-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JQ7MYS+ID4uJa2eLms7chMP7Byj+CXFty8cwf0OcvYqMK+DPUewWdWHeAp5a4q+a jTCCtY0qBXhU+2+58JAANg== 0000899243-96-001460.txt : 19961115 0000899243-96-001460.hdr.sgml : 19961115 ACCESSION NUMBER: 0000899243-96-001460 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEXAS BIOTECHNOLOGY CORP /DE/ CENTRAL INDEX KEY: 0000887023 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 133532643 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20117 FILM NUMBER: 96662490 BUSINESS ADDRESS: STREET 1: DOCTORS CENTER STREET 2: 7000 FANNIN STE 1920 CITY: HOUSTON STATE: TX ZIP: 77030 BUSINESS PHONE: 7137968822 10-Q 1 FORM 10-Q CONFORMED COPY -------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED SEPTEMBER 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-12574 TEXAS BIOTECHNOLOGY CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3532643 - --------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7000 Fannin, Suite 1920, Houston, Texas 77030 - ------------------------------------------------------------------------------- (Address of principal executive office) (Zip code) (713) 796-8822 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at October 15, 1996 ----- ------------------------------- Common Stock, $0.005 par value 25,454,434 TEXAS BIOTECHNOLOGY CORPORATION TABLE OF CONTENTS -----------------
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 1 Consolidated Statements of Operations for the three months ended September 30, 1996 and 1995, the nine months ended September 30, 1996 and 1995, and the period from August 2, 1989 (date of incorporation) through September 30, 1996 2 Consolidated Statements of Cash Flows the nine months ended September 30, 1996 and 1995, and the period from August 2, 1989 (date of incorporation) through September 30, 1996 3 Notes to Consolidated Financial Statements 4 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 PART II. OTHER INFORMATION ITEM 1: Legal Proceedings 19 ITEM 2: Changes in Securities 19 ITEM 3: Defaults Upon Senior Securities 19 ITEM 4: Submission of Matters to a Vote of Security Holders 20 ITEM 5: Other Information 20 ITEM 6: Exhibits and Reports on Form 8-K 20 SIGNATURES 21 INDEX TO EXHIBITS 22
PART I FINANCIAL INFORMATION - ------------------------------- ITEM 1. FINANCIAL STATEMENTS - ------------------------------ TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1996 1995 ASSETS ------------- ------------ ------ (UNAUDITED) Current assets: Cash and cash equivalents $ 808,126 $ 5,724,264 Short term investments 11,738,650 8,195,307 Short term note receivable 122,500 122,500 Prepaids 278,072 554,208 Other current assets 385,267 547,391 ------------- ------------- Total current assets 13,332,615 15,143,670 Equipment, furniture and fixtures, and leasehold improvements 7,611,538 7,529,415 Less: Accumulated depreciation and amortization (4,294,237) (3,746,586) ------------- ------------- Net property 3,317,301 3,782,829 ------------- ------------- Total assets $ 16,649,916 18,926,499 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 2,983,544 2,566,264 Deferred revenue 250,000 650,110 ------------- ------------- Total current liabilities 3,233,544 3,216,374 Commitments and contingencies --- --- Stockholders' equity: Preferred stock, par value $.005 per share. At September 30, 1996 and December 31, 1995, 5,000,000 shares authorized; none outstanding. --- --- Common stock, par value $.005 per share. At September 30, 1996, 75,000,000 shares authorized; 24,203,600 shares issued and outstanding. At December 31, 1995, 40,000,000 shares authorized; 17,439,365 shares issued and outstanding (notes 2, 3 and 5) 121,017 87,198 Additional paid-in capital 73,149,358 59,540,730 Deferred compensation expense (note 3) --- (46,177) Deficit accumulated during the development stage (59,854,003) (43,871,626) ------------- ------------- Total stockholders' equity 13,416,372 15,710,125 ------------- ------------- Total liabilities and stockholders' equity $ 16,649,916 $ 18,926,499 ============= ============= FORM 10-Q See accompanying notes to consolidated financial statements Page 1
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
AUGUST 2, 1989 (DATE OF INCORPORATION) THREE MONTHS ENDED NINE MONTHS ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 1996 ---------- ---------- ---------- ---------- -------------- Revenues: Research agreements $ 1,100,000 3,338,027 4,295,110 5,638,247 15,333,796 Products and services 2,500 35,600 6,439 207,801 403,080 Grant revenue --- 30,391 1,727 206,939 668,951 ----------- ---------- ---------- ---------- ----------- Total revenues 1,102,500 3,404,018 4,303,276 6,052,987 16,405,827 ----------- ---------- ---------- ---------- ----------- Expenses: Research and development 5,980,096 3,753,107 17,484,641 10,560,959 51,072,296 Charge for purchase of in-process research and development --- --- --- 1,973,883 9,465,610 General and administrative 952,299 1,223,671 3,076,936 3,928,417 18,481,570 Restructuring and impairment of intangible assets (note 9) --- --- 421,165 --- 1,064,915 ----------- ---------- ---------- ---------- ----------- Total expenses 6,932,395 4,976,778 20,982,742 16,463,259 80,084,391 ----------- ---------- ---------- ---------- ----------- Operating loss 5,829,895 1,572,760 16,679,466 10,410,272 63,678,564 ----------- ---------- ---------- ---------- ----------- Other income (expense): Interest income 199,811 285,333 697,089 960,540 3,916,208 Interest expense --- --- --- (969) (91,647) ----------- ---------- ---------- ---------- ----------- Net loss $ 5,630,084 1,287,427 15,982,377 9,450,701 59,854,003 =========== ========== ========== ========== =========== Net loss per share $ 0.23 0.07 0.69 0.57 5.96 =========== ========== ========== ========== =========== Weighted average common shares used to compute net loss per share 24,188,708 17,439,365 23,053,607 16,516,343 10,045,776 =========== ========== ========== ========== =========== FORM 10-Q See accompanying notes to consolidated financial statements Page 2
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
AUGUST 2, 1989 (DATE OF NINE MONTHS ENDED INCORPORATION) SEPTEMBER 30, THROUGH SEPTEMBER 30, 1996 1995 1996 ------------ ------------ -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (15,982,377) (9,450,701) (59,854,003) Adjustments to reconcile net loss to net cash used in operating activities: Write-off of deferred offering costs related to delayed offering --- --- 324,938 Depreciation and amortization 547,651 607,097 4,400,490 Interest expense converted on notes payable to stockholders --- --- 87,755 Expenses paid with stock --- --- 24,500 Non cash acquisition costs expensed --- 1,973,883 9,465,610 Deferred compensation expense 46,177 70,505 287,158 Impairment of intangible assets --- --- 643,750 Change in operating assets and liabilities, net of effect of acquisition: (Increase) decrease in prepaids 276,136 --- (100,412) (Increase) decrease in receivables 7,291 87,500 (82,995) (Increase) decrease in other current assets 154,833 (75,833) (500,450) Decrease in inventories --- --- 61,245 Increase in current liabilities 417,280 333,295 2,917,426 (Decrease) in deferred revenue (400,110) (1,378,620) (1,422,122) -------------- ------------ ------------ Net cash used in operating activities (14,933,119) (7,832,874) (43,747,110) -------------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements (82,123) (184,257) (7,303,078) Purchase of short term investments (24,007,757) (20,949,220) (75,928,978) Redemption of short term investments 20,464,414 25,049,002 64,190,328 Acquisition of subsidiary, net of cash acquired --- --- (167,331) -------------- ------------ ------------ Net cash (used in) provided by investing activities (3,625,466) 3,915,525 (19,209,059) -------------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable to stockholders and related trusts --- --- 1,852,500 Proceeds from sale of common stock and option and warrant exercises, net 13,642,447 --- 62,240,483 Repurchase of common stock --- --- (3,750) Cost of delayed offering --- --- (324,938) -------------- ------------ ------------ Net cash provided by financing activities 13,642,447 --- 63,764,295 -------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents (4,916,138) (3,917,349) 808,126 Cash and cash equivalents at beginning of period 5,724,264 7,199,942 --- -------------- ------------ ------------ Cash and cash equivalents at end of period $ 808,126 3,282,593 808,126 ============== ============ ============ Supplemental schedule of noncash financing activities $ --- 2,061,383 11,405,865 ============== ============ ============ FORM 10-Q See accompanying notes to consolidated financial statements Page 3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (a) Organization Texas Biotechnology Corporation (the "Company" or "TBC"), a biopharmaceutical company, applies innovative drug discovery techniques and its specialized knowledge of the role of vascular cell biology in cardiovascular disease to the design and development of novel pharmaceutical compounds. The Company was incorporated in the state of Delaware in 1989. During the period from August 2, 1989, (date of incorporation) through March 1990, the Company was largely inactive. Since that time, the Company has been engaged principally in research and drug discovery programs and clinical development of a drug compound. On July 25, 1994, the Company acquired all of the outstanding common stock of ImmunoPharmaceutics, Inc. ("IPI"), a San Diego, California based company, in exchange for common stock of the Company. TBC decided to consolidate the IPI operation into TBC in the first half of 1996. (See note 9) The Company is presently working on a number of long-term development projects which involve experimental and unproven technology, which may require many years and substantial expenditures to complete, and which may be unsuccessful. To date, other than small amounts of monoclonal antibody compounds and services produced and sold by IPI (now discontinued), the Company has not developed or sold any products, and no assurance can be given that the Company will be able to develop, manufacture or market any products in the future. In addition, no assurance exists that future revenues will be significant, that any sales will be profitable, or that the Company will have sufficient funds available to complete its research and development programs or market any products which it may develop. Accordingly, the Company is considered to be in the development stage as it has not to date derived significant revenues from its planned principal operations. (b) Basis of Consolidation The Company's consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, IPI. All material intercompany transactions have been eliminated. The Company's consolidated financial statements include the activity related to IPI since August 1, 1994. (c) Cash, Cash Equivalents and Short Term Investments Cash equivalents are considered to be those securities or instruments with original maturities, when purchased, of three months or less. At September 30, 1996, approximately $808,000 was invested in demand and money market accounts. Short term investments are those investments which have an original maturity of less than one year and greater than three months. At September 30, 1996, the Company's short term investments consisted of approximately $998,000 in U.S. Treasury Bills and $10,741,000 in Corporate Commercial Paper. Cash equivalents and short term investments are stated at cost, which approximates market value. Interest income is accrued as earned. On January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (Statement 115), Accounting for Certain Investments in Debt and Equity Securities. Statement 115 provides for the use of the amortized cost method for investments in debt securities when FORM 10-Q Page 4 management has the positive intent and ability to hold such securities to maturity. In connection with the adoption of Statement 115, the Company classified all short term investments as held to maturity. (d) Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is provided on the straight-line method over the estimated useful lives of the respective assets (3 to 10 years). Amortization of leasehold improvements is provided on the straight- line method over the remaining minimum lease term. (e) Intangible Assets Intangible assets are amortized on a straight line basis over ten years. (f) Research and Development Costs All research and development costs are expensed as incurred and include salaries of research and development employees. For the three months ended September 30, 1996 and 1995, salaries and benefits totaled approximately $1,469,000 and $1,797,000, respectively, of which approximately $1,179,000 and $1,396,000, respectively, was charged to research and development. For the nine months ended September 30, 1996 and 1995, salaries and benefits totaled approximately $4,936,000 and $5,223,000, respectively, of which approximately $3,872,000 and $4,005,000, respectively, was charged to research and development. Payments related to the acquisition of in- process research and development are expensed. (g) Net Loss Per Share Net loss per share is calculated using the weighted average shares of common stock outstanding during the period. For the three months ended September 30, 1996 and 1995, the weighted average common shares used to compute net loss per share totaled 24,188,708 and 17,439,365 respectively. For the nine months ended September 30, 1996 and 1995, and the period from August 2, 1989 (date of incorporation) through September 30, 1996, the weighted average common shares used to compute net loss per share totaled 23,053,607, 16,516,343 and 10,045,776 respectively. Stock options and stock warrants are considered common stock equivalents, however are not included in the loss per share computations as their effect is anti-dilutive. Shares held in escrow through June 30, 1995, pending satisfaction of certain future conditions, and shares related to contingent stock issue rights related to the IPI acquisition have been excluded from the net loss per share calculation until such shares were released or issued. (h) Reclassifications Certain reclassifications have been made to prior period financial statements to conform with the September 30, 1996 presentation with no effect on net loss reported. (i) Revenue Recognition Revenue from grants is recognized as earned under the terms of the related grant agreements. Revenue from service contracts is recognized as the services are performed and/or as milestones are achieved. Revenue from products and services is recognized when the products are shipped or the services are performed. Amounts received in advance of services to be performed under contracts are recorded as deferred revenue. FORM 10-Q Page 5 (j) Patent Application Costs Costs incurred in filing for patents are expensed as incurred. (k) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. (l) Interim Financial Information The Consolidated Balance Sheet as of September 30, 1996, and the related Consolidated Statements of Operations for the three and nine month periods ended September 30, 1996 and 1995, and the period from August 2, 1989 (date of incorporation) through September 30, 1996, and Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1996 and 1995, and the period from August 2, 1989 (date of incorporation) through September 30, 1996, are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company's Annual Consolidated Financial Statements and Notes which should be read in conjunction with these consolidated financial statements and notes. (m) Accounting Pronouncements In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (Statement 121). The Company has adopted the statement effective December 31, 1995. Statement 121 requires that long-lived assets and certain identifiable intangible assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, Statement 121 requires that certain long-lived assets and certain identifiable intangible assets to be disposed of be reported at the lower of carrying amount or fair value less costs to sell. The Company believes the goodwill associated with IPI, $643,750, is impaired due to the decision to cease operations at IPI and the sale of the QED business unit and has recorded a charge to expense during 1995. (See note 9) In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123). Statement 123 establishes financial accounting and reporting standards for stock-based employee compensation plans using a fair value based methodology as an alternative to intrinsic value based methodology. In addition, Statement 123 establishes the fair value as the measurement basis for transactions in which an entity issues its equity instruments to acquire goods or services from non- employees. The accounting and reporting requirements of Statement 123 are effective beginning January 1, 1996. The Company intends to continue using the intrinsic value method. (2) CAPITAL STOCK In February, 1996, the Company completed a private placement of common stock. The Company issued 6,550,990 shares of Common Stock at $2 1/8 per share with proceeds of approximately $13.0 million, net of selling commissions and expenses of approximately $900,000. In accordance with the terms of the offering, the Company filed, pursuant to Rule 415 of the Securities Act, a Shelf Registration Statement as to the shares of Common Stock sold to the purchasers in the private placement which became effective on June 4, 1996. FORM 10-Q Page 6 In connection with the private placement, the co-exclusive agent, Harris, Webb & Garrison received a $634,630 selling commission, 49,775 warrants with an exercise price of $3.05 per share and no registration rights, and 497,749 warrants with an exercise price of $3.66 per share with the underlying common stock being registered, under certain circumstances, on a "piggyback" basis in the event of a public offering of common stock by the Company. The co-exclusive agent, Aurora Capital Corp., received a $124,653 selling commission, 25,587 warrants with an exercise price of $3.36 per share, and 149,002 warrants with an exercise price of $4.58 per share. The common stock underlying Aurora's warrants will be registered with the Common Stock issued in the private placement. The co-exclusive agents assigned some of these warrants to others. In May 1996, the Board of Directors proposed, and stockholders approved, an amendment to the Company's Certificate of Incorporation to increase the authorized number of shares of the Company's common stock from 40 million shares to 75 million shares. On October 10, 1996 the Company signed a strategic alliance agreement with LG Chemical, Ltd. ("LG Chem"), a Korean corporation. In conjunction with the agreement, LG Chem purchased 1,250,000 shares of common stock for $4.00 per share for a total of $5 million. In addition, LG Chem has the option to purchase up to $5 million of common stock on one of four exercise dates ending at December 31, 1997. The minimum purchase amount is $1,000,000 and LG Chem and TBC must agree on the purchase price or the option cannot be exercised on the given exercise date. These shares were issued pursuant to "Regulation S" and may not be sold by LG Chem for a period of one year per the agreement. The Company's agents in the contract negotiations, Raymond James & Associates, Inc. and Mitani & Co., Inc. received $420,000 in commissions and 113,636 warrants exercisable at $4.40 per share with the underlying common stock being subject to certain piggyback registration rights. (3) STOCK OPTIONS The Company has in effect the following stock option plans: The Amended and Restated 1990 Incentive Stock Option Plan ("1990 Plan") allows for the issuance of incentive and non-qualified options to employees, directors, officers, non-employee independent contractors and non-employee directors, pursuant to which 230,590 shares of common stock are reserved for issuance out of authorized but unissued shares of the Company. The Amended and Restated 1992 Incentive Stock Option Plan ("1992 Plan") allows for the issuance of incentive and non-qualified options to employees, directors, officers, non-employee independent contractors and non-employee directors, pursuant to which 1,597,843 shares of common stock are reserved for issuance out of authorized but unissued shares of the Company. The Stock Option Plan for Non-Employee Directors ("Director Plan") allows for the issuance of non-qualified options to non-employee directors, pursuant to which 71,429 shares of common stock are reserved for issuance out of authorized but unissued shares of the Company to be issued to non- employee members of the Board of Directors of the Company based on a formula. The 1995 Stock Option Plan ("1995 Plan") allows for the issuance of incentive and non-qualified options, shares of restricted stock and stock bonuses to employees, officers, and non-employee independent contractors, pursuant to which 1,000,000 shares of common stock are reserved for issuance out of authorized but unissued shares of the Company. The 1995 Amended and Restated Non-Employee Director Stock Option Plan ("1995 Director Plan") allows for the issuance of non-qualified options to non-employee directors, pursuant to which 200,000 shares of common stock are reserved for issuance out of authorized but unissued shares of the Company to be issued to non-employee members of the Board of Directors of the Company based on a formula. In June 1996, FORM 10-Q Page 7 the 1995 Director Plan was amended with respect to the election date requirement for a director to request stock in lieu of cash payment of director fees. A summary of stock options as of September 30, 1996, follows:
Exercise Price Available Stock Option Plans Per Share Outstanding Exercised Exercisable for Grant - ------------------- -------------- ----------- --------- ----------- --------- 1990 Plan $3.50 - $3.56 173,369 55,125 165,369 57,221 1992 Plan $1.41 - $5.36 1,422,977 102,157 710,391 174,866 Director Plan $2.40 - $4.54 42,576 --- 33,148 28,853 1995 Plan $1.31 - $4.53 564,500 --- 37,500 435,500 1995 Director Plan $1.38 - $5.19 82,806 --- 27,606 117,194 ----------- -------- ---------- -------- TOTAL 2,286,228 157,282 974,014 813,634 =========== ======== ========== ========
The Company has recorded deferred compensation for the difference between the grant price and the deemed fair value for financial statement presentation purposes related to certain options granted in the period subsequent to May 27, 1993 and prior to the initial public offering. Such amount totaled $287,158, of which $46,177 has been charged to expense in 1996. (4) INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" effective January 1, 1993. As of September 30, 1996, the Company had a net deferred tax asset of approximately $20,934,000, primarily composed of the tax benefit associated with net operating loss carry forwards, start-up and other capitalized costs. A valuation allowance for the full amount of the deferred tax asset has been established as realization of the benefit is uncertain. (5) COMMON STOCK RESERVED The Company has reserved common stock for issuance as of September 30, 1996 as follows:
Stock option plans 3,099,862 Agreement with Genentech, Inc. 285,715 Warrants issuable under the Genentech Agreement 142,858 Warrants outstanding 5,376,905 Underwriters purchase options and related warrants 710,000 IPI acquisition (contingent shares) 1,000,000 ---------- Total shares reserved 10,615,340 ==========
LG Chem has the option to purchase up to $5 million of common stock on one of four exercise dates ending at December 31, 1997. The minimum purchase amount is $1,000,000 and LG Chem and TBC must agree on the purchase price or the option cannot be exercised on the given exercise date. FORM 10-Q Page 8 (6) CLINICAL RESEARCH AGREEMENTS On February 10, 1995, the Company entered into an agreement with Coromed, Inc., a contract research organization, to coordinate the clinical evaluation of Novastan/R/ as an adjunct to Streptokinase in acute myocardial infarction. Coromed is responsible for managing all aspects of the clinical trial and making all financial remuneration to testing sites. The term of the agreement is 19 months, subject to extension upon the mutual written agreement of both parties. The parties have agreed to a total budget of approximately $3,196,000. Of this amount, $106,000 was paid upon execution of a letter of intent and approximately $450,000 was paid upon execution of the agreement. Subsequent payments will be made monthly on a per patient basis, to a maximum total of approximately $2,490,000. Three additional payments of $50,000 each will be made upon completion of specified tasks by Coromed. If the clinical trial is completed in less than 19 months, the Company will pay Coromed a bonus calculated as a percentage of personnel costs as set forth in the budget, to a maximum bonus amount of approximately $327,000. In addition, the Company has engaged Coromed to provide various services related to other ongoing Novastan/R/ trials being conducted by the Company. On May 1, 1996, the Company amended the above agreement with Coromed, Inc. The term of the contract was extended to 24 months with an additional cost of $1,200,000. The bonus payment, if any, is now based on the completion in less than 24 months. (7) RESEARCH AGREEMENTS On October 11, 1994, the Company signed a collaborative agreement with Synthelabo, a French pharmaceutical group, to develop and market compounds for vascular proliferation disease derived from the Company's FGF and antisense programs. Upon consummation of the transaction, Synthelabo purchased 1,428,571 shares of common stock for $3.50 per share for a total of $5 million and paid a non-refundable licensing fee of $3 million. In addition, Synthelabo has committed to pay $3 million annually in research payments (payable in quarterly installments of $750,000) for three years. Synthelabo has agreed, upon the achievement of certain milestones, to further payments of up to $3 million per year for up to $18 million in total. Synthelabo has the right to terminate the agreement any time on or after October 15, 1996, for any reason and either party has the right to terminate the contract for breach of any material obligation. If Synthelabo exercises this termination right, the license granted to Synthelabo shall terminate and TBC will pay Synthelabo a royalty on net sales of any products sold in a certain territory for a period of time. In addition, Synthelabo may, at its option, require that the technology be transferred to and the development program be conducted by a joint venture owned by TBC and Synthelabo should "net worth" as defined in the agreement be less than $5 million as of the end of any calendar quarter during the term of the agreement. The first quarterly research payment of $750,000 was received on October 31, 1994, of which $500,000 was recognized in 1994. As of September 30, 1996, $250,000 is included in current deferred revenue. Synthelabo will pay royalties to TBC, based on the net sales, in those geographic areas covered in the agreement. In exchange for the above consideration, Synthelabo will receive an exclusive license to manufacture, use, and sell any products generated from the research in Europe, the Middle East, Africa and the countries of the former Soviet Union. One of the programs, which involves antisense, has been abandoned and may result in a redirection of the research into another area. During 1995, the Company and Synthelabo mutually agreed to exchange certain clinical data. In January 1996, the Company signed two agreements with Synthelabo with respect to the supply of information related to certain clinical studies. Synthelabo paid TBC $500,000 upon execution of the agreement. In addition, over the term of the agreements as certain milestones are met, Synthelabo has committed to pay TBC additional payments that total $2,400,000. These payments are dependent on rate of enrollment in certain clinical studies, the completion of certain clinical studies and date of completion of certain clinical studies. As of September 30, 1996, TBC has received approximately $1.5 million related to these agreements. Synthelabo is the licensee for Novastan/R/ in certain territories other than those which were sublicensed to TBC. FORM 10-Q Page 9 On October 10, 1996, the Company signed a strategic alliance agreement with LG Chem, a Korean corporation, to develop and market compounds derived from the Company's Endothelin Receptor and Selectin Antagonist for certain disease indications. Upon consummation of the transaction, LG Chem purchased 1,250,000 shares of common stock for $4.00 per share for a total of $5 million. In addition, LG Chem has committed to pay $10.7 million in research payments. Of this amount, $100,000 will be paid on or before December 31, 1996, $1.0 million on each of June 30 and December 31 of 1997, 1998, 1999 and 2000, and $1.3 million on June 30 and December 31, 2001. LG Chem has the right to terminate future research payments if TBC fails to meet certain Agreement milestones, which milestones will be established by the parties in accordance with the agreement. LG Chem will pay royalties to TBC, based on net sales, in those geographic areas covered by the agreement, which include Korea, China, India and certain other Asian countries, excluding Japan. The Company will pay its agents in the contract negotiations, Raymond James & Associates, Inc. and Mitani & Co., Inc., a commission on all future research payments as well as a royalty on net sales. (8) LICENSE AGREEMENT In May 1993, TBC entered into an agreement with Genentech to sublicense Genentech's rights and technology relating to Novastan/R/ (argatroban) originally licensed to Genentech by Mitsubishi Chemical Corporation ("Mitsubishi"), and to license Genentech's own proprietary technology developed with respect to Novastan/R/ (the "Genentech Agreement"). Under