net proceeds of $1,175,000).
On December 31, 1997, the Company consummated the acquisition of Innovative
Medical Systems Corp. ("IMS") pursuant to a transaction whereby the Company
acquired all of the outstanding stock of IMS in exchange for 1,000,000 shares
of the Company's common stock issued immediately and additional common shares
to be issued. The acquisition of IMS 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 $1,559,000 has been allocated to the assets and liabilities acquired.
The purchase price represents the sum of (1) 1,000,000 common shares issued
times the average per share closing price of the Company's common stock for
the three days before and after November 1, 1997, the date on which the two
companies reached agreement on the purchase price and (2) the present value of
minimum future issuances of common stock aggregating $1,250,000. The number
of additional common shares to be issued to former IMS shareholders depends on
future revenues of IMS through 2002 and on the market price of the Company's
common stock. The total number of additional shares of common stock to be
issued to former IMS shareholders in exchange for their IMS stock is limited
to a maximum of 4,519,264 shares.
30
<PAGE>
Subject to final valuation of assets acquired and liabilities assumed, the
cost of the acquisition of IMS has been allocated to the assets acquired and
liabilities assumed as follows:
<TABLE>
<S> <C>
Cash $ 7,000
Accounts receivable 324,000
Inventories 1,093,000
Property, plant and equipment 2,861,000
Other assets 86,000
Less liabilities assumed (2,812,000)
-----------
Acquisition cost $ 1,559,000
===========
</TABLE>
Because the acquisition has been recorded as a purchase, the Company's
consolidated results of operations for 1995, 1996 and 1997 do not include the
operating results of the acquired company.
The following table presents the unaudited pro forma combined results of
operations for the years ended December 31, 1997 and 1996, as if the
acquisition had occurred at the beginning of the period presented:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Total revenues $ 7,207,000 $ 8,313,000
Net loss $(6,080,000) $(6,214,000)
Net loss per share (based
on 28,596,320 shares outstanding) $ (.21) $ (.22)
</TABLE>
The above table includes, on an unaudited pro forma basis, the Company's
financial information for the years ended December 31, 1997 and 1996, combined
with the financial information of IMS for its fiscal years ended October 31,
1997 and 1996.
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.
31
<PAGE>
4. NOTES PAYABLE
Notes payable at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Secured convertible term notes $ 500,000 $1,000,000
8% unsecured notes 480,000 --
Note payable to Mellon Bank, interest at 12.5%;
subsequently refinanced 389,000 --
Liability, without interest, under inventory
purchase agreement -- 200,000
Other 54,000 21,000
---------- ----------
$1,423,000 $1,221,000
========== ==========
</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
remaining note bears interest at 15% per annum, was due in June 1997, and is
convertible into common stock at a price determined based on the closing bid
price of the Company's common stock. The warrants issued entitle the holders
to purchase up to 300,000 shares of common stock at an exercise price of
$1.61 per share. The conversion rate of the convertible term note and the
exercise price of the warrants are subject to change under certain
circumstances. The convertible term note is secured by assets relating to the
Company's clinical diagnostic products.
The 8% unsecured notes are due to shareholders of the Company. The notes were
due in May 1997. The majority of the noteholders are indebted to the Company
under the terms of a separate indemnification agreement.
Payment of the secured convertible term note and the 8% unsecured notes has
been deferred pending the outcome of ongoing discussions with representative
of the noteholders.
The note payable to Mellon Bank was paid in full in February 1998 from
proceeds of a loan pursuant to a $450,000 line of credit from Commerce
Bank/Pennsylvania, N.A. The liability under the new line of credit bears
interest at the bank's prime rate plus 1.75% (initially 10.5%). The liability
is secured by inventory and accounts receivable of IMS and is guaranteed by a
former IMS shareholder.
32
<PAGE>
5. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Note payable to AT&T Small Business Lending
Corporation, secured by land, building,
improvements, equipment, accounts receivable
and general intangibles of IMS; interest at prime
plus 2% (10.5% at December 31, 1997) due in
monthly installments through October 2011 $1,535,000 $ --
Note payable to shareholder 128,000 --
Other -- $78,000
---------- -------
1,663,000 78,000
Less amounts due within one year 93,000 76,000
---------- -------
$1,570,000 $ 2,000
========== =======
</TABLE>
The aggregate annual maturities of long-term debt during the years ending
December 31, 1999 to 2002 are as follows: 1999 - $100,000; 2000 - $110,000;
2001 - $71,000; 2002 - $79,000.
6. SHAREHOLDERS' EQUITY
COMMON STOCK - On May 20, 1997, the Company issued 9,000,000 shares of its
common stock pursuant to an underwriting agreement with certain underwriters
in France. The underwriters purchased the stock at a price of 4.60 French
francs per share (an aggregate of $7,328,000). The newly-issued shares have
been listed on the French stock market, Le Nouveau Marche, and on the NASDAQ
National Market System.
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. Forty thousand
(40,000) shares of nonvoting Series A Preferred Stock were issued during 1994
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 which were issued in
1995 and remained outstanding at December 31, 1997 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.
33
<PAGE>
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. At December 31, 1997,
1,021,697 shares of Series C Preferred Stock remained outstanding.
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. At December 31, 1997, 750 shares of Series
D Preferred Stock remained outstanding.
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.
During 1997 all of the Series E Preferred Stock was converted into common
stock.
