Exhibit 2 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") SHARE EXCHANGE AGREEMENT BY AND AMONG INNOVATIVE MEDICAL SYSTEMS CORP. ("SELLER"), OXIS INTERNATIONAL, INC. ("BUYER") AND EACH OF THE SHAREHOLDERS OF SELLER WHO ARE SIGNATORIES HERETO (COLLECTIVELY, THE "SHAREHOLDERS"). 2 SHARE EXCHANGE AGREEMENT THIS SHARE EXCHANGE AGREEMENT ("Agreement") is entered into as of this 1/st/ day of November, 1997, by and among INNOVATIVE MEDICAL SYSTEMS CORP., a Pennsylvania corporation (herein referred to as "Seller"), OXIS INTERNATIONAL, INC., a Delaware corporation (herein referred to as "Buyer"), and each of the shareholders of the Seller who are signatories hereto (collectively, the "Shareholders", and each individually a "Shareholder"). RECITALS -------- A. Seller is in the business of medical instrument design, manufacturing, marketing and selling and providing services related thereto as described more fully in Section 3.1 hereof (the "Business"). B. The Shareholders are the owners of all of the issued and outstanding shares of capital stock of the Seller as set forth adjacent to their names in Section 3.24 hereto (the issued and outstanding shares of capital stock of the Seller are sometimes referred to as the "Seller Stock"). Joseph B. Catarious, Jr., together with his wife, Eleanor Catarious, is the majority owner of the issued and outstanding capital stock of Seller (the "Majority Shareholder"). C. The parties hereto desire for Seller and Buyer to engage in the acquisition by Buyer of all of the Seller Stock solely in exchange for shares of the common stock, par value $.50 per share of the Buyer ("OXIS Stock") upon the terms and subject to the conditions set forth herein (the "Exchange"). D. The parties intend and desire for the Exchange to constitute a nontaxable reorganization within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the "Code"), for federal income tax purposes. AGREEMENT --------- NOW, THEREFORE, in consideration of the premises and of the mutual covenants and conditions herein contained, Buyer, Seller and Shareholders hereby agree as follows: 1.1 The Exchange. ------------ (a) Upon the performance of all covenants and obligations of the parties contained herein and upon the fulfillment of all conditions to the obligations of the parties contained herein (other than such covenants, obligations and conditions as shall have been waived in accordance with the terms hereof), each Shareholder shall assign, transfer and deliver to Buyer the number of shares of Seller Stock owned by such Shareholder, as set forth opposite such 3 Shareholder's name in Section 3.24 hereto, free and clear of all liens, encumbrances, restrictions and claims of every kind. In exchange for all of the shares of the Seller Stock transferred to Buyer, Buyer shall issue and deliver to each Shareholder (i) at Closing, the number of shares of OXIS Stock determined by multiplying (A) the percentage set forth next to each Shareholder's name in Exhibit "A" attached hereto and made a part hereof, times (B) the Total Number of Initial Exchange Shares calculated in accordance with Section 2.1(a) below (the "Initial Exchange"), and (ii) on an annual basis as provided in Section 2.1(c) below, OXIS shall issue to the Shareholders additional shares of OXIS Stock determined by multiplying (A) the percentage set forth next to each Shareholder's name in Exhibit "A" attached hereto and made a part hereof, times (B) the Total Number of Earnout Exchange Shares calculated in accordance with Section 2.1(c) below (the "Earnout Exchange") (all such shares of OXIS Stock issued to the Shareholders, collectively, the "Shares"). Each certificate representing shares of Seller Stock shall be accompanied by a stock power duly executed by the Shareholder transferring such shares in favor of Buyer. The shares of OXIS Stock constituting the Initial Exchange shall be delivered at Closing, and the shares of OXIS Stock constituting the Earnout Exchange shall be delivered to the Shareholders within ninety (90) days following the end of each calendar year throughout the Earnout Period (as hereafter defined) as specified in Section 2.1(c) below. (b) On the Closing Date, each of the Shareholders shall be deemed to have waived, without further action, all of such Shareholder's preemptive, dissenters or similar rights, if any, with respect to any share or other securities of the Seller. 2.1 Initial Exchange Shares/Earnout Exchange Shares. ----------------------------------------------- (a) The Total Number of Initial Exchange Shares to be delivered to the Shareholders pursuant to the terms of this Agreement shall be as defined and determined in subsection (b) below. In the event that between the date of this Agreement and the Closing, Buyer shall change the number of shares of OXIS Stock that are issued and outstanding as a result of any stock split, stock dividend or similar recapitalization, the Initial Average Share Price (as defined and determined in subsection (b) below) and the Total Number of Initial Exchange Shares shall each be proportionately adjusted correspondingly. (b) Definitions for Initial Exchange. For purposes of Section -------------------------------- 2.1(a), the following capitalized terms shall have the respective meanings set forth below: (i) "Initial Average Share Price" means the average of the ----------------------------- closing bid price of OXIS Stock for the ten (10) trading days prior to one (1) business day before Closing, provided that in no event shall such average price per share of OXIS Stock be less than the par value of $.50 per share. The Initial Average Share Price is also sometimes referred to below as the "Floor Price". (ii) "Total Number of Initial Exchange Shares" means the ---------------------------------------- lesser of (A) the number (rounded to four (4) decimal places) determined by dividing Seven Hundred Fifty Thousand Dollars ($750,000) by the Initial Average Share Price, or (B) 1,000,000 shares of OXIS 4 Stock. (c) Earnout Exchange. In addition to the shares of OXIS Stock ---------------- constituting the Initial Exchange to be delivered at Closing, the Shareholders shall be entitled to an annual Earnout Exchange, based upon Seller's Actual Revenues (as hereafter defined), for each calendar year commencing January 1, 1998 and ending December 31, 2002, provided that Actual Revenues for November and December of 1997 shall be deemed included in the 1998 calendar year (the "Earnout Period"), all as more fully set forth in Section 2.1(d) below and Schedule 1 attached hereto and made a part hereof. "Actual Revenues" means, for each of the aforementioned calendar years in the Earnout Period, the gross revenues generated by the assets of Seller (including those revenues which arise from internal sales within Buyer's business organization), including revenues from the sale of instruments, technology licensing fees relating to Seller's technology, proceeds from the sale of any and all such assets including disposables, and revenues from development contracts performed by Seller's employees, but not including revenues from the sale of reagents or other products or services of the Buyer in existence today or developed or offered in the future relating to Seller's technology. The Total Number of Earnout Exchange Shares to be delivered to the Shareholders under the terms of this Agreement shall be defined and determined as set forth in subsection (d) below. In the event that between the Closing and the dates on which the Total Number of Earnout Exchange Shares is determined, Buyer shall change the number of shares of OXIS Stock that are issued and outstanding as a result of any stock split, stock dividend or similar recapitalization, the Earnout Average Share Price (as defined below) and the Total Number of Earnout Exchange Shares shall each be proportionately adjusted correspondingly. In addition, in the event that an individual product or product line constituting more than five percent (5%) of Actual Revenues for the 1997 calendar year is affected by any decision of Buyer to discontinue the product or product line so that the result is a reduction of fifty percent (50%) or more in the Actual Revenues attributable to such product or product line for any calendar year during the Earnout Period from those Actual Revenues achieved in the 1997 calendar year, then, provided that Majority Shareholder expressed his opposition to such business decision in writing, Majority Shareholder may elect to have the dollar amount of such reduction deemed to be included in the calculation determining the Total Number of Earnout Exchange Shares due to the Shareholders for each calendar year of the Earnout Period, all as set forth in Section 2.1(d) below, but the proceeds from the sale of such product line shall be excluded from the calculation. (d) Definitions for Earnout Exchange. For purposes of Section 2.1(c), the -------------------------------- following capitalized terms shall have the respective meanings set forth below. (i) "Earnout Average Share Price" means the average of the ----------------------------- closing bid price of OXIS Stock for the last ten (10) trading days for the calendar year upon which the Earnout Exchange is being determined, but in no event shall such price be less than the Floor Price. 5 (ii) "Total Number of Earnout Exchange Shares" means the ---------------------------------------- number determined by dividing the Payout (as defined in (iii) below) by the Earnout Average Share Price. (iii) "Payout" means: -------- Guarantee + *Min. Pay. + [(Act. Rev. - Min. Rev.) X $.25] *only if Min. Rev. achieved Where: Act. Rev. = Actual Revenue (defined in Section 2.1(c)) Min. Pay. = Minimum Payout (defined in Schedule 1) Min. Rev. = Minimum Revenue (defined in Schedule 1) Guarantee = Guarantee (defined in Schedule 1); The Payout for the calendar year ended December 31, 1998 shall be determined without regard to the foregoing formula, and shall consist of (i) a Guarantee of $250,000, and (ii) in the event that Actual Revenues for the calendar year ended December 31, 1998 exceed the Minimum Revenue target of $5,000,000 set forth in Schedule 1, an additional $250,000. In the event that Actual Revenues exceed Maximum Revenues for a given calendar year during the Earnout Period (the "Excess Earnout"), the Excess Earnout shall be carried forward to the following year or years during the Earnout Period and added to the following year's Actual Revenues for the purpose of calculating (A) the annual Payout for such year and (B) the resulting number of shares of OXIS Stock which shall be determined and delivered to the Shareholders within ninety (90) days following the end of each calendar year during the Earnout Period, provided that in no year shall the dollar amount of the Excess Amount added to the Actual Revenues for any one year exceed the Maximum Revenues (as defined in Schedule 1 hereto) for such year, and any such excess amount of Actual Revenues shall be carried forward. (e) OXIS Stock Cap. Notwithstanding the foregoing, in no event shall -------------- the total number of shares of OXIS Stock issued to Shareholders pursuant to this Section 2.1 equal or exceed a number equal to 20% of the number of shares of OXIS Stock outstanding (the "20% Threshold"), which number shall be determined based upon the number of shares of OXIS Stock outstanding as of the close of trading on the business day immediately preceding the Closing Date. (f) Adjustment. Notwithstanding anything to the contrary contained in ---------- this Agreement, in the event that (i) the aggregate dollar value of the Total Number of Initial 6 Exchange Shares is less than $750,000 (based on the Initial Average Share Price) (the difference between $750,000 and the aggregate value of the Total Number of Initial Exchange Shares being the "Initial Exchange Deficiency"), and (ii) the Actual Revenues for any year during the Earnout Period exceed the Maximum Revenues for such year (each, an "Excess Year"), Buyer shall pay that portion of the Initial Exchange Deficiency which is "earned" (as defined below) in such Excess Year, in the form of delivery of shares of OXIS Stock within ninety (90) days following the end of the Excess Year. For purposes of this Section 2.1(f), the number of shares of OXIS Stock constituting that portion of the Initial Exchange Deficiency which is deemed "earned" in an Excess Year shall equal the number determined by dividing (A) [(Actual Revenues- Maximum Revenues) x $.25], by (B) the Earnout Average Share Price for the Excess Year. To the extent that any portion of the Initial Exchange Deficiency remains unearned, it may be earned following the foregoing formula in any subsequent Excess Year. (g) Accounting and Tax Treatment. The Buyer, the Shareholders and ---------------------------- the Seller intend for the transactions contemplated by this Agreement to qualify as a nontaxable reorganization under Section 368(a)(1)(B) of the Code. 3. REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDERS. --------------------------------------------------------- Majority Shareholder hereby represents and warrants on behalf of himself and the Seller, jointly and severally, except as otherwise set forth (with a reference to the relevant subparagraph below) in Exhibit B (Schedule of Exceptions) attached hereto, the following Sections 3.1 through 3.23. 