the license and sublicense, the Company has an exclusive license to use and sell Novastan/R/ in the United States and Canada for specified human cardiovascular indications, not including cerebral thromboembolism (stroke). The Company is required to pay Genentech and Mitsubishi specified royalties on net sales of Novastan/R/ by the Company and its sublicensees after its commercial introduction in the United States and Canada. Genentech has the right to terminate the agreement or to cause the license to become non-exclusive if the Company fails to exercise due diligence in performing its obligations under the agreement for a period of 60 days after receiving written notice from Genentech or fails to maintain a minimum consolidated tangible net worth of $5.0 million. The Genentech Agreement, as amended, provides that Mitsubishi may terminate Genentech's license with Mitsubishi (which results in the termination of the Genentech Agreement as well) if TBC does not file an NDA for Novastan/R/ with the FDA no later than June 30, 1997, subject to certain additional goals being met by TBC. As of December 31, 1995, TBC had not met certain of those goals. However, Mitsubishi has agreed to withhold its rights to terminate the license with Genentech if the NDA is filed by June 30, 1997, and if TBC accomplishes the following milestones: (i) on or before December 31, 1996, TBC shall have met certain enrollment guidelines for certain Novastan/R/ clinical trials; (ii) on or before March 31, 1997, TBC shall complete, report and analyze certain other Novastan/R/ clinical trials; (iii) on or before September 30, 1997, TBC shall have agreed to proceed with the Phase III trial in AMI, and (iv) TBC shall comply with certain reporting and information meeting requirements. If these milestones are not met, Mitsubishi will retain the rights to terminate the Genentech license; provided, that if such termination results from TBC's violation of the milestone described in (iii) above, TBC will receive a license from Mitsubishi in the field of HIT/HITTS on the same terms, as presently included in the Genentech Agreement. Either party may terminate the Genentech Agreement on 60 days notice if the other party defaults in its material obligations under the agreement, declares bankruptcy or is insolvent, or if a substantial portion of its property is subject to attachment. The Genentech Agreement is also subject to the continuation of Genentech's license agreement with Mitsubishi, which is only terminable if Genentech defaults in its material obligations under the agreement, declares bankruptcy or is insolvent, or if a substantial portion of its property is subject to attachment. Unless terminated sooner pursuant to the above described termination provisions, the Genentech Agreement is expected to expire in June 2007. Under the Genentech Agreement, TBC has access to an improved formulation patent granted in 1993 which expires in 2010 and a use patent which expires in 2009. Mitsubishi further agreed to supply the Company with its requirements of Novastan/R/ throughout the term of the Genentech Agreement for TBC's clinical testing and commercial sales of Novastan/R/ in the United States and Canada. In the event Mitsubishi should discontinue the manufacture of Novastan/R/, Mitsubishi, FORM 10-Q Page 10 Genentech and TBC have agreed to discuss in good faith the means by which, and the party to whom, Novastan/R/ production technology will be transferred. The transferee may be a person or entity other than Genentech or TBC. At present, Mitsubishi is the only manufacturer of Novastan/R/. Should Mitsubishi terminate or default in its supply commitment, there can be no assurance that alternate sources of bulk Novastan/R/ will be available to the Company at reasonable cost, if at all. If such alternate sources of supply are unavailable or uneconomic, the Company's results of operations would be materially and adversely affected. In exchange for the license to Genentech's Novastan/R/ technology, TBC issued Genentech 285,714 shares of Common Stock and agreed to issue (i) an additional 214,286 shares of Common Stock to Genentech within 10 days after the filing of the first New Drug Application ("NDA") with the FDA for Novastan/R/, and (ii) an additional 71,429 shares of Common Stock to Genentech within 10 days after the FDA's first approval of an NDA for Novastan/R/. The Company has also agreed to grant Genentech a warrant to purchase an additional 142,858 shares of Common Stock at an exercise price of $14.00 per share, subject to adjustment, within ten days of the filing of the first NDA for Novastan/R/ with the FDA. If the Company is unable to issue any of the additional shares of Common Stock or the warrant to Genentech due to circumstances beyond the Company's control, the Company has agreed to pay Genentech, in lieu thereof, an amount equal to the value of the securities plus interest from May 27, 1993 at the prime rate plus one percent, compounded annually. The value of the Common Stock is deemed to be $7.00 per share, which represents the cash consideration the Company will be obligated to pay to Genentech as liquidated damages, and the value of the warrants is to be determined by appraisal, based on the warrants' market value. The Company will not be required to make any cash payment if both of the filing and approval of the NDA do not occur. TBC has also granted Genentech demand and piggyback registration rights with regard to shares of Common Stock issued to Genentech. Due to the additional research and development required to commercialize the technologies associated with the Sublicense and License Agreement, the Company expensed the value associated with the 285,714 shares issued to Genentech, charging $1,000,000 to purchase of in-process research and development expense in the year ended December 31, 1993. In connection with the Genentech Agreement, a consultant involved in negotiations related to the Agreement will receive a royalty on net sales of licensed products. (9) CONSOLIDATION OF IMMUNOPHARMACEUTICS, INC. The Company decided to consolidate the IPI operation into TBC's in the first half of 1996. The overall financial impact on the Company's performance will be positive in 1996 due to expected reduction in general and administrative expenses and the elimination of some research and development positions associated with IPI. The Company believes the goodwill associated with IPI, $643,750, is impaired due to the decision to cease operations at IPI and the sale of the QED business unit and has charged it to expense in the year ended December 31, 1995. The restructuring costs associated with the consolidation of the IPI operation were approximately $421,000 and have been expensed in the three months ended March 31, 1996. This cost included waste disposal, future lease commitments, severance pay and related taxes. (10) COMMITMENTS AND CONTINGENCIES a) Employment Agreements Since inception, the Company has entered into employment agreements with certain officers and key employees. As of September 30, 1996, remaining commitments total approximately $120,000 in 1996 and $232,000 in 1997. These amounts include payments due to one former employee pursuant to his severance agreement. The employment agreements of various officers and key employees provide for salary continuation for up to twelve months from date of termination upon dismissal by the Company, which would approximate $465,000 currently. In addition to salary, the Company has FORM 10-Q Page 11 agreed to reimburse certain officers and other employees for costs of relocation and temporary travel and living expenses. In addition, the Company has signed agreements with five of its officers to provide certain benefits in the event of a "change of control" as defined in the agreement and the occurrence of certain other events. The agreements provide for a lump-sum payment in cash equal to eighteen (18) months to three (3) years of annual base salary and annual bonus if any. The base salary portion of the agreements would aggregate approximately $1.9 million at current rate of compensation. In addition, the agreements provide for gross-up for certain taxes on the lump-sum payment, continuation of certain insurance and other benefits for periods of eighteen (18) months to three (3) years and reimbursement of certain legal expenses in conjunction with the agreements. These provisions are intended to replace compensation continuation provisions of any other agreement in effect for an officer if the specified event occurs. b) Legal Proceedings On November 21, 1994, a class action shareholders' suit was filed in the United States District Court for the Southern District of Texas, Houston Division seeking damages in the amount of $16 million. Plaintiffs are two individuals who purchased shares of the Company on December 16, 1993 following the Company's initial public offering. In their complaint, plaintiffs have sued the Company, and certain members of the board of directors and certain officers alleging violations of Sections 11, 12 and 15 of the Securities Act of 1933, as amended (the "Act"). Plaintiffs have also named David Blech, D. Blech & Co., Incorporated and Isaac Blech as defendants. On January 23, 1995, the Company and the members of the board of directors filed a motion to dismiss the plaintiffs' complaint pursuant to Rule 9(b) and Rule 12b(6) of the Federal Rules of Civil Procedure. In addition, defendant John Pietruski, Chairman of the Board of Directors, filed a motion to dismiss the plaintiffs' complaint pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure. On February 7, 1995, the plaintiffs filed a motion for class certification. The Court denied the motion by the Company and by John Pietruski. On March 28, 1995, a second class action shareholders' suit was filed in the United States District Court for the Southern District of New York seeking unspecified damages. Plaintiffs are eight individuals who purchased shares in various companies for which D. Blech & Co. acted as an underwriter (or co-underwriter) or marketmaker. In their complaint, the plaintiffs have sued the Company alleging violations of Section 10(b) of the Securities Exchange Act of 1934, as Amended (the "Exchange Act") and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (the "Commission"). Plaintiffs have named a number of defendants, including David Blech and D. Blech & Co., four individuals, two brokerage firms, one investment management company and ten other companies for which D. Blech & Co. acted as underwriter or marketmaker. On August 14, 1995, the Judicial Panel on The Multi-District Litigation ordered that the action filed in the United States District Court for the Southern District of Texas, Houston Division be transferred to the United States District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings with the action pending there. In light of the transfer and consolidation of the Texas case with similar cases against other companies for which Blech acted as underwriter, the Company requested that the Court in New York reconsider the Texas Court's denial of its motion to dismiss as a part of the Court's consideration of similar motions to dismiss filed by those companies. All of these motions were presented to the Court on February 6, 1996. On June 6, 1996, the New York District Court entered two memorandum opinions in the consolidated cases. In one of its opinions, the Court dismissed all of the Exchange Act and common law fraud claims filed against the Company and its officers and directors, but afforded those plaintiffs the right to attempt to preserve those claims by repleading them. The Court ordered that those claims be repleaded no later than July 26, 1996. Plaintiffs did not replead those claims by the deadline, resulting in the dismissal of all claims against the Company in that litigation. In its opinion in the second case, i.e., the case filed on November 21, 1994, the Court granted the Company and its officers and directors' motion for FORM 10-Q Page 12 reconsideration, but together with all other similar pending motions, denied the requested relief. Pursuant to the court's order, the Company therefore filed an answer in that case. The Company also filed a Motion seeking leave of court to prosecute an immediate appeal of the Court's denial of the Company's Motion to Dismiss. The Court heard argument on that Motion on October 10, 1996, and the Company awaits the Court's ruling. Given the early stage of that case, which is the only remaining litigation against the Company, the Company is unable to evaluate its potential outcome at this time. The Company disputes these claims and intends to contest them vigorously. FORM 10-Q Page 13 ITEM 2. - ------- TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 OVERVIEW -------- The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Since its formation in 1989, the Company has primarily devoted its resources to fund research, drug discovery and development. The Company has been unprofitable to date and expects to incur substantial losses for the next several years as the Company invests in product research and development, preclinical and clinical testing and regulatory compliance. The Company has sustained net losses of approximately $59.8 million from inception to September 30, 1996. The Company has primarily financed its operations to date through private placements of Common Stock and debt, which have raised an aggregate of $34.3 million in net proceeds, an initial public offering ("IPO") in December 1993, which raised an aggregate of $24.2 million in net proceeds including the over-allotment, and a collaborative agreement with Synthelabo, which has raised an aggregate of approximately $15.5 million from research payments, license fees and sale of stock. On July 25, 1994, the Company acquired all of the outstanding stock of ImmunoPharmaceutics, Inc. ("IPI") in exchange for Common Stock of the Company. IPI's results of operations have been included in the consolidated results of operations beginning August 1, 1994. During September 1993, IPI entered into an agreement to provide research and development services, over a period of 30 months, to EISAI Co., LTD ("EISAI"). The agreement, which expired in March 1996, guaranteed contract research funding and allowed for additional amounts to be received upon the attainment of certain milestones. On August 10, 1995, IPI received a $2.0 million milestone payment from EISAI. The Company decided to consolidate the IPI operation into TBC's in the first half of 1996. The overall financial impact on the Company's performance will be positive in 1996 due to expected reduction in general and administrative expenses and the elimination of some research and development positions associated with IPI. The Company believes the goodwill associated with IPI of $643,750 was impaired due to the decision to cease operations at IPI and the sale of IPI's QED business unit and charged it to expense in the year ended December 1995. Restructuring costs of $421,165 associated with the consolidation of the IPI operation were recorded in the quarter ended March 31, 1996. The Company signed a collaborative agreement with Synthelabo, the pharmaceutical division of L'Oreal, on October 11, 1994 (the "Synthelabo Agreement"). Upon consummation of the transaction, Synthelabo purchased 1,428,571 shares of Common Stock for a total of $5 million and paid the Company a nonrefundable licensing fee of $3 million. In addition, Synthelabo has committed to pay $3 million annually in research payments (payable in quarterly installments) through July 31, 1997. In 1996, TBC has signed two agreements with Synthelabo to provide to them copies of certain clinical data for Novastan/R/. Through September 30, 1996, TBC has received approximately $1.5 million pursuant to these two clinical data agreements. Over the life of the agreements, TBC may receive as much as $2.9 million, including the $1.5 million received, from Synthelabo. FORM 10-Q Page 14 On October 10, 1996 the Company signed a strategic alliance agreement with LG Chemical, LTD. ("LG Chem"), a Korean corporation. In conjunction with the agreement, LG Chem purchased 1,250,000 shares of common stock for $4.00 per share for a total of $5 million. In addition, LG Chem has the option to purchase up to $5 million of common stock on one of four exercise dates ending at December 31, 1997. The minimum purchase amount is $1,000,000 and LG Chem and TBC must agree on the exercise price or the stock option cannot be exercised on the given exercise date. The Company's operating results have fluctuated significantly during each quarter, and the Company anticipates that such fluctuations, largely attributable to varying research and development commitments and expenditures, will continue for the next several years. RESULTS OF OPERATIONS --------------------- THREE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 Revenues decreased from $3,404,018 in the three month period ended September 30, 1995 to $1,102,500 in the same period of 1996, a decrease of 68%. Revenues were composed of earned revenues under research agreements, sales of products and services, and grant income. The period ended September 30, 1995, included a $2 million milestone payment from EISAI (which agreement terminated in March 1996). Total operating expenses increased 38% from $4,976,778 in the three month period ended September 30, 1995 to $6,932,395 in the same period of 1996. Research and development expenses increased 59% from $3,753,107 in the three month period ended September 30, 1995 to $5,980,096 in the same period of 1996. This increase was primarily attributable to continued increases in research and development activity related to the clinical trials on the compound Novastan/R/ (argatroban) and development work associated with the Selectin and Endothelin programs. General and administrative expenses decreased 26% from $1,223,671 in the three month period ended September 30, 1995 to $952,299 in the same period of 1996. The decrease was primarily attributable to the consolidation of the IPI operation in March 1996. The Company had 99 employees at September 30, 1995, including 25 employees at IPI, and 80 employees at September 30, 1996, including 1 employee at IPI. Other income and expenses was composed entirely of investment income on invested funds and interest expense. Investment income decreased from $285,333 in the three month period ended September 30, 1995 to $199,811 in the same period of 1996, a decrease of 30%. The decrease is due to lower interest rates from 1995 to 1996 and a lower investment balance throughout 1996. The Company incurred a net loss of $1,287,427 for the three month period ended September 30, 1995, compared with a net loss of $5,587,670 for the same period of 1996. The increase was due to a $2.0 million milestone payment from EISAI received in 1995 and increased research and development expenses related to clinical trials on the compound Novastan/R/ in 1996. NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 Revenues decreased from $6,052,987 in the nine month period ended September 30, 1995 to $4,303,276 in the same period of 1996, a decrease of 29%. Revenues were composed of earned revenues under research agreements, sales of products and services, and grant income. The period ended September 30, 1995, included a $2 million milestone payment from EISAI (which agreement terminated in March 1996). The period ended September 30, 1996, included $1,645,000 from Synthelabo related to the agreement to supply certain clinical data. Total operating expenses increased 27% from $16,463,259 in the nine month period ended September 30, 1995 to $20,982,742 in the same period of 1996. Included in the 1995 operating expenses was a non-cash FORM 10-Q Page 15 charge for in-process research and development for $1,973,883. Exclusive of this charge, operating expenses increased 45% from $14,489,376 in the nine month period ended September 30, 1995, to $20,982,742 in the same period of 1996. Research and development expenses increased 66% from $10,560,959 in the nine month period ended September 30, 1995 to $17,484,641 in the same period of 1996. General and administrative expenses decreased 22% from $3,928,417 in the nine month period ended September 30, 1995 to $3,076,936 in the same period of 1996. See comments under the preceding three month period comparison for explanation of the changes. Other income and expenses was composed entirely of investment income on invested funds and interest expense. Investment income decreased from $959,571 in the nine month period ended September 30, 1995 to $697,089 in the same period of 1996, a decrease of 27%. See comments under the preceding three month period comparison for explanation of the decrease. The Company incurred a net loss of $9,450,701 for the nine month period ended September 30, 1995, compared with a net loss of $15,982,377 for the same period of 1996. See comments under the preceding three month period comparison for explanation of the changes. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company has financed its research and development activities to date principally through (i) private sales of common stock and an initial public offering of a unit security, (ii) issuance of common stock in conjunction with assumption of liabilities and assets to acquire IPI and the Novastan/R/ license, (iii) revenues and proceeds from sales of common stock in connection with corporate partner collaboration and research agreements and (iv) investment income, net of interest expense. During the first nine months of 1996, the Company utilized $14,933,119 net cash in operating activities and $13,642,447 was provided by financing activities. The use of cash in operations was caused by the Company's net loss of $15,982,377. Financing activities produced approximately $13,640,000 in net proceeds for the Company resulting from the 1996 private placement and the remaining was from exercise of stock options and warrants. The Company expects to incur substantial research and development expenditures as it designs and develops biopharmaceutical products for the prevention and treatment of cardiovascular diseases. The Company anticipates that operating expenses will continue to increase during 1996 and subsequent years. These costs to develop Novastan/R/ have increased and will continue to increase during 1996 due to the continuation of clinical trials and will continue to be significant through the FDA approval process. These costs include, among other things, hiring personnel to direct and carry out all operations related to the clinical trials, paying for hospital and procedural costs, services of a contract research organization, and purchasing and manufacturing large quantities of the compound to be used in such trials. In addition, the Company anticipates that the administrative costs associated with this effort will continue to be significant. The amounts and timing of expenditures will depend on the progress of ongoing research and clinical development and product launch costs. At September 30, 1996, the Company had cash, cash equivalents and short-term investments of approximately $12.5 million. Subsequent to September 30, 1996 the Company received $5 million from LG Chem, a Korean corporation, related to a strategic alliance agreement. The Company anticipates that its existing capital resources and its other revenue sources should be sufficient to fund its cash requirements into the third quarter of 1997. The Company's existing capital resources may not be sufficient to fund the Company's operations through commercialization of its first product. Moreover, the Genentech Agreement and Synthelabo Agreement require the Company to maintain a tangible net worth of at least $5.0 million during the term of these agreements. For failure to maintain at least $5.0 million of net worth, Synthelabo may require that the technology be transferred to, and the development program be conducted by, a joint venture owned by TBC and Synthelabo. As of September 30, 1996, the Company's tangible net worth significantly exceeded $5.0 million. The Genentech Agreement and Synthelabo Agreement are also terminable for other reasons. Termination of either of these agreements will have a material adverse effect on the Company. FORM 10-Q Page 16 The Company will need to raise substantial funds for future operations and is actively seeking such funding through collaborative arrangements, public or private financing, including equity financing, and other arrangements. The Company expects that significant additional expenditures will be required to complete the clinical trials related to Novastan/R/ and to it other product candidates which are not yet in clinical trials. If the Company's current (or any additional) product candidates enter clinical trials, further significant expenditures will be necessary for laboratory space, scientific and administrative personnel, and services of contract research organizations. There can be no assurance that the Company will be able to obtain additional financing on acceptable terms or in time to fund any necessary or desirable expenditures. In the event such financing is not obtained, the Company's drug discovery or development and programs regarding Novastan/R/ and its other product candidates may be delayed, scaled back or eliminated; or it may be required to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would not otherwise relinquish. PENDING LITIGATION As of September 30, 1996, one class action shareholder lawsuit remains pending against the Company and includes certain directors and officers as defendants. The Company disputes all claims set forth in this lawsuit and intends to contest it vigorously. However, the Company is unable to evaluate the potential outcome at this time. HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS The Company's research and development activities involve the controlled use of hazardous and radioactive materials. The Company is subject to federal, state, and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Management believes that the Company is in compliance with all such laws, regulations and standards currently in effect and that the cost of compliance with such laws, regulation, and standards will not have a material adverse effect on the Company. The Company does not expect to incur any capital expenditures for environmental control in the foreseeable future. IMPACT OF INFLATION AND CHANGING PRICES The pharmaceutical research industry is labor intensive, and wages and related expenses increase in inflationary periods. The lease of space and related building services for the Houston facility contains a clause that escalates rent and related services each year based on the increase in building operating costs and the increase in the Houston Consumer Price Index, respectively. To date, inflation has not had a significant impact on operations. ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (Statement 121). The Company has adopted the statement effective December 31, 1995. Statement 121 requires that long- lived assets and certain identifiable intangible assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, Statement 121 requires that certain long-lived assets and certain identifiable intangible assets to be disposed of be reported at the lower of carrying amount or fair value less costs to sell. The Company believes the goodwill associated with IPI, $643,750, was impaired due to the decision to cease operations at IPI and the sale of the QED business unit and has recorded a charge to expense. In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123). Statement 123 establishes financial accounting and reporting FORM 10-Q Page 17 standards for stock-based employee compensation plans using a fair value based methodology as an alternative to intrinsic value based methodology. In addition, Statement 123 established the fair value as the measurement basis for transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. The accounting and reporting requirements of Statement 123 were effective beginning January 1, 1996. The adaptation of Statement 123 is not expected to have a material impact on TBC's 1996 financial position or results of operations as the Company intends to continue using the intrinsic value method. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This Report includes "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Report are forward looking statements. Such forward looking statements include, without limitation, statements under (a) "Organization and Significant Accounting Policies -- Organization" regarding TBC's expectations for future drug discovery and development and related expenditures and (b) "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" - regarding TBC's estimate of sufficiency of existing capital resources and ability to raise additional capital to fund cash requirements for future operations. Although TBC believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations reflected in such forward looking statements will prove to have been correct. The ability to achieve TBC's expectations is contingent upon a number of factors which include (i) ongoing cost of research and development activities, (ii) cost of clinical development of product candidates, (iii) attainment of research and clinical goals of product candidates, (iv) timely approval of TBC's product candidates by appropriate governmental and regulatory agencies, (v) effect of any current or future competitive products, (vi) ability to manufacture and market products commercially, (vii) retention of key personnel and (viii) obtaining and timing of sufficient financing through capital raising or collaborative agreements to fund operations. FORM 10-Q Page 18 PART II OTHER INFORMATION - ------------------------- ITEM 1. LEGAL PROCEEDINGS - -------------------------- On November 21, 1994, a class action shareholders' suit was filed in the United States District Court for the Southern District of Texas, Houston Division seeking damages in the amount of $16 million. Plaintiffs are two individuals who purchased shares of the Company on December 16, 1993 following the Company's initial public offering. In their complaint, plaintiffs have sued the Company, and certain members of the board of directors and certain officers alleging violations of Sections 11, 12 and 15 of the Securities Act of 1933, as amended (the "Act"). Plaintiffs have also named David Blech, D. Blech & Co., Incorporated and Isaac Blech as defendants. On January 23, 1995, the Company and the members of the board of directors filed a motion to dismiss the plaintiffs' complaint pursuant to Rule 9(b) and Rule 12b(6) of the Federal Rules of Civil Procedure. In addition, defendant John Pietruski, Chairman of the Board of Directors, filed a motion to dismiss the plaintiffs' complaint pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure. On February 7, 1995, the plaintiffs filed a motion for class certification. The Court denied the motion by the Company and by John Pietruski. On March 28, 1995, a second class action shareholders' suit was filed in the United States District Court for the Southern District of New York seeking unspecified damages. Plaintiffs are eight individuals who purchased shares in various companies for which D. Blech & Co. acted as an underwriter (or co- underwriter) or marketmaker. In their complaint, the plaintiffs have sued the Company alleging violations of Section 10(b) of the Securities Exchange Act of 1934, as Amended (the "Exchange Act") and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (the "Commission"). Plaintiffs have named a number of defendants, including David Blech and D. Blech & Co., four individuals, two brokerage firms, one investment management company and ten other companies for which D. Blech & Co. acted as underwriter or marketmaker. On August 14, 1995, the Judicial Panel on The Multi-District Litigation ordered that the action filed in the United States District Court for the Southern District of Texas, Houston Division be transferred to the United States District Court for the Southern District of New York for coordinated or consolidated pretrial proceedings with the action pending there. In light of the transfer and consolidation of the Texas case with similar cases against other companies for which Blech acted as underwriter, the Company requested that the Court in New York reconsider the Texas Court's denial of its motion to dismiss as a part of the Court's consideration of similar motions to dismiss filed by those companies. All of these motions were presented to the Court on February 6, 1996. On June 6, 1996, the New York District Court entered two memorandum opinions in the consolidated cases. In one of its opinions, the Court dismissed all of the Exchange Act and common law fraud claims filed against the Company and its officers and directors, but afforded those plaintiffs the right to attempt to preserve those claims by repleading them. The Court ordered that those claims be repleaded no later than July 26, 1996. Plaintiffs did not replead those claims by the deadline, resulting in the dismissal of all claims against the Company in that litigation. In its opinion in the second case, i.e., the case filed on November 21, 1994, the Court granted the Company and its officers and directors' motion for reconsideration, but together with all other similar pending motions, denied the requested relief. Pursuant to the court's order, the Company therefore filed an answer in that case. The Company also filed a Motion seeking leave of court to prosecute an immediate appeal of the Court's denial of the Company's Motion to Dismiss. The Court heard argument on that Motion on October 10, 1996, and the Company awaits the Court's ruling. Given the early stage of that case, which is the only remaining litigation against the Company, the Company is unable to evaluate its potential outcome at this time. The Company disputes these claims and intends to contest them vigorously. ITEM 2. CHANGES IN SECURITIES - ------------------------------ None ITEM 3. DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- None FORM 10-Q Page 19 ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- ---------------------------------------------------- None ITEM 5. OTHER INFORMATION - -------------------------- None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - -----------------------------------------
EXHIBIT NO. DESCRIPTION ----------- ----------- 3.6(2) Certificate of Amendment of Certificate of Incorporation 3.7 Amended and Restated Bylaws of Texas Biotechnology Corporation 10.51(1)* Letter Agreement regarding Argatroban Studies Information dated December 14, 1995, between the Company and Synthelabo Recherche 10.52(1) Amendment B to Clinical Trial Research Agreement dated February 10, 1995 between Texas Biotechnology Corporation and Coromed Inc. 10.53(2) Letter of Understanding between Texas Biotechnology Corporation and Mitsubishi Chemical Corporation dated July 10, 1996 10.54(2) Form of Indemnification Agreement between Texas Biotechnology Corporation and its officers and directors dated May 3, 1996 10.55(2) Amended and Restated 1995 Non-Employee Director Stock Option Plan (as amended by the Board of Directors on June 30, 1996) 10.56* Strategic Alliance Agreement between Texas Biotechnology Corporation and LG Chemical, Ltd. dated October 10, 1996 10.57 Common Stock Purchase Agreement between Texas Biotechnology Corporation and LG Chemical, Ltd. dated October 10, 1996 27.1 Financial Data Schedule
* The Company has omitted certain portions of this agreement in reliance on Rule 24b-2 under the Securities and Exchange Act of 1934, as amended. (1) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the quarter ended March 31, 1996 and incorporated herein by reference. (2) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the quarter ended June 30, 1996 and incorporated herein by reference. REPORTS ON FORM 8-K - -------------------- None FORM 10-Q Page 20 TEXAS BIOTECHNOLOGY CORPORATION SEPTEMBER 30, 1996 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 13th day of November, 1996. TEXAS BIOTECHNOLOGY CORPORATION By: /s/ David B. McWilliams ------------------------ David B. McWilliams President and Chief Executive Officer By: /s/ Stephen L. Mueller ----------------------- Stephen L. Mueller Vice President of Administration Secretary and Treasurer (Principal Financial and Accounting Officer) FORM 10-Q Page 21 INDEX TO EXHIBITS
Exhibit No. Description of Exhibit Page No. - ----------- ---------------------- -------- 3.6 (2) Certificate of Amendment of Certificate of Incorporation 3.7 Amended and Restated Bylaws of Texas Biotechnology Corporation 10.51 (1)* Letter Agreement regarding Argatroban Studies Information dated December 14, 1995, between the Company and Synthelabo Recherche 10.52 (1) Amendment B to Clinical Trial Research Agreement dated February 10, 1995 between Texas Biotechnology Corporation and Coromed Inc. 10.53 (2) Letter of Understanding between Texas Biotechnology Corporation and Mitsubishi Chemical Corporation dated July 10, 1996 10.54 (2) Form of Indemnification Agreement between Texas Biotechnology Corporation and its officers and directors dated May 3, 1996 10.55 (2) Amended and Restated 1995 Non-Employee Director Stock Option Plan (as amended by the Board of Directors on June 30, 1996) 10.56* Strategic Alliance Agreement between Texas Biotechnology Corporation and LG Chemical, Ltd. dated October 10, 1996 10.57 Common Stock Purchase Agreement between Texas Biotechnology Corporation and LG Chemical, Ltd. dated October 10, 1996 27.1 Financial Data Schedule - --------------
* The Company has omitted certain portions of this agreement in reliance on Rule 24b-2 under the Securities and Exchange Act of 1934, as amended. (1) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the quarter ended March 31, 1996 and incorporated herein by reference. (2) Filed as an exhibit to the Company's Form 10-Q (File No. 1-12574) for the quarter ended June 30, 1996 and incorporated herein by reference. FORM 10-Q Page 22 EX-3.7 2 AMENDED AND RESTATED BYLAWS EXHIBIT 3.7 AMENDED AND RESTATED BY-LAWS OF TEXAS BIOTECHNOLOGY CORPORATION (a Delaware corporation) ARTICLE I Office ------ Section 1.1. Registered Office. The registered office of Texas Biotechnology Corporation ("Corporation") in the State of Delaware shall be located at 229 South State Street in the City of Dover, County of Kent, or at such other place as the Board of Directors may at any time or from time to time designate. Section 1.2. Registered Agent. The registered agent of the Corporation in the State of Delaware at its registered office is The Prentice-Hall Corporation System, Inc., or such other person, firm or corporation as the Board of Directors may at any time or from time to time designate. Section 1.3. Principal Office. The principal office of the Corporation shall be located at such place as the Board of Directors may at any time or from time to time designate. Section 1.4. Other Offices. The Corporation may establish or discontinue, from time to time, such other offices and places of business within or without the State of Delaware as may be deemed proper for the conduct of the business of the Corporation. -1- ARTICLE II Meeting of Stockholders ----------------------- Section 2.1. Annual Meeting. An annual meeting of such holders of capital stock ("Stock") as are entitled to vote thereat ("Annual Meeting of Stockholders") shall be held for the election of directors and the transaction of such other business on a date and time to be determined by the Board of Directors. If the Annual Meeting of Stockholders is not held on the date designated therefor, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. Section 2.2. Special Meetings. In addition to such special meetings as are provided for by law or by the Certificate of Incorporation, special meetings of the stockholders of the Corporation may be called at any time by the Board of Directors, and by the Secretary upon the written request stating the purposes of any such meeting of the holders of record collectively of at least fifty-one (51%) percent of the outstanding shares of Stock of the Corporation. Special meetings shall be called by means of a notice as provided in Section 2.4 hereof. Section 2.3. Place of Meetings. All meetings of the stockholders shall be held at such place within or without the State of Delaware as shall be designated by the Board of Directors. Section 2.4. Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called. The notice of each Annual Meeting of Stockholders shall identify each matter intended to be acted upon at such meeting. If mailed, the notice shall be addressed to each stockholder in a postage-prepaid envelope at his address as it appears on the records of the Corporation unless, prior to the -2- time of mailing, the Secretary shall have received from any such stockholder a written request that notices intended for him be mailed to some other address. In such case, the notice intended for such stockholder shall be mailed to the address designated in such request. Notice of each meeting of stockholders shall be delivered personally or mailed not less than ten (10) nor more than sixty (60) days before the date fixed for the meeting to each stockholder entitled to vote at such meeting. Section 2.5. Waiver of Notice. Whenever notice is required to be given, a written waiver thereof signed by the person entitled to notice whether before or after the time stated therein for such meeting shall be deemed equivalent to notice. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except as otherwise provided by law. Neither the business to be transacted at nor the purpose of any regular or special meeting of the stockholders need be specified in any written waiver of notice. Section 2.6. Organization of Meetings. The Chairman of the Board, if any, shall act as chairman at all meetings of stockholders at which he is present and, as such chairman, shall call such meetings of stockholders to order and shall preside thereat. If the Chairman of the Board shall be absent from any meeting of stockholders, the duties otherwise provided in this Section to be performed by him at such meeting shall be performed at such meeting by the President. If both the Chairman of the Board and the President shall be absent, such duties shall be performed by a Vice President designated by the President to preside at such meeting. If no such officer is present at such meeting, any stockholder or the proxy of any stockholder entitled to vote at the meeting may call the meeting to order and a chairman to preside thereat shall be elected by a majority of those present and entitled to vote. The Secretary of the Corporation shall act as secretary at all meetings of the stockholders but, in his absence, the chairman of the meeting may appoint any person present to act as secretary of the meeting. -3- Section 2.7. Stockholders Entitled to Vote. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 2.8. List of Stockholders Entitled to Vote. The Secretary shall prepare and make or cause to be prepared and made, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order and showing the address of each such stockholder as it appears on the records of the Corporation and the number of shares registered in the name of each such stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place specified in the notice of meeting within the city where the meeting is to be held or, if not so specified, at the place where the meeting is to be held, and a duplicate list shall be similarly open to examination at the principal place of business of the Corporation. Such list shall be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. -4- Section 2.9. Quorum and Adjournment. Except as otherwise provided by law and in the Certificate of Incorporation, the holders of a majority of the shares of Stock entitled to vote at the meeting shall constitute a quorum at each meeting of the stockholders. Where more than one class or series of Stock is entitled to vote at such a meeting, a majority of the shares of each such class or series of Stock entitled to vote at such meeting shall constitute a quorum at such meeting. In the absence of a quorum, the holders of a majority of all such shares of Stock present in person or by proxy may adjourn any meeting from time to time until a quorum shall attend. At any such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. Notice of an adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 2.10. Order of Business. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. Section 2.11. Vote of Stockholders. Except as otherwise permitted by law, by the Certificate of Incorporation or by Section 2.13 hereof, all action by stockholders shall be taken at a meeting of the stockholders. Except as otherwise provided in the Certificate of Incorporation, every stockholder of record, as determined pursuant to Section 2.7 hereof, who is entitled to vote shall at every meeting of the stockholders be entitled to one vote for each share of Stock entitled to participate in such vote held by such stockholder on the record date. Every stockholder entitled to vote shall have the right to vote in person or by proxy. Except as otherwise provided by law, no vote on any question upon which a vote of the stockholders may be taken need be by ballot unless the chairman of the meeting shall determine that it shall be by ballot or the holders of a majority of the shares of Stock -5- present in person or by proxy and entitled to participate in such vote shall so demand. In a vote by ballot each ballot shall state the number of shares voted and the name of the stockholder or proxy voting. Unless otherwise provided by law or by the Certificate of Incorporation, each director shall be elected by a plurality of the votes of the shares of Stock present in person or represented by proxy at the meeting and entitled to vote on the election of directors and all other questions shall be decided by a vote of the holders of a majority of the shares of Stock present in person or represented by proxy at the meeting and entitled to vote on the question. Section 2.12. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. A proxy acting for any stockholder shall be duly appointed by an instrument in writing subscribed by such stockholder, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. Section 2.13. Consent of Stockholders in Lieu of Meeting. Whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action by any provision of the General Corporation Law of the State of Delaware, the meeting, prior notice of such meeting and the vote of the stockholders may be dispensed with and such corporate action may be taken with the written consent of the stockholders of Stock having not less than the minimum percentage of the total vote required by statute for the proposed corporate action, unless the Certificate of Incorporation or the By-Laws require a greater percentage for such action, in which case -6- the consent shall be that of the holders of such greater percentage; provided, however, that prompt notice is given to all the stockholders who have not consented of the taking of such corporate action without a meeting by less than unanimous written consent. Whenever it is intended that action is to be taken by stockholders without a meeting, a form for expressing consent in writing to such action shall be sent to all holders of Stock entitled to vote on such action. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated written consent received in accordance with these By-Laws, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the Corporation in the manner prescribed in these By-Laws. Section 2.14. Record Date for Actions by Written Consent. (a) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten days after the date on which such a request is received, adopt a resolution fixing the record date (unless a record date has previously been fixed by the Board of Directors pursuant to the first sentence of this Section 2.14(a)). If no record date has been fixed by the Board of Directors pursuant to the first sentence of this Section 2.14(a) or otherwise within ten days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or -7- proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or to any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. (b) In the event of the delivery, in the manner provided by Section 2.14(a), to the Corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the Corporation may engage independent inspectors of elections for the purpose of performing promptly a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the Corporation that the consents delivered to the Corporation in accordance with Section 2.14(a) represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in this Section 2.14(b) shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution, or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). Section 2.15. Attendance at Meetings of Stockholders. Any stockholder of the Corporation not entitled to notice of the meeting or to vote at such meeting shall nevertheless be entitled to attend any meeting of stockholders of the Corporation. -8- Section 2.16. Notice of Stockholder Nominees. Only persons who are nominated in accordance with the procedures set forth in this Section 2.16 shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at a meeting of the Corporation's Stockholders (a) by or at the direction of the Board of Directors or (b) by any Stockholder of the Corporation entitled to vote for the election of directors at such meeting who complies with the procedures set forth in this Section 2.16. All nominations by Stockholders shall be made pursuant to timely notice in proper written form to the Secretary of the Corporation. To be timely, a Stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 50 days nor more than 75 days prior to the meeting; provided, however, that if less than 65 days notice or prior public disclosure of the date of the meeting is given or made to the Stockholders, notice by Stockholder must be received at the principal executive offices of the Corporation not later than the close of business on the 15/th /day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such Stockholder's notice to the Secretary shall set forth in writing (a) as to each person whom such Stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and (b) as to such Stockholder, (i) the name and address, as they appear on the Corporation's books, of such Stockholder and (ii) the class and number of shares of the Corporation's capital stock that are beneficially owned by such Stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a Stockholders notice of nomination which pertains to the nominee. No person shall be eligible for election as a director unless nominated in -9- accordance with the procedures set forth in these By-Laws of the Company. The chairman of the Stockholders' meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these By-Laws, and if he shall so determine, he shall announce such determination to the meeting and the defective nomination shall be disregarded. Section 2.17. Stockholder Proposals. At any special meeting of the Corporation's Stockholders, only such business brought before the meeting by or at the direction of the Board of Directors shall be conducted. At any Annual Meeting of Stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any Stockholder who complies with the procedures set forth in this Section 2.17. For business to be properly brought before an Annual Meeting of Stockholders by a Stockholder, the Stockholder must give timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a Stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 50 days nor more than 75 days prior to the meeting; provided, however, that if less than 65 days notice or prior public disclosure of the date of the meeting is given or made to the Corporation's Stockholders, notice by the Stockholder must be received at the principal executive offices of the Corporation not later than the close of business on the 15th day following the day on which such notice of the date of the Corporation's Annual Meeting of Stockholders was mailed or such public disclosure was made. Such Stockholder's notice to the Secretary shall set forth in writing as to each matter such Stockholder proposes to bring before the Annual Meeting of Stockholders: (a) a brief description of the business desired to be brought before the Annual Meeting of Stockholders and the reason for conducting such business at the Annual Meeting of Stockholders, (b) the name and address, as they appear on the Corporation's books, of such Stockholder, (c) the class and number of shares of the Corporation's stock which are beneficially owned by such Stockholder and (d) any material interest of such Stockholder in such business. Notwithstanding anything in these -10- By-Laws to the contrary, no business shall be conducted at an Annual Meeting of Stockholders except in accordance with the procedures set forth in this Section 2.17. The chairman of an Annual Meeting of Stockholders shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.17, and, if he should so determine, he shall so announce such determination to the meeting and any such business not properly brought before the meeting shall not be transacted. ARTICLE III Board of Directors ------------------ Section 3.1. Election and Term. Except as otherwise provided by law or by this Article III, directors shall be elected at the Annual Meeting of Stockholders and shall hold office until the next Annual Meeting of Stockholders and until their successors are elected and qualify, or until they sooner die, resign, or are removed. Acceptance of the office of director need not be expressed in writing. Section 3.2. Number. The number of directors of the Corporation shall be fixed from time to time by the vote of a majority of the entire Board then in office and the number thereof may thereafter by like vote be increased or decreased to such greater or lesser number. Section 3.3. General Powers. The business, properties and affairs of the Corporation shall be managed by or under the direction of the Board of Directors which, without limiting the generality of the foregoing, shall have the power to appoint the officers and agents of the Corporation, to fix and alter the salaries of officers, employees and agents of the Corporation, to grant general or limited authority (including authority to delegate and sub-delegate) to officers, employees and agents of the Corporation, to make, execute, affix the corporate seal to and deliver contracts and other instruments and -11- documents including bills, notes, checks or other instruments for the payment of money, in the name and on behalf of the Corporation without specific authority in each case and to appoint committees in addition to those provided for in Articles IV hereof with such powers and duties as the Board of Directors may determine and as provided by law. The membership of such committees shall consist of such persons as are designated by the Board of Directors. In addition, the Board of Directors may exercise all the powers of the Corporation and do all lawful acts and things which are not reserved to the stockholders by law, by the Certificate of Incorporation or by the By-Laws. Section 3.4. Place of Meetings. Meetings of the Board of Directors may be held at the principal office of the Corporation or at any other place, within or without the State of Delaware, from time to time as designated by the Board of Directors. Meetings of the Board of Directors may be held, and one or more members may attend any meeting of the Board of Directors, by telephonic conference or similar communications equipment, by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this by-law shall constitute presence in person at such meeting. Section 3.5. First Meeting of New Board. A newly elected Board of Directors shall meet without notice as soon as practicable after each Annual Meeting of Stockholders at the place at which such meeting of stockholders took place. If a quorum is not present, such organization meeting may be held at any other time or place which may be specified for special meetings of the Board of Directors in a notice given in the manner provided in Section 3.7 hereof or in a waiver of notice thereof. Section 3.6. Regular Meetings. Regular meetings of the Board of Directors shall be held at such times as may be determined by resolution of the Board of Directors. No notice shall be required for any regular meeting. Except as otherwise provided by law, any business may be transacted at any regular meeting of the Board of Directors. -12- Section 3.7. Special Meetings; Notice; and Waiver of Notice. Special meetings of the Board of Directors shall be called by the Secretary or an Assistant Secretary at the request of the Chairman of the board, if any, the President, a Vice President, or at the request in writing of one or more of the whole Board of Directors stating the purpose or purposes of such meeting. Notices of special meetings shall be mailed to each director addressed to him at his residence or usual place of business not later than three (3) days before the day on which the meeting is to be held or shall be sent to him at either of such places by telegraph or shall be communicated to him personally or by telephone, not later than the day before the date fixed for the meeting. Notice of any meeting of the Board of Directors shall not be required to be given to any director if he shall sign a written waiver thereof either before or after the time stated therein for such meeting or if he shall be present at the meeting and participate in the business transacted thereat. Any and all business transacted at any meeting of the Board of Directors shall be fully effective without any notice thereof having been given if all the members shall be present thereat. Unless limited by law, the Certificate of Incorporation, the By-Laws, or by the terms of the notice thereof, any and all business may be transacted at any special meeting without the notice thereof having so specifically enumerated the matters to be acted upon. Section 3.8. Organization. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors at which he is present. If the Chairman of the Board shall be absent from any meeting of the Board of Directors, the duties otherwise provided in this Section 3.8 to be performed by him at such meeting shall be performed by the President. If both the Chairman of the Board and the President shall be absent, such duties shall be performed by a director designated by the President to preside at such meeting. If no such officer or director is present at such meeting, one of the directors present shall be chosen to preside by a majority vote of the members of the Board of Directors present at such meeting. The Secretary of the Corporation shall act as the -13- secretary at all meetings of the Board of Directors and, in his absence, a temporary secretary shall be appointed by the chairman of the meeting. Section 3.9. Quorum and Adjournment. Except as otherwise provided by Section 3.14 hereof and in the Certificate of Incorporation, at every meeting of the Board of Directors a majority of the total number of directors shall constitute a quorum. Except when the total number of directors is one, in no event shall a quorum consist of less than two directors. Except as otherwise provided by law, by the Certificate of Incorporation, by Sections 3.14, 4.1, 4.8, 4.9, 5.3, or 9.1 hereof, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, any meeting may be adjourned from time to time until a quorum is present. Notice of an adjourned meeting shall be required to be given if notice was required to be given of the meeting as originally called. Section 3.10. Voting. On any question on which the Board of Directors shall vote, the names of those voting and their votes shall be entered in the minutes of the meeting when any member of the Board of Directors present at the meeting so requests. Section 3.11. Acting without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing and such written consents are filed with the minutes of such proceeding. Section 3.12. Resignations. Any director may resign at any time by written notice thereof to the Corporation. Any resignation shall be effective immediately unless some other time is specified for it to take effect. Acceptance of any resignation shall not be necessary to make it effective unless such resignation is tendered subject to such acceptance. -14- Section 3.13. Removal of Directors. Subject to any agreement in writing between the stockholders of the Corporation, any director may be removed either with or without cause at any time by action of the holders of record of a majority of the outstanding shares of Stock of the Corporation then entitled to vote at an election of directors at a meeting of holders of such shares. The vacancy in the Board of Directors caused by any such removal may be filled by action of such stockholders at such meeting or at any subsequent meeting. Section 3.14. Filling of Newly Created Directorships or Vacancies. In case of any increase in the number of directors or of any vacancy created by death, resignation, or disqualification, the additional director or directors may be elected or the vacancy or vacancies may be filled, as the case may be, by the Board of Directors at any meeting by affirmative vote of a majority of the remaining directors or by a sole remaining director though the remaining director or directors be less than the quorum provided for in Section 3.9 hereof. Each director so chosen shall hold office until the next Annual Meeting of Stockholders and until his successor is elected and qualifies or until such director sooner dies, resigns, or is removed. Section 3.15. Compensation of Directors. Directors may receive such sums as compensation for their services and expenses as may be directed by resolution of the Board of Directors; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity, and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for their service and expenses. -15- ARTICLE IV Committees of the Board ----------------------- A. Executive Committee ------------------- Section 4.1. Appointment and Powers. The Board of Directors, by resolution adopted by affirmative vote of a majority of the whole Board of Directors, may appoint an Executive Committee and the members thereof consisting of one or more members which shall have and may exercise, during the intervals between the meetings of the Board of Directors, all of the powers of the Board of Directors in the management of the business, properties and affairs of the Corporation; provided, however, that the foregoing is subject to the applicable provisions of law and the Certificate of Incorporation and shall not be construed as authorizing action by the Executive Committee with respect to any action which is required to be taken by vote of a specified proportion of the whole Board of Directors. So far as practicable, the members of the Executive Committee shall be appointed at the organization meeting of the Board of Directors in each year and, unless sooner discharged by affirmative vote of a majority of the whole Board of Directors, shall hold office until the next annual organization meeting of the Board of Directors and until their respective successors are appointed or until they sooner die, resign, or are removed. All acts done and powers conferred by the Executive Committee shall be deemed to be, and may be certified as being, done or conferred under authority of the Board of Directors. Section 4.2. Place of Meetings. Meetings of the Executive Committee may be held at the principal place of business of the Corporation or at any other place from time to time designated by the Board of Directors or the Executive Committee. Meetings of the Executive Committee may be held, and one or more members may attend any meeting of the Executive Committee, by telephonic conference. -16- Section 4.3. Meetings; Notice; and Waiver of Notice. Regular meetings of the Executive Committee shall be held at such times as may be determined by resolution either of the Board of Directors or the Executive Committee and no notice shall be required for any regular meeting. Special meetings of the Executive Committee shall be called by the Secretary or an Assistant Secretary upon the request of any member of the Executive Committee. Notices of special meetings shall be delivered personally to each member or shall be mailed to each member either by over night courier service or first-class mail addressed to him at his residence or usual place of business or other address provided to the Corporation, or shall be sent to him at any of such places by telegraph, telecopy, or shall be communicated to him personally or by telephone, such that such notice is received by each member not later than the business day before the date fixed for the meeting. Notice of any such meeting shall not be required to be given to any member of the Executive Committee if he shall sign a written waiver thereof either before or after the time stated therein for such meeting or if he shall be present at the meeting and participate in the business transacted thereat, and all business transacted at any meeting of the Executive Committee shall be fully effective without any notice thereof having been given if all the members shall be present thereat. Unless limited by law, the Certificate of Incorporation, the By-Laws, or the terms of the notice thereof, any and all business may be transacted at any special meeting without the notice thereof having specifically enumerated the matters to be acted upon. Section 4.4. Organization. The Chairman of the Executive Committee shall preside at all meetings of the Executive Committee at which he is present. In the absence of the Chairman of the Executive Committee, the Chairman of the Board, if he is a member of the Executive Committee, shall preside at meetings of the Executive Committee at which he is present. In the absence of the Chairman of the Executive -17- Committee and the Chairman of the Board, the Vice Chairman of the Board, if he is a member of the Executive Committee, shall preside at meetings of the Executive Committee at which he is present. In the absence of the Chairman of the Executive Committee, the Chairman of the Board and the Vice Chairman of the Board, the President, if he is a member of the Executive Committee, shall preside at meetings of the Executive Committee at which he is present. In the absence of the Chairman of the Executive Committee, the Chairman of the Board, the Vice Chairman of the Board and the President, one of the members present shall be chosen by the members of the Executive Committee present to preside at such meeting. The Secretary of the Corporation shall act as secretary at all meetings of the Executive Committee, if he is a member thereof, and, in his absence, or if he is not a member thereof, a temporary secretary shall be appointed by the chairman of the meeting. Section 4.5. Quorum and Adjournment. A majority of the members of the Executive Committee shall constitute a quorum for the transaction of business. The vote of a majority of those present at any meeting at which a quorum is present shall be the act of the Executive Committee. In the absence of a quorum, any meeting may be adjourned from time to time until a quorum is present. No notice of any adjourned meeting shall be required to be given other than by announcement at the meeting that is being adjourned. Section 4.6. Voting. On any question on which the Executive Committee shall vote, the names of those voting and their votes shall be entered in the minutes of the meeting when any member of the Executive Committee present at the meeting so requests. Section 4.7. Records. The Executive Committee shall keep minutes of its acts and proceedings which shall be submitted at the next regular meeting of the Board of Directors. Any action taken by the Board of Directors with respect thereto shall be entered in the minutes of the Board of Directors. Each director shall be entitled to receive a copy of the minutes of the Executive Committee at his request. Section 4.8. Vacancies; Alternate Members; and Absences. In case of any increase in the number of members of the Executive Committee or of any vacancy created -18- by death, resignation, disqualification or otherwise, the additional member or members may be elected or the vacancy or vacancies filled, as the case may be, by affirmative vote of a majority of the remaining Board of Directors or by a sole remaining director, though the remaining director or directors be less than the quorum provided for herein. By similar vote, the Board of Directors may designate one or more directors as alternate members of the Executive Committee who may replace any absent or disqualified member at any meeting of the Executive Committee. B. Other Committees of the Board ----------------------------- Section 4.9. Appointing Other Committees of the Board. The Board of Directors from time to time by resolution adopted by affirmative vote of a majority of the whole Board of Directors may appoint other committees of the Board of Directors and the members thereof which shall have such powers of the Board of Directors and such duties as the Board of Directors may properly determine and as provided by law. Such other committee of the Board of Directors shall consist of one or more directors. By similar vote, the Board of Directors may designate one or more directors as alternate members of any such committee who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of any member of any such committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Section 4.10. Place and Time of Meetings; Notice; Waiver of Notice; and Records. Meetings of such other committees of the Board of Directors may be held at any place from time to time designated by the Board of Directors or the committee. Regular meetings of any such committee shall be held at such times as may be determined by resolution of the Board of Directors or the committee and no notice shall be required for -19- any regular meeting. A special meeting of any such committee shall be called by resolution of the Board of Directors or by the Secretary or an Assistant Secretary upon the request of any member of the committee. The provisions of Section 4.3 hereof with respect to notice and waiver of notice of special meetings of the Executive Committee shall also apply to all special meetings of other committees of the Board of Directors. Any such committee may make rules for holding and conducting its meetings and shall keep minutes of all meetings. Meetings of any such committee may be held, and one or more members of such committee may attend any meeting of such committee, by telephonic conference. ARTICLE V The Officers ------------ Section 5.1. Officers. The officers of the Corporation shall be a President, Vice President, Secretary and a Treasurer. The officers shall be elected by the Board of Directors. The Board of Directors may also elect a Chairman of the Board, an Executive Vice President, one or more Vice Presidents, a Chairman of the Executive Committee, a Controller, one or more Second Vice Presidents, Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents as in their judgment may be necessary or desirable. The Chairman of the Board, the Chairman of the Executive Committee, the President, and the Executive Vice President shall be selected from the directors. Section 5.2. Terms of Office and Vacancies. So far as is practicable, all officers shall be appointed at the organization meeting of the Board of Directors in each year and, except as otherwise provided in Sections 5.1, 5.3, and 5.4 hereof, shall hold office until the organization meeting of the Board of Directors in the next subsequent year and until their respective successors are elected and qualify or until they sooner die, retire, resign or -20- are removed. If any vacancy shall occur in any office, the Board of Directors may elect a successor to fill such vacancy for the remainder of the term. Section 5.3. Removal of Officers. Any officer may be removed at any time, either with or without cause, by affirmative vote of a majority of the whole Board of Directors at any regular meeting or at any special meeting called for that purpose. Section 5.4. Resignations. Any officer may resign at any time by giving written notice thereof to the Corporation. Any resignation shall be effective immediately unless some other date is specified for it to take effect. Acceptance of any resignation shall not be necessary to make it effective unless such resignation is tendered subject to such acceptance. Section 5.5. Officers Holding More Than One Office. Any officer may hold two or more offices so long as the duties of such offices can be consistently performed by the same person. Section 5.6. The Chairman of the Board. The Chairman of the Board, if any, shall be a member of the Board of Directors. As provided in Section 2.6 hereof, he shall act as chairman at all meetings of the stockholders at which he is present; as provided in Section 3.8 hereof, he shall preside at all meetings of the Board of Directors at which he is present. He shall also perform such other duties and shall have such other powers as may from time to time be assigned to him by the Board of Directors. In the absence or disability of the Chairman of the Board, the duties of the Chairman of the Board shall be performed and his powers may be exercised by the President of the Board. In the absence or disability of the Chairman of the Board and the President, the powers of the Chairman of the Board may be exercised by such member of the Board of Directors as may be designated by the Chairman of the Board and, failing such designation or in the absence of -21- the person so designated, by such member of the Board of Directors as may be designated by the President. Section 5.7. The President. The President shall be the chief executive officer of the Corporation and, subject to the control of the Board of Directors, shall have general and active charge, control, and supervision of the business, property and affairs of the Corporation, shall approve all operating expense and capital expenditure budgets and shall formulate recommendations to the Board of Directors for its action and decision. In the absence or disability of the President, the duties of the President shall be performed and his powers may be exercised by the Chairman of the Board. If neither the President nor the Chairman of the Board is available, the duties of the President shall be performed and his powers may be exercised by such member of the Board of Directors as may be designated by the President and, failing such designation or in the absence of the person so designated, by such member of the Board of Directors as may be designated by the Chairman of the Board. In the absence of such designation by the Chairman of the Board, the duties of the President shall be performed and his powers may be exercised by such member of the Board of Directors, or such officer of the Corporation, as may be designated by the Board of Directors. Section 5.8. The Vice Presidents. The Vice Presidents, if any, including the Executive Vice President, shall perform such duties and have such powers as may from time to time be assigned to them by the Board of Directors, the Chairman of the Board or the President. Section 5.9. The Secretary. The Secretary shall attend to the giving of notice of each meeting of stockholders, the Board of Directors and committees thereof and, as provided in Sections 2.6 and 3.8 hereof, shall act as secretary at each meeting of stockholders and directors. He shall keep minutes of all proceedings at such meetings as well as of all proceedings at all meetings of such other committees of the Board of -22- Directors as any such committee shall direct him to so keep. The Secretary shall have charge of the corporate seal and he or any officer of the Corporation shall have authority to attest to any and all instruments or writings to which the same may be affixed. He shall keep and account for all books, documents, papers and records of the Corporation except those for which some other officer or agent is properly accountable. He shall generally perform all the duties usually appertaining to the office of secretary of a corporation. In the absence of the Secretary, such person as shall be designated by the chairman of any meeting shall perform his duties. Section 5.10. The Treasurer. The Treasurer shall have the care and custody of all the funds of the Corporation and shall deposit such funds in such banks or other depositories as the Board of Directors or any officer or officers thereunto duly authorized by the Board of Directors shall from time to time direct or approve. In the absence of a Controller, he shall perform all duties appertaining to the office of Controller of the Corporation. He shall generally perform all the duties usually appertaining to the office of treasurer of a corporation. When required by the Board of Directors, he shall give bonds for the faithful discharge of his duties in such sums and with such sureties as the Board of Directors shall approve. In the absence of the Treasurer, such person as shall be designated by the Chairman of the Board or President shall perform his duties. Section 5.11. The Controller. The Controller shall prepare and have the care and custody of the books of account of the Corporation. He shall keep a full and accurate account of all moneys received and paid on account of the Corporation. He shall render a statement of his accounts whenever the Board of Directors shall require. He shall generally perform all the duties usually appertaining to the office of controller of a corporation. When required by the Board of Directors, he shall give bonds for the faithful discharge of his duties in such sums and with such sureties as the Board of Directors shall approve. -23- Section 5.12. Additional Powers and Duties. In addition to the foregoing specifically enumerated duties and powers, the several officers of the Corporation shall perform such other duties and exercise such further powers as the Board of Directors may from time to time determine or as may be assigned to them by any superior officer. The salaries of all officers shall be fixed by the Board of Directors except as otherwise directed by the Board of Directors. ARTICLE VI Transactions With Directors and Officers ---------------------------------------- Section 6.1. Transactions with Directors and Officers. No contract or transaction between the Corporation and one or more of its directors or officers or between the Corporation and any other corporation, partnership, association or other organization, in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for such reason or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction or solely because his or their votes are counted for such purpose if: (a) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee and the Board of Directors or the committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors even though the disinterested directors may be less than a quorum; or (b) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting -24- of the stockholders or the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE VII Stock and Transfers of Stock ---------------------------- Section 7.1. Stock Certificates. The Stock of the Corporation shall be represented by certificates signed by two officers of the Corporation, one the Chairman of the Board, the President or a Vice President and the other the Secretary or an Assistant Secretary. Any or all of the signatures may be a facsimile. Such certificates shall be sealed with the seal of the Corporation. Such seal may be a facsimile, engraved or printed. In case any officer who has signed any such certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Corporation with the same effect as if he were such officer at the date of issue. Certificates representing the Stock of the Corporation shall be in such form as shall be approved by the Board of Directors. Section 7.2. Restrictive Legend on Certificates. Every certificate representing shares of Stock of the Corporation shall bear a legend substantially in the following form: "The shares of stock represented hereby have been acquired for investment and not with a view to distribution or resale, have not been registered under the Securities Act of 1933, as amended, and are transferable only in accordance with and upon proof of compliance with the Securities Act of 1933, as amended, and the Rules promulgated thereunder." Section 7.3. Registration of Transfers of Stock. Registration of a transfer of Stock shall be made on the books of the Corporation only upon presentation by the person -25- named in the certificate evidencing such stock, or by an attorney lawfully authorized in writing, upon surrender and cancellation of such certificate, with duly executed assignment and power of transfer endorsed thereon or attached thereto, and with such proof of the authenticity of the signature thereon as the Corporation or its agents may reasonably require. Section 7.4. Lost Certificates. In case any certificate representing Stock shall be lost, stolen or destroyed, the Board of Directors in its discretion or any officer or officers thereunto duly authorized by the Board of Directors may authorize the issuance of a substitute certificate in the place of the certificate so lost, stolen or destroyed; provided, however, in each such case the Corporation may require the owner of the lost, stolen or destroyed certificate or his legal representative to give the Corporation evidence which the Corporation determines in its discretion satisfactory of the loss, theft or destruction of such certificate and of the ownership thereof and may also require a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 7.5. Determination of Stockholders of Record for Certain Purposes. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix in advance a record date which shall not be more than sixty (60) days prior to any such action. ARTICLE VIII Miscellaneous ------------- Section 8.1. Seal. The seal of the Corporation shall have inscribed thereon the name of the Corporation, the year of its organization and the state of its incorporation. -26- Section 8.2. Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 8.3. Signatures on Negotiable Instruments. All bills, notes, checks or other instruments for the payment of money shall be signed or countersigned by such officers or agents of Corporation and in such manner as from time to time may be prescribed by resolution (whether general or special) of the Board of Directors or as may be prescribed by any officer or officers or any officer and agent jointly thereunto duly authorized by the Board of Directors. Section 8.4. Indemnification. (a) Subject to Subsection (c) of this Section 8.4, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. -27- (b) Subject to Subsection (c) of this Section 8.4, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) Any indemnification under this Section 8.4 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Subsection (a) or Subsection (b), as the case may be. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent, however, that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of -28- any claim, issue or matter herein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case. (d) Notwithstanding any contrary determination in the specific case under Subsection (c) of this Section 8.4, and notwithstanding the absence of any determination thereunder, any director, officer, employee or agent may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Subsections (a) and (b) of this Section 8.4. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standards of conduct set forth in Subsections (a) and (b) of this Section 8.4, as the case may be. Notice of any application for indemnification pursuant to this Section 8.4 shall be given to the Corporation promptly upon the filing of such application. (e) Expenses incurred in defending or investigating a threatened or pending action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Section 8.4. (f) The indemnification and advancement of expenses provided by or granted pursuant to this Section 8.4 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. It is the policy of the Corporation that indemnification of the persons specified in -29- Subsections (a) and (b) of this Section 8.4 shall be made to the fullest extent permitted by law. The provisions of this Section 8.4 shall not be deemed to preclude the indemnification of any person who is not specified in Subsections (a) and (b) of this Section 8.4 but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware, or otherwise. (g) The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Section 8.4. (h) For purposes of this Section 8.4, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents so that any person who is or was a director, officer, employee or agent of such constiuent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 8.4 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 8.4 shall, unless otherwise provided when authorized or ratified, -30- continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 8.5. Books of the Corporation. Except as otherwise provided by law, the books of the Corporation shall be kept at the principal place of business of the Corporation and at such other locations as the Board of Directors may from time to time determine. Section 8.6. References to Gender. Whenever in the By-Laws reference is made to the masculine gender, such reference shall where the context so requires be deemed to include the feminine gender, and the By-Laws shall be read accordingly. Section 8.7. References to Article and Section Numbers and to the By-Laws and the Certificate of Incorporation. Whenever in the By-Laws reference is made to an Article or Section number, such reference is to the number of an Article or Section of the By-Laws. Whenever in the By-Laws reference is made to the By- Laws, such reference is to these By-Laws of the Corporation as the same may from time to time be amended. Whenever reference is made to the Certificate of Incorporation, such reference is to the Certificate of Incorporation of the Corporation as the same may from time to time be amended. ARTICLE IX Amendments ---------- Section 9.1. Amendments. Except as otherwise provided in the Certificate of Incorporation, the By-Laws may be altered, amended or repealed from time to time by the Board of Directors by affirmative vote of a majority of the whole Board of Directors except such of the By-Laws as shall have been made from time to time by holders of shares of Stock entitled to vote thereon. The By-Laws may be altered, amended or -31- repealed at any annual or special meeting of stockholders. Notice of such proposed alteration, amendment or repeal setting forth the substance or text thereof shall be included in the notice of any meeting of the Board of Directors or stockholders called to consider any such alteration, amendment or repeal. * * * * * * * * * -32- EX-10.56 3 STRATEGIC ALLIANCE AGREEMENT EXHIBIT 10.56 STRATEGIC ALLIANCE AGREEMENT BETWEEN TEXAS BIOTECHNOLOOGY CORPORATION AND LG CHEMICAL, LTD. DATED OCTOBER 10, 1996 TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS....................................................... 1 1.1 "AFFILIATE"............................................. 2 1.2 "CLOSING DATE".......................................... 2 1.3 "CONFIDENTIAL INFORMATION............................... 2 1.4 "COST OF GOODS SOLD" OR "COGS".......................... 2 1.5 "DEVELOPMENT COSTS"..................................... 2 1.6 "DEVELOPMENT PARTNER"................................... 2 1.7 "DEVELOPMENT PROGRAM"................................... 3 1.8 "DISTRIBUTION COSTS".................................... 3 1.9 "ENDOTHELIN RECEPTOR ANTAGONIST,"....................... 3 1.10 "ENDOTHELIN RECEPTOR ANTAGONIST PROGRAM................. 3 1.11 "FDA"................................................... 3 1.12 "FIRST COMMERCIAL SALE"................................. 3 1.13 "IMPROVEMENTS".......................................... 3 1.14 "INDICATIONS"........................................... 4 1.15 "MAJOR COUNTRY"......................................... 4 1.16 "MANUFACTURING COSTS"................................... 4 1.17 "MILESTONE"............................................. 4 1.18 "NET SALES"............................................. 5 1.19 "NOVASTAN(R)"........................................... 5 1.20 "PCT"................................................... 5 1.21 "PRA"................................................... 5 1.22 "PHASE I CLINICAL TRIALS"............................... 5 1.23 "PHASE II CLINICAL TRIALS".............................. 5 1.24 "PHASE III CLINICAL TRIALS"............................. 5 1.25 "PRODUCT"............................................... 5 1.26 "PROJECT REPRESENTATIVE"................................ 6 1.27 "SELECTIN ANTAGONIST,".................................. 6 1.28 "SELECTIN ANTAGONIST PROGRAM"........................... 6 1.29 "SUBJECT TECHNOLOGY".................................... 6 1.30 "TBC PATENTS"........................................... 6 1.31 "TECHNOLOGY"............................................ 7 1.32 "TERRITORY"............................................. 7 1.33 "THIRD PARTY"........................................... 7 1.34 "VALID PATENT".......................................... 7 1.35 "WORK PLAN"............................................. 7 2. LICENSE TO LG CHEM. .............................................. 7 2.1 EXCLUSIVE LICENSE....................................... 7