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 1995, 1996 or
1997. During 1997 warrants to purchase 35,000 shares expired. At December
31, 1997, warrants to purchase 977,500 shares remained outstanding and
exercisable.
34
<PAGE>
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 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, 1997.
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, 1997.
Warrants to purchase 300,000 common shares were issued to the purchasers of
the secured convertible term notes in October 1996. The warrants have an
exercise price of $.61 per share. They were immediately exercisable and
remained outstanding as of December 31, 1997.
STOCK OPTIONS - The Company has a stock incentive plan under which 4,200,000
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 Compensation Committee
of the Company's board of directors. Options granted through 1997 have had
vesting requirements of up to three years. Options granted and outstanding
under the plan are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
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 1,420,500 $1.92 382,900 $2.93 90,000 $3.44
Granted 943,800 $ .62 1,090,000 $1.57 317,900 $2.73
Exercised -- -- (3,333) $1.69 -- --
Forfeitures (20,600) $1.33 (49,067) $2.17 (25,000) $2.25
--------- --------- -------
Outstanding at end
of year 2,343,700 $1.40 1,420,500 $1.92 382,900 $2.93
========= ========= =======
Exercisable at end
of year 1,333,065 $1.66 619,331 $2.29 219,299 $3.18
========= ========= =======
</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, 1997, by range of exercise price was as follows:
35
<PAGE>
<TABLE>
<CAPTION>
Weighted Weighted
Range of average average
exercise exercise remaining
price Shares price life
----- ------ ----- ----
<S> <C> <C> <C>
$ .53 - $ .91 798,700 $ .55 9.2 years
$1.15 - $1.69 1,174,500 $1.52 8.5 years
$2.25 - $2.28 125,500 $2.26 6.7 years
$3.00 - $3.50 245,000 $3.31 7.1 years
</TABLE>
The number of shares under option and weighted average exercise price of
options exercisable as of December 31, 1997, by range of exercise price was as
follows:
<TABLE>
<CAPTION>
Weighted
Range of average
exercise exercise
price Shares price
----- ------ -----
<S> <C> <C> <C>
$ .53 - $ .91 309,566 $ .59
$1.15 - $1.69 652,999 $1.51
$2.25 - $2.28 125,500 $2.26
$3.00 - $3.50 245,000 $3.31
</TABLE>
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 greater 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 1997, 1996 and 1995 would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net loss:
As reported $(5,151,000) $(5,992,000) $(8,892,000)
Pro forma $(5,543,000) $(6,596,000) $(9,195,000)
Net loss per share:
As reported $ (.23) $ (.47) $ (.82)
Pro forma $ (.25) $ (.51) $ (.85)
</TABLE>
36
<PAGE>
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:
<TABLE>
<CAPTION>
Grants issued in
--------------------------
1997 1996 1995
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 69% 75% 75%
Risk-free interest rate 5.7% 6% 6%
Expected lives 3 years 3 years 3 years
</TABLE>
The weighted average fair value as of the option date was computed to be $.33
per share for options issued during 1997, $.83 per share for options issued
during 1996 and $1.53 per share for options issued during 1995.
As of December 31, 1997, the Company also has options outstanding that have
not been issued pursuant to its stock incentive plan. These options grant the
holders the right to acquire 249,699 shares of the Company's common stock at
exercise prices ranging from $1.69 to $3.55 per share.
7. INCOME TAXES
INCOME TAX PROVISION - Income tax provisions were not necessary in 1997, 1996
and 1995 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.
37
<PAGE>
The tax effects of significant items comprising the Company's deferred taxes
as of December 31 were as follows:
<TABLE>
<CAPTION>
United States taxes: 1997 1996
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforward
and capitalized research and development
expenses $ 5,396,000 $ 5,194,000
Federal R&D tax credit carryforward 522,000 522,000
State net operating loss carryforward and capitalized
research and development expenses 310,000 211,000
Deferred tax liabilities - book basis in excess
of noncurrent assets acquired in the
acquisition of IBC (1,300,000) (1,102,000)
----------- -----------
Net deferred tax assets 4,928,000 4,825,000
Valuation allowance (4,928,000) (4,825,000)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
French taxes: 1997 1996
Deferred tax assets:
Net operating loss carryforward $ 4,320,000 $ 5,426,000
Impact of temporary differences (133,000) (211,000)
----------- -----------
Total 4,187,000 5,215,000
Valuation allowance (4,187,000) (5,215,000)
----------- -----------
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.
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
$1,824,000 when and if realized, and the remaining benefit will be recorded as
a reduction of income tax expense.
The tax benefits ($351,000) of the net operating losses of $1,032,000 which
existed at the date of acquisition (December 31, 1997) of IMS will be recorded
as a reduction of the net unamortized balance of property, plant and equipment
of $2,861,000 when and if realized.
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
38
<PAGE>
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, 1997, the Company had net operating loss
carryforwards of approximately $2,493,000 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 $11,784,000 (70,862,000 French francs) to reduce French
taxable income in future years. These carryforwards expire as follows:
<TABLE>
<CAPTION>
United States R&D tax French
net operating credit operating loss
Year of expiration loss carryforward carryforward carryforward
<S> <C> <C> <C>
1998 $ 208,000 $ 1,070,000
1999 111,000 190,000
2000 -- 5,000
2001 23,000 $123,000 --
2002 7,000 6,000 --
2003-2012 2,144,000 393,000 --
No expiration -- -- 10,519,000
---------- -------- -----------
$2,493,000 $522,000 $11,784,000
========== ======== ===========
</TABLE>
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.
8. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
One domestic customer and one foreign licensee have 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:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Domestic customer -- -- 18%
Spanish licensee 31% 39% 16%
</TABLE>
39
<PAGE>
The Company's domestic customer to whom sales of bovine superoxide dismutase
("bSOD") accounted for 18% of the Company's revenues in 1995, 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 $112,000 and $1,000 in that account at December 31, 1997 and
1996, respectively.
The Company and its French subsidiary maintain bank accounts in France and
had the equivalent of $116,000 and $6,000 in those accounts at December 31,
1997 and 1996, respectively. Foreign currency transaction gains and losses
were not material.
9. 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:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States $ 1,946,000 $ 1,303,000 $ 2,686,000
Export sales from the U.S. 3,113,000 3,185,000 1,878,000
France -- 379,000 572,000
----------- ----------- -----------
Total $ 5,059,000 $ 4,867,000 $ 5,136,000
=========== =========== ===========
Operating loss:
United States $(2,873,000) $(2,874,000) $(5,653,000)
France (2,205,000) (3,017,000) (3,110,000)
----------- ----------- -----------
Total $(5,078,000) $(5,891,000) $(8,763,000)
=========== =========== ===========
Identifiable assets:
United States $10,068,000 $ 5,110,000 $ 7,824,000
France 2,507,000 2,942,000 3,866,000
Eliminations -- (55,000) (1,820,000)
----------- ----------- -----------
Total $12,575,000 $ 7,997,000 $ 9,870,000
=========== =========== ===========
</TABLE>
40
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities in Oregon and in France under operating
leases that expire in 1998. Lease payments to which the Company is committed
in 1998 are $230,000. Rental expense included in the accompanying statements
of operations was $361,000 in 1997, $519,000 in 1996 and $492,000 in 1995.
The Company and its subsidiaries are parties to various claims. Although the
Company is unable to predict with certainty whether or not it will
ultimately be successful in its defense of such claims or, if not, what the
impact might be, management currently believes that disposition of these
matters will not have a materially adverse effect on the Company's
consolidated financial statements.
11. 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.
41
<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.
42
<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 18 to 41.
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 45.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the fourth quarter
of 1997.
(c) Exhibits specified by item 601 of Regulation S-K.
See Exhibit Index - page 45.
(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.
43
<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 23, 1998
OXIS INTERNATIONAL, INC.
Registrant
By: /s/ Ray R. Rogers
-----------------------------
Ray R. Rogers
Chairman of the Board 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 23, 1998 /s/ Timothy G. Biro March 23, 1998
- ------------------------------------- ------------------------------------
Anna D. Barker Date Timothy G. Biro Date
/s/ Richard A. Davis March 23, 1998 /s/ Stuart S. Lang March 23, 1998
- ------------------------------------- ------------------------------------
Richard A. Davis Date Stuart S. Lang Date
/s/ David Neeham March 23, 1998 /s/ Ray R. Rogers March 23, 1998
- ------------------------------------- ------------------------------------
David Needham Date Ray R. Rogers Date
/s/ A.R. Sitaraman March 23, 1998
- -------------------------------------
A.R. Sitaraman Date
44
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
<S> <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)
2 (c) Share exchange Agreement by and among Innovative Medical
Systems Corp. ("Seller"), OXIS International, Inc. ("Buyer") and
each of The Shareholders Who Are Signatories Hereto (collectively,
the "Shareholders"). (3)
3 (a) Second Restated Certificate of Incorporation as filed
September 10, 1996 (4)
3 (b) Certificate of Designations, Preferences, and Rights of Series E
Preferred Stock of the Company (5)
3 (c) Bylaws of the Company as amended on June 15, 1994 (6)
4 (a) Securities Purchase Agreement, Registration Rights Agreement
and Security Agreement (7)
10 (a) 1987 Stock Purchase Warrants (6)
10 (b) 1988 Stock Purchase Warrants (9)
10 (c) Lease agreement between Bioxytech S.A. and Sofibus (10)
10 (d) OXIS International, Inc. Series B Preferred Stock Purchase Agreement
dated July 18, 1995 (11)
10 (e) Factoring (security) Agreement dated September 6, 1996 between
Silicon Valley Financial Services and OXIS International, Inc. (4)
10 (f) Form of Promissory Notes dated March 27, 1997 - April 24, 1997 (12)
10 (g) Underwriting agreement (13)
</TABLE>
45
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
<S> <C> <C>
10 (h) Listing advisor - market making agreement (13)
10 (i) Non-Exclusive License Agreement between OXIS International,
Inc. and Enzon, Inc. dated July 29, 1997 (14)
10 (j) Note Payable to AT&T Small Business Lending Corporation
and related Open-End Mortgage 47
21 (a) Subsidiaries of OXIS International, Inc. 55
23 (a) Independent Auditors' Consent 56
27 (a) Financial data schedule 57
</TABLE>
(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
January 15, 1998.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
1996.
(5) Incorporated by reference to the Company's Form 8-K Current Report dated
December 30, 1996.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994.
(7) Incorporated by reference to the Company's Form 8-K Current Report dated
November 4, 1996.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
1992 - Exhibit 10(b).
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
1992 - Exhibit 10(c).
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
1994.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.