3.1 Organization, Qualification, Subsidiaries and Address. ----------------------------------------------------- Seller is engaged in the business of designing, developing, marketing, selling and manufacturing instruments or parts of instruments and disposables for use in the medical, environmental and industrial fields and providing services related thereto, and is not engaged in any other business. Seller is a corporation validly existing and in good standing, under the laws of the Commonwealth of Pennsylvania. Seller has all requisite power to own its properties and carry on its business as now conducted. The only office and facility of Seller is located at 55 Steam Whistle Drive, Ivyland, Pennsylvania. Seller does not own or lease property or conduct any activities outside of Pennsylvania or is not otherwise required to be licensed or qualified to do business in any other jurisdiction. Except as set forth in Schedule 3.1 of Exhibit B, Seller has no subsidiary corporations, or investments in any other business ventures and is not a partner or joint venturer in any partnership or joint venture enterprise. Seller does not use any fictitious or assumed business or other names, except for "IMS" and "Innovative Medical Systems". 3.2 Due Execution. ------------- This Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by Seller, and this Agreement has been duly and validly executed and delivered by Seller and it is a valid and binding obligation of Seller enforceable against it in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or by equitable principles 7 relating to or limiting creditor's rights generally. 3.3 Effect of Agreement. ------------------- Except as set forth in Schedule 3.3 of Exhibit B, the execution, delivery and performance of this Agreement by Seller and consummation of the transactions contemplated hereby will not (i) require the consent, approval or authorization of any person or public authority, (ii) violate any provision of law applicable to Seller or (iii) conflict with, violate or constitute a breach of or default under any indenture, mortgage, deed of trust or other agreement or instrument, or any order, judgment, award, decree, statute, ordinance, regulation or any other restriction of any kind or character, to which Seller is a party, or by which Seller or any of its assets or properties is bound. 3.4 Capital Stock and Ownership. --------------------------- All of the issued and outstanding shares of Seller are owned beneficially and of record as set forth in Section 3.24 hereof. All of the issued and outstanding shares of capital stock of Seller are fully paid and nonassessable. All of the issued and outstanding shares of Seller are owned by the individuals set forth in Section 3.24, and, to the knowledge of Seller and Majority Shareholder, are held free and clear of any liens, encumbrances and obligations. Except as set forth in Schedule 3.4 to Exhibit B, there are no existing warrants, options, convertible rights, calls, puts or other rights or commitments of any character relating to the capital stock of Seller, and both the issued and the unissued capital stock of Seller are free from any voting or pooling trusts, agreements and similar arrangements, any redemption and cross purchase (buy/sell) agreements, preemptive purchase rights or any other restrictions. 3.5 Financial Statements. -------------------- Seller has furnished Buyer with audited financial statements (balance sheets and income statements), for each of the years ended October 31, 1995 and 1996 and unaudited financial statements for the twelve-month period ended October 31, 1997. All of said balance sheets and income statements (hereinafter referred to as "Financial Statements") are attached hereto as Exhibit C. The audited financial statements: (i) have been prepared in accordance with GAAP on a basis consistent with prior accounting methodology; (ii) are in accordance and consistent with the books and records of Seller in all material respects; (iii) fairly present in all material respects the financial condition and the results of operations for Seller at and for the periods therein specified; (iv) contain and reflect all necessary adjustments for a fair presentation of the results of operations and financial condition for the periods covered by said financial statements; and (v) with respect to any contracts and commitments and accounts receivable of Seller contain and reflect reserves for all material liabilities and for all reasonably anticipated material losses and costs in excess of expected receipts, with a 8 full description of the bases of calculation of such reserves set forth therein or in Exhibit B attached hereto. The unaudited financial statements present fairly in all material respects the financial condition of Seller as at October 31, 1997 and the results of its operations for the twelve-month period ending October 31, 1997, are correct and complete, and are consistent with the books and records of Seller, and have been prepared on a consistent basis with interim financial statements for prior periods. 