i TABLE OF CONTENTS (Continued)
PAGE ---- 3. DEVELOPMENT PROGRAM............................................... 9 3.1 GOALS................................................... 9 3.2 PROGRAM ADMINISTRATION.................................. 10 3.3 PERFORMANCE OF SERVICES................................. 12 3.4 REGISTRATION............................................ 12 3.5 RECORDS AND DATA........................................ 14 3.6 VISIT OF FACILITIES..................................... 14 4. OTHER RESEARCH/DEVELOPMENT COLLABORATION.......................... 15 5. PAYMENTS AND REPORTS.............................................. 15 5.1 ANNUAL RESEARCH PAYMENTS................................ 15 5.2 ROYALTIES............................................... 16 5.3 AUDIT RIGHTS............................................ 18 5.4 PAYMENT CURRENCY........................................ 18 5.5 PAYMENT MECHANICS....................................... 18 6. COMMERCIALIZATION................................................. 19 6.1 TBC TO MANUFACTURE...................................... 19 6.2 LG CHEM RIGHTS TO MANUFACTURE........................... 20 6.3 LG CHEM TO SELL IN TERRITORY............................ 20 6.4 TBC TO SELL............................................. 20 7. TBC REPRESENTATIONS AND WARRANTIES................................ 21 7.1 NO THIRD PARTY AGREEMENTS............................... 21 7.2 NO THIRD PARTY RIGHTS................................... 21 8. PROPRIETARY RIGHTS................................................ 21 8.1 IMPROVEMENTS............................................ 21 8.2 PATENT PROSECUTION AND MAINTENANCE...................... 22 8.3 THIRD PARTY CLAIM OF INFRINGEMENT....................... 23 8.4 INFRINGEMENT BY THIRD PARTIES........................... 24 9. CONFIDENTIALITY................................................... 25 9.1 GENERAL................................................. 25 9.2 DISCLOSURE OF AGREEMENT................................. 26 10. INDEMNIFICATION.................................................. 26 10.1 MUTUAL RIGHT TO INDEMNIFICATION......................... 26
ii TABLE OF CONTENTS (Continued)
PAGE ---- 10.2 TBC RIGHT TO INDEMNIFICATION............................ 27 10.3 PROCEDURE............................................... 27 10.4 PRODUCT LIABILITY INSURANCE............................. 28 11. TERM AND TERMINATION.............................................. 29 11.1 LICENSE TERM............................................ 29 11.2 TERMINATION FOR BREACH.................................. 29 11.3 SURVIVAL OF OBLIGATIONS................................. 30 12. MISCELLANEOUS..................................................... 31 12.1 FORCE MAJEURE........................................... 31 12.2 RELATIONSHIP OF THE PARTIES............................. 31 12.3 NOTICES................................................. 31 12.4 SUCCESSORS AND ASSIGNS.................................. 32 12.5 AMENDMENTS AND WAIVERS.................................. 32 12.6 GOVERNING LAW........................................... 33 12.7 DISPUTE RESOLUTION...................................... 33 12.8 SEVERABILITY............................................ 35 12.9 HEADINGS................................................ 35 12.10 EXECUTION IN COUNTERPARTS............................... 35 12.11 ENTIRE AGREEMENT........................................ 35
iii STRATEGIC ALLIANCE AGREEMENT THIS STRATEGIC ALLIANCE AGREEMENT (the "Agreement") dated as of October 10, 1996 is between Texas Biotechnology Corporation, a Delaware corporation ("TBC"), and LG Chemical, Ltd., a Korean corporation ("LG Chem"). RECITALS A. TBC and LG Chem desire to engage in a strategic alliance to research, develop and commercialize certain small molecule endothelin receptor antagonist compounds and selectin antagonist compounds presently being developed by TBC as more particularly described below (the "Products"). B. LG Chem is willing to (i) undertake certain research and development activities assigned to it hereunder, (ii) participate in the commercialization of the Products in specified markets, and (iii) make certain research payments for the research and development of the Products and royalty payments on the terms and conditions specified herein in exchange for certain rights with respect to the Products. C. TBC is willing to (i) undertake certain research and development activities assigned to it hereunder, (ii) provide partial funding for the research and development of the Products and (iii) grant certain rights with respect to the Products to LG Chem or its Affiliates in exchange for the right to receive research payments and royalty payments. In consideration of the foregoing and the mutual promises and covenants contained in this Agreement, the parties hereto agree as follows: 1. DEFINITIONS. The following capitalized terms used herein shall have the respective meanings set forth below. The accounting terms used but not defined herein shall have the meanings ascribed to them under United States Generally Accepted Accounting Principles ("GAAP"). Certain other capitalized terms are defined elsewhere in this Agreement. 1.1 "AFFILIATE" means a person or entity that directly or indirectly controls, is controlled by or is under common control with, a party to this Agreement. "Control" (and, with correlative meanings, the terms "controlled by" and "under common control with") means, in the case of a corporation, the ownership of more than 50% of the outstanding voting securities thereof or the right to acquire such securities within 60 days and, in the case of any other type of entity (including, without limitation, joint ventures), an interest that results in the ability to direct or have a significant impact on the direction of the management and policies of such entity or a significant ownership position of no less than 25%. 1.2 "CLOSING DATE" means October 15, 1996. 1.3 "CONFIDENTIAL INFORMATION" means all proprietary information communicated to, learned of, developed or otherwise acquired by either party separately or jointly under this Agreement. 1.4 "COST OF GOODS SOLD" OR "COGS" means TBC's Manufacturing Costs plus 15% of the Manufacturing Costs. 1.5 "DEVELOPMENT COSTS" means the direct and indirect costs, fees, out-of-pocket or other expenses, and reasonable allocated overhead incurred in the course of performing the work under the Development Program (excluding capital expenditures). 1.6 "DEVELOPMENT PARTNER" means any Third Party with whom TBC has entered into an agreement concerning a geographic area outside the Territory, which agreement is currently ongoing, to collaborate on the Endothelin Receptor Antagonist and/or Selectin Antagonist Programs. 2 1.7 "DEVELOPMENT PROGRAM" means research and development and other work, as delineated in this Agreement, conducted by the parties hereunder on the Products for the Indications, which may include clinical testing, regulatory submissions and ongoing Product research and development performed in accordance with the Work Plans. 1.8 "DISTRIBUTION COSTS" means all freight and other transportation costs actually incurred by TBC in the delivery of the Products to LG Chem, including transportation costs to a storage facility, storage charges, Third Party handling fees, insurance during transport and taxes payable for such transportation or storage services. Distribution Costs incurred by TBC shall be determined on a reasonable basis consistent with its internal cost accounting system and reasonable industry practice. 1.9 "ENDOTHELIN RECEPTOR ANTAGONIST," which is more particularly described in SCHEDULE 1 attached hereto, means a molecular compound under development by TBC which inhibits the binding of endothelin to a distinct cell surface receptor. 1.10 "ENDOTHELIN RECEPTOR ANTAGONIST PROGRAM" means the research and development of the Endothelin Receptor Antagonist. 1.11 "FDA" means the United States Food and Drug Administration. 1.12 "FIRST COMMERCIAL SALE" means the first arms-length sale in the Territory pursuant to this Agreement to one or more Third Parties of any Product following receipt of approval to commence manufacturing and selling such Product from any one PRA. 1.13 "IMPROVEMENTS" means any Technology that is discovered, developed or otherwise acquired in the course of the Development Program hereunder that may be useful in the manufacture, sale or use of the Products. 3 1.14 "INDICATIONS" means, (a) with respect to the Endothelin Receptor Antagonist: (i) congestive heart failure* (b) with respect to the Selectin Antagonist: (i) asthma* 1.15 "MAJOR COUNTRY" means any of the following: the Republic of Korea, Taiwan, China (including Hong Kong), Singapore, Indonesia, India, and Thailand. 1.16 "MANUFACTURING COSTS" means (a) the direct material and labor costs associated with manufacturing the Products, (b) overhead allocable to manufacture of the Products and (c) the amount paid to Third Parties to acquire manufactured Products, whether or not completed, and (d) Distribution Costs. Direct material costs include the costs of purchasing raw materials and packaging components. Direct labor includes the costs of employees directly employed in Product manufacturing, quality control or packaging. Overhead allocated to manufacture of the Products shall be limited to (i) a reasonable allocation of the cost of employees who have a direct relationship with Product manufacturing, quality control or packaging, but who are not classified as direct labor, which allocation shall be based on each such employee's time spent in Product manufacturing, quality control or packaging as compared to time spent on all such employee's work, and (ii) a reasonable allocation of facilities' costs allocable to Product manufacturing, quality control and packaging. Manufacturing Costs shall be determined on a reasonable and typical basis consistent with TBC's internal cost accounting system and reasonable industry practice or on actual charges from Third Parties. 1.17 "MILESTONE" means those research and development milestones established by the parties to this Agreement in connection with the Work Plans. *This information has been omitted in reliance on Rule 24-b under the Securities Exchange Act of 1934 and has been filed separately with the Securities and Exchange Commission. 4 1.18 "NET SALES" means the gross amount billed for Products sold pursuant to this Agreement to a Third Party, less discounts, duties , rebates, returns, credits, allowances, uncollectible sales, shipping and insurance charges, sales taxes, tariffs and other governmental charges measured by the amount billed. 1.19 "NOVASTAN(R)" means a non-protein, synthetic small molecule thrombin inhibitor developed by TBC that directly and selectively binds to and inactivates thrombin in the blood plasma. 1.20 "PCT" means the Patent Cooperation Treaty, a multinational agreement pursuant to which member nations agree to recognize a uniform system of patent protection. 1.21 "PRA" means any applicable regulatory authority in any jurisdiction included within the Territory which regulates the development, approval and marketing of pharmaceuticals. 1.22 "PHASE I CLINICAL TRIALS" means the first phase of human clinical trials of a product required by the FDA or a PRA in which the product is tested to determine early safety profile, drug distribution patterns, and metabolism. 1.23 "PHASE II CLINICAL TRIALS" means the second phase of human clinical trials of a Compound required by the FDA or a PRA in which the Compound is tested in patients afflicted with a particular disease in order to gain preliminary evidence of efficacy, optimal dosage and expanded evidence of safety. 1.24 "PHASE III CLINICAL TRIALS" means the third phase of human clinical trials of a product required by the FDA or a PRA. 1.25 "PRODUCT" means (a) TBC-11251, the lead candidate for TBC's Endothelin Receptor Antagonist (TBC-11251 is more particularly described in SCHEDULE 1 attached hereto), and/or (b) 5 TBC-1269, the lead candidate for TBC's Selectin Antagonist (TBC-1269 is more particularly described in SCHEDULE 2 attached hereto). 1.26 "PROJECT REPRESENTATIVE" means an individual designated by a party pursuant to Section 3.2(a). All Project Representatives of a party may be changed at any time by written notice to the other party. 1.27 "SELECTIN ANTAGONIST," which is more particularly described in SCHEDULE 2 attached hereto, means a molecular compound under development by TBC which inhibits the selectin-mediated adhesion of inflamed endothelium to the surface of white blood cells. 1.28 "SELECTIN ANTAGONIST PROGRAM" means the research and development of the Selectin Antagonist. 1.29 "SUBJECT TECHNOLOGY" means all Technology owned or controlled by TBC as of the date hereof or owned or controlled by TBC hereafter during the term of this Agreement, but only to the extent that such Technology relates to the use, manufacture or sale of the Products. Technology "owned or controlled" includes Technology as to which TBC has the right to grant or cause to be granted sublicenses and/or immunity from suit. 1.30 "TBC PATENTS" means (a) the patent applications listed on SCHEDULES 1 and 2 hereto and all patent applications hereafter filed that are owned by or licensed to or otherwise acquired by TBC and which have one or more claims covering Products, Subject Technology or Improvements, (b) any patent application constituting an equivalent, reissue, extension, continuation-in-part or a division of any of the foregoing, including foreign counterparts, and (c) any patents issued upon any of the foregoing applications or any other patents acquired by TBC relating to the Products, Subject Technology or Improvements. 6 1.31 "TECHNOLOGY" means all (a) ideas, methods, inventions, techniques, processes, know-how, trade secrets and other information and all (b) products, formulations, and other natural and man-made materials. 1.32 "TERRITORY" means the countries as set forth on SCHEDULE 3 attached hereto. 1.33 "THIRD PARTY" means any entity other than TBC, LG Chem or their Affiliates. 1.34 "VALID PATENT" means a claim of an issued patent included within the TBC Patents that has not expired or been withdrawn, canceled, disclaimed or held invalid by a court or governmental agency of competent jurisdiction in an unappealed or unappealable decision. 1.35 "WORK PLAN" means a written summary of the tasks to be undertaken by each party during a particular calendar year in connection with the research and development of the Products, adopted by the parties in accordance with Section 3.2(c). Each Work Plan will include reasonably detailed descriptions of the tasks and work to be performed, the resources required to accomplish the work, the costs associated with the planned work and whether TBC or LG Chem or its Affiliates will be responsible for accomplishing each task. 2. LICENSE TO LG CHEM. 2.1 EXCLUSIVE LICENSE. Subject to the terms and conditions of this Agreement, TBC hereby grants to LG Chem a sole and exclusive right and license in the Territory to use and sell any of the Products for the indications as specified herein. (a) Sublicense. LG Chem shall have the right to grant sublicenses in the Territory mutually satisfactory to both parties. To the extent LG Chem grants a sublicense pursuant to this Agreement, it shall be obligated to perform in full all of the obligations and agreements of such sublicense, including payment of royalties. 7 (b) ADDITIONAL INDICATIONS BY TBC. In the event TBC develops additional indications for the Products, TBC hereby agrees to give LG Chem advance notice of TBC's intention to negotiate the transfer, license or other disposition of such indications in the Territory. TBC shall not propose terms to, or enter into active negotiations with, any Third Party in the Territory regarding the transfer, license or other disposition of such additional indications during the 90 day period following such notice to LG Chem unless LG Chem notifies TBC that it is not interested in the matters set forth in such notice. If LG Chem notifies TBC that it is interested in the matters specified in such notice, the parties will immediately enter into good faith negotiations to include such indications under this Agreement on mutually agreeable terms. If the parties are unable to reach agreement within 60 days after commencement of negotiations concerning such additional indications for the Products in the Territory, then TBC shall be free to transfer, license or dispose of such indications. (c) ADDITIONAL INDICATIONS BY LG CHEM. In the event LG Chem itself desires to develop additional indications for the Products in the Territory, TBC agrees to negotiate in good faith with LG Chem regarding LG Chem's ability to receive license rights for such additional indications. If the parties are unable to reach agreement within 60 days after commencement of negotiations concerning such additional indications for the Products in the Territory, then TBC shall be free to pursue such indications outside of this Agreement. (d) RELINQUISHMENT OF INDICATION BY TBC. If TBC decides not to complete an indication due to lack of appropriate data, lack of funds, small market size, etc., then TBC will extend to LG Chem the right to complete the indication for the Territory. TBC will provide LG Chem all clinical data relative to the indication to that point. If LG Chem gains approval for the 8 indication in the Territory, TBC will negotiate in good faith a revised royalty rate schedule for the indication. (e) BACKUP CANDIDATES. If, during the term of this Agreement, TBC discovers, develops or utilizes one or more molecular compounds that it believes in its good faith judgment will be more likely to be commercially viable than TBC-11251 and/or TBC-1269 for, respectively, the Endothelin Receptor Antagonist and the Selectin Antagonist in the treatment of the Indications (the "Backup Candidates"), then such Backup Candidates will deemed to be Products under this Agreement. 3. DEVELOPMENT PROGRAM. 3.1 GOALS. Commencing upon completion of the initial Work Plan as set forth in Section 3.2(c), TBC and LG Chem agree that they will continue research and development on the Products for the Indications according to subsequent Work Plans, with the goal of developing commercially marketable Products in the shortest period of time practicable. (a) TBC. The parties contemplate that TBC shall be responsible for the discovery and origination of Products, the conduct of research outside of the Territory regarding the development of the Products, clinical trials outside of the Territory regarding the Products, and Patent filing, maintenance and prosecution regarding the Products in all geographic areas. Any research and development information generated by TBC's Receptor Antagonist and Selectin Antagonist Programs will be shared without cost to LG Chem. (b) LG CHEM. The parties contemplate that LG Chem will be responsible for clinical and (if required) preclinical trials in the Territory regarding the Products for the Indications required for registration in the Territory, and for the registration and sales of the Products for the 9 Indications in the Territory. While the parties agree to use best efforts to achieve the goals of the Development Program, neither TBC nor LG Chem warrants or guarantees that its efforts will result in a marketable or approvable Product or that the goals specified in the Work Plan will be achieved within the periods set forth therein. 3.2 PROGRAM ADMINISTRATION. (a) PROJECT REPRESENTATIVES. The parties shall each designate two Project Representatives to facilitate liaison between the parties, oversee and review the progress of the Development Program, determine the allocation of responsibilities between the parties for conducting the Development Program, develop trial protocols, manage the clinical/regulatory process and discuss potential competition and other relevant matters to assure rapid development and commercialization of the Products. (b) DISAGREEMENTS. All decisions made hereunder relating to the Development Program shall require the approval of the Project Representatives. The Project Representatives shall attempt in good faith to reach consensus on all matters regarding the Development Program. The Project Representatives shall promptly present any disagreements to the chief executive officers of the parties or their designees, who shall attempt resolution of the matter. If such executives or designees cannot promptly resolve such disagreement, then the dispute shall be resolved under the arbitration provisions of Section 12.7. (c) WORK PLANS. The Work Plan shall be the plan as approved by both parties in writing. On or before January 1, 1997 the parties hereto will agree on an initial Work Plan for 1997. Thereafter, each successive Work Plan adopted shall be agreed upon and signed by an officer of both parties as soon as practicable at the beginning of the first quarter of the year covered by the 10 Work Plan and in any event, no later than March 31 of the year covered by the Work Plan. The Project Representatives shall actively consult with one another throughout the term of the Development Program so as to adjust the specific work performed under each Work Plan to conform to evolving developments in technology and the results of the development work performed. While minor adjustments to a Work Plan may be made from time to time upon approval by the Project Representatives, significant changes to the scope or direction of a Work Plan must be agreed to in writing by each party, in the absence of which the most recently approved Work Plan shall remain in effect. (d) MEETINGS. The Project Representatives and other employees or consultants of the parties responsible for management of the Work Plan and the Development Program shall meet at least once every six months during the term of this Agreement to establish and monitor Product Milestones and to review (i) relevant data, (ii) technical issues that have arisen, (iii) the design and conduct of preclinical and clinical trials and anticipated regulatory filings, (iv) budgets and expenditures; provided, that the budgets and expenditures of the Development Program shall at all times be wholly within the discretion of TBC, (v) competition, (vi) patent prosecution, (vii) progress on FDA submission and other regulatory or protocol issues and (viii) any other matters relevant to the development of the Products. Approximately two weeks prior to the scheduled meeting, each party will present to the other a written summary of all relevant information to be presented at the meeting. At such meetings, a Project Representative for each party shall deliver to the other a reasonably detailed written report which shall (1) describe the work performed by the respective party on the Development Program during the prior six month period and (2) if appropriate, recommend any revisions to the Work Plan that would improve the progress of the 11 Development Program. Such meetings shall be at such times and at such locations as may be agreed to by the parties. Each party shall be responsible for its own costs incurred in connection with such meetings. The Project Representatives shall jointly prepare minutes summarizing the matters reviewed and any actions taken at such meetings and shall distribute such minutes to the parties within 14 days following each meeting. Each party may invite additional colleagues to participate at meetings as appropriate and acceptable to the other party. TBC shall be responsible for the preparation and communication to LG Chem of the specific agenda of each meeting in advance of each meeting and either party may place items for consideration on the agenda. 3.3 PERFORMANCE OF SERVICES. Each party shall perform the research and development work assigned to it in a prudent and skillful manner in accordance, in all material respects, with the Work Plan then in effect and applicable laws. Each party shall furnish all labor, supervision, facilities, supplies and materials necessary to perform the research and development work and other tasks assigned to it in accordance with the Work Plan then in effect. LG Chem shall make available to TBC for TBC's review and approval, which approval may not be unreasonably withheld or delayed, any materials LG Chem proposes to file in connection with any regulatory filings with a PRA. Such materials shall be made available to TBC sufficiently in advance of the anticipated filing date so as to give it a reasonable opportunity to review and comment. All responses by regulatory bodies received by LG Chem shall also be promptly disclosed to TBC. 3.4 REGISTRATION. (a) Within 12 months after a Product for an Indication is approved for commercial sale in the United States, LG Chem will apply and pay for registration in those countries in the 12 Territory where the United States data package is sufficient and no additional clinical trials are required. (b) In those countries in the Territory where the United States data package is not solely sufficient for registration and additional supporting studies are required before the Product for the Indication may be sold commercially, LG Chem will commence and pay for the required additional studies within six months of United States approval of the commercial sale of the Product for the Indication and apply for registration no later than 36 months after United States approval. (c) In those countries in the Territory where neither the United States data package nor any other foreign country data is sufficient and LG Chem must generate all data within the country for registration, and additional Phase I, Phase II, and Phase III Clinical studies or the equivalent is required, LG Chem will initiate the necessary clinical trials within 12 months of United States approval of the commercial sale of the Product for the Indication and will complete such studies in a timely manner. (d) In the event LG Chem chooses to conduct clinical trials in the Territory with regard to indications being developed outside the Territory by TBC and TBC's Development Partners, LG Chem agrees that it will only conduct these trials at its own expense and with prior approval of protocols by TBC and TBC's Development Partners. Furthermore, LG Chem will provide on a regular basis updates of the status of the clinical trials and any interim data results. LG Chem will promptly make available to TBC and to TBC's Development Partners, at no cost to TBC, all of the data from these trials that could be used in regulatory submissions throughout the world by TBC or its Development Partners. LG Chem also agrees that it will insure that the data filed with any PRA and/or produced in clinical trials in the Territory will comply with all applicable PRA 13 standards and will use its commercially reasonable best efforts to comply with all applicable FDA standards. In any case where responsibility for a regulatory filing is assigned to a sublicensee, the applicable sublicense shall require the sublicensee to afford the parties hereto the same review, approval and comment rights with respect to such regulatory filings as are set forth in this Section 3.4. (e) TBC agrees to use its commercially reasonable best efforts to assist LG Chem with regard to LG Chem's clinical trials in the Territory and to supply Products to LG Chem, as such is provided for under the terms of this Agreement, in a timely fashion. 3.5 RECORDS AND DATA. Each party shall maintain records in sufficient detail and in good scientific manner appropriate for patent and regulatory purposes, so as to properly reflect all work done and results achieved in the performance of the Work Plan and Development Program. Such records shall include books, records, reports, research notes, charts, graphs, comments, computations, analyses, recordings, photographs, computer programs and documentation thereof, computer information storage means, samples of materials and other graphic or written data generated in connection with the Work Plan and Development Program, including any data required to be maintained pursuant to applicable governmental regulations. Each party shall provide the other the right to inspect all such records, and shall provide copies of all such requested records. 3.6 VISIT OF FACILITIES. Representatives of each party may, upon reasonable notice and at times reasonably acceptable to the other party, (a) visit the facilities where the Work Plan and Development Program are being conducted by the other party and/or the facilities where the other party manufactures a Product (or has a Product manufactured by a Third Party), (b) consult informally, during such visits and by telephone, with personnel of the other party performing work 14 on the Work Plan and Development Program and (c) with the other party's prior approval, which approval shall not be unreasonably withheld, visit the sites of any clinical trials or other experiments being conducted by such other party in connection with the Work Plan and Development Program, but only to the extent in each case as such trials or other experiments relate to the Work Plan and Development Program. If requested by the other party, TBC and LG Chem shall cause appropriate individuals working on the Development Program to be available for meetings at the location of the facilities where such individuals are employed at times reasonably convenient to the party responding to such request. 4. OTHER RESEARCH/DEVELOPMENT COLLABORATION LG Chem will have a right of first discussion for a 90 day period, commencing on the Closing Date, concerning other unlicensed preclinical research collaborations with TBC, during which period TBC will not enter into any agreements with a Third Party relating to the license, development, or transfer of any compounds currently being developed through TBC's research and development programs other than the Endothelin Receptor Antagonist and Selectin Antagonist Programs and Novastan(R). 