(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
46
<PAGE>
EXHIBIT 10 (j)
NOTE PAYABLE TO AT&T SMALL BUSINESS LENDING CORPORATION
AND RELATED OPEN-END MORTGAGE
OMB APPROVAL NO. 3245-0201
SBA LOAN NUMBER
PLP 950-789-3008
U.S. Small Business Administration
NOTE
Philadelphia, Pennsylvania
--------------------------
(City and State)
(Date) Oct. 28 , 1996
------------
$1.587.500,00
- -------------
For value received, the undersigned promises to paid to the order of AT&T
----
SMALL BUSINESS LENDING CORPORATION
- ----------------------------------
(Payee)
at its Office in the city of Parsippany, State of New Jersey or at holders
---------- ----------
option, at such other place as may be designated from time to time
by the holder One Million Five Hundred Eighty-Seven Thousand Five Hundred
-----------------------------------------------------------
dollars, with interest on unpaid principal computed from the date of each
advance to the undersigned at the initial rate of 10.25% percent per annum,
-------
payment to be made in installments as follows:
NOTE PAYABLE: One installment of interest only will be payable on the first day
of month following the date of this Note. Then, equal monthly installments of
principal and interest in the amount of $17,303.00 will be due on the first day
of the second month following the date of this Note and on the first day of each
and every month thereafter, unless the amount of any installment changes
pursuant hereto. The balance of principal, accrued interest and all other
amounts due hereunder shall be payable on or before fifteen (15) years from the
date of this Note. THE INITIAL INTEREST RATE SHALL BE TEN AND ONE QUARTER
PERCENT (10.25%) PER ANNUM. Each payment shall be applied first to the interest
accrued to the date of receipt of said payments, and the balance, if any, to
principal, and then to any other amounts due hereunder, Including late charges.
The interest rate shall not exceed the maximum rate allowable under applicable
law.
LATE CHARGES: Borrower agrees to pay a late charge equal to five percent (5.0%)
of the payment amount due if such payment is no received within ten (10) days of
the due date. Funds received from the borrower will first be applied to
interest, to the date of receipt, then to principal, and then to the late fee.
THIS IS A VARIABLE RATE LOAN. Commencing on the first Adjustment Date (as
defined below) and continuing on each Adjustment Date thereafter, the interest
rate will fluctuate in accordance with the "Prime Rate" as published the
InMoney Rates section of the Wall Street Journal on such date (or if the Wall
Street Journal is not published on such date, as published in the Wall Street
Journal on the first business day after such date, or if no such rate is
published in the Wall Street Journal then the prime rate as published in a
national daily financial newspaper as selected by the holder of this Note (the
"Holder"). The interest rate (spread) to be added to the Prime Rate at the
beginning of each applicable adjustment period will be two percent (2%). Each
adjustment period will be quarterly, beginning on the first business day of the
calendar quarter following the date of this Note. Adjustment periods and
calendar quarters shall commence on each January 1, April 1, July 1 and October
1 (each an "Adjustment Date").
If this Note contains a fluctuating interest rate, the notice provision is not a
pre condition for fluctuation (which shall take place regardless of notice).
Payment of any installment of principal or interest owing on this Note may be
made prior to the maturity date thereof without penalty. Borrower shall provide
lender with written notice of intent to prepay part or all of this loan at least
three (3) weeks prior to the anticipated prepayment date. A prepayment is any
payment made ahead of schedule that exceeds twenty (20) percent of the then
outstanding principal balance. If borrower makes a prepayment and fails to give
at least three weeks advance notice of intent to prepay, then, notwithstanding
any other provision to the contrary in this note or other document, borrower
shall be required to pay lender three weeks interest on the unpaid principal as
of the date preceding such prepayment
47
<PAGE>
The interest rate on this Note shall increase or decrease on each Adjustment
Date by adding the spread to the Prime Rate in effect as of such Adjustment
Date.
Upon any changes in the interest rate, the above monthly principal and interest
payment shall be adjusted to amortize the remaining principal balance in equal
monthly payments of principal and interest over the remaining term of the loan.
Holder shall give written notice to the undersigned of each increase or decrease
in the interest rate within thirty (30 ) days after the effective date of each
rate adjustment; however, the fluctuation of the interest rate is not contingent
on whether the notice is given and any failure of the Holder to give such notice
shall not relieve the Borrower from any obligation to make any payment due under
this Note.
If the undersigned shall be in default of payment due on the indebtedness herein
and the Small Business Administration (SBA) purchases its guaranteed portion of
said indebtedness, the rate of interest on both the guaranteed and unguaranteed
portions herein shall become fixed at the rate in effect as of the date of
default. If the Undersigned shall not be in default in payment when SBA
purchases its guaranteed portion, the rate of interest on both the guaranteed
and unguaranteed portions shall be fixed at the rate in effect as of the date of
purchase by SBA.
Borrower shall provide Holder with written notice of intent to prepay part or
all of this loan at least 21 calendar days prior to the prepayment date. A
prepayment is any payment made ahead of schedule that exceeds twenty (20%)
percent of the then outstanding principal balance before such prepayment. If
Borrower makes a prepayment and fails to give at least 21 days advance notice of
intent to prepay, then, notwithstanding any other provisions to the contrary in
this Note or other document, Borrower shall pay Holder 21 days interest on the
unpaid principal as of the date preceding such prepayment.