3.6 Absence of Certain Changes or Events. ------------------------------------ Except as (i) specifically disclosed in Schedule 3.6 to Exhibit B, or (ii) specifically disclosed in the Financial Statements attached hereto as Exhibit C, since October 31, 1997, Seller has not: (a) incurred any obligation or liability (contingent or otherwise in an amount in excess of $5,000), except normal trade or business obligations incurred in the ordinary course of business and obligations under contracts, agreements, leases and documents referred to in Exhibit B hereto, which remain in existence as of the date of this Agreement; (b) mortgaged, pledged or subjected to lien, charge, security interest or to any other encumbrance, any of its assets or properties which remain in existence as of the date of this Agreement; (c) transferred, leased or otherwise disposed of any of its material assets or properties other than in the ordinary course of Seller's business; (d) canceled or compromised any material debt or claim or waived or released any material rights; (e) transferred or granted any rights under any concessions, leases, licenses, agreements, trademarks or trade names; (f) made or granted any general wage or salary increase or paid any bonuses or similar payments to employees (other than normal annual or regularly scheduled increases or bonuses consistent with prior business practices) or entered into any employment contract with any officer or employee; (g) entered into, amended or terminated any material agreement, contract or commitment other than in the ordinary course of Seller's business; (h) suffered any material casualty loss or material damage, whether or not such loss or damage shall have been covered by insurance; (i) except as disclosed in this Agreement or the Exhibits hereto, suffered any material adverse change in its financial condition, earnings, assets, properties or business; 9 (j) acquired any additional material assets except as acquired in the ordinary course of business as consistent with Seller's prior business practices; (k) issued, sold or otherwise granted any rights to an ownership interest in Seller or its business or assets; (l) made any change in its accounting methods; or (m) entered into any agreement to do any of the things described in the preceding clauses (a) to (l). 3.7 Absence of Defaults and Undisclosed Liabilities. ----------------------------------------------- Except as specifically disclosed in the Financial Statements or in Exhibit B with respect to Section 3.6(a), Seller is not obligated for, nor are any of Seller's assets subject to, any obligations or liabilities of any kind (fixed or contingent, whether known or unknown), whether or not such obligations or liabilities are normally shown or reflected on a balance sheet in a manner consistent with GAAP. Seller is not in default with respect to any material term or condition of any of its indebtedness or liability or any material amount of trade payables, except as otherwise set forth in Schedule 3.7 of Exhibit B. In addition, there are no facts in existence on the date hereof and known to either Seller or Majority Shareholder which, insofar as can be reasonably foreseen, might serve as the basis, in whole or in part, for any liabilities or obligations of Seller of a type which would cause an adverse effect on the business of Seller. 3.8 Taxes. ----- (a) Seller has (i) filed all federal, state, local and foreign income, franchise, real and personal property, and other tax returns, estimates and statements which are required to be filed by it or them as of the date hereof, (ii) paid all taxes, (whether income, sales, use, property, unemployment, social security, payroll, employee withholding, import duties, export duties and/or other) owed by Seller, with respect to Seller, as of the date hereof (other than amounts which are being actively and validly contested (as described in Exhibit B)), whether or not shown on said returns, estimates and statements and (iii) made appropriate provision for the payment of all such taxes where returns, estimates and statements are not yet required to be filed. Prior to the Closing Date, Seller (i) will have filed all such returns, estimates and statements which are required to be filed by it or them by the Closing Date, and (ii) paid all such taxes owed and required to be paid by it or them through the Closing Date. All of said tax returns and statements correctly set forth and report the entire liability for such taxes; are otherwise consistent with the Financial Statements; and contain accurate and complete information in the form, manner and content as required by the relevant taxing authorities in all material respects. Seller also has paid all such other taxes and governmental assessments and charges as are due and payable by it. Except as set forth in Schedule 3.8, no income tax return of Seller has been audited by the Internal Revenue Service or any state tax agency. (b) There are no tax liens or tax liabilities which have not been paid as of the date of this Agreement (other than inchoate tax liens). 3.9 Litigation. ---------- 10 Except as set forth in Schedule 3.9 of Exhibit B, neither Seller nor Majority Shareholder has been served with any summons, complaint or notice to arbitrate with respect to any actions presently unresolved involving the business of Seller, or any of its assets, business or operations, and no such action, suit, proceeding or investigation is currently pending; and neither Seller nor Majority Shareholder has any knowledge of any suit or action (equitable, legal or administrative), arbitration or other proceeding pending or threatened against Seller which could involve Buyer relative to any of the transactions contemplated herein. 3.10 Title to and Condition of Assets and Compliance with Contracts. -------------------------------------------------------------- Except as provided to the contrary in Schedule 3.10 to Exhibit B, Seller has good and marketable title, free and clear of restraints on or conditions to transfer or assignment and free and clear of all liens, mortgages, pledges, encumbrances, security interests, or charges of any kind, other than liens for taxes, assessments or other governmental charges not yet due and payable, to all of Seller's assets whether tangible, intangible, real, personal or mixed. All of such assets are in good operating condition and repair and free of any material defects except such as are normal in the conduct of operations and will not interfere with the conduct of sound operations. All accounts receivable of the Business as of the date hereof arose, and all of the accounts receivable as of the Closing Date will have arisen, from valid sales in the ordinary course of business. Seller owns or possesses all of the names (including the names "Innovative Medical Systems" and "IMS"), trade secrets, trademarks and service marks, trade names, copyrights and other proprietary rights reasonably necessary to conduct the Business as presently conducted, all of which are described in Schedule 3.10 to Exhibit B attached hereto. Seller has not received any claim of, or been served with any legal action or proceeding alleging its infringement of any proprietary rights, names or marks of any other person or entity and neither Seller nor Majority Shareholder has any knowledge of any such infringement. Seller is in possession of all premises leased to it by others. All leases pursuant to which Seller leases any property are valid and binding in accordance with their respective terms, and there is not any existing default, event of default or event which with notice and/or lapse of time would constitute a default under any such lease with respect to such Seller which default would have a material adverse effect on the Business of Seller or its assets, nor is there, to the best of Seller's and Majority Shareholder's knowledge, any such default, event of default or event with respect to other parties to such leases. Seller has materially performed the obligations required to be performed by it pursuant to its contracts and legal commitments. 