5. PAYMENTS AND REPORTS. 5.1 ANNUAL RESEARCH PAYMENTS LG Chem will be responsible for funding a specified portion of the research and development programs of the Products for the Indications conducted by TBC. LG Chem will make the following payments to TBC: Year Annual Research Payment ---- ----------------------- 1996 $100,000 15 1997 $2,000,000 1998 $2,000,000 1999 $2,000,000 2000 $2,000,000 2001 $2,600,000 ------ ------------ Total $10,700,000 The 1996 payment will be made on or before December 31, 1996 and all other payments for the other years will be made semiannually with 50% of each annual payment made on June 30 of the applicable year and 50% made on December 31 of the applicable year. All such payments shall be made without any deduction for or on account of any taxes or other charges. 5.2 ROYALTIES. (a) ROYALTY RATES. LG Chem or its Affiliates shall pay TBC an annual royalty based on the following percentages of Net Sales by LG Chem and its Affiliates of Products for the Indications in the Territory: * Should the combined equity investment in TBC's common stock pursuant to that certain Stock Purchase Agreement between TBC and LG Chem and that certain Stock Purchase Agreement between TBC and the Investor Consortium (as defined therein) ever equal * (including funds received from LG Chem upon LG * This information has been omitted in reliance on Rule 24b-2 under the Securities Exchange Act of 1934 and has been filed separately with the Securities and Exchange Commission. 16 Chem's exercise of the Option (defined therein), then each of the three rates used to calculate the royalties paid by LG Chem shall thereafter be reduced by * All royalty payments by LG Chem or its Affiliates shall be made without any deduction, unless such deduction is required by law. If deduction is required by current law and/or government authority the royalty payment shall be paid net, after such deduction. (b) ADVANCE ROYALTY PAYMENTS. LG Chem will make a $1 million advance royalty payment to TBC each time a Product for an Indication has been approved for the first time for commercial sale by both the FDA and by a PRA in a Major Country. Any advance royalty payment made by LG Chem will be fully credited against future royalty payments from the sale of the same Product for the Indication, the approval of which resulted in the advance royalty payment. (c) SUBLICENSE ROYALTIES. In the event that LG Chem grants any sublicense hereunder in the Territory to any Third Party and in connection therewith receives royalties from such sublicensee based on such sublicensee's sales of a Product, LG Chem or its Affiliates shall pay TBC royalties on such sublicensee's sales at the rate specified in Section 5.2(a) unless LG Chem receives approval from TBC to pay at a different rate. For purposes of calculating whether LG Chem has met minimum sales levels pursuant to Section 11.2(b) hereof, or otherwise, sales of a Product by a sublicensee of LG Chem shall be attributed to LG Chem. (d) REPORTS AND PAYMENT. LG Chem shall keep, and shall require all Affiliates and sublicensees to keep, accurate records in sufficient detail to enable the amounts due to TBC to be determined. LG Chem shall deliver to TBC within 60 days after the end of each calendar quarter a written accounting, including quantities and monetary amounts of sales of each Product by LG Chem and its Affiliates and sublicensees, on a country-by-country basis, and the amount of the royalty payments due to TBC for such quarter. LG Chem or its Affiliates, simultaneously with the delivery of each such accounting, shall tender payment of all royalties shown to be due thereon. * This information has been omitted in reliance on Rule 24-b under the Securities Exchange Act of 1934 and has been filed separately with the Securities and Exchange Commission. 17 (e) TERMINATION OF ROYALTY PAYMENTS. LG Chem shall pay royalties to TBC in accordance with this Section 5.2 as long as Valid Patents protecting the Products are in force. Prior to United States patent expiration protecting the Products, TBC and LG Chem will negotiate in good faith a reduced royalty schedule, if required, relating to continued sales of Products by LG Chem in the Territory. (f) The parties shall negotiate in good faith an adjusted royalty schedule for sales in those countries in the Territory in which the patents protecting the Products are not recognized as a matter of law. 5.3 AUDIT RIGHTS. LG Chem shall permit TBC or its representatives to have access, at TBC's own expense, no more than once in each calendar year during the term of this Agreement and twice during the three calendar years following the termination hereof, during regular business hours and upon reasonable notice, to its records and books for the sole purpose of determining the appropriateness of all amounts payable hereunder. If such examination reveals that such amounts have been understated for any calendar year, LG Chem shall promptly pay the amount of any underpayment; provided that if such examination was not conducted by an independent accountant, LG Chem shall have the right to engage an independent accountant at LG Chem's expense reasonably acceptable to TBC to verify the results of such examination. If such independent accountant determines that the amount of the underpayment is incorrect, such amount shall be adjusted accordingly and, to the extent LG Chem has underpaid amounts owed to TBC, shall be promptly paid by LG Chem. If, however, such examination reveals that such amounts have been overstated for any calendar year, TBC shall promptly refund the amount of any overpayment to LG Chem. Any sublicense granted by LG Chem hereunder shall contain audit provisions substantially similar to those as set forth in this Section 5.3. 18 5.4 PAYMENT CURRENCY. All payments to be made under this Agreement shall be made in United States dollars. In the case of sales in foreign currencies, the rate of exchange to be used in computing the amount of currency equivalent in United States dollars due to TBC for the relevant calendar quarter shall be made at the rate of exchange prevailing on the last day of such calendar quarter published by a New York, New York money center bank which is satisfactory to both parties. 5.5 PAYMENT MECHANICS. All payments under this Agreement shall be made by wire transfer of immediately available funds to such account as the receiving party shall specify or by other payment method acceptable to the parties. 6. COMMERCIALIZATION. 6.1 TBC TO MANUFACTURE. Subject to LG Chem's rights under Section 6.2, TBC will manufacture or subcontract the manufacture of all LG Chem's requirements for Products, subject to customary forecast and order procedures. If TBC or its subcontractor is manufacturing Products, TBC's (or its subcontractor's) responsibilities shall include all aspects of the manufacturing process, including maintenance of manufacturing inventory, quality control and shipment of Products (FOB United States factory) in accordance with orders placed by LG Chem. TBC and LG Chem will also agree to negotiate in good faith a manufacturing agreement which will include provisions on forecasts, delivery time, quality control, quality assurance, delivery location, insurance, packaging, inventories, term and time of payment and such other provisions as are customarily included in agreements of this type. As compensation for such manufacturing services, TBC shall be entitled to receive payment of its COGS for shipments of the Products (FOB United States factory) to be used by LG Chem for research purposes. Prior to the initiation of commercial sales within the 19 Territory, the parties shall negotiate in good faith mutually agreeable transfer price terms for shipments of the Products to be used by LG Chem in its commercial operations. LG Chem shall have the right to audit at its expense the manufacturer or submanufacturer of the Products or Products. 6.2 LG CHEM RIGHTS TO MANUFACTURE. At any time during the term of this Agreement, LG Chem may elect negotiate for rights to manufacture the Products, in the Territory as well as worldwide. In such case, the parties shall enter into good faith negotiations to include such under this Agreement on mutually agreeable terms. 6.3 LG CHEM TO SELL IN TERRITORY. Following regulatory approval in any country in the Territory, LG Chem shall use its best efforts to market and sell the Products for the Indications in such country. LG Chem will use all resources in such marketing and sales efforts that it would use regarding any of its other products with similar commercial potential. All terms of sale, including pricing policies, credit terms, cash discounts and returns and allowances, shall be set by LG Chem. LG Chem shall be responsible for invoicing its customers for Products and collecting payment therefrom. LG Chem, in consultation with, and approval by, TBC, will select the trademarks to be used, at no additional cost to LG Chem, for the sale of the Products for the Indications in the Territory, which selection will take into account the need for worldwide trademarks. TBC will own any worldwide trademarks concerning the Products for the Indications. LG Chem will own any non-worldwide trademarks regarding sales of the Products for the Indications in the Territory and TBC will have the right to use such trademarks outside the Territory at no cost to TBC. 6.4 TBC TO SELL. TBC shall have all marketing and other rights to sell the Products outside the Territory without compensation to LG Chem. 20 7. TBC REPRESENTATIONS AND WARRANTIES. TBC represents and warrants to LG Chem as follows: 7.1 NO THIRD PARTY AGREEMENTS. As of the date hereof, there are no agreements with third parties relating to the Products. 7.2 NO THIRD PARTY RIGHTS. TBC owns or possesses adequate licenses or other rights to use all patents, patent rights, inventions and know-how necessary for the manufacture, use and sale of the Products and to grant the licenses granted herein. To the best of TBC's knowledge, the manufacture, use or sale of the Products pursuant to this Agreement will not infringe or conflict with any Third Party right or patent and TBC is not aware of any pending patent application that if issued would be infringed by the manufacture, use or sale of the Products pursuant to this Agreement. TBC has not received any notice from a Third Party that any manufacture, use or sale of the Products pursuant to this Agreement infringes or conflicts with any Third Party right or patent. 8. PROPRIETARY RIGHTS. 8.1 IMPROVEMENTS. Improvements conceived or made solely by the employees of either party during the term of this Agreement shall be the sole property of such party. Improvements made jointly by employees of both parties during the term of this Agreement shall be owned by TBC, but each party shall have the right to use such Improvements free of any royalty payments. All Improvements shall be automatically included in the license granted to LG Chem under Section 2; provided, that the parties agree to negotiate in good faith appropriate modifications to the terms of this Agreement which reflect the fact that an Improvement has been jointly developed. TBC shall have a royalty-free, non-exclusive license, solely for the purposes of this Agreement, to make, use and sell outside the Territory under the terms of this Agreement any Improvements owned 21 by LG Chem. Each party shall promptly disclose to the other any Improvements developed by its employees or agents acting on its behalf. Each party agrees that all employees and other persons acting on its behalf under this Agreement shall be obligated under a binding written agreement to assign (or exclusively license in the case of academics) to such party, or as such party shall direct, all Improvements made or conceived by such employee or other person. 8.2 PATENT PROSECUTION AND MAINTENANCE. The parties agree that they will coordinate with each other in all reasonable respects the worldwide prosecution of the TBC Patents, subject to the provisions of this Section 8. TBC shall be responsible, at its expense, for filing, prosecuting and maintaining the TBC Patents (except for Improvements owned exclusively by LG Chem) in all Major Countries which recognize the PCT and shall bear all costs associated therewith. Subject to the rights of LG Chem pursuant to this Section 8.2, TBC may in its discretion choose not to pursue the filing, prosecution, and maintenance of patent protection for the Products for the Indications for those countries within the Territory that do not recognize the PCT. However, in the event that LG Chem desires TBC to file in one or more of such countries within the Territory, TBC and LG Chem will each bear half of the expenses related to the filing, prosecution and maintenance of such patents. TBC shall furnish LG Chem with copies of any TBC Patent application concerning Subject Technology or Improvements sufficiently in advance of the anticipated filing date (but in no event less than 5 working days before filing) so as to give LG Chem a reasonable opportunity to review and comment. TBC shall also furnish copies to LG Chem of all communications to and from relevant foreign patent offices in the Territory regarding TBC Patents or Patent applications within a reasonable time prior to filing such communication or promptly following the receipt thereof. TBC shall reasonably consider any comments LG Chem may have related to such TBC Patent 22 applications or communications. LG Chem shall have the right at its expense to file, prosecute and maintain patents in the United States and all foreign countries on Improvements owned solely by it. TBC shall have the right to review and comment on such filings and all patent office communications related thereto to the same extent as LG Chem is permitted by this Section 8.2 with respect to TBC filings. Notwithstanding the foregoing, beyond best efforts, neither party assumes liability to the other for the successful prosecution of any patent application. However, if LG Chem shall fail to pay an annuity, tax or other maintenance fee with respect to a patent or patent application or otherwise decide not to pursue a patent relating to Improvements owned solely by LG Chem, it shall give TBC timely notice and the opportunity to take such action and assume all ownership rights to such patent or patent application. 8.3 THIRD PARTY CLAIM OF INFRINGEMENT. Each party shall give the other prompt notice of each claim or allegation that the exercise of rights hereunder constitutes an infringement of one or more patents or other rights of a Third Party. TBC shall use all commercially reasonable efforts to defend the parties against any such claim or allegation with counsel of its own choice reasonably acceptable to LG Chem. The costs of such defense and any costs of settling or otherwise satisfying such claim (including damage awards, if any) shall be borne as follows: (a) TBC COSTS. TBC shall bear all costs associated with claims based on any patent issued or patent application published as of the date of this Agreement. If LG Chem continues to sell the Products following notice of such claim against explicit requests to the contrary by TBC, then LG Chem shall have the obligation to satisfy all claims in connection with such continued sales activity. At all times, LG Chem shall the right to defend itself at its own expense against this with counsel of its own choice reasonably acceptable to TBC. 23 (b) SHARED COSTS. The parties shall share equally all costs associated with claims not allocated under Section 8.3(a) above, namely, claims based on any patent or patent application that was not issued or published as of the date of this Agreement; provided, that LG Chem may in the exercise of its best business judgment elect not to participate in the defense of such claims and in such case will not be obligated to share or pay any such costs. (c) COOPERATION. Each party agrees to cooperate with the other in the defense of any such claim or allegation, including, to the extent able, furnishing testimony by its employees and providing technical support and information as requested. Neither party shall settle or discontinue defense of any such case without the other's prior written consent, which shall not be unreasonably withheld. In the case of any proposed settlement involving a cross-license with a Third Party, neither party may unreasonably refuse to enter into such a cross-license. The provisions of this Section 8.3(c) shall also apply to actions for declaratory relief which raise or are in response to an issue of infringement of a Third party patent. 8.4 INFRINGEMENT BY THIRD PARTIES. Each party shall give the other party prompt written notice of any incident of infringement of TBC Patents that comes to its attention. The parties shall thereupon confer as to what steps are to be taken to stop or prevent such infringement. TBC agrees to use reasonable efforts to stop any such infringement, but shall not be obligated to commence proceedings against the infringer. If TBC decides to commence proceedings, however, TBC shall be responsible for any legal costs incurred and will be entitled to retain any settlement or damage award received, and LG Chem agrees to cooperate with TBC in such proceeding. LG Chem shall have the right at its expense to engage its own counsel in connection with such proceedings. Should TBC decide not to commence proceedings, and should the infringement represent a substantial threat 24 to the commercial value of any Products, LG Chem shall be entitled (but not obligated) to do so in its own name and/or in TBC's name against the infringer, in which event LG Chem shall be responsible for all legal costs incurred, and will be entitled to retain any settlement or damage award received, and TBC agrees to cooperate with LG Chem in such proceedings and TBC shall have the right at its expense to engage its own counsel in connection with such proceedings. 9. CONFIDENTIALITY. 9.1 GENERAL. Any party receiving Confidential Information pursuant to this Agreement shall maintain the confidential and proprietary status of such Confidential Information, keep such Confidential Information and each part thereof within its possession or under its control sufficient to prevent any activity with respect to the Confidential Information that is not specifically authorized by this Agreement and prevent the disclosure of any Confidential Information to any Third Party using the same degree of care it would use with respect to its own information of like importance; provided, however, that such restrictions shall not apply to any Confidential Information that is (a) independently developed outside the scope of this Agreement by employees of the receiving party having no access to or knowledge of the Confidential Information disclosed hereunder, (b) in the public domain at the time of its receipt or thereafter becomes part of the public domain through no fault of the receiving party, (c) lawfully received without an obligation of confidentiality from a Third Party having the right to disclose such information, (d) released from the restrictions of this Section 8 by the express written consent of the disclosing party, (e) disclosed to any permitted assignee, sublicensee or subcontractor or customer of LG Chem or TBC, provided that such assignee, sublicensee, subcontractor or customer is subject to the provisions of this Section 8 or substantially similar provisions or (f) required by law, statute, rule or court order to be disclosed, 25 including requirements of the Securities and Exchange Commission, the FDA, any PRA, and other regulatory authorities, provided that the disclosing party uses commercially reasonable efforts to obtain confidential treatment of any such disclosure. Without limiting the generality of the foregoing, LG Chem and TBC each shall use all commercially reasonable efforts to obtain, if not already in place, confidentiality agreements from its respective relevant employees and agents, to protect the Confidential Information as herein provided. 9.2 DISCLOSURE OF AGREEMENT. The parties shall coordinate efforts regarding the preparation and distribution of press releases and other public announcements of this Agreement. Neither party shall make a public announcement or otherwise disclose the terms of this Agreement to any Third Party without giving prior notice to the other party and receiving no objection, except that the parties may without each other's consent disclose (a) the existence of this Agreement, (b) the identity of the other party and (c) the general subject matter of this Agreement. Each party shall also be permitted to make such disclosure of the terms of this Agreement as its counsel reasonably determines is necessary to comply with law, provided that such party shall use commercially reasonable efforts to obtain confidential treatment of any such disclosure. 10. INDEMNIFICATION. 10.1 MUTUAL RIGHT TO INDEMNIFICATION. Each party shall defend, indemnify and hold harmless the other and its directors, officers, employees and agents from and against any and all claims, liabilities, losses and expenses, including attorneys' fees, incurred by or asserted against it or any of the foregoing arising out of the development, testing, manufacture, handling or storage of any Product by such party, including without limitation (i) any actual or alleged bodily injury, death or property damage resulting from the use of any Product manufactured by such party, (ii) any actual 26 or alleged violation of law applicable to the development, testing, manufacture, handling or storage of the Products by such party and (iii) any recall of a Product manufactured by such party that is ordered by a governmental agency or required by a confirmed Product failure as reasonably determined by the parties, except as otherwise provided herein and except to the extent that such liabilities, losses and expenses result from the negligence or willful misconduct of a party, in which case the party who engaged in such negligence or willful misconduct shall indemnify and hold harmless the other party and its directors, officers, employees and agents. 10.2 TBC RIGHT TO INDEMNIFICATION. LG Chem shall defend, indemnify and hold harmless TBC and its directors, officers, employees and agents from and against any and all claims, liabilities, losses and expenses, including attorneys' fees, incurred by or asserted against TBC or any of the foregoing arising out of a misrepresentation regarding any Products by LG Chem, its Affiliates or sublicensees which is not in accordance with approved Product claims or prior TBC approval. 10.3 PROCEDURE. Any person that intends to claim indemnification under this Section 10 (an "Indemnitee") shall promptly notify the other party (the "Indemnitor") of any claim, in respect of which the Indemnitee intends to claim such indemnification, and the Indemnitor shall assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor, if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceedings. The indemnity agreement in this Section 10 shall not apply to amounts paid in settlement of any loss, claim, liability or action if such settlement is effected without the consent of the Indemnitor, which consent shall not be unreasonably withheld. 27 The failure to deliver notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Section 10, but not any liability that it may have to any Indemnitee otherwise than under this Section 10. The Indemnitee and its employees and agents shall cooperate fully with the Indemnitor and its legal representatives in the investigation of any action, claim or liability covered by this indemnification. In the event that each party claims indemnity from the other and one party is finally held liable to indemnify the other, the Indemnitor shall additionally be liable to pay the reasonable legal costs and attorneys' fees incurred by the Indemnitee in establishing its claim for indemnity. 10.4 PRODUCT LIABILITY INSURANCE. Each party shall use all commercially reasonable efforts to maintain product liability insurance with respect to its manufacture of the Products hereunder. Such insurance shall be in such amounts and subject to such deductibles as the parties may agree based upon standards prevailing in the industry at the time such manufacturing commences. At such time as a Product is being launched by a party for commercial sale, the parties shall attempt to maximize the product liability insurance coverage for both parties. TBC shall maintain such insurance for so long as LG Chem continues to sell any Product manufactured by TBC, and thereafter for so long as TBC maintains insurance for itself covering such manufacture or sales. LG Chem shall maintain such insurance for as long as LG Chem continues to sell any Product pursuant to this agreement manufactured by it, and thereafter for so long as LG Chem maintains insurance for itself covering such manufacture or sales. 28 11. TERM AND TERMINATION. 11.1 LICENSE TERM. The term of LG Chem's license of the Products for the Indications in the Territory, granted in Article 2, and the obligations of LG Chem granted thereunder shall terminate as to each Product in the Territory and any trademarks relating to the Products for the Indications shall revert back to TBC, upon the expiration of the last United States patent included in the TBC Patents relating to such Product; provided, however, that if patent protection afforded the Product in the Territory continues beyond the expiration of the United States patent for such Product, the royalty rate for the sale of such Product shall not be adjusted pursuant to Section 5.2(e) until expiration of such foreign patent protection. 11.2 TERMINATION FOR BREACH. (a) GENERAL. Either party may terminate this Agreement by written notice to the other in the event that (i) the other party fails to perform any material obligation hereunder or in that certain Stock Purchase Agreement (the "Stock Purchase Agreement") entered into between the parties as of the date hereof, and such failure is not cured within 60 days following prompt notice thereof from the non-defaulting party, or (ii) any bankruptcy, receivership, insolvency or reorganization proceedings are instituted by the other party or any such proceedings are instituted against the other party and not dismissed within 120 days. The bankruptcy of a party shall not give rise to the right of the bankrupt party to terminate any license granted herein. (b) FAILURE OF LG CHEM TO MEET MINIMUM SALES LEVELS. After United States approval of the sale of a Product for an Indication and the submission of an application for approval of the sale of such Product for the Indication in a Major Country, the parties shall in good faith negotiate minimum sales levels for that Product for the Indication in Major Countries in the Territory 29 and for the entire Territory. Upon approval of the sale of such Product for the Indication in a Major Country in the Territory, LG Chem shall maintain the agreed-upon sales levels for that Product for the Indication in such country. In the event LG Chem fails to maintain such sales levels, TBC shall have the right to terminate this Agreement as to such country and such Product per indication. Prior to exercising the right to such termination, TBC shall grant to LG Chem an opportunity to cure such failure or to propose an alternative solution mutually acceptable to both parties for a sixty day period after receipt of LG Chem of notice from TBC of its intent to exercise such right. (c) FAILURE OF LG CHEM TO REGISTER PRODUCTS. In the event LG Chem fails to register the Products for the Indications in a country in the Territory in accordance with Section 3.4, TBC shall have the right to terminate this Agreement as to such country and such Product per indication. Prior to exercising the right to such termination, TBC shall grant to LG Chem an opportunity to cure such failure or to propose an alternative solution mutually acceptable to both parties for a sixty day period after receipt of LG Chem of notice from TBC of its intent to exercise such right. (d) FAILURE OF TBC TO MEET MILESTONE. LG Chem shall have the right to terminate this Agreement and shall not be responsible for future research payments to TBC under Section 5.1 in the event TBC fails to meet an Agreement Milestone, which Milestones will be established by the parties in accordance with Section 3.2(d). Prior to exercising the right to such termination, LG Chem shall grant to TBC an opportunity to cure such failure or to propose an alternative solution mutually acceptable to both parties for a sixty day period after receipt of TBC of notice from LG Chem of its intent to exercise such right. 11.3 SURVIVAL OF OBLIGATIONS. In the event of termination, LG Chem's license rights shall revert automatically to TBC; provided, that no termination of this Agreement shall eliminate any 30 rights and obligations accrued prior to such termination. Promptly following any termination of this Agreement, each party shall return all materials containing Confidential Information, except one copy that may be retained by counsel for each of the parties for record keeping purposes only. The provisions of Sections 8.3, 10, 11.3, 12.6 and 12.7 shall survive any termination of this Agreement. The provisions of Section 9 shall survive until 10 years after the expiration of the license as to all of the Products. 12. MISCELLANEOUS 12.1 FORCE MAJEURE. Each party shall be excused for any failure or delay in performing any of its obligations under this Agreement, if such failure or delay is caused by Force Majeure. For purposes of this Agreement, "Force Majeure" shall mean any act of God, accident, explosion, fire, storm, earthquake, flood, drought, riot, embargo, civil commotion, war, act of war or any other circumstances or event beyond the reasonable control of the party prevented from timely performing its obligations under this Agreement as a result of such circumstance or event. 