48
<PAGE>
The term "Indebtedness" as used herein shall mean the indebtedness evidenced by
this Note, including principal, interest, and expenses, whether contingent, now
due or hereafter to become due and whether heretofore or contemporaneously
herewith or hereafter contracted. The term "Collateral" as used in this Note
shall mean any funds, guaranties, or other property or rights therein of any
nature whatsoever or the proceeds thereof which may have been, are, or hereafter
may be, hypothecated, directly or indirectly by the undersigned or others, in
connection with, or as security for, the indebtedness or any part thereof. The
Collateral, and each part thereof, shall secure the Indebtedness and each part
thereof. The covenants and conditions set forth or referred to in any and all
instruments of hypothecation constituting the Collateral are hereby incorporated
in this Note as covenants and conditions of the undersigned with the same force
and effect as though such covenants and conditions were fully set forth herein.
The Indebtedness shall immediately become due and payable, without notice or
demand, upon the appointment of a receiver or liquidator, whether voluntary or
involuntary, for the undersigned or for any of its property, or upon the filing
of a petition by or against the undersigned under the provisions of any State
insolvency law or under the provisions of the Bankruptcy Reform Act of 1978, as
amended, or upon the mailing by the undersigned of an assignment for the
benefits of its creditors. Holder is authorized to declare all or any part of
the Indebtedness immediately due and payable upon the happening of any of the
following events: (1) Failure to pay any part of the indebtedness when due; (2)
nonperformance by the undersigned of any agreement with, or any condition
imposed by, Holder or Small Business Administration (hereinafter called "SBA"),
with respect to the Indebtedness; (3) Holder's discovery of the undersigned's
failure In any application of the undersigned to Holder or SBA to disclose any
fact deemed by Holder to be material or of the making therein or in any of the
said agreements, or in any affidavit or other documents submitted in connection
with said application or the indebtedness, of any misrepresentation by, on
behalf of, or for the benefit of the undersigned; (4) the reorganization (other
than a reorganization pursuant to any of the provisions of the Bankruptcy Reform
Act of 1978, as amended) or merger or consolidation of the undersigned (or the
making of any agreement therefor) without the prior written consent of Holder;
(5) the undersigned's failure duly to account, to Holder's satisfaction, at such
time or times as Holder may require, for any of the Collateral, or proceeds
thereof, coming into the control of the undersigned; or (6) the institution of
any suit affecting the undersigned deemed by Holder to affect adversely its
interest hereunder in the Collateral or otherwise. Holder's failure to
exercise its rights under this paragraph shall not constitute a waiver thereof.
Upon the nonpayment of the Indebtedness, or any part thereof, when due, whether
by acceleration or otherwise, Holder is empowered to sell, assign, and deliver
the whole or any part of the Collateral at public or private sale, without
demand, advertisement or notice of the time or place of sale or of any
adjournment thereof, which are hereby expressly waived. After deducting all
expenses incidental to or arising from such sale or sales, Holder may apply the
residue of the proceeds thereof to the payment of the indebtedness, as it shall
deem proper, returning the excess, if any, to the undersigned. The undersigned
hereby waives all rights of redemption or appraisement whether before or after
sale.
Holder is further empowered to collect or cause to be collected or otherwise to
be converted into money all or any part of the Collateral, by suit or otherwise,
and to surrender, compromise , release, renew, extend, exchange, or substitute
any item of the Collateral in transactions with the undersigned or any third
party irrespective of any assignment thereof by the undersigned, and without
prior notice to or consent of the undersigned or any assignee. Whenever any
item of the Collateral shall not be paid when due, or otherwise shall be in
default, whether or not the indebtedness, or any part thereof, has become due,
Holder shall have the same rights and powers with respect to such items of the
Collateral as are granted In this paragraph in case of nonpayment of the
Indebtedness, or any part thereof, when due. None of the rights, remedies,
privileges, or powers of Holder expressly provided for herein shall be
exclusive, but each of them shall be cumulative with and in addition to every
other right, remedy, privilege, and power now or hereafter existing in favor of
Holder, whether at law or equity, by statute or otherwise.
The undersigned agrees to take all necessary steps to administer, supervise,
preserve, and protect the Collateral; and regardless of any action taken by
Holder, there shall be no duty upon Holder in this respect. The undersigned
shall pay all expenses of any nature, whether incurred in or out of court, and
whether incurred before or after this Note shall become due at its maturity date
or otherwise, including but not limited to reasonable attorney's fees and costs,
which Holder may deem necessary or proper in connection with the satisfaction of
the Indebtedness or the administration, supervision, preservation, protection of
(including but not limited to, the maintenance of adequate insurance) or the
realization upon the Collateral. Holder is authorized to pay at any time and
from time to time any or all of such expenses, add the amount of such payment to
the amount of the Indebtedness, and charge interest thereon at the rate
specified herein with respect to the principal amount of this Note.
The security rights of Holder and its assigns hereunder shall not be impaired by
Holder's sale, hypothecation or rehypothecation of any note of the undersigned
or any item of the Collateral, or by any indulgence, including but not limited
to (a) any renewal, extension, or modification which Holder may grant with
respect to the Indebtedness or any part thereof, or (b) any surrender,
compromise, release renewal, extension, exchange, or substitution which Holder
may grant in respect of the Collateral, or (c) any indulgence granted in respect
of any endorser, guarantor, or surety. The purchaser, assignee, transferee, or
pledgee of this Note, the Collateral, and guaranty, and any other document (or
any of them), sold, assigned, transferred, pledged, or repledged, shall
forthwith become vested with and entitled to exercise all the powers and rights
given by this Note and all applications of the undersigned to Holder or SBA, as
if said purchaser, assignee, transferee, or pledgee were originally named as
Payee in this Note and in said application or applications.