3.11 Compliance with Laws. -------------------- Seller has complied with all material laws, regulations and orders applicable to its operations, except where the failure to so comply would not have a material adverse effect on the business of Seller. Without limiting the foregoing, none of the operations of Seller violates any state or federal occupational, health or safety laws or rules, any federal or state worker's notification laws, any federal or state anti-discrimination or affirmative action law or administrative requirement or governmental regulations or rules, except where such violation would not have a material adverse effect on the business of Seller; and there is no pending or to the best of Seller's and Majority Shareholder's knowledge threatened action against Seller relating to any such matters. 3.12 Key Employees and Customers. --------------------------- 11 Neither Seller nor Majority Shareholder has any knowledge of any: (i) intention of any employee of Seller to sever employment relations; or (ii) plan or intention of any of the customers, suppliers or other parties which do business with Seller to cancel presently existing contracts or other business arrangements or relationships with Seller or to take any other action which would adversely affect the business, operations, or anticipated earnings of the Business. 3.13 Interests in Competitors, Suppliers, Customers, etc. ---------------------------------------------------- Seller and the Majority Shareholder, and, to the knowledge of Seller and Majority Shareholder, affiliates of Seller or Majority Shareholder, (with respect to Majority Shareholder which are natural persons) and members of any of their immediate families do not own, directly or indirectly (whether as undisclosed principal or otherwise), individually or collectively, or own any interest in any corporation (other than holdings in any such corporation (the stock of which is publicly traded) which constitutes less than five percent (5%) of the voting stock of such corporation), partnership, firm or other entity which owns, any interest in: (i) a competitor, customer or supplier of Seller; (ii) any contractual relationship with Seller, including, but not limited to, leases of real and/or personal property leased to Seller or rights or options to extend contractual or lease terms or to purchase stock or other property as are exercisable by Seller or said other party; or (iii) any tangible or intangible property (including trade secrets, copyrights and other proprietary rights) used in the business activities of Seller. 3.14 List of Properties, Contracts and Other Data. -------------------------------------------- All of the following documents, instruments and/or information, if any, are described or listed, as is applicable, in Exhibit B attached hereto, with a specific reference to the appropriate and relevant paragraph under this Section 3.14 set forth therein: (a) any contract or agreement, to which Seller is a party, with a labor union or any local or subdivision thereof; (b) any unresolved claim of an unfair labor practice involving Seller or any present union organizing activity among any employees of Seller; (c) any employment contract or commitment or any consulting contract or commitment, entered into by Seller extending beyond the Closing Date, with any employee or consultant; (d) any insurance policies applied for and/or obtained by Seller upon the life of any of its employees; 12 (e) all real property owned of record or beneficially by Seller, and all leases of real property to which Seller is a party; (f) all material rights, licenses, leases of personal property, permits, franchises and concessions to which Seller is a party; (g) a list of all employees of Seller showing position, start date, current compensation, commission and/or bonus arrangements and perquisites (e.g., club memberships, etc.), latest compensation review date or date of last change in compensation and a description of all compensation changes made at that time; (h) any outstanding retirement plans, stock option plans and/or medical, health or other fringe benefit plans of Seller for the benefit of any of its employees and directors, including a description of all perquisites provided for employees and directors (to the extent not otherwise described pursuant to any other paragraph of this Section 3.14); (i) a list of customers of Seller and approximate annual revenues from such customers, if any, whose billings constituted $5,000 or more of the revenues of Seller during the ten-month period ended August 31, 1997 and the years ended October 31, 1995 and 1996 has been previously delivered to Buyer; (j) any material warranty or guaranty given to any customer or other party by Seller relative to Seller's performance or the performance of its employees; (k) a list of all persons and entities which are independent sales representatives or sales agents of Seller; (l) any written contract, agreement or instrument, or any oral contract or agreement, involving Seller and extending beyond the Closing Date, material to the conduct of the business of Seller (including, without limitation, material customer contracts and sales representative agreements); (m) a description and list of all material licenses, leases, contracts and other arrangements under which Seller is using any assets or operations which are owned by other parties or by another party or which are jointly owned by Seller with any other party or parties which has not otherwise been described pursuant to any other paragraph of this Section 3.14 (with any such relationship identified in such description); (n) a list of all assets owned by Seller or used by Seller in connection with its business describing each such asset or asset group, the original cost thereof and its current book value, and all property on any premises which is not owned or leased by Seller (excluding the personal effects of Seller's employees); and (o) all customer files, inventory files and historical records regarding the same, which are kept in an electronic medium by Seller, are available for inspection by Buyer at Seller's offices. 