12.2 RELATIONSHIP OF THE PARTIES. The parties agree that each is acting as an independent contractor with respect to the other and nothing contained in this Agreement is intended, or is to be construed, to cause LG Chem and TBC to be deemed partners or joint venturers or TBC an agent of LG Chem. Neither party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any contract, agreement or undertaking. 12.3 NOTICES. Any notice or other communication hereunder shall be in writing and shall be deemed given when so delivered in person, by overnight courier (with receipt confirmed) or by facsimile transmission (with receipt confirmed by telephone or by automatic transmission report) 31 or on the tenth business day after being sent by registered or certified mail (postage prepaid, return receipt requested), as follows (or to such other person's address as may be specified in writing to the other party hereto); Texas Biotechnology Corporation 7000 Fannin, Suite 1920 Houston, Texas 77030 Attention: David B. McWilliams Telephone: (713) 796-8822 Facsimile: (713) 796-8232 LG Chemical, Ltd. LG Twin Tower 20, Yoido-dong, Yongdungpo-gu Seoul 150-721, Korea Attn: Kyu D. Kim, Ph.D. Telephone: (02) 3773-7270 Facsimile: (02) 3773-7967 12.4 SUCCESSORS AND ASSIGNS. The terms and provisions of this Agreement shall inure to the benefit of, and be binding upon, LG Chem, TBC, and their respective successors (including a successor pursuant to a merger of a party hereto) and assigns. This Agreement, or any of the rights granted hereunder, may be assigned by LG Chem or TBC to any of their respective Affiliates; provided, that such assignment expressly provides that the assignor remains liable for its obligations hereunder and the performance of its Affiliate under this Agreement. 12.5 AMENDMENTS AND WAIVERS. No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure by LG Chem or TBC therefrom, shall in any event be effective unless the same shall be in writing specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged and signed by the party against whom enforcement of such amendment is sought, and each amendment, modification, waiver, termination or discharge shall be effective only in the 32 specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by the party against whom enforcement of such variance, contradiction or explanation is sought. 12.6 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 12.7 DISPUTE RESOLUTION. The parties agree to effect all reasonable efforts to resolve any and all disputes between them in connection with this Agreement in an amicable manner. The parties agree that any dispute that arises in connection with this Agreement and which cannot be amicably resolved by the parties shall be resolved by binding Alternative Dispute Resolution (ADR) in the manner set forth in this Section 12.7. If a party intends to begin ADR to resolve a dispute, such party shall provide written notice to the other party informing the other party of such intention and the issues to be resolved. Within ten (10) business days after its receipt of such notice, the other party may, by written notice to the party initiating ADR, add additional issues to be resolved. If the parties cannot agree upon the selection of a neutral within twenty (20) business days following receipt of the original ADR notice, a neutral shall be selected by the then President of the Center for Public Resources (CPR), 680 Fifth Avenue, New York, New York 10019. The neutral shall be a single individual having experience in the pharmaceutical industry who shall preside in resolution of any disputes between the parties. The neutral selected shall not be an employee, director or shareholder of either party or of an Affiliate. Each party shall have ten (10) business days from the date the neutral is selected to object in good faith to the selection of that person. If either party makes such an objection, the then President of the CPR shall, as soon as possible thereafter, select 33 another neutral under the same conditions as set forth above. This second selection shall be final. The ADR shall be conducted in the following manner: (a) No later than forty-five (45) business days after selection, the neutral shall hold a hearing to resolve each of the issues identified by the parties. (b) At least five (5) days prior to the hearing, each party must submit to the neutral and serve on the other party a proposed ruling on each issue to be resolved. Such proposed ruling shall contain no argument on or analysis of the facts or issues, and shall be limited to not more than fifty (50) pages. (c) The neutral shall not require or permit any discovery by any means, including depositions, interrogatories or production of documents. (d) Each party shall be entitled to no more than twelve (12) hours of hearing to present testimony or documentary evidence. The testimony of both parties shall be presented during consecutive calendar days. Such time limitation shall apply to any direct, cross or rebuttal testimony, but such time limitation shall only be charged against the party conducting such direct, cross or rebuttal testimony. It shall be the responsibility of the neutral to determine whether the parties have had the twelve (12) hours to which each is entitled. (e) Each party shall have the right to be represented by counsel. The neutral shall have the sole discretion with regard to the admissibility of any evidence. (f) The neutral shall rule on each disputed issue within thirty (30) days following the completion of the testimony of both parties. Such ruling shall adopt in its entirety the proposed ruling of one of the parties on each disputed issue. 34 (g) ADR shall take place in the city of New York, New York. All costs incurred for a hearing room shall be shared equally between the parties. (h) The neutral shall be paid a reasonable fee plus expenses, which fees and expenses shall be shared equally by the parties. (i) The ruling shall be binding on the parties and may be entered as an enforceable judgment by a state or federal court having jurisdiction of the parties. 12.8 SEVERABILITY. If any provision hereof should be held invalid, illegal or unenforceable in any respect in any jurisdiction, then, to the fullest extent permitted by law, (a) all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as may be possible and (b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction. 12.9 HEADINGS. Headings used herein are for convenience only and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement. 12.10 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument. 12.11 ENTIRE AGREEMENT. This Agreement, together with the Common Stock Purchase Agreement between the parties of even date herewith, contains the entire agreement and understanding of the parties hereto, and supersedes any prior agreements or understandings between the parties with respect to the subject matter hereof. 35 IN WITNESS HEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. TEXAS BIOTECHNOLOGY CORPORATION /s/ D. B. McWILLIAMS By: ___________________________ Title: _________________________ LG CHEMICAL, LTD. /s/ YUNG JAE CHOI By: ___________________________ Title: ________________________ 36 SCHEDULE I DESCRIPTION OF TBC11251 AND RELEVANT PATENTS 1. Description of TBC11251 ----------------------- TBC11251 is a sulfonamide based antagonist of endothelin binding to its receptors. The compound exhibits selectivity for binding to the A subtype of the endothelin receptors relative to the B subtype. The chemical structure of TBC11251 is 4-chloro-3-methyl-5-(2-(2-(6-methylbenzo[d][1.3]dioxol-5- yl)acetyl)-3-thienylsulfonamido)isoxazole (it is also referred to by N-(4-chloro-3-methyl-5-isoxazolyl)-2-[2-methyl-4,5- (methylenedioxy)phenylacetyl]thiophene-3-sulfphonamide). The compound is also referred to as various salt forms which include, but are not limited to, the sodium phosphate salt (TBC11251Z) and the sodium salt (TBC11251Na). 2. Patents covering TBC11251 in the Territories Application 1: PCT/US94/05755: "Sulfonamides and derivatives thereof that modulate the activity of endothelin" filed April 4, 1994. National filings for this patent were made in South Korea and Singapore. This application contains broad claims to the endothelin receptor antagonists. Application 2: PCT/US96/04759: "Thienyl-, furyl, pyrrolyl-, and biphenylsulfonamides and derivatives thereof that modulate the activity of endothelin" filed April 4, 1996. The PCT countries which have been designated within the Territory are South Korea, North Korea, Singapore, Sri Lanka, Viet Nam, China and Mongolia. National filings have also been made in Taiwan, Philippines, Indonesia and Thailand. This application contains specific claims to TBC11251 and related compounds. SCHEDULE 2 DESCRIPTION OF TBC1269 AND RELEVANT PATENTS 1. Description of TBC1269 ---------------------- * 2. Patents covering TBC1269 in the Territories ------------------------------------------- Application 1: PCT/US96/11032 * Application 2: 08/650,653 * Application 3: PCT/US95/05463 entitled "Binding of E-selectin, P-selectin or L-selectin to Sialyl-Lewis/x/ or Sialyl-Lewis/a/" filed April 28, 1995. This application covers other mannosylated biphenyl compounds which inhibit selectin binding to ligands. The national filings for this application will be filed in South Korea, China and Singapore. Application 4: PCT/US95/05359 entitled "Compositions and methods for inhibiting the binding of E-selectin or P-selectin to Sialyl-Lewis/x/ or Sialyl-Lewis/a/" filed May 1, 1995. This application covers other mannosylated biphenyl compounds which inhibit selectin binding to ligands. The national filings for this application will be filed in South Korea, China and Singapore. - ------ *This information has been omitted in reliance to Rule 24-b under the Securities Exchange Act of 1934 and has been filed separately with the Securities and Exchange Commission. SCHEDULE 3 TERRITORY - --------- Republic of Korea People's Republic of Korea Taiwan China (including Hong Kong) Myanmar Cambodia Brunei Phillippines Indonesia Malaysia-Singapore Vietnam India Laos Thailand Pakistan Bangladesh Nepal Sri Lanka Mongolia Afghanistan EX-10.57 4 COMMON STOCK PURCHASE AGREEMENT EXHIBIT 10.57 COMMON STOCK PURCHASE AGREEMENT BETWEEN TEXAS BIOTECHNOLOGY CORPORATION AND LG CHEMICAL, LTD. DATED OCTOBER 10, 1996 COMMON STOCK PURCHASE AGREEMENT THIS AGREEMENT, dated as of October 10, 1996, is between Texas Biotechnology Corporation, a Delaware corporation (the "Company"), and LG Chemical, Ltd., a Korean corporation (the "Purchaser"). In consideration of the mutual promises and covenants contained in this Stock Purchase Agreement (the "Agreement") and in the Strategic Alliance between the Company and the Purchaser entered into as of the date hereof (the "Strategic Alliance") relating to the Company's development of small molecule endothelin receptor antagonist compounds and selectin antagonist compounds, the parties hereto hereby agree as follows: 1. Purchase of Common Stock ------------------------ Section 1.1 Purchase. Subject to the terms and conditions of this Agreement, the Purchaser hereby purchases 1,250,000 shares (the "Shares") of the Company's common stock, par value $.005 per share (the "Common Stock"), for and in consideration of the purchase amount of $5,000,000. Section 1.2 Option to Purchase Additional Shares. The Company hereby grants to the Purchaser an Option (the "Option") entitling it to purchase additional shares of Common Stock determined as set forth below (the "Option Shares") on one and only one of the following four exercise dates (the "Exercise Dates"): March 31, 1997; June 30, 1997; September 30, 1997; or December 31, 1997. The Purchaser shall notify the Company of its intent to exercise the Option 30 calendar days prior to the Exercise Date. The aggregate purchase amount of the Option Shares shall be equal to the difference between $10,000,000 and the sum of $5,000,000 plus the Consortium Investment; provided in no event will the purchase amount be less than $1,000,000. The "Consortium Investment" means the aggregate dollar value of shares of Common Stock purchased by a consortium of Korean accredited Investors (the "Investor Consortium") pursuant to an investment agreement which may be entered into by and between the Company and the Investor Consortium. The per share price of the Option shall be negotiated in good faith between the parties no later than 5 calendar days prior to the Exercise Date. In the event that the parties fail to negotiate such price prior to such deadline, the stock option shall not be exercisable on such Exercise Date. Payment of the exercise price for the Option Shares purchased under the Option shall be delivered in accordance with Section 2.2(b) herein. The purchase and sale of the Shares and Option Shares hereunder is referred to as the "Offering." 2. Closing Regarding Shares and Option Shares; Deliveries ------------------------------------------------------ Section 2.1 Closing Date. The closing date for the purchase and sale of the Shares shall be a date, not later than October 15, 1996, when all of the applicable conditions set forth in Sections 5 and 6 hereto have been met (the "Closing Date"). The closing date for the purchase and sale of the Option Shares shall be the date upon which all of the applicable conditions set forth in Sections 5 and 6 hereto have been met (the "Second Closing Date"). Section 2.2 Deliveries. (a) In accordance with the escrow agreement attached hereto as Exhibit A (the "Escrow Agreement"), on the Closing Date the Company shall deliver to the designated escrow agent (the "Escrow Agent") for the benefit of the Purchaser a certificate representing the Shares, registered in the name of the Purchaser, in consideration of the receipt of payment of the purchase price of the Shares in U.S. currency by wire transfer, certified or cashier's check, or other method acceptable to the Company, in the Company's United States account designated by the Company. (b) On the Second Closing Date the Company shall deliver to an escrow agent mutually acceptable to the parties hereto, a certificate or certificates representing the Option Shares, registered in the name of the Purchaser, in consideration of the receipt of payment of the purchase price of the Option Shares in U.S. currency by wire transfer, certified or cashier's check, or other method acceptable to the Company, in the United States account designated by the Company. Section 2.3 Conclusion of Offering. The Closing Date and Second Closing Date shall be deemed to be the conclusion of the purchase and sale of the Shares and Option Shares, respectively. For purposes of clarifying the applicable restricted period (as such term is defined in Rule 902(m) of Regulation S ("Regulation S") of the Securities Act of 1933 (the "1933 Act")) for the Shares, the period commencing on the Closing Date and ending 40 days thereafter shall be deemed the "Restricted Period." For purposes of clarifying the restricted period for the Option Shares, the period commencing on the Second Closing Date and ending 40 days thereafter shall be deemed the "Second Restricted Period." Section 2.4 Release of Shares by Escrow Agent. The parties agree that the Escrow Agent shall hold the Shares and Option Shares for the benefit of the Purchaser for the duration of the Restricted Period and Second Restricted Period, as applicable; provided, that the Purchaser may retain the right to vote with respect to the Shares and/or Option Shares and the right to receive dividends while the Shares and/or the Option Shares are held by the Escrow Agent. Subject to the terms hereof, including Section 2.5 below, following the expiration of the Restricted Period and Second Restricted Period the Escrow Agent, at the direction of the Purchaser, shall deliver certificates representing the Shares and Option Shares, respectively, to the Purchaser, registered in the name of the Purchaser and free of any restrictive legend. Section 2.5 Transfer Restrictions. The Purchaser agrees that the Shares may not be transferred, sold, hypothecated, assigned, or otherwise disposed of for a period of one year following the Closing Date (the "Holding Period") and the Option Shares may not be transferred, sold, hypothecated, assigned, or otherwise disposed of for a period of one year following the Second Closing Date (the "Second Holding Period"). After the Holding Period and Second Holding Period, as applicable, the Shares and Option Shares will only be resold by it (a) in compliance with Regulation S, under which LG Chem has a right to freely transfer or dispose of any of the Shares or Option Shares after the Holding Period and Second Holding Period, as applicable, subject to the restrictions of this Agreement, (b) pursuant to an exemption from registration under the 1933 Act other than Regulation S, or (c) pursuant to an effective and current registration statement under the 1933 Act; provided, however, that the purchaser may retain the right to vote with respect to the Shares and/or Option Shares and the right to receive dividends during the Holding Period and Second Holding Period, as applicable. Moreover, in the event the Company files a registration statement with the Commission for a public 2 offering of securities, upon notice from the Company the Purchaser agrees not to transfer, offer, sell, hypothecate or otherwise dispose of any Common Stock for the period of time beginning with the date of the filing of the registration statement and ending 90 days after the closing of the public offering (such restriction referred to as the "Public Offering Restriction"). 3. Representations and Warranties of the Company --------------------------------------------- The Company hereby represents and warrants to the Purchaser as follows: Section 3.1 Organization and Standing. The Company is a corporation duly organized, and is validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite corporate power to own and operate its properties and assets, to carry on its business as presently conducted, to execute and deliver this Agreement, to sell and issue the Shares and Option Shares hereunder and to carry out and perform its obligations under the terms of this Agreement. Section 3.2 Authorization. All corporate action on the part of the Company, its directors and stockholders necessary to authorize the execution and delivery of this Agreement, the performance of the Company's obligations hereunder and the sale and issuance of the Shares and the Option Shares has been duly taken or will be taken before the Closing. This Agreement has been duly executed and delivered by the Company and is a valid and legally binding obligation of the Company, which is enforceable against the Company in accordance with its terms. The execution and delivery of this Agreement by the Company, the performance of its obligations hereunder and the sale and issuance of the Shares and Option Shares will not violate any law applicable to the Company or its Certificate of Incorporation or Bylaws or breach or be a default under (with or without the giving of notice or the lapse of time) any material contract, agreement or instrument to which the Company is a party. The Shares and Option Shares have been duly authorized and, when issued and paid for in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable and free and clear of all liens, encumbrances and adverse claims other than restrictions on transfer under this Agreement and applicable federal and state securities laws or those that are imposed by or through the Purchaser. Section 3.3 Registration Not Required. Subject to the truth and accuracy of the representations of the Purchaser set forth in Section 4 of this Agreement, the sale to the Purchaser of the Shares and Option Shares provided for in this Agreement and the issuance of the Shares and Option shares hereunder, are made pursuant to "Regulation S" of the 1933 Act and therefore are exempt from registration under the Securities Act and the registration requirements imposed by the securities laws of the State of Delaware, and neither the Company nor any person acting on its behalf will take any action hereafter that would cause the loss of such exemption. Section 3.4 Disclosure. The Company has delivered, and the Purchaser acknowledges receipt of, the Company's annual report on Form 10-K for the fiscal year ending December 31, 1995, the Company's quarterly report on Form 10-Q for the fiscal quarters ending March 31, 1996 and June 30, 1996 (collectively, the "Reporting Documents") and the Company's most recent 3 Registration Statement, dated May 30, 1996, Registration No. 333-3433, as filed with the Commission (the "Registration Statement"), which Reporting Documents and Registration Statement are true and correct in all respects. There has been no material adverse change in the Company's financial position or results, business or prospects since June 30, 1996. Section 3.5 Environmental Compliance. To the knowledge of the Company, the Company's operations and use of its assets do not violate in any material respect any applicable federal, state or local law, statute, ordinance, rule, regulation, order or notice requirement pertaining to (a) the condition or protection of air, groundwater, surface water, soil, or other environmental media, (b) the environment, including natural resources or any activity which affects the environment, or (c) the regulation of any pollutants, contaminants, waste, substances (whether or not hazardous or toxic), including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. (S) 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. (S) 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. (S) 1609 et seq.), the Clean Water Act (33 U.S.C. 1251 et seq.), the Clean Air Act (42 U.S.C. (S) 7401 et seq.), the Toxic Substances Control Act (17 U.S.C. (S) 2601 et seq.) and analogous federal, interstate, state and local requirements, as any of the foregoing may have been amended or supplemented from time to time. Section 3.6 Compliance with Other Laws. The Company is currently in compliance in all material respects with the terms of all licenses, permits and authorizations necessary for the lawful conduct of the business of the Company. The Company is not in violation of or in default with respect to, or in alleged violation of or alleged default with respect to, any applicable law or any applicable rule, regulation, or any writ or decree of any court or any governmental commission, board, bureau, agency, or instrumentality, or delinquent with respect to any report required to be filed with any governmental commission, board, bureau, agency or instrumentality, except for violations which, either singly or in the aggregate, do not and are not expected to result in a material adverse effect on the Company's assets or its financial condition. Section 3.7 Subsidiaries. Other than ImmunoPhamaceutics, Inc., a California based company, and wholly-owned subsidiary of the Company, there is no corporation, partnership, joint venture, business trust or other legal entity in which the Company, either directly or indirectly through one or more intermediaries, owns or holds beneficial or record ownership. Section 3.8 Litigation. Except as set forth in the Reporting Documents, there is no lawsuit, action, arbitration, mediation, administrative proceeding, investigation by a governmental authority, or other legal proceeding pending or, to the knowledge of the Company, threatened against the Company, which would have a material adverse effect on the Company's assets or its financial condition. In addition, the Company is not subject to any court order, writ, injunction, court decree, settlement agreement, or judgment that contains or orders any ongoing obligations (whether prohibitory or mandatory in nature). Section 3.9 Liabilities. The Company does not have any liabilities or obligations, either accrued, absolute, contingent, or otherwise, or have any knowledge of any potential liabilities or obligations, which would materially adversely affect the Company's assets or its financial condition, other than those reflected in the Reporting Documents. Section 3.10 Compliance with Securities Laws. All securities of the Company have been issued in compliance, in all material respects, with applicable federal or state securities laws. 4. Representations and Warranties of the Purchaser. ----------------------------------------------- The Purchaser hereby represents and warrants to the Company as follows: Section 4.1 Exempt Offering. The Purchaser understands that the Shares and Option Shares have not been registered under the Securities Act on the ground that the sale provided for in this Agreement and the issuance of the Shares and Option Shares hereunder are exempt from registration under the Securities Act pursuant to Rule 903 of Regulation S, that the Company's reliance on such exemption is predicated on the Purchaser's representations set forth herein, and that in order to obtain such exemption, the transfer of such Shares and Option Shares is restricted by Section 2.5(a), (b) and (c) of this Agreement. Section 4.2 Compliance with Transfer Restrictions. The Purchaser hereby covenants and agrees to comply with the transfer restrictions provided in Section 2.5. Section 4.3 Notification Requirement. Subject to the restrictions in this Agreement, LG Chem has a right to freely transfer or dispose of any of the Shares or Option Shares after the one year Holding Period and Second Holding Period, as applicable. LG Chem will, however, first consult with TBC before disposing of any of the Shares or Option Shares and will attempt to coordinate the sales of the Shares and Option Shares with TBC in the best interests of both parties. However, LG Chem may transfer the Shares and Option Shares in its sole discretion if the effort at coodination fails. Section 4.4 Investment Intent. The Purchaser is purchasing the Shares and Option Shares for the Purchaser's own account for purposes of investment and not for other persons and not with a view to the distribution of any of the Shares or Option Shares. Section 4.5 Information. The Purchaser has received a copy of the Registration Statement and the Reporting Documents and has carefully read the Registration Statement and the Reporting Documents. Other than those representations contained in this Agreement, the Registration Statement, or the Reporting Documents, in entering this Agreement the Purchaser has not relied on any other oral or written representations regarding the Company or its prospects. The Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the Offering and the business, properties, financial condition and prospects of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to the Purchaser in the Registration Statement and the Reporting Documents or otherwise. 4 Section 4.6 Non-U.S. Person. The Purchaser is a non-U.S. person (as defined below) and is not purchasing the Shares or the Option Shares for the account or benefit of a U.S. Person. The statements made in this Agreement concerning the Purchaser are true and correct. A non-U.S. person is a person who is not: (a) a natural person resident in the United States; (b) a partnership or corporation organized or incorporated under the laws of the United States; (c) an estate of which any executor or administrator is a U.S. person; (d) a trust of which any trustee is a U.S. person; (e) an agency or branch of a foreign entity located in the United States; (f) a non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (g) a discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and (h) a partnership or corporation if: (i) organized or incorporated under the laws of any foreign jurisdiction; and (ii) formed by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by "accredited Purchasers" (as defined in Regulation D under the Securities Act) who are not natural persons, estates, or trusts. (i) Notwithstanding the foregoing, any discretionary account or similar account (other than an estate or trust) held for the benefit or account of a non-U.S. person by a dealer or other professional fiduciary organized, incorporated, or (if an individual) resident in the United States shall not be deemed a "U.S. person." 