49
<PAGE>
This promissory note is given to secure a loan which SBA is making or in which
it is participating and, pursuant to Part 101 of the Rules and Regulations of
SBA (13 C.F.R 101.1 (d)), this instrument is to be construed and (when SBA is
the Holder or a party in Interest) enforced in accordance with applicable
Federal law.
CONFESSION OF JUDGMENT CLAUSE - THE UNDERSIGNED HEREBY AUTHORIZES AND EMPOWERS
- -----------------------------
ANY ATTORNEY OR CLERK OF ANY COURT OF RECORD IN THE UNITED STATES OR ELSEWHERE
TO APPEAR FOR AND, WITH OR WITHOUT DECLARATION FILED, CONFESS JUDGMENT AGAINST
THE UNDERSIGNED IN FAVOR OF THE HOLDER, ASSIGNEE OR SUCCESSOR OF HOLDER OF THE
NOTE, AT ANY TIME, FOR THE FULL OR TOTAL AMOUNT OF THIS NOTE, TOGETHER WITH ALL
INDEBTEDNESS PROVIDED FOR THEREIN, WITH COSTS OF SUIT AND ATTORNEY'S COMMISSION
OF TEN (10) PERCENT FOR COLLECTION; AND THE UNDERSIGNED EXPRESSLY RELEASES ALL
ERRORS, WAIVES ALL STAY OF EXECUTION, RIGHTS OF INQUISITION AND EXTENSION UPON
ANY LEVY UPON REAL ESTATE AND ALL EXEMPTION OF PROPERTY FROM LEVY AND SALE UPON
ANY EXECUTION HEREON; AND THE UNDERSIGNED EXPRESSLY AGREES TO CONDEMNATION AND
EXPRESSLY RELINQUISHES ALL RIGHTS TO BENEFITS OR EXEMPTIONS UNDER ANY AND ALL
EXEMPTION LAWS NOW IN FORCE OR WHICH MAY HEREAFTER BE ENACTED.
INNOVATIVE MEDICAL SYSTEMS CORP.
By:
- ---------------------- -----------------------------
Attest Joseph B. Catarious, Jr., CEO
Note. Corporate applicants must execute Note, in corporate name, by duly
authorized officer, and seal must be affixed and duly attested; partnership
applicants must execute Note in firm name, together with signature of a general
partner.
50
<PAGE>
OPEN-END
MORTGAGE
(Participation)
PLP 950-789-3008
This mortgage made and entered into this 28th day of October, 1996,
by and between INNOVATIVE MEDICAL SYSTEMS CORP.
(hereinafter referred to as mortgagor) and AT&T SMALL BUSINESS LENDING
CORPORATION (hereinafter referred to as mortgagee), who maintains an office and
place of business at 2 Gatehall Drive, Parsippany, New Jersey 07054.
WITNESSETH, that for the consideration hereinafter stated, receipt of which is
hereby acknowledged, the mortgagor does hereby mortgage, sell grant, assign, and
convey unto the mortgagee, his successors and assigns, all of the following
described property situated and being in the County of Bucks.
State of Pennsylvania.
Commonly known as 55 Steam Whistle Drive, Ivyland, Pennsylvania and more
particularly described in the attached Exhibit A.
Together with and including all buildings, all fixtures including but not
limited to all plumbing, heating, lighting, ventilation, refrigerating,
incinerating, air conditioning apparatus, and elevators (the mortgagor hereby
declaring that it is intended that the items herein enumerated shall be deemed
to have been permanently installed as part of the realty), and all improvements
now or hereafter existing thereon; the hereditaments and appurtenances and all
other rights thereunto belonging, or in anywise appertaining, and the reversion
and reversions, remainder and remainders, all rights or redemption, and the
rents, issues, and profits of the above described property (provided, however,
that the mortgagor shall be entitled to the possession of said property and to
collect and retain the rents, issues, and profits until default hereunder). To
have and to hold the same unto the mortgagee and the successors in interest of
the mortgage forever in fee simple or such other estate, if any, as is stated
herein.
The mortgagor covenants that he is lawfully seized and possessed of and has the
right to sell and convey said property; that the same is free from all
encumbrances except as hereinabove recited; and that he hereby binds himself and
his successors in interest to warrant and defend the title aforesaid thereto and
every part thereof against the claims of all persons whomsoever.
This instrument is given to secure the payment of a guaranty of a promissory
note dated of even date in the principal sum of $1,587,500 signed by Joseph B.
Catarious, Jr.
in behalf of Innovative Medical Systems Corp.
THIS MORTGAGE SECURES FUTURE ADVANCES.
51
<PAGE>
Said promissory note was given to secure a loan in which the Small Business
administration, an agency of the United States of America, has participated. In
compliance with section 101.1(d) of the Rules and Regulations of the Small
Business Administration [13 C.F.R. 101.1(d)], this instrument is to be construed
and enforced in accordance with applicable Federal law.