13 (p) all material licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities required to conduct the business of Seller which has not otherwise been described pursuant to any other paragraph of this Section 3.14. 3.15 Transfer of Rights. ------------------ Except as set forth in Schedule 3.15 to Exhibit B, all of Seller's right, title and interest in the assets and contracts (the "Material Contracts") listed in Schedule 3.14 to Exhibit B are being transferred to Buyer (together, the "Intangible Assets") by operation of law under the terms and conditions of this Agreement. As of the date of the Closing, Buyer will have the same rights with respect thereto as possessed by Seller prior to the Closing. All consents or other actions by or involving any other party required for the survival and continuance of the Intangible Assets and the Material Contracts have been, or will be prior to Closing, secured. 3.16 Intellectual Property. --------------------- Set forth on Schedule 3.16 is a description of all the Seller's Intellectual Property Rights with all registration numbers and dates of filing and registration, if any, except that the trade secrets referenced in subsection (ii) below are not described on such Schedule 3.16. The term "Intellectual Property Rights" means (i) all patent rights and all rights, title, and interest in and to all letters patent and applications for letters patent, industrial models, industrial designs, utility models, and other government issued or granted indicia of invention ownership including any reissue, division, continuation, or continuation-in-part applications throughout the world; (ii) all rights, title, and interest in and to all trade secrets and trade secret rights arising under the common law, state law, federal law, and laws of foreign countries; (iii) all copyrights; (iv) all mask work rights including mask work registration rights and mask work registrations throughout the world; (v) all rights, title and interest in and to all know-how and show-how whether or not protectable by intellectual property law; and (vi) all trademarks, trade names, and service marks, whether registered or arising under the common law, state law, federal law, and laws of foreign countries and all registrations thereof and interest therein throughout the world and all associated goodwill and the right to sue for past infringement. Except as otherwise set forth in Schedule 3.16, (i) the Seller owns the entire right, title, and interest in and to all Intellectual Property Rights of Seller used or useful in or associated with software developed by Seller ("Seller Software"), the Seller's assets, or the Business; and (ii) neither Seller Software nor Seller's Intellectual Property Rights are subject to any outstanding orders, decrees, judgments, stipulations, claims, or settlements, nor is any such software or any item of such Intellectual Property Rights subject to any mortgage, option, lease, covenant, condition, agreement, lien, security interest, adverse claim, restriction, charge, or encumbrance. Furthermore, except as otherwise set forth on Schedule 3.16, there are no pending or threatened claims, proceedings or lawsuits relating to, affecting or otherwise impairing Seller's rights in Seller Software or in Seller's Intellectual Property Rights, and no person or entity has misappropriated any of Seller Software or has or is violating or infringing Seller's Intellectual Property Rights. There is no restriction on the use or transfer of any of Seller's Intellectual Property Rights or Seller Software. Seller has no knowledge of any facts, which would be detrimental to the ownership, use, or validity of any of Seller's Intellectual Property Rights or Seller Software. To Seller's knowledge, Seller is not infringing upon or violating any Intellectual Property Rights of any other person or entity in the conduct of Business, and to Seller's knowledge, Buyer's use of Seller's Intellectual Property Rights and Seller 14 Software will not infringe upon or violate any Intellectual Property Rights of any other person or entity. 3.17 Licenses For Third-Party Software. --------------------------------- Set forth on Schedule 3.17 to Exhibit B is a description of each license under which Seller is the licensee of any Third-Party Software along with a description of such Third-Party Software. Seller has delivered to Buyer a true, correct, and complete copy of each license agreement identified in Schedule 3.17. Seller presently uses the software described in such licenses as licensee under terms of such licenses. All royalties due under such licenses have been paid and there exists no default under the terms of such licenses and no event has occurred which, upon the passage of time or the giving of notice, or both, would result in any event of default or prevent Seller from exercising and obtaining the benefits of any options contained therein. The Seller has all rights, title, and interest of the licenses under the terms of such licenses, free of all liens, claims, or encumbrances, all such licenses are valid and in full force and effect and Seller is in compliance with the terms thereof. There will be no default or basis for acceleration under any such license as a result of the transactions contemplated by this Agreement. Seller has not received any notice of infringement, violation, or conflict with any Intellectual Property Rights of third parties with respect to its use of any Third-Party Software. 