5 (j) Notwithstanding the foregoing, any estate of which any professional fiduciary acting as executor or administrator is a U.S. person shall not be deemed a "U.S. person" if: (i) an executor or administrator of the estate who is not a U.S. person has sole or shared investment discretion with respect to the assets of the estate; and (ii) the estate is governed by foreign law. (k) Notwithstanding the foregoing, any trust of which any professional fiduciary acting as trustee is a U.S. person shall not be deemed a "U.S. person" if a trustee who is not a U.S. person has sole or shared investment discretion with respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is revocable) is a "U.S. person." (l) Notwithstanding the foregoing, an employee benefit plan established and administered in accordance with the law of a country other than the United States and customary practices and documentation of such country shall not be deemed a "U.S. person." (m) Notwithstanding the foregoing, any agency or branch of a U.S. person located outside the United States shall not be deemed a "U.S. person" if: (i) the agency or branch operates for valid business reasons; and (ii) the agency or branch is engaged in the business of insurance or banking and is subject to substantive insurance or banking regulation, respectively, in the jurisdiction where located. (n) The International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies, affiliates, and pension plans shall not be deemed "U.S. persons." Regulation S under the Securities Act defines "United States" to mean the United States of America, its territories and possessions, any State of the United States, and the District of Columbia. Section 4.7 Purchaser Sophistication; Suitability. The Purchaser is an "accredited purchaser" as that term is defined in Regulation D under the Securities Act and has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of investment in the Shares and Option Shares. The Purchaser has determined that 6 the Shares and Option Shares are a suitable investment for the Purchaser and that the Purchaser could bear the complete loss of the Purchaser's investment in the Shares and Option Shares. Section 4.8 Capacity: Enforceability. The Purchaser represents and warrants that this Agreement constitutes a valid and legally binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms. Section 4.9 Lawful Transaction. Neither the Purchaser nor the Company is violating the law of the Purchaser's domicile or of its principal place of business by conducting or participating in the Offering or the transactions contemplated by this Agreement. Section 4.10 Offering Structure. The Purchaser represents and warrants that the Purchaser is not acquiring the Shares or Option Shares in reliance on any other party acquiring shares of the Common Stock under the same or similar terms. Section 4.11 Indemnification. The Purchaser shall indemnify the Company, each of its directors and officers, each agent, each legal counsel and independent accountant of the Company and each person who controls the Company (within the meaning of the Securities Act), against any and all claims, losses and liabilities (and actions and proceedings in respect thereof) arising out of or related to any breach of any warranty or agreement made by the Purchaser in this Section 4 or any misrepresentation of the Purchaser contained herein and will reimburse the Company, such directors, officers, agents, persons or control persons for any legal or any other expense reasonably incurred in connection with investigating or defending any such claim, loss, liability, action or proceeding. Section 4.12 No Short Sales. The Purchaser agrees to refrain from "short" sales of the Common Stock prior to the Closing and for a period of one year following the Closing Date, and for so long as the Public Offering Restrictions apply. As to the Option Shares, the Purchaser agrees to refrain from "short" sales of the Common Stock prior to the Second Closing and for a period of one year following the Second Closing Date, and for so long as the Public Offering Restriction applies. The term "short sale" is defined by Rule 3b-3 of the Securities and Exchange Act of 1934 as "any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller." 5. Conditions to Purchaser's Obligations at Closing. ------------------------------------------------ The Purchaser's obligations to purchase the Shares and Option Shares are subject to the fulfillment on or before the Closing Date and Second Closing Date, as applicable, of the following conditions to the extent not waived by the Purchaser. Section 5.1 Government Approval. Any Korean governmental clearance necessary for consummating the sale of the Shares or Option Shares, as the case may be, shall have been obtained. 7 Section 5.2 Representations and Warranties Correct. The representations and warranties made by the Company in Section 3 hereof shall be true and correct when made, and shall be true and correct in all material respects on the Closing Date and Second Closing Date, as applicable. Section 5.3 Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date and Second Closing Date, as applicable, shall have been performed or complied with in all respects. Section 5.4 Closing Date. The Closing Date shall be on or before October 15, 1996. Section 5.5 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated on the Closing Date and Second Closing Date, as applicable, and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the special counsel to the Purchaser, and such special counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. Section 5.6 Strategic Alliance. The Company and the Purchaser shall have entered into the Strategic Alliance. Section 5.7 Legal Opinion. The company will cause its legal counsel to issue a legal opinion on the Closing Date. 6. Conditions to Company's Obligations at Closing. ----------------------------------------------- The Company's obligation to sell the Shares and Option Shares is subject to the fulfillment on or before the Closing Date and Second Closing Date, as applicable, of the following conditions to the extent not waived by the Company: Section 6.1 Governmental Approval. Any Korean governmental clearance necessary for consummating the sale of the Shares or Option Shares, as the case may be, shall have been obtained. Section 6.2 Closing Date; Receipt of Payment. The Closing Date shall be on or before October 15, 1996, and the Company shall have received payment in U.S. currency in its designated bank account located in the United States for the Shares and Option Shares, as applicable. Section 6.3 Representations Correct. The representations and warranties made in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date and Second Closing Date, as applicable. Section 6.4 Qualifications, Legal Investment. No stop order or other order enjoining the sale of the Shares or Option Shares, as applicable, shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company, threatened by the Commission or any other person or governmental authority. On the Closing Date and Second Closing Date, the sale and issuance of the Shares and Option Shares, respectively, shall be legally permitted by all laws and regulations to which the Purchaser and the Company are subject. 8 7. Dispute Resolutions. All disputes under this Agreement shall be settled, if possible, through good faith negotiations between the parties. In the event such good faith negotiations are unsuccessful, either party will, after 30 days' written notice to the other, submit the matter in dispute to the American Arbitration Association ("AAA") to be settled by arbitration by a panel of three arbitrators in New York, New York in accordance with the commercial arbitration rules of the AAA. Each party shall appoint one arbitrator and the two arbitrators so named will select the third, who shall act as chair of the arbitration panel. If one party fails to appoint its arbitrator or if the parties' arbitrators cannot agree on the selecting of the third, the AAA shall make the necessary appointments. The arbitrators shall have the authority to grant specific performance and to allocate between the parties the costs of arbitration in such equitable manner as they may determine. Upon reasonable notice and prior to any hearing, the parties will allow document discovery and will disclose all materials relevant to the subject matter of the dispute within 60 days following selection of the arbitrators. The arbitrators shall make final determinations as to any discovery disputes. A hearing on the matter in dispute shall commence within 90 days following selection of the arbitrators and the decision of the arbitrators shall be rendered no later than 60 days after commencement of such hearing. The determination of the arbitrators shall be conclusive and binding upon the parties and judgment may be entered thereon and enforced by any court of competent jurisdiction, including the courts of the State of New York or the United States District Court for the Southern District of New York, and each party hereby irrevocably consents to the jurisdiction of such courts for such purpose. 8. Miscellaneous ------------- Section 8.1 Survival. The representations, warranties, covenants and agreements made by the parties herein shall survive any investigation made by the Purchaser or the Company and shall survive the Closing Date and Second Closing Date. Section 8.2 Expenses. The Company, the Escrow Agent and the Purchaser shal each bear their own expenses and legal fees incurred on their behalf with respect to this Agreement and the transactions contemplated hereby. Section 8.3 Notices. Any notice, request or other communication required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person or transmitted by telecopier (with receipt confirmed) to a party at the address or telecopy number, as applicable, set forth below (as any such address or telecopier number may be changed from time to time by notice similarly given): If to the Company: Texas Biotechnology Corporation 7000 Fannin, Suite 1920 Houston, Texas 77030 9 Attention: David B. McWilliams Telephone: (713) 796-8822 Facsimile: (713) 796-8232 If to the Purchaser: LG Chemical, Ltd. LG Twin Tower 20, Yoido-dong, Yongdungpo-gu Seoul 150-721, Korea Attn: Kyu D. Kim, Ph.D. Telephone: (02) 3773-7270 Facsimile: (02) 3773-7967 Section 8.4 Successors and Assigns. Except as otherwise provided herein, the terms of this Agreement shall inure to the benefit of and be binding upon the respective heirs, legal representatives and corporate or partnership successors of the parties. The Purchaser may not assign its rights to purchase Common Stock hereunder without the prior written consent of the Company. Section 8.5 This Agreement. This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof and it supersedes and discharges all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter. There are no oral conditions precedent to the effectiveness of this Agreement. Section 8.6 Non-Waiver. Neither the failure of nor any delay by any party to this Agreement to enforce any right hereunder or to demand compliance with its terms is a waiver of any right hereunder. No action taken pursuant to this Agreement on one or more occasions is a waiver of any right hereunder or constitutes a course of dealing that modifies this Agreement. Section 8.7 Waivers. No waiver of any right or remedy under this Agreement shall be binding on any party unless it is in writing and is signed by the party to be charged. No such waiver of any right or remedy under any term of this Agreement shall in any event be deemed to apply to any subsequent default under the same or any other term contained herein. Section 8.8 Amendments. No amendments, modification or termination of this Agreement shall be binding on any party hereto unless it is in writing and is signed by the party to be charged. Section 8.9 Severability. The terms of this Agreement are severable and the invalidity of all or any part of any term of this Agreement shall not render invalid the remainder of this Agreement or the remainder of such term. If any term of this Agreement is so broad as to be unenforceable, such term shall be interpreted to be only so broad as is enforceable. 10 Section 8.10 Third Parties. Nothing herein expressed or implied is intended or shall be construed to give any person other than the parties hereto any rights or remedies under this Agreement. Section 8.11 Saturdays, Sundays and Holidays. Where this Agreement authorizes or requires a payment or performance on a Saturday, Sunday or public holiday, such payment or performance shall be deemed to be timely if made on the next succeeding business day. Section 8.12 Rules of Construction. In this Agreement, unless the context otherwise requires, words of the masculine gender include the feminine and the neuter, and when the sense so indicates, words of the neuter gender may refer to any gender. The captions and section numbers appearing in this Agreement are inserted only as a matter of convenience. They do not define, limit or describe the scope or intent of the provisions of this Agreement. Section 8.13 Counterparts. This Agreement may be executed in any number of counterparts, all of which shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing one or more counterparts. Section 8.14 Governing Law. The validity, terms, performance and enforcement of this Agreement shall be governed by laws of the State of New York that are applicable to agreements negotiated, executed, delivered and performed solely in the State of New York. 11 IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to be duly executed by its duly authorized officer on this 10th day of October 1996. TEXAS BIOTECHNOLOGY CORPORATION By: /s/ D. B. MCWILLIAMS ---------------------------- Name: -------------------------- Title: ------------------------- LG CHEMICAL, LTD. By: /s/ YUNG JAE CHOI ---------------------------- Name: -------------------------- Title: ------------------------- 12 EXHIBIT A ESCROW AGREEMENT ESCROW AGREEMENT ---------------- THIS ESCROW AGREEMENT is entered into as of this 10th day of October 1996, by and among Texas Biotechnology Corporation, a Delaware corporation ("TBC"), LG Chemical, Ltd., a Korean corporation ("LG Chem"), and LG Securities ("LG Securities"), with its principal offices in Seoul, Korea (the "Escrow Agent"). WITNESSETH: ---------- WHEREAS, TBC AND LG Chem have agreed to enter into the Common Stock Purchase Agreement (the "Stock Purchase Agreement"); WHEREAS, LG Chem has agreed that the shares of TBC's common stock, par value $.005 per share (the "Common Stock"), issued to LG Chem pursuant to Section 2.2(a) of the Stock Purchase Agreement shall be held in escrow in accordance with this Escrow Agreement; and WHEREAS, LG Securities is designated to act as Escrow Agent for the parties hereto under the terms of this Escrow Agreement and pursuant to the terms of the Stock Purchase Agreement, the pertinent provisions of which are incorporated herein by reference. NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. Appointment of Escrow Agent. TBC and LG Chem hereby appoint LG Securities as Escrow Agent and it hereby agrees to serve as Escrow Agent pursuant to the terms of this Escrow Agreement and the Stock Purchase Agreement. 2. Deposit of Escrowed Stock. Pursuant to the terms of the Stock Purchase Agreement, TBC shall tender a certificate or certificates representing a total of 1,250,000 shares of Common Stock (the "Shares"), registered in the name of LG Chem, to the Escrow Agent on the Closing Date (as such term is defined in Section 2.1 of the Stock Purchase Agreement). The Shares are referred to herein as the "Escrowed Stock." The Escrow Agent shall hold the Escrowed Stock pursuant to the terms of this Escrow Agreement and the Stock Purchase Agreement. 3. Administration and Investment of Escrowed Stock. The Escrow Agent agrees to receive and hold in escrow the Escrowed Stock pursuant to the terms of this Escrow Agreement and to perform the acts and duties imposed upon it under the terms and conditions of this Escrow Agreement. It is expressly agreed and understood by the parties hereto that the Escrow Agent shall not in any way be liable for losses on any investments, including, but not limited to, losses from market risks due to premature liquidation, or resulting from other actions taken pursuant to this Escrow Agreement. 4. Disbursement of Escrowed Stock. Upon written notification from TBC and LG Chem that the Restricted Period (as such term is used in Section 2.3 of the Stock Purchase Agreement) has elapsed, the Escrow Agent shall, at LG Chem's direction, disburse the Escrowed Stock to LG Chem. 5. Termination of Escrow Agreement. Upon delivery of all the Escrowed Stock, this Escrow Agreement shall terminate. 6. Dividends and Voting Rights, etc. Any cash dividends which may be declared and paid by TBC in respect of the Escrowed Stock shall be paid by TBC to LG Chem in proportion to LG Chem's ownership of Escrowed Stock. LG Chem shall have the right to vote the Escrowed Stock during the time such shares are held in escrow pursuant to the terms hereof. All shares of Common Stock payable in respect of Escrowed Stock as a result of any stock split or other non-cash distributions (including a stock dividend) shall be deposited with the Escrow Agent by TBC. 7. Deposit Records. The Escrow Agent shall forward all account records or statements related to the Escrowed Stock to TBC and LG Chem as soon as practicable upon receipt of the same. The Escrow Agent shall deliver to TBC and LG Chem, upon final disbursement of the Escrowed Stock, a complete accounting of all transactions relating to this Escrow Agreement. LG Chem shall be responsible for any taxes arising from dividends declared on the Escrowed Stock. Any payments of income shall be subject to applicable withholding regulations then in force in the United States or any other jurisdiction, as the case may be. 8. Scope of Undertaking. The Escrow Agent's duties and responsibilities in connection with this Escrow Agreement shall be purely ministerial and shall be limited to those expressly set forth in this Escrow Agreement. The Escrow Agent is not a principal, participant or beneficiary in any transaction underlying the Escrow Agreement and shall have no duty to inquire beyond the terms and provisions hereof. The Escrow Agent shall have no responsibility or obligation of any kind in connection with this Escrow Agreement or the Escrowed Stock and shall not be required to deliver the Escrowed Stock or any part thereof or take any action with respect to any matters that might arise in connection therewith, other than to receive, hold and deliver the Escrowed Stock as herein provided. Without limiting the generality of the foregoing, it is hereby expressly agreed and stipulated by the parties hereto that the Escrow Agent shall not be required to exercise any discretion hereunder and shall have no investment or management responsibility and, accordingly, shall have no duty to, or liability for its failure to, provide investment recommendations or investment advice to LG Chem. The Escrow Agent shall not be liable for any error in judgment, any act or omission, any mistake of law or fact, or for anything it may do or refrain from doing in connection herewith, except for, subject to Section 9 below, its own willful misconduct or gross negligence. It is the intention of the parties hereto that the Escrow Agent shall never be required to use, advance or risk its own funds or otherwise incur financial liability in the performance of any of its duties or the exercise of any of its rights and powers hereunder. 2 9. Reliance; Liability. The Escrow Agent may rely on, and shall not be liable for, following the instructions contained in any written notice, instruction or request or other paper furnished to it hereunder or pursuant hereto and believed by it to have been signed or presented by the proper party or parties. The Escrow Agent shall be responsible for holding and disbursing the Escrowed Stock pursuant to this Escrow Agreement; provided, however, that in no event shall the Escrow Agent be liable for any lost profits, lost savings or other special, exemplary, consequential or incidental damages (except those lost profits, savings or damages arising out of the Escrow Agent's willful misconduct) in excess of the Escrow Agent's fee hereunder and provided, further, that the Escrow Agent shall have no liability for any loss arising from any cause beyond its control, including, but not limited to, the following: (a) acts of God, force majeure, including, without limitation, war (whether or not declared or existing), revolution, insurrection, riot, civil commotion, accident, fire, explosion, stoppage of labor, strikes and other differences with employees; (b) the act, failure or negligence of TBC, LG Chem, or any agent or correspondent or any other person selected by the Escrow Agent; (c) any delay, error, omission or default of any mail, courier, telegraph, cable or wireless agency or operator; or (d) the acts or edicts of any government or governmental agency or other group or entity exercising governmental powers. The Escrow Agent is not responsible or liable in any manner whatsoever for the sufficiency, correctness, genuineness or validity of the subject matter of this Escrow Agreement or any part hereof or for the transaction or transactions requiring or underlying the execution of this Escrow Agreement, the form or execution hereof, for the identity or authority of any person executing this Escrow Agreement or any part hereof, or for depositing the Escrowed Stock. 10. Right of Interpleader. Should any controversy arise involving the parties hereto or any of them or any other person, firm or entity with respect to this Escrow Agreement or the Escrowed Stock, or should a substitute escrow agent fail to be designated as provided in Section 17 hereof, or if the Escrow Agent shall be in doubt as to what action to take, the Escrow Agent shall have the right, but not the obligation, either to (a) withhold delivery of the Escrowed Stock until the controversy is resolved, the conflicting demands are withdrawn or its doubt is resolved or (b) institute a petition for interpleader in any court of competent jurisdiction to determine the rights of the parties hereto. In the event the Escrow Agent is a party to any dispute, the Escrow Agent shall have the additional right to refer such controversy to binding arbitration. Should a petition for interpleader be instituted, or should the Escrow Agent be threatened with litigation or become involved in litigation or binding arbitration in any manner whatsoever in connection with this Escrow Agreement or the Escrowed Stock, then, as between (a) TBC and LG Chem on the one hand and (b) the Escrow Agent on the other, TBC and LG Chem hereby jointly and severally agree to reimburse the Escrow Agent for its attorneys' fees and any and all other expenses, losses, costs and damages incurred by the Escrow Agent in connection with or resulting from such threatened or actual litigation or arbitration. 11. Indemnification. TBC and LG Chem hereby jointly and severally indemnify the Escrow Agent, its officers, directors, partners, employees and agents (each herein called an "Indemnified Party") against, and hold each Indemnified Party harmless from, any and all expenses, including, without limitation attorneys' fees and court costs, losses, costs, damages and claims, 3 including, but not limited to, costs of investigation, litigation and arbitration, tax liability and loss on investments suffered or incurred by any Indemnified Party in connection with or arising from or out of this Escrow Agreement, except such acts or omissions as may result from the willful misconduct or gross negligence of such Indemnified Party. IT IS THE EXPRESS INTENT OF EACH OF TBC AND LG CHEM TO INDEMNIFY AND HOLD HARMLESS THE INDEMNIFIED PARTY'S OWN NEGLIGENT ACTS OR OMISSIONS. 12. Compensation and Reimbursement of Expenses. LG Chem hereby agrees to pay the Escrow Agent for its services hereunder the fee of one million (1,000,000) won. The Escrow Agent shall bear all out-of-pocket expenses incurred by it in connection with the performance of its duties and enforcement of its rights hereunder and otherwise in connection with the preparation, operation, administration and enforcement of this Escrow Agreement, including, without limitation, attorneys' fees, brokerage costs and related expenses incurred by the Escrow Agent. LG Chem shall be liable to the Escrow Agent for the payment of the Escrow Agent's fee of one million won. In the event LG Chem for any reason fails to pay such fee when due, such unpaid fee and shall be charged to and set off and paid from the Escrowed Stock by the Escrow Agent without any further notice. 13. Lien. The Escrow Agent is hereby granted a lien upon, and security interest in, the right, title and interest in and to all of the Escrowed Stock, as security for the payment and performance of the parties' obligations owing to the Escrow Agent hereunder, including, without limitation, the parties' obligations of payment, indemnity and reimbursement provided for hereunder, which lien and security interest may be enforced by the Escrow Agent without notice by charging, and setting off and paying from, the Escrowed Stock, as applicable, any and all amounts then owing to it pursuant to this Escrow Agreement or by appropriate foreclosure proceedings. 14. Notices. Any notice, request or other communication required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person or transmitted by telecopier (with receipt confirmed) to a party at the address or telecopy number, as applicable, set forth below (as any such address or telecopier number may be changed from time to time by notice similarly given): If to the Escrow Agent: LG Securities --------------------------------- --------------------------------- --------------------------------- --------------------------------- --------------------------------- 4 If to TBC: Texas Biotechnology Corporation 7000 Fannin, Suite 1920 Houston, Texas 77030 Attn: President Telefax No.: (713) 796-8232 Telephone No.: (713) 796-8822 If to LG Chem: LG Chemical, Ltd. LG Twin Tower 20, Yoido-dong, Yongdungpo-gu Seoul 150-721, Korea Attn: Kyu D. Kim, Ph.D. Telephone: (02) 3773-7270 Facsimile: (02) 3773-7967 15. Consultation with Legal Counsel. The Escrow Agent may consult with its counsel or other counsel satisfactory to it concerning any question, relating to its duties or responsibilities hereunder or otherwise in connection herewith and shall not be liable for any action taken, suffered or omitted by it in good faith upon the advice of such counsel. 16. Governing Law. The validity, terms, performance and enforcement of this Agreement shall be governed by laws of the State of New York that are applicable to agreements negotiated, executed, delivered and performed solely in the State of New York. 17. Resignation. The Escrow Agent may resign hereunder upon ten (10) days' prior written notice to TBC and LG Chem. Upon the effective date of such resignation, the Escrow Agent shall deliver the Escrowed Stock to any substitute escrow agent designated by TBC and LG Chem in writing. If TBC and LG Chem fail to designate a substitute escrow agent within ten (10) days after the giving of such notice, the Escrow Agent may institute a petition for interpleader. The Escrow Agent's sole responsibility after such 10-day notice period expires shall be to hold the Escrowed Stock (without any obligation to reinvest the same) and to deliver the same to a designated substitute escrow agent, if any, or in accordance with the directions of a final order or judgment of a court of competent jurisdiction, at which time of delivery the Escrow Agent's obligations hereunder shall cease and terminate. 18. Assignment. This Escrow Agreement shall not be assigned by either TBC or LG Chem without the prior written consent of the Escrow Agent (such assigns of TBC or LG Chem to which the Escrow Agent consents, if any, and the Escrow Agent's assigns being hereafter referred to collectively as "Permitted Assigns"). 5 19. Severability. If one or more of the provisions hereof shall for any reason be held to be invalid, illegal or unenforceable in any respect under applicable law, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, and this Escrow Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein, and the remaining provisions hereof shall be given full force and effect. 20. Termination. This Escrow Agreement shall terminate upon disbursement of all the Escrowed Stock in accordance with Section 4 hereof; provided, however, that in the event any fees, expenses, costs or otherwise, required to be paid to the Escrow Agent hereunder are not fully and finally paid prior to termination, the provisions of Section 12 hereof shall survive the termination hereof and, provided further, that the last two sentences of Section 10 hereof and the provisions of Section 11 hereof shall, in any event, survive the termination hereof. 21. General. The section headings contained in this Escrow Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Escrow Agreement. This Escrow Agreement and any affidavit, certificate, instrument, agreement or other document required to be provided hereunder may be executed in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute but one and the same instrument. Unless the context shall otherwise require, the singular shall include the plural and vice-versa, and each pronoun in any gender shall include all other genders. The terms and provisions of this Escrow Agreement constitute the entire agreement among the parties hereto in respect of the subject matter hereof. THIS ESCROW AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR OR CONTEMPORANEOUS ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This Escrow Agreement or any provision hereof may be amended, modified, waived or terminated only by written instrument duly signed by the parties hereto. This Escrow Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, devisees, executors, administrators, personal representatives, successors, trustees, receivers and Permitted Assigns. This Escrow Agreement is for the sole and exclusive benefit of TBC, LG Chem and the Escrow Agent, and nothing in this Escrow Agreement, express or implied, is intended to confer or shall be construed as conferring upon any other person any rights, remedies or any other type or types of benefits. All capitalized terms used in this Escrow Agreement which are not otherwise defined herein shall have the meaning assigned to them in the Stock Purchase Agreement unless the context hereof otherwise requires. 6 IN WITNESS WHEREOF, the parties have signed this Escrow Agreement as of the date first above written. LG SECURITIES By: /s/ K. S. JUNG -------------------------------------- Its: K. S. Jung, Executive Vice President ------------------------------------- TEXAS BIOTECHNOLOGY CORPORATION By: /s/ D. B. MCWILLIAMS -------------------------------------- David B. McWilliams, President LG CHEMICAL, LTD. BY: /s/ YUNG JAE CHOI -------------------------------------- Print Name: Yung Jae Choi ------------------------------ Title: President & C.E.O. ----------------------------------- 7 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 808,126 11,738,650 122,500 0 0 13,332,615 7,611,538 4,294,237 16,649,916 3,233,544 0 0 0 121,017 13,295,355 16,649,916 0 1,102,500 0 0 0 0 0 (5,630,084) 0 (5,630,084) 0 0 0 (5,630,084) (.23) .00
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