1. The mortgagor covenants and agrees as follows:
a. He will promptly pay the indebtedness evidenced by said promissory note
at the times and in the manner therein provided.
b. He will pay all taxes, assessments, water rates, and other governmental
or municipal charges, fines, or imposition, for which provision has not been
made hereinbefore, and will promptly deliver the official receipts therefor to
the said mortgagee.
c. He will pay such expenses and fees as may be incurred in the protection
and maintenance of said property, including the fees of any attorney employed by
the mortgagee for the collection of any or all of the indebtedness hereby
secured, or foreclosure by mortgagee's sale, or court proceedings, or in any
other litigation or proceeding affecting said property. Attorney's fees
reasonable incurred in any other way shall be paid by the mortgagor.
d. For better security of the indebtedness hereby secured, upon the request
of the mortgagee, its successors or assigns, he shall execute and deliver a
supplemental mortgage or mortgages covering any additions, improvements, or
betterments made to the property hereinabove described and all property acquired
by it after the date hereof (all in form satisfactory to mortgagee).
Furthermore, should mortgagor fail to cure any default in the payment of a prior
or inferior encumbrance on the property described by this instrument, mortgagor
hereby agrees to permit mortgagee to cure such default, but mortgagee is not
obligated to do so; and such advances shall become part of the indebtedness
secured by this instrument, subject to the same terms and conditions.
e. The rights created by this conveyance shall remain in full force and
effect during any postponement or extension of the time of the payment of the
indebtedness evidenced by said promissory note or any part thereof secured
hereby.
f. He will continuously maintain hazard insurance, of such type or types
and in such amounts as the mortgagee may from time to time require on the
improvements now or hereafter on said property, and will pay promptly when due
any premiums thereof. All insurance shall be carried in companies acceptable to
mortgagee and the policies and renewals thereof shall be held by mortgagee and
have attached thereto loss payable clauses in favor of and in form acceptable to
the mortgagee. In event of loss, mortgagor will give immediate notice in
writing to mortgagee, and mortgagee may make proof of loss if not made promptly
by mortgagor, and each insurance company concerned is hereby authorized and
directed to make payment for such loss directly to mortgagee instead of to
mortgagor and mortgagee jointly, and the insurance proceeds, or any part
thereof, may be applied by mortgagee at its option either to the reduction of
the indebtedness hereby secured or to the restoration or repair of the property
damaged or destroyed. In event of foreclosure of this mortgage, or other
transfer of title to said property in extinguishment of the indebtedness secured
hereby, all right, title, and interest of the mortgagor in and to any insurance
policies then in force shall pass to the purchaser or mortgagee or, at the
option of the mortgagee, may be surrendered for a refund.
g. He will keep all buildings and other improvements on said property in
good repair and condition; will permit, commit, or suffer no waste, impairment,
deterioration of said property or any part thereof; in the event of failure of
the mortgagor to keep the buildings on said premises and those erected on said
premises, or improvements thereon, in good repair, the mortgagee may make such
repairs as in its discretion it may deem necessary for the proper preservation
thereof; and the full amount of each and every such payment shall be immediately
due and payable; and shall be secured by the lien of this mortgage.
h. He will not voluntarily create or permit to be created against the
property subject to this mortgage any lien or liens inferior or superior to the
lien of this mortgage without the written consent of the mortgagee; and further,
that he will keep and maintain the same free from the claim of all persons
supplying labor or materials for construction of any and all buildings or
improvements now being erected or to be erected on said premises.
i. He will not rent or assign any part of the rent of said mortgaged
property or demolish, or remove, or substantially alter any building without the
written consent of the mortgagee.
j. All awards of damages in connection with any condemnation for public use
of or injury to any of the property subject to this mortgage are hereby assigned
and shall be paid to mortgagee, who may apply the same to payment of the
installments last due under said note, and mortgagee is hereby authorized, in
the name of the mortgagor, to execute and deliver valid acquittances thereof and
to appeal from any such award.
k. The mortgagee shall have the right to inspect the mortgaged premises at
any reasonable time.
2. Default in any of the covenants or conditions of this instrument or of the
note or loan agreement secured hereby shall terminate the mortgagor's right to
possession, use, and enjoyment of the property, at the option of the mortgagee
or his assigns (it being agreed that the mortgagor shall have such right until
default). Upon any such default, the mortgagee shall become the owner of all of
the rents and
52
<PAGE>
profits accruing after default as security for the indebtedness secured hereby,
with the right to enter upon said property for the purpose of collection such
rents and profits. This instrument shall operate as an assignment of any rentals
on said property to that extent.