3.18 Compliance with Environmental Laws. ---------------------------------- (a) Definitions. The following terms, when used in this Section ----------- 3.18, shall have the following meanings. Any of these terms may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. (i) "Release" shall mean and include any spilling, ------- leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment or the workplace of any Hazardous Substance, and otherwise as defined in any applicable Environmental Law. (ii) "Hazardous Substance" shall mean any quantity of ------------------- asbestos, urea formaldehyde, PCBs, radon gas, crude oil or any fraction thereof, all forms of natural gas, petroleum products or by-products, any radioactive substance, any toxic, infectious, reactive, corrosive, ignitable or flammable chemical or chemical compound and any other hazardous substance, material or waste (as defined in or for purposes of any applicable Environmental Law), whether solid, liquid or gas. (iii) "Facility " shall mean each plant, facility, office or -------- other item of real property owned or leased by Seller relating to the Business. (iv) "Permits" shall mean all licenses, permits, ------- franchises, approvals, authorizations, consents or orders of, or filings with, any governmental authority, whether foreign, federal, state or local, or any other person, necessary or desirable for the present or anticipated conduct of, or relating to the operation of the Business. 15 (b) Compliance with Applicable Environmental Laws. The Facility --------------------------------------------- has been maintained by Seller in substantial compliance with all applicable federal, state and local laws, statutes, ordinances, regulations, rules, judgments, orders, notice requirements, court decisions, agency guidelines or principles of law, restrictions, licenses, with respect to the Facility in effect on the Closing Date, which (i) regulate or relate to the protection or clean-up of the environment, the use, treatment, storage, transportation, handling or disposal of hazardous, toxic or otherwise dangerous substances, wastes or materials (whether gas, liquid or solid), the preservation or protection of waterways, groundwater, drinking water, air, wildlife, plants or other natural resources, or the health and safety of persons or property, including without limitation protection of the health and safety of employees or (ii) impose liability with respect to any of the foregoing, including without limitation the Federal Water Pollution Control Act (33 U.S.C. (S) 1251 et seq.), Resource Conservation & Recovery Act (42 U.S.C. (S) 6901 et seq.) ("RCRA"), Safe Drinking Water Act (21 U.S.C. (S) 349, 42 U.S.C. (S)(S) 201, 300f), Toxic Substances Control Act (15 U.S.C. (S) 2601 et seq.), Clean Air Act (42 U.S.C. (S) 7401 et seq.), Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. (S) 9601 et seq.) ("CERCLA"), or any other similar federal, state or local law of similar effect, each as amended. ("Environmental Laws"). (c) Facility. The Facility is, and at all times when leased or -------- operated by Seller, leased and operated in substantial compliance in all material respects with all applicable Environmental Laws and in a manner that will not give rise to any material liability under any applicable Environmental Laws; (d) Permits. Seller has, and at all times has had, all Permits ------- required under any applicable Environmental Law and the Facility is, and at all times has been, in substantial compliance in all material respects with all such Permits; (e) Permits Required. The consummation of any of the ---------------- transactions contemplated by this Agreement will not require an application for issuance, renewal, transfer or extension of, or any other administrative action regarding, any Permit required under any applicable Environmental Law; (f) Notice of Violation. Seller has not received any written ------------------- notice at any time that it is or was claimed to be in violation of or in non- compliance in any material respect with the conditions of any Permit required under any applicable Environmental Law or the provisions of any applicable Environmental Law; (g) Pending Actions. There is not now pending or to the --------------- knowledge of Seller, threatened, nor any basis for, nor has there ever been, any Action against Seller under any applicable Environmental Law or otherwise with respect to any Release or mishandling of any Hazardous Substance; (h) Judgments. To the knowledge of Seller, there are no consent --------- decrees, judgments, judicial or administrative orders or agreements with, or liens by, any governmental authority or quasi-governmental entity relating to any applicable Environmental Law which regulate, obligate, bind or in any way affect Seller or the Facility; 16 (i) Hazardous Substances. During the period of time which Seller -------------------- has leased the Facility, there is not and has not been any Hazardous Substance used, generated, treated, stored, transported, disposed of, handled or otherwise existing on, under, about or from the Facility, except for quantities of any such Hazardous Substances stored or otherwise held on, under or about the Facility in substantial compliance in all material respects with all applicable Environmental Laws and necessary for the operation of the Business. (j) Handling of Hazardous Substances. Seller has at all times -------------------------------- used, generated, treated, stored, transported, disposed of or otherwise handled its Hazardous Substances in substantial compliance in all material respects with all applicable Environmental Laws and in a manner that will not result in liability of Seller under any applicable Environmental Law; (k) Environmental Conditions. To the knowledge of Seller, there ------------------------ are no present or past Environmental Conditions (as defined below) of any material nature in any way relating to the Business, and the Facility. "Environmental Conditions" means the introduction into the environment of any Hazardous Substance (whether or not upon the Facility, or other property of the Business) as a result of which Seller has or may become liable to any person or by reason of which the Facility or any of the Seller's assets may suffer or be subjected to any lien; (l) CERCLA or RCRA. To the knowledge and belief of Seller, no -------------- current or past use, generation, treatment, transportation, storage, disposal or handling practice of Seller with respect to any Hazardous Substance has or likely will result in any liability under the CERCLA or RCRA or any state or local law of similar effect, as in effect on the Closing Date; (m) Storage Tank or Pipeline. To the knowledge of Seller, there ------------------------ is not now and has not been at any time in the past any underground or above- ground storage tank or pipeline at the Facility where the installation, use, maintenance, repair, testing, closure or removal