3. The mortgagor covenants and agrees that if he shall fail to pay said
indebtedness or any part thereof when due, or shall fail to perform any covenant
or agreement of this instrument or the promissory note secured hereby, the
entire indebtedness hereby secured shall immediately become due, payable, and
collectible without notice, at the option of the mortgagee or assigns,
regardless of maturity, and the mortgagee or his assigns may before or after
entry sell said property without appraisement (the mortgagor having waived and
assigned to the mortgagee all rights of appraisement):
(i) at judical sale pursuant to the provisions of 28 U.S.C. 2001 (a); or
(ii) at the option of the mortgagee, either by auction or by solicitation
of sealed bids, for the highest and best bid complying with the terms of sale
and manner of payment specified in the published notice of sale, first giving
four weeks' notice of the time, terms, and place of such sale, by advertisement
not less than once during each of said four weeks in a newspaper published or
distributed in the county in which said property is situated, all other notice
being hereby waived by the mortgagor (and said mortgagee, or any person on
behalf of said mortgagee, may bid with the unpaid indebtedness evidenced by said
note). Said sale shall be held at or on the property to be sold or at the
Federal, county, or city courthouse for the county in which the property is
located. The mortgagee is hereby authorized to execute for and on behalf of the
mortgagor and to deliver to the purchaser at such sale a sufficient conveyance
of said property, which conveyance shall contain recitals as to the happening of
the default upon which the execution of the power of sale herein granted
depends; and the said mortgagor hereby constitutes and appoints the mortgagee or
any agent or attorney of the mortgagee, the agent and attorney in fact of said
mortgagor to make such recitals and to execute said conveyance and hereby
covenants and agrees that the recitals so made shall be effectual to bar all
equity or right of redemption, homestead, dower, and all other exemptions of the
mortgagor, all of which are hereby expressly waived and conveyed to the
mortgagee; or
(iii) take any other appropriate action pursuant to state or Federal
statute either in state or Federal court or otherwise for the disposition of the
property.
In the event of a sale as hereinbefore provided, the mortgagor or any persons in
possession under the mortgagor shall then become and be tenants holding over and
shall forthwith deliver possession to the purchaser at such sale or be summarily
dispossessed, in accordance with the provisions of law applicable to tenants
holding over. The power and agency hereby granted are coupled with an interest
and are irrevocable by death or otherwise, and are granted as cumulative to the
remedies for collection of said indebtedness provided by law.
4. The proceeds of any sale of said property in accordance with the preceding
paragraphs shall be applied first to pay the costs and expenses of said sale,
the expenses incurred by the mortgagee for the purpose of protecting or
maintaining said property, and reasonable attorney's fees; secondly, to pay the
indebtedness secured hereby; and thirdly, to pay any surplus or excess to the
person or persons legally entitled thereto.
5. In the event said property is sold at a judicial foreclosure sale or pursuant
to the power of sale hereinabove granted, and the proceeds are not sufficient to
pay the total indebtedness secured by this instrument and evidenced by said
promissory note, the mortgagee will be entitled to a deficiency judgment for the
amount of the deficiency without regard to appraisement.
6. In the event the mortgagor fails to pay and Federal, state or local tax
assessment, income tax or other tax lien, charge, fee, or other expense charged
against the property the mortgagee is hereby authorized at his option to pay the
same. Any sums so paid by the mortgagee shall be added to and become a part of
the principal amount of the indebtedness evidence by said note, subject to the
same terms and conditions. If the mortgagor shall pay and discharge the
indebtedness evidenced by said promissory note, and shall pay such sums and
shall discharge all taxes and liens and the costs, fees, and expenses of making,
enforcing, and executing this mortgage, then this mortgage shall be canceled and
surrendered.
7. The covenants herein contained shall bind and the benefits and advantages
shall inure to the respective successors and assigns of the parties hereto.
Whenever used, the singular number shall include the plural, the plural the
singular, and the use of any gender shall include all genders.
8. No waiver of any covenant herein or of the obligation secured hereby shall at
any time thereafter be held to be a waiver of the terms hereof or of the note
secured hereby.
9. A judicial decree, order, or judgment holding any provision or portion of
this instrument invalid or unenforceable shall not in any way impair or preclude
the enforcement of the remaining provisions or portions of this instrument.
10. Any written notice to be issued to the mortgagor pursuant to the provisions
of this instrument shall be addressed to the mortgagor at the mortgaged premises
and any written notice to be issued to the mortgagee shall be addressed to the
mortgagee at 2 Gatehall Drive, Parsippany, New Jersey 07054.
53
<PAGE>
IN WITNESS WHEREOF, the mortgagor has executed this instrument and the mortgagee
has accepted delivery of this instrument as of the day and year aforesaid.
INNOVATIVE MEDICAL SYSTEM CORP
By:
----------------------------------
Attest:
------------------------------
Executed and delivered in the presence of the following witnesses:
- --------------------------------
- --------------------------------
(Add Appropriate Acknowledgment)
COMMONWEALTH OF PENNSYLVANIA
COUNTY OF PHILADELPHIA
On this day of , in the year 1996, before me, the undersigned, a Notary
------ -----
Public in and for said County and Sate, personally appeared Joseph B. Catarious,
Jr., personally known to me (or proved to be on the basis of satisfactory
evidence) to be the persons who executed the within instrument as the CEO of
Innovative Medical Systems Corp. as the free act and deed of such corporation
for the purposes contained therein.
----------------------------------------------
Notary Public in and for said County and State
My Commission Expires:
------------------------
================================================================================
MORTGAGE
===============================================================================
INNOVATIVE MEDICAL SYSTEMS CORP
TO
AT&T SMALL BUSINESS LENDING CORPORATION
================================================================================
RECORDING DATA
The ADDRESS OF Mortgagee IS 2 Gatehall Drive, Parsippany, NJ 07054
------------------------------------------------------------------
================================================================================
RETURN TO:
Name: Carolyn Stedronsky
Address: 2 Gatehall Drive
Parsippany, New Jersey 07054
54
<PAGE>
EXHIBIT 21 (a)
SUBSIDIARIES OF OXIS INTERNATIONAL, INC.
As of December 31, 1997, 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
Innovative Medical Systems Corp. Pennsylvania
<PAGE>
EXHIBIT 23(a)
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 13, 1998 (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,
1997.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 20, 1998
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