of such tank or pipeline was not in substantial compliance in all material respects with all applicable Environmental Laws and there has been no material Release from or rupture of any such tank or pipeline, including without limitation any Release from or in connection with the filling or emptying of such tank; (n) Environmental Audits or Assessments. Copies of the written ----------------------------------- reports, and all parts thereof, including any drafts of such reports if such drafts are in the possession or control of Seller, of all environmental audits or assessments which have been conducted at the Facility or any former Facility within the past five years, either by Seller or any attorney, environmental consultant or engineer engaged for such purpose, have been delivered to Buyer and a list of all such reports, audits and assessments and any other similar report, audit or assessment of which Seller has knowledge is included on Schedule 3.18 of Exhibit "B" hereto; (o) Indemnification Agreements. Except as set forth in Exhibit B -------------------------- hereto, Seller is not a party, whether as a direct signatory or as successor, assign or third party beneficiary, or otherwise bound, to any lease or other contract (excluding insurance policies disclosed on Exhibit B hereto) under which Seller is obligated by or entitled to the benefits of, directly or indirectly, any representation, warranty, indemnification, covenant, restriction or other undertaking concerning environmental conditions; 17 (p) Releases or Waivers. Except as set forth in Exhibit B, ------------------- Seller has not released any other person from any claim under any applicable Environmental Law or waived any rights concerning any Environmental Condition; and (q) Notices, Warnings and Records. Seller has given all notices ----------------------------- and warnings, made all reports, and has kept and maintained all records required by and in material compliance with all applicable Environmental Laws. 3.19 Inventory. All inventories of raw materials, work-in-progress --------- and finished goods set forth or reflected in the October 31, 1997 Balance Sheet, attached as part of Exhibit "C" to this Agreement (the "Balance Sheet"), consist of a quality and quantity usable and saleable in the ordinary course of business, except for obsolete items and materials of below standard quality, all of which have been written down to net realizable market value as reflected in the Balance Sheet. The value at which inventories are carried on the Balance Sheet reflects the normal inventory valuation policy of Seller, as applicable, in accordance with GAAP at the lower of cost or market value and on a basis consistent with that of preceding periods. 3.20 Labor Controversies. There are no labor controversies pending ------------------- or, to the best of Seller's and Majority Shareholder's knowledge, threatened between Seller and its employees. Seller has substantially complied with all laws relating to the employment of labor, including any thereof relating to wages, hours, collective bargaining and the payment of social security and similar taxes, and Seller is not liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. 3.21 ERISA. Except as set forth in Schedule 3.21 of Exhibit B, there ----- are no employee benefit plans as defined in section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), maintained by Seller or under which Seller has any present or future obligation or liability. Seller does not participate in or have any present or future obligation or liability under any "multi-employer plan" or "employee pension benefit plan," as those terms are defined under ERISA. 3.22 Accounts Receivable . Schedule 3.22 to Exhibit B lists the ------------------- accounts receivable of Seller as of August 31, 1997, including the name of each account; the account number; the invoice number and date; payment terms; and the age of each such account on the basis of thirty (30), sixty (60) and ninety (90) days and over, from the date of original invoice. Each such account receivable listed arose from valid sales in the ordinary course of business. The dollar value of the number of shares of OXIS Stock constituting the Earnout Exchange (including the Guarantee) for the first year of the Earnout Period shall be adjusted downward by the dollar amount of any such account receivable or portion thereof which Seller is not able to collect by the end of such year, and such adjustment shall be Buyer's sole remedy for such non-collectible accounts receivable. In the event that such adjustment occurs, Buyer shall promptly assign such non-collectible accounts receivable to the Shareholders for collection, provided that as a result of such assignment the Shareholders shall be entitled to retain any monies collected with respect thereto. Except as reflected in Schedule 3.22 , no refunds, reimbursements, discounts or other adjustments are payable by Seller with respect to any of its accounts receivable other than those arising in the ordinary course of business. Except as set forth in Schedule 3.22, neither Seller nor 18 Majority Shareholder, know, or have any reasonable grounds to know, of any defenses, rights of setoff, recoupment, assignments, pledges, liens, encumbrances, claims, equities or conditions enforceable by third parties with respect to or affecting the accounts receivable of Seller. 3.23 Disclosure. No representation or warranty (whether or not ---------- relating to Seller) by Seller or Majority Shareholder in this Agreement, any Schedule or Exhibit hereto, or in any certificate furnished or to be furnished pursuant hereto or at the Closing, or in connection with the transactions contemplated hereby contains any knowingly untrue statement of a material fact as of the date hereof or thereof, or omits to state a material fact necessary to make the statements contained herein or therein as of the date hereof or thereof not misleading. Each of the Shareholders hereby represents and warrants, severally with respect to himself or herself, except as otherwise set forth (with a reference to the relevant subparagraph below) in Exhibit B (Schedule of Exceptions) attached hereto, the following Sections 3.24 through 3.28: 3.24 Capital Stock and Ownership. The issued and outstanding shares --------------------------- of Seller are owned beneficially and of record by the Shareholder as set forth next to his or her name as follows: