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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 9, 2000 REGISTRATION NO. 333-96025 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ TANOX, INC. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> <C> DELAWARE 2836 76-0196733 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.) </TABLE> ------------------------------------ 10301 STELLA LINK, SUITE 110 HOUSTON, TEXAS 77025-5497 (713) 664-2288 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------------ NANCY T. CHANG, PH.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER TANOX, INC. 10301 STELLA LINK, SUITE 110 HOUSTON, TEXAS 77025-5497 (713) 664-2288 (Name, address, including zip code, and telephone number, including area code, of registrant's agent for service) ------------------------------------ COPIES TO: <TABLE> <S> <C> WILBURN O. MCDONALD, JR., ESQ. RODD M. SCHREIBER, ESQ. CHAMBERLAIN, HRDLICKA, SKADDEN, ARPS, SLATE, MEAGHER WHITE, WILLIAMS & MARTIN & FLOM (ILLINOIS) 1200 SMITH STREET, SUITE 1400 333 WEST WACKER DRIVE HOUSTON, TEXAS 77002-4310 CHICAGO, ILLINOIS 60606 </TABLE> ------------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------------------ CALCULATION OF REGISTRATION FEE <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------ PROPOSED TITLE OF EACH CLASS OF MAXIMUM AMOUNT OF SECURITIES TO BE AGGREGATE REGISTRATION REGISTERED OFFERING PRICE(1) FEE(2) - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Common Stock, $.01 par value per share...................... $241,500,000 $63,756 - ------------------------------------------------------------------------------------------------------------------------ </TABLE> (1) Estimated solely for the purpose of calculating the amount of the Registration Fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended. (2) The company has previously paid $33,264 of the registration fee. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ <PAGE> SUBJECT TO COMPLETION, DATED MARCH 9, 2000 THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. 7,000,000 SHARES TANOX, INC. COMMON STOCK $ PER SHARE - -------------------------------------------------------------------------------- This is an initial public offering of common stock of Tanox, Inc. Tanox expects that the price to the public in the offering will be between $27.00 and $30.00 per share. The market price of the shares after the offering may be higher or lower than the offering price. We have applied to include the common stock on the Nasdaq National Market under the symbol "TNOX." INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8. PER SHARE TOTAL ---------- ---------- Price to the public.................. $ $ Underwriting discount................ Proceeds to Tanox.................... Tanox has granted an over-allotment option to the underwriters. Under this option, the underwriters may elect to purchase a maximum of 1,050,000 additional shares from Tanox within 30 days following the date of this prospectus to cover over-allotments. - -------------------------------------------------------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CIBC WORLD MARKETS ROBERTSON STEPHENS WARBURG DILLON READ LLC ADAMS, HARKNESS & HILL, INC. KBC SECURITIES The date of this prospectus is , 2000. <PAGE> (This page has been intentionally left blank) <PAGE> TABLE OF CONTENTS PAGE ---- Prospectus Summary ...................................................... 4 Risk Factors ............................................................ 8 Forward-Looking Statements .............................................. 19 Use of Proceeds ......................................................... 20 Dividend Policy ......................................................... 20 Capitalization .......................................................... 21 Dilution ................................................................ 22 Selected Consolidated Financial Data .................................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................. 24 Business ................................................................ 29 Management .............................................................. 47 Principal Stockholders .................................................. 56 Certain Transactions .................................................... 58 Description of Capital Stock ............................................ 59 Shares Eligible for Future Sale ......................................... 62 Underwriting ............................................................ 64 Legal Matters ........................................................... 66 Experts ................................................................. 66 Where You Can Find More Information ..................................... 66 Index to Consolidated Financial Statements .............................. F-1 3 <PAGE> PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE SHARES. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. THE COMPANY OVERVIEW Tanox identifies and develops therapeutic monoclonal antibodies to address significant unmet medical needs in the areas of immunology, infectious diseases and cancer. Monoclonal antibodies are genetically engineered antibodies that target a specific foreign substance, or antigen. E25, our most advanced product in development, is an anti-immunoglobulin E, or anti-IgE, antibody. We are developing E25 in collaboration with Novartis Pharma AG and Genentech, Inc. E25 has successfully completed Phase III clinical trials in both allergic asthma and seasonal allergic rhinitis (hay fever). Based on the results of these trials, our collaboration partners intend to file for marketing approval in the United States and Europe in mid-2000. In addition, we are developing a number of monoclonal antibodies to treat other allergic diseases or conditions, such as severe allergic reactions to peanuts, autoimmune diseases, HIV and to restore the suppressed immune systems of chemotherapy patients. MONOCLONAL ANTIBODY THERAPEUTICS Monoclonal antibodies represent an exciting area of novel therapeutic development. Because of advances in antibody technologies, scientists are now able to develop antibody products that can be administered to patients on a chronic basis with reduced concern for adverse responses by the human immune system. Companies can also manufacture these antibody products more cost- effectively. As a result, a large number of monoclonal antibodies are now in clinical and preclinical development. According to an industry survey, 74 out of 350, or 21% of all, biotechnology medicines in clinical trials in 1998 were antibodies. The FDA has approved eight therapeutic antibodies, six of them in the last three years. In 1999, total sales of these products exceeded $1.3 billion. OUR PRODUCTS IN DEVELOPMENT E25. In 1987, we discovered a novel approach for treating allergies and asthma by using monoclonal antibodies to inhibit IgE. E25, a product based on this discovery, is a humanized (human-like) anti-IgE monoclonal antibody in development for allergic asthma and allergic rhinitis. We estimate that, in the United States, allergic asthma afflicts approximately 11 million people, and allergic rhinitis afflicts approximately 40 million people, of whom approximately 32 million are seasonal sufferers. A pivotal Phase III clinical trial and a pivotal Phase IIb clinical trial have demonstrated E25's ability to prevent or reduce symptoms of seasonal allergic rhinitis. Two Phase III clinical trials in allergic asthma have demonstrated E25's ability to reduce symptoms related to asthma. Clinicians who participated in the studies presented the results of those trials at the American Academy of Allergy Asthma and Immunology in March 2000. As mentioned above, Novartis and Genentech intend to file for marketing approval for both indications in the United States and Europe in mid-2000. OTHER PRODUCT CANDIDATES. Using our comprehensive understanding of the human immune system, we are building a diverse pipeline of monoclonal antibody product candidates. In addition to E25, we have two other products in clinical development and we are evaluating several product candidates in preclinical and research studies. o HU-901 is a humanized anti-IgE monoclonal antibody similar to E25 that is in a Phase I/II trial to test its effectiveness in reducing severe allergic reactions to peanuts. According to a recently published survey, peanut or tree nut (e.g., walnut, almond and cashew) allergy affects about 3 million people in the United States. If our clinical trial indicates that Hu-901 reduces sensitivity 4 <PAGE> to peanuts, we may also investigate its benefit to patients with other food allergies. Novartis and Genentech are currently disputing our right to independently develop this product. o 5D12 is an anti-CD40 monoclonal antibody that we are developing to treat autoimmune diseases. We are currently conducting a Phase I/II trial in patients with Crohn's disease. We expect the results of this trial to play an important role in determining clinical indications that we intend to pursue with this product. We have exclusive rights to 5D12 in Europe and Japan under a license from Chiron Corporation. We believe potential autoimmune disease indications, such as Crohn's disease, rheumatoid arthritis, multiple sclerosis and psoriasis, represent significant market opportunities in Europe and Japan. o 5A8 is an anti-CD4 antibody that is in preclinical development for treating HIV. o 166-32 is a complement factor D inhibiting antibody in research for treating acute inflammation. o 163-93 is an anti-G-CSF receptor activating antibody in research for treating neutropenia, or suppression of the immune system caused by depletion of white blood cells during chemotherapy. OUR STRATEGY Our objective is to leverage our expertise in monoclonal antibodies and our understanding of the human immune system to advance our product pipeline and become a profitable biopharmaceutical company. We intend to accomplish this through the following strategic initiatives: o continuing to identify and develop novel monoclonal antibodies using our demonstrated expertise in immunology and monoclonal antibody technology; o maximizing the market opportunity for anti-IgE antibodies by exploring indications beyond allergic asthma and seasonal allergic rhinitis; o expanding our product pipeline through attractive acquisition and in-licensing opportunities; o forming strategic collaborations to complement our research and development resources and enhance the value of our product development programs; and o capturing additional value from our pipeline by retaining marketing rights for products that we can effectively sell using a small, targeted sales force. OTHER INFORMATION We were incorporated in Texas in March 1986 and we reincorporated in Delaware in January 2000. Our corporate headquarters, manufacturing facility and principal research laboratories are located at 10301 Stella Link, Houston, Texas 77025-5497 and our telephone number is 713-664-2288. Tanox and our logo are our registered service marks. 5 <PAGE> THE OFFERING <TABLE> <S> <C> Common stock offered................. 7,000,000 shares Common stock to be outstanding after 40,788,731 shares the offering....................... Use of proceeds...................... For research and development activities, for capital expenditures, to finance possible acquisitions and investments in technology, products or businesses and for working capital and other general corporate purposes. Proposed Nasdaq National Market TNOX symbol............................. </TABLE> The share amounts in the table above are based on the number of shares outstanding at March 7, 2000 and excludes: o 2,747,733 shares of common stock issuable on exercise of outstanding options at a weighted average exercise price of $5.06 per share; and o 8,200,480 shares of common stock reserved for issuance pursuant to future grants under our stock option plans. Unless otherwise stated, all information contained in this prospectus assumes no exercise of the underwriters' over-allotment option. On February 1, 2000, we effected a 1.6 for 1 stock split by paying a stock dividend. All common share numbers in this prospectus reflect the stock split. 6 <PAGE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (in thousands, except per share data) YEAR ENDED DECEMBER 31, --------------------------------- 1997 1998 1999 --------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenues............................. $ 8,939 $ 2,422 $ 1,405 Research and development............. 6,926 11,933 17,163 General and administrative........... 2,230 3,431 8,582 --------- ---------- ---------- Total operating costs and expenses... 9,156 15,364 25,745 --------- ---------- ---------- Income (loss) from operations........ (217) (12,942) (24,340) Other income, net.................... 1,045 1,240 1,028 --------- ---------- ---------- Income (loss) before income taxes.... 828 (11,702) (23,312) (Provision) benefit of income taxes.............................. (198) 1,533 (34) --------- ---------- ---------- Net income (loss).................... $ 630 $ (10,169) $ (23,346) ========= ========== ========== Earnings (loss) per share: Basic........................... $ 0.02 $ (0.35) $ (0.75) ========= ========== ========== Diluted......................... $ 0.02 $ (0.35) $ (0.75) ========= ========== ========== Shares used in computing earnings (loss) per share: Basic........................... 27,909 29,105 31,113 Diluted......................... 31,190 29,105 31,113 DECEMBER 31, 1999 -------------------------- ACTUAL AS ADJUSTED --------- -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........................ $ 47,254 $231,704 Working capital...................... 42,718 227,168 Total assets......................... 55,328 239,778 Long term debt....................... 10,000 10,000 Retained earnings (deficit).......... (30,461) (30,461) Total stockholders' equity........... 40,007 224,457 The as adjusted balance sheet data in the table above reflects the sale of 7,000,000 shares of common stock in this offering at an assumed public offering price of $28.50 per share, after deducting estimated underwriters' discounts and commissions and offering expenses. 7 <PAGE> RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. WE HAVE A HISTORY OF NET LOSSES; WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND WE MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY. We have incurred net losses since our inception. As of December 31, 1999, we had an accumulated deficit of approximately $30.5 million, including a net loss of approximately $23.3 million for the year ended December 31, 1999. Our losses have primarily been the result of costs incurred in our research and development programs and from our general and administrative costs. We have not earned any revenues from commercial sales of any of our therapeutic products, and we do not expect sales to commence until at least 2001, if at all. We have funded our operations principally from licensing fees and milestone payments under our current or former collaborations and private placements of our common stock. We expect to continue to incur substantial operating losses for the foreseeable future, particularly as we increase our research and development, manufacturing, clinical trial and administrative activities. We expect that losses will continue until such time, if ever, that we are able to generate sufficient revenue from milestone payments and royalties on our lead product candidate, E25, to cover our expenses. Our ability to achieve and maintain long term profitability depends to a significant extent on obtaining regulatory approval for and successfully commercializing E25, and also on successfully completing preclinical and clinical trials, obtaining required regulatory approvals and successfully developing, manufacturing and marketing our other current and future product candidates. We cannot assure you that we will be able to achieve any of the foregoing or that we will be profitable even if we successfully commercialize our products. FAILURE TO COMMERCIALIZE OUR LEAD PRODUCT CANDIDATE, E25, WOULD HAVE A SIGNIFICANT AND ADVERSE EFFECT ON US AND OUR STOCK PRICE. E25 is our lead product candidate. Our success will depend, to a great degree, on the success of E25. In order to successfully commercialize E25, our collaborators, Novartis and Genentech, must be able to, among other things, obtain regulatory approvals for and achieve market acceptance of E25. Neither the U.S. Food and Drug Administration, or FDA, nor any European regulatory agency, has approved E25. Novartis and Genentech intend to file a biologics license application, or BLA, for E25 in the United States and apply for registration of E25 in Europe by mid-2000. We cannot assure you that the FDA or other regulatory authorities will accept these filings, that E25 will be approved in a timely manner or that it will be approved at all. Even if the FDA approves E25, we cannot be certain that physicians, patients, insurers or other third-party payors will accept E25 as a treatment for its approved indications in the United States or in any foreign markets. A number of factors may affect the rate and level of E25's market acceptance including: o regulatory developments related to manufacturing or using E25; o E25's price relative to other products or competing treatments; o the effectiveness of Novartis' and Genentech's sales and marketing efforts; o the perception by physicians and other members of the healthcare community of E25's safety, efficacy and benefits compared to those of competing products or therapies; o the willingness of physicians to adopt a new allergy treatment regimen; o the availability of third-party reimbursement; and o unfavorable publicity concerning E25 or comparable products or therapies. If our collaborators fail to successfully obtain regulatory approval for and commercialize E25, our business, financial condition and results of operations will be materially harmed. Moreover, since E25 is our most advanced product candidate, a setback of this nature would cause a sharp drop in our stock price. Failure of our E25 program could also reflect adversely on our Hu-901 8 <PAGE> program, which is also based on anti-IgE technology. WE DEPEND ON NOVARTIS AND GENENTECH TO DEVELOP, OBTAIN REGULATORY APPROVAL FOR, MANUFACTURE, MARKET AND DISTRIBUTE E25 AND OTHER ANTI-IGE PRODUCTS. WE WILL ALSO DEPEND ON FUTURE COLLABORATION PARTNERS TO DEVELOP, MANUFACTURE, MARKET AND DISTRIBUTE OUR OTHER PRODUCTS. FAILURE BY NOVARTIS OR GENENTECH, OR ANY OTHER COLLABORATION PARTNER, TO PERFORM UNDER OUR CURRENT OR FUTURE COLLABORATION AGREEMENTS MAY DELAY OR SIGNIFICANTLY IMPAIR OUR ABILITY TO GENERATE REVENUES OR OTHERWISE ADVERSELY AFFECT OUR PROFITABILITY. Under the terms of our collaboration agreements, Novartis and Genentech are responsible for developing, obtaining regulatory approval for, manufacturing, marketing and distributing E25 and other anti-IgE products that the collaboration may select for development. We expect for the extended future that Novartis and Genentech will manufacture, market and distribute E25 and other selected anti-IgE products, if the FDA approves any of these products. We also rely on Novartis and Genentech for significant financial and technical contributions to develop products covered by our collaboration agreements. Our ability to profit from these products depends on Novartis' and Genentech's performance under their agreements with us. We cannot control the amount and timing of resources Novartis and Genentech will devote to any of our products. If Novartis or Genentech experiences manufacturing or distribution difficulties, does not actively market E25 or other selected anti-IgE products or does not otherwise perform under our collaboration agreements, our potential for revenue from those products will be dramatically reduced. Novartis and Genentech may terminate our collaboration agreements on short notice. If Novartis or Genentech terminates our collaboration, we would experience increased capital requirements to undertake development and marketing at our expense, and we cannot assure you that we would be able to develop E25 or our other anti-IgE products on our own. We will also rely on other collaboration partners to develop, manufacture, commercialize, market and distribute our other products. Many of our competitors are similarly seeking to develop or expand their collaboration and license arrangements with pharmaceutical companies. The success of these efforts by our competitors could have an adverse impact on our ability to form future collaboration arrangements. We cannot assure you that we will be able to negotiate acceptable collaboration agreements in the future or that efforts under any current or future collaboration agreements will succeed. To the extent that we choose not to or are unable to enter into future collaboration agreements or maintain existing collaborations, we would experience increased capital requirements to undertake research, development and marketing at our own expense. In addition, we may encounter significant delays in introducing our product candidates or find that the absence of these collaboration agreements adversely affects our ability to develop, manufacture or sell our product candidates. Our reliance on collaboration partners poses the following additional risks: o disputes with our partners may arise, delaying or terminating our product candidates' research, development or commercialization or resulting in significant litigation or arbitration; o contracts with our partners may fail to provide significant protection or may become unenforceable if one of these partners fails to perform; o our partners could develop, independently or with third parties, products or treatments that compete with our products; o our partners may not commit enough capital or other resources to successfully develop our products; o our partners may not continue to develop and commercialize products resulting from our collaborations; o our partners with marketing and distribution rights to one or more of our products may not commit enough resources to marketing and distributing our products; o our contracts with collaboration partners may expire or terminate and we may not be able to replace them; and o the terms of our contracts with our partners may not be favorable to us in the future. 9 <PAGE> If any of these risks occur, our product development and productivity may suffer, and our business, financial condition and results of operations would be materially harmed. WE ARE INVOLVED IN LITIGATION AND ARBITRATION PROCEEDINGS WITH NOVARTIS AND GENENTECH THAT MAY BE VERY COSTLY TO US AND COULD CAUSE US TO LOSE OUR RIGHTS TO INDEPENDENTLY DEVELOP PRODUCTS. We are a party to arbitrations and a related federal district court lawsuit with our collaboration partners Novartis and Genentech, relating to our rights to develop Hu-901 and other anti-IgE antibodies independently of our collaboration with Novartis and Genentech. Novartis and Genentech are disputing our right to pursue development of Hu-901 independently and are claiming that we are using their unspecified confidential and proprietary information that we have no right to use. If we do not succeed in these proceedings, we could incur substantial damages that would harm our financial position and we could lose our rights to independently develop products covered by the collaboration, including Hu-901. Even if we succeed, we may not be able to secure any recovery or develop anti-IgE products independently of the collaboration. In either case, we expect these proceedings to consume substantial amounts of our financial and managerial resources. Further, because of the substantial amount of discovery required in connection with this type of litigation, there is a risk that disclosure might compromise some of our confidential information. NONE OF OUR PRODUCTS HAVE RECEIVED REGULATORY APPROVAL. IF WE DO NOT RECEIVE AND MAINTAIN REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET OUR PRODUCTS. Neither the FDA, nor any regulatory authority, has approved any of our products, including E25. We cannot assure you that the data collected from our completed or future clinical trials will support any regulatory approvals. We must receive FDA approval to manufacture and market our products in the United States. Other countries have similar requirements. The process that pharmaceutical products must undergo to receive this approval is extensive, and includes preclinical testing and clinical trials to demonstrate safety and efficacy and a review of the manufacturing process to ensure compliance with good manufacturing practices. This process can last many years, be very costly and still be unsuccessful. The FDA can delay, limit or not grant approval for many reasons, including: o a product candidate may not be safe or effective; o FDA officials may interpret data from preclinical testing and clinical trials in different ways than we interpret it; o the FDA might not approve our manufacturing processes or facilities or the processes or facilities of our collaboration partners; o the FDA may change its approval policies or adopt new regulations; and o the FDA may approve a product candidate for fewer than all the indications requested. The process of obtaining approvals in foreign countries is subject to delay and failure for the same reasons. Any delay in or failure to receive approval for E25 or any of our current or future product candidates could materially harm our business, financial condition and results of operations. Our products other than E25 require significant additional laboratory development and/or clinical testing and investment prior to commercialization. We cannot assure you that our product candidates will prove to be safe and effective in clinical trials. Further, any of our products may prove to have undesirable and unintended side effects. We may not successfully develop products currently in research and development, successfully market our products or produce our products in commercial quantities at an acceptable cost or in compliance with applicable regulatory guidelines. Our products may not meet applicable regulatory standards or obtain required regulatory approvals. Approval of a product candidate could also depend on post-marketing studies. In addition, any marketed product and its manufacturer continue to be subject to strict regulation after approval. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market. Delays in receiving or failing to 10 <PAGE> receive regulatory approvals, or losing previously received approvals, would delay or prevent product commercialization, which would adversely affect our business, financial condition and results of operations. WE ARE INVOLVED IN LEGAL PROCEEDINGS WITH OUR FORMER ATTORNEYS THAT MAY BE VERY COSTLY TO US. We have been involved in an arbitration regarding a fee dispute with our former attorneys who represented us in our 1993 lawsuit against Genentech and F. Hoffman-La Roche, Ltd. and its affiliates, and a 1994 lawsuit filed against us by Genentech. The arbitration panel issued an award which entitled those attorneys to receive approximately $3.5 million, including interest, payments ranging from 33 1/3% to 40% of any future milestone payments received by us from Genentech following product approval and 10% of the royalties that we receive on sales of anti-IgE products. We sought a court order vacating the arbitration award. However, a judgment was entered confirming the award. We intend to pursue all available remedies, including appealing the decision. We may not be successful in this proceeding. If this proceeding continues to result in decisions unfavorable to us, we could lose substantial value from our collaboration with Novartis and Genentech which could negatively affect our stock price and harm our business, financial condition and results of operations. Whether or not we are successful in this proceeding, we expect it to consume substantial amounts of our financial and managerial resources. OUR PRECLINICAL AND CLINICAL TESTING RESULTS ARE UNCERTAIN. IF TRIAL RESULTS ARE NEGATIVE, WE MAY BE FORCED TO STOP DEVELOPING PRODUCTS IMPORTANT TO OUR FUTURE. We must demonstrate through preclinical studies and clinical trials that our products are safe and effective for use in each target indication before we can obtain regulatory approvals to sell our products commercially. These studies and trials may be very costly and time consuming. The results of preclinical studies and initial clinical trials of our products do not necessarily predict the results from later-stage clinical trials. Drugs in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing. We cannot assure you that the data collected from clinical trials of our products will be sufficient to support FDA or other regulatory approval. The speed with which we are able to enroll patients in clinical trials is an important factor in determining how quickly we may complete clinical trials. Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the study. We may target our clinical trial protocols at indications that have small patient populations, which may make it difficult for us to enroll enough patients to complete the trials. Delays in patient enrollment in the trials may result in increased costs, program delays, or both, which could slow down our product development and approval process, and could materially harm our business. Administering any product we develop to humans may produce undesirable side effects. These side effects could interrupt or delay clinical trials of products and could result in the FDA or other regulatory authorities denying approval of our products for any or all targeted indications. The FDA, other regulatory authorities or we may suspend or terminate clinical trials at any time. Even if we receive FDA and other regulatory approvals, our products may later exhibit adverse effects that limit or prevent their widespread use or that force us to withdraw those products from the market. We cannot assure you that any of our products will be safe for human use. WE HAVE LIMITED EXPERIENCE AND CAPABILITY IN MANUFACTURING AND MAY ENCOUNTER MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST REVENUE. To commercialize our products successfully, we and our collaboration partners must manufacture our products in commercial quantities in compliance with regulatory requirements and at an acceptable cost. If the manufacturing facilities used to produce our products cannot pass a pre-approval or periodic plant inspection, the FDA may not approve our products or it may delay or bar their sale. Although we expect Novartis and Genentech to manufacture E25 and other anti-IgE products that our collaboration develops, if the FDA and 11 <PAGE> other regulatory authorities approve these products, we have reserved the right to manufacture up to 50% of the worldwide requirements for these products. We currently have a process development and manufacturing facility for biological products located in Houston, Texas. However, we have no experience in manufacturing commercial quantities of antibodies and currently have limited manufacturing capacity. In order to obtain regulatory approvals and to create capacity to produce our products in sufficient quantities for commercial sale at an acceptable cost, we will have to develop or acquire additional technology for large scale manufacturing and build or otherwise obtain access to adequate facilities, which will require substantial additional funds. We will also be required to demonstrate to the FDA and corresponding foreign authorities our ability to manufacture our products using controlled, reproducible processes. We cannot assure you that we can develop the necessary manufacturing technology or that we will be able to fund or build an adequate commercial manufacturing facility necessary to obtain regulatory approvals and to produce adequate commercial supplies of our potential products on a timely basis. We cannot assure you that we, operating alone or with the assistance of others, will be able to successfully make the transition to commercial production. WE LACK SALES AND MARKETING EXPERIENCE, WHICH MAKES US DEPEND ON THIRD PARTIES FOR THEIR EXPERTISE IN THIS AREA. If we receive the required regulatory approvals, we expect to market and sell our products principally through distribution, co-marketing, co-promotion or licensing arrangements with third parties. Under our current collaboration agreement, Novartis and Genentech have exclusive marketing rights to E25 and other selected anti-IgE products. However, commercialization rights may revert back to us if either we or our collaborators terminate our relationship. We currently have no sales, marketing or distribution capabilities. Any revenues we receive from our E25 collaboration will depend primarily on the efforts of our collaboration partners. We intend to retain marketing rights in the United States and selected Asian countries for products that we can develop and sell effectively with a small, targeted sales force. If we elect to market products directly, we would require significant additional expenditures and management resources to develop an internal sales force. We cannot assure you that we would be able to establish a successful sales force should we choose to do so. WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE THAT COULD RESULT IN PRODUCTS THAT ARE SUPERIOR TO THE PRODUCTS WE ARE DEVELOPING. The biotechnology and pharmaceutical industries are subject to rapid and significant technological change. We have numerous competitors in the United States and abroad, including, among others, major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. These competitors may develop technologies and products that are more effective or less costly than any of our current or future products or that could render our technologies and products obsolete or noncompetitive. Many of these competitors have substantially more resources and product development, production and marketing capabilities than we do. In addition, many of our competitors have significantly greater experience than we do in undertaking preclinical testing and clinical trials of new or improved pharmaceutical products and obtaining FDA and other regulatory approvals of products for use in health care. If we succeed in achieving significant commercial sales of our products, we also will be competing in manufacturing efficiency and marketing capability, areas in which we have limited or no experience. Furthermore, our competitors may obtain FDA approval for products sooner and be more successful in manufacturing and marketing their products than are we or our collaborators. Products currently exist in the market that will compete directly with the products that we seek to develop. Any product candidate that we develop and that obtains regulatory approval must then compete for market acceptance and market share. Our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. Significant factors in determining whether we will be able to compete successfully include: o efficacy and safety of our products; 12 <PAGE> o timing and scope of regulatory approval; o product availability; o potential advantages over alternative treatment methods; o development, marketing, distribution and manufacturing capabilities and support of our collaborators; o reimbursement coverage from insurance companies and others; o price and cost-effectiveness of our products; and o patent protection. If our products are not competitive based on these or other factors, our business, financial condition and results of operations will be materially harmed. WE DEPEND ON OUR PATENTS AND PROPRIETARY RIGHTS. THE VALIDITY, ENFORCEABILITY AND COMMERCIAL VALUE OF THESE RIGHTS ARE HIGHLY UNCERTAIN. Our success depends in part on obtaining, maintaining and enforcing patents, licensing the rights to patents and patent applications owned by others, maintaining trade secrets and operating without infringing on the proprietary rights of third parties. While we file and prosecute patent applications to protect our inventions, our pending patent applications may not result in the issuance of valid patents and our issued patents may not provide competitive advantages. Also, our patent protection may not prevent others from developing competitive products using related technology. We cannot assure you that pending patent applications licensed to us will result in patents being issued or that, if issued, the patents will give us an advantage over competitors with similar technology. We own and have licenses to certain issued patents. The patents we own that are most material to our business are five U.S. patents and six foreign patents relating to anti-IgE antibodies. However, the patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues. There is no clear policy involving the breadth of claims allowed or the degree of protection afforded under such patents. Issued patents can be challenged in litigation in the courts and in proceedings in the patent and trademark office in the United States and in courts and patent offices in foreign countries. Issuance of a patent is not conclusive as to its validity, enforceability or the scope of its claim. We cannot assure you that our patents will not be successfully challenged as to enforceability, invalidated or limited in the scope of their coverage. Moreover, litigation to uphold the validity of patents and to prevent infringement can be very costly and can result in diverting technical and management personnel's time and attention, which may materially harm our business, financial condition and results of operations. If the outcome of litigation is adverse to us, third parties may be able to use our patented technology without paying us. Moreover, we cannot assure you that our patents will not be infringed or successfully avoided through design innovation. Any of these events may materially and adversely effect our business. There may be patent rights belonging to others that require us to alter our products, pay licensing fees or cease certain activities. If our products conflict with patent rights of others, the owners of those patent rights could bring legal actions against us claiming damages and seeking to stop us from manufacturing and marketing the affected products. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. We cannot assure you that we would prevail in any such action or that any license required under any such patent would be made available on acceptable terms or at all. Any of these events may materially harm our business, financial condition and results of operations. Researching, developing and commercializing a biopharmaceutical product often involves alternative development and optimization routes that are presented at various stages in the development process. We cannot predict the preferred routes at the outset of a research and development program, because they will depend on subsequent discoveries and test results. There are numerous third-party patents in our field, and it is possible that, to pursue the preferred development route of one or more of our products, we will need to obtain a license to a patent, which would decrease the ultimate profitability of the applicable 13 <PAGE> product. If we cannot negotiate a license, we might have to pursue a less desirable development route or terminate the program altogether. We are aware that other groups have claimed discoveries similar to those covered by our patent applications. In addition, other companies, some of which may be our competitors, have filed applications for or have been issued patents and may obtain additional patents and proprietary rights relating to products or processes used in, necessary to, competitive with or otherwise related to our patents and products. These products and processes include, among other items, patents covering technology relating to humanized monoclonal antibodies that we anticipate developing. Protein Design Labs, Inc. owns certain patents and patent applications relating to such humanized antibodies. We have recently taken a non-exclusive license to these patents and patent applications for one of our products. We do not know if we can obtain licenses from Protein Design Labs for our other antibody products. We must make substantial cash payments and achieve certain milestones and satisfy certain conditions, including filing investigational new drug applications, obtaining product approvals and introducing products, to maintain our rights under certain of our licenses, including our licenses from Chiron and Biogen, Inc. We cannot assure you that we will be able to maintain our rights under these licenses. If any of these licenses terminate, we may be unable to commercialize any related product. In addition to the intellectual property rights described above, we also rely on unpatented technology, trade secrets and confidential information. We cannot assure you that others will not independently develop substantially equivalent information and techniques or otherwise gain access to our technology or disclose such technology, or that we can effectively protect our rights in unpatented technology, trade secrets and confidential information. We require each of our employees, consultants and advisors to execute a confidentiality agreement at the commencement of an employment or consulting relationship with us. We cannot assure you, however, that these agreements will provide effective protection if an unauthorized use or disclosure of this confidential information occurs. WE MAY EXPERIENCE DIFFICULTIES IN MANAGING GROWTH, WHICH COULD MATERIALLY HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. If our product development efforts and the product development efforts of our collaborators succeed, our growth could strain our operations, product development and other managerial and operating resources. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees, including management. In the future, our financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to: o manage our research and development efforts effectively; o expand the capacity, scalability and performance of our product development infrastructure; o develop our administrative, accounting and management information systems and controls; o improve coordination among our research, accounting, finance, marketing and operations personnel; and o hire and train additional qualified personnel. We cannot assure you that we will be able to accomplish these tasks, and our failure to accomplish any of these tasks could materially harm our business, financial condition and results of operations. FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL AND PRINCIPAL MEMBERS OF OUR SCIENTIFIC AND MANAGEMENT STAFF COULD MATERIALLY HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Our success depends greatly on our abilities to attract and retain qualified scientific and technical personnel, as well as to retain the services of our existing technical management staff. To expand our research and development programs and pursue our product development plans, we will be required to hire additional qualified scientific and technical personnel, as well as personnel with 14 <PAGE> expertise in clinical testing and government regulation. There is intense competition for qualified staff, and we cannot assure you that we will be able to attract and retain the necessary qualified staff to develop our business. The failure to attract and retain key scientific and technical personnel and management staff or the loss of any of our current management team could materially harm our business and financial condition. We do not maintain, and do not currently intend to obtain, key employee global life insurance on any of our personnel. WE MAY NEED ADDITIONAL FINANCING, BUT OUR ACCESS TO CAPITAL FUNDING IS UNCERTAIN. Our current and anticipated development projects require substantial additional capital. We expect that the net proceeds from this offering, together with our existing assets and revenue from operations, will sufficiently fund our operations for the next three years. However, our future capital needs will depend on many factors, including successfully commercializing E25, receiving milestone payments from our collaboration partners, and making progress in our research and development activities. Our success may also depend on the magnitude and scope of these activities, the progress and level of unreimbursed costs associated with preclinical studies and clinical trials, the costs associated with acquisitions, the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaboration and licensing arrangements, the establishment of additional collaboration and licensing arrangements, and the cost of manufacturing scale-up and development of marketing activities, if undertaken by us. We do not have committed external sources of funding and we cannot assure you that we will be able to obtain additional funds on acceptable terms, if at all. If adequate funds are not available, we may be required to: o delay, reduce the scope of or eliminate one or more of our development programs; o obtain funds through arrangements with collaboration partners or others that may require us to relinquish rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves; or o license rights to technologies, product candidates or products on terms that are less favorable to us than might otherwise be available. If we raise additional funds by issuing additional stock, further dilution to our stockholders may result, and new investors could have rights superior to existing stockholders. If funding is insufficient at any time in the future, we may be unable to develop or commercialize our products, take advantage of business opportunities or respond to competitive pressures. WE ARE SUBJECT TO THE UNCERTAINTY RELATED TO REIMBURSEMENT POLICIES AND HEALTHCARE REFORM MEASURES. In recent years, there have been numerous proposals to change the healthcare system in the United States. Some of these proposals have included measures that would limit or eliminate payments for medical procedures and treatments or subject pharmaceutical product pricing to government control. In addition, as a result of the trend towards managed healthcare in the United States, as well as legislative proposals to reduce government insurance programs, third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drug products. Consequently, significant uncertainty exists as to the reimbursement status of newly-approved healthcare products. If we or any of our collaborators succeed in bringing one or more of our products to market, we cannot assure you that third-party payors will establish and maintain price levels sufficient for us to realize an appropriate return on our investment in product development. Significant changes in the healthcare system in the United States or elsewhere, including changes resulting from adverse trends in third-party reimbursement programs, could materially reduce our profitability. Such changes could also significantly harm our ability to raise the capital we would need to continue our operations. Furthermore, if these proposals affect our collaborators, the proposals may harm our ability to commercialize the products we develop jointly with them. 15 <PAGE> WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS, AND IT IS UNCERTAIN THAT WE CAN OBTAIN INSURANCE AGAINST THESE CLAIMS AT A REASONABLE RATE IN THE FUTURE. Our business exposes us to potential product liability risks, which are inherent in testing, manufacturing, marketing and selling pharmaceutical products. We may be held liable if any product we develop, or any product that uses or incorporates any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. We cannot assure you that we will be able to avoid product liability exposure. Product liability insurance for the biopharmaceutical industry is generally expensive, if available at all. We have obtained product liability insurance coverage in the amount of $5.0 million per occurrence, subject to a $5.0 million aggregate limitation. However, we cannot assure you that our present insurance coverage is now or will continue to be adequate. In addition, some of our license and collaboration agreements require us to obtain product liability insurance. Future license and collaboration agreements may also include such a requirement. We cannot assure you that we can obtain adequate insurance coverage at a reasonable cost in the future. Our inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit us or our collaborators from commercializing our products. If we are sued for any injury caused by our products, our liability could exceed our total assets. WE DEAL WITH HAZARDOUS MATERIALS AND MUST COMPLY WITH ENVIRONMENTAL LAWS AND REGULATIONS, WHICH CAN BE EXPENSIVE AND RESTRICT HOW WE DO BUSINESS. Our research and development work and manufacturing processes involve the controlled use of hazardous materials, including chemical, radioactive and biological materials. Our operations also produce hazardous waste products. We are subject to federal, state and local laws and regulations governing how we use, manufacture, store, handle and dispose of these materials. Although we believe that we comply in all material respects with applicable environmental laws and regulations, we cannot assure you that we will not incur significant costs to comply with environmental laws and regulations in the future. In addition, current or future environmental laws and regulations may impair our research, development or production efforts. WE COULD BE LIABLE FOR DAMAGES, PENALTIES OR OTHER FORMS OF CENSURE IF WE ARE INVOLVED IN A HAZARDOUS WASTE SPILL OR OTHER ACCIDENT. Despite precautionary procedures that we implement for handling and disposing of hazardous materials, we cannot eliminate the risk of accidental contamination or discharge or any resultant injury from these materials. If a hazardous waste spill or other accident occurs, we could be liable for damages, penalties or other forms of censure. In addition, we may be sued for injury or contamination that results from our use or the use by third parties of these materials, and our liability could exceed our total assets. OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK AND WILL CONTINUE TO CONTROL OUR COMPANY AND THE OUTCOME OF MATTERS PUT TO A VOTE OF STOCKHOLDERS AFTER THIS OFFERING. Immediately after we complete this offering, our executive officers and directors and their affiliates will, in the aggregate, own shares representing approximately 36% of our outstanding common stock. As a result, these stockholders, acting together, will significantly influence our general management and affairs, and all matters submitted to our stockholders for approval, including electing directors and approving changes in control. Such control could discourage others from initiating potential merger, takeover or other change of control transactions, and may adversely affect the market price of our common stock. For a more detailed description of our management team and their ownership of common stock, please refer to "Management" on page 47. 16 <PAGE> OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN CERTAIN PROVISIONS THAT COULD DELAY OR PREVENT A TAKEOVER AND SUPPRESS OUR STOCK PRICE. Provisions of our amended and restated certificate of incorporation, bylaws and Delaware law could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the price of our common stock. These provisions include: o the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval; o a staggered board of directors; o a limitation on who may call special meetings of stockholders; and o advance notice requirements for nomination for election to the board of directors or for proposing matters that stockholders may act on at stockholder meetings. In addition to these provisions, we are subject to certain Delaware laws, including one that prohibits us from engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. We may also adopt a shareholder rights plan or "poison pill" after this offering. All of this may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. YOU MAY NOT BE ABLE TO TRADE OUR COMMON STOCK IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP. Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in us will lead to an active trading market in our common stock or how liquid that market might become. We will determine the initial public offering price for our shares by negotiating with representatives of the underwriters. This price may not indicate prices that will prevail in any future trading market. You may not be able to sell shares of our common stock at or above our initial public offering price. MARKET VOLATILITY MAY AFFECT OUR STOCK PRICE AND THE VALUE OF YOUR INVESTMENT MAY BE SUBJECT TO SUDDEN DECREASES. The trading price for our common stock is likely to be volatile. Prices for our common stock will be determined in the marketplace and may be influenced by many factors, including variations in our financial results, changes in earnings estimates by industry research analysts, investors' perceptions of us and our financial prospects, results of the governmental approval process for our products, results of clinical trials, changes in government regulations, developments in our relationships with our collaboration partners, developments in our litigation, announcements of new products, technologies or treatments by us or our competitors and general economic, industry and market conditions. In addition, the stock markets from time to time have experienced extreme price and volume fluctuations. In particular, the market prices of the securities of biotechnology companies have been especially volatile, and often these fluctuations do not relate to operating performance. These broad fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance. In the past, following periods of market volatility, security holders have instituted class action litigation. If the market value of our stock experiences adverse fluctuations and we become involved in this type of litigation, we could incur substantial legal costs and management's attention could be diverted, which could materially harm our business or the market price of our common stock. SALES OF COMMON STOCK MAY HAVE AN ADVERSE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK. Sales of significant amounts of our common stock after this offering or the perception that such sales will occur could adversely affect the market price of our common stock or our future ability to raise capital by selling equity securities. After this 17 <PAGE> offering is completed, 40,788,731 shares of our common stock will be issued and outstanding. All of the shares of common stock to be sold in this offering will be freely tradable without restriction or further registration under the federal securities laws unless purchased by our "affiliates" within the meaning of Rule 144 under the Securities Act. The 33,788,731 remaining shares of outstanding common stock will be "restricted securities" under the Securities Act, subject to restrictions on the timing, manner and volume of sales of those shares. Our officers and directors and stockholders who together own 32,040,783 shares of common stock have agreed for a period of 180 days after the date of this prospectus not to sell or otherwise dispose of any shares of our common stock, other than shares acquired in this offering. When the lock-up period expires, the shares owned by these persons prior to completion of this offering may be sold into the public market without a registration statement, to the extent permitted by Rule 144 or exemptions under the Securities Act. Moreover, following this offering, a substantial number of shares of common stock issuable on exercise of outstanding options will be eligible for sale in the public market. For a more detailed description of additional shares that may be sold in the future, please refer to "Shares Eligible for Future Sale" on page 62 and "Underwriting" on page 64. AS A NEW INVESTOR, YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR SHARES. The public offering price for our shares will be substantially higher than our net tangible book value per share, which at December 31, 1999, was $1.20 per share. If you purchase shares of our common stock in this offering, you will suffer immediate, substantial net tangible book value dilution of $22.93 per share, or $22.40 per share, if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $28.50. You will also incur additional dilution if the holders of outstanding options to purchase common stock at prices below our net tangible book value per share after this offering exercise their options. For a more detailed discussion of dilution, please refer to "Dilution" on page 22. OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO ALLOCATE THE NET PROCEEDS OF THIS OFFERING AND MAY NOT USE THE PROCEEDS APPROPRIATELY. Our management will have broad discretion over how we use the proceeds of this offering. We estimate the net proceeds from this offering to be approximately $184.5 million, after deducting underwriting discounts and commissions and estimated offering expenses, assuming an initial public offering price of $28.50. We plan to use these proceeds to substantially increase clinical development of our products, expand our research and development infrastructure and research facilities in the United States, The Netherlands and Taiwan, acquire or in-license additional technologies and products and market our products. We have no specific allocations for any other net proceeds of this offering. The amount of proceeds we will actually expend on general corporate purposes will vary depending on a number of factors, including successfully commercializing E25. Our progress in and scope of our research and development activities, changes in or termination of existing collaboration and licensing arrangements, costs and magnitude of product or technology acquisitions and our need for manufacturing capacity. Consequently, management will retain a significant amount of discretion in spending these proceeds. Because of the number and variability of factors that will determine the use of these proceeds, how we spend these proceeds may vary substantially from our current intentions. 18 <PAGE> FORWARD-LOOKING STATEMENTS Some of the information in this prospectus contains forward-looking statements within the meaning of the federal securities laws. You can find these statements under "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus. We typically identify forward-looking statements by using terms such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue" or similar words, although we express some forward-looking statements differently. You should be aware that actual events could differ materially from those suggested in the forward-looking statements due to a number of factors, including: o the ability to develop safe and efficacious drugs; o failure to achieve positive results in clinical trials; o failure to successfully commercialize our products; o relationships with our collaboration partners; o variability of royalty, license and other revenues; o ability to enter into future collaboration agreements; o competition and technological change; and o existing and future regulations affecting our business. You should also consider carefully the statements under "Risk Factors" and other sections of this prospectus, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. 19 <PAGE> USE OF PROCEEDS We estimate that our net proceeds from the sale of the shares of common stock in this offering will be approximately $184,450,000. If the underwriters fully exercise their over-allotment option, we estimate that our net proceeds from the offering will be $212,280,250. "Net Proceeds" are what we expect to receive after paying the underwriters' discounts and commissions and other expenses of the offering. For the purpose of estimating net proceeds, we are assuming an initial public offering price of $28.50 per share. We intend to use the net proceeds of this offering primarily for research and development, capital expenditures and general corporate purposes, including working capital. We may use a portion of the proceeds to acquire or invest in technologies, products or businesses that we believe may complement our business. We currently have no agreements or commitments in this regard. The amount of proceeds we will actually spend on general corporate purposes will vary depending on a number of factors, including: o successfully commercializing E25; o our progress in and the scope of our research and development activities; o changes in or termination of existing collaboration and licensing arrangements; o costs and magnitude of product or technology acquisitions; and o our need for manufacturing capacity; Our management will have broad discretion over how we use the net proceeds of this offering. Pending such uses, we intend to invest the net proceeds of this offering in short-term, interest-bearing investment grade securities. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We anticipate that we will retain earnings to support operations and to finance our business growth and development. Therefore, we do not expect to pay cash dividends in the foreseeable future. 20 <PAGE> CAPITALIZATION The following table shows: o our actual capitalization on December 31, 1999; and o our as adjusted capitalization on December 31, 1999, assuming the completion of the offering as adjusted for the sale of 7,000,000 shares of common stock by us at an assumed public offering price of $28.50 per share, net of estimated underwriters' discounts and commissions and offering expenses. DECEMBER 31, 1999 ------------------------ ACTUAL AS ADJUSTED -------- ------------ (IN THOUSANDS) Long term debt....................... $ 10,000 $ 10,000 -------- ------------ Stockholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding; no shares issued or outstanding, as adjusted..................... -- -- Common stock, $.01 par value; 120,000,000 shares authorized; 33,324,402 shares issued and outstanding, actual; 40,324,402 shares issued and outstanding, as adjusted..................... 333 403 Additional paid-in capital......... 71,701 256,081 Deferred compensation.............. (651) (651) Loans receivable from employees.... (1,086) (1,086) Other comprehensive income, cumulative translation adjustment...................... 171 171 Retained earnings (deficit)........ (30,461) (30,461) -------- ------------ Total stockholders' equity...... 40,007 224,457 -------- ------------ Total capitalization.......... $ 50,007 $234,457 ======== ============ The shares of common stock outstanding in the actual and as adjusted columns exclude 3,183,920 shares of common stock issuable upon exercise of options outstanding at December 31, 1999 at a weighted average exercise price of $4.39 per share. 21 <PAGE> DILUTION Our net tangible book value on December 31, 1999 was approximately $39,965,000, or $1.20 per share. "Net tangible book value" is total assets minus the sum of liabilities and intangible assets. "Net tangible book value per share" is net tangible book value divided by the total number of shares outstanding. After giving effect to adjustments relating to the offering, our pro forma net tangible book value on December 31, 1999, would have been $224,415,000 or $5.57 per share. The adjustments made to determine pro forma net tangible book value per share are the following: o increasing total assets to reflect the estimated net proceeds of the offering as described under "Use of Proceeds" assuming that the public offering price will be $28.50 per share; and o adding the number of shares offered by this prospectus to the number of shares outstanding. The following table illustrates the pro forma increase in net tangible book value of $4.37 per share and the dilution (the difference between the offering price per share and net tangible book value per share) to new investors: Assumed public offering price per share........................... $ 28.50 Net tangible book value per share as of December 31, 1999......... $ 1.20 Increase in net tangible book value per share attributable to the offering........................ 4.37 --------- Pro forma net tangible book value per share as of December 31, 1999, after giving effect to the offering........................ 5.57 --------- Dilution per share to new investors in the offering................. $ 22.93 ========= The following table shows the difference between existing stockholders as of December 31, 1999 and new investors with respect to the number of shares purchased from Tanox, the total consideration paid and the average price paid per share. We assume that the public offering price will be $28.50 per share. <TABLE> <CAPTION> SHARES PURCHASED TOTAL CONSIDERATION ---------------------- ------------------------ AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ ------- -------------- ------- ------------- Existing stockholders................ 33,324,402 82.6% $ 61,924,000 23.7% $ 1.86 <S> <C> <C> <C> <C> <C> New investors........................ 7,000,000 17.4 199,500,000 76.3 28.50 ------------ ------- -------------- ------- ------- Total........................... 40,324,402 100.0% 261,424,000 100.0% ============ ======= ============== ======= </TABLE> In the discussion and tables above, we assume no exercise of outstanding options to purchase shares of our common stock. As of December 31, 1999, there were outstanding options to purchase a total of 3,183,920 shares of common stock at a weighted average exercise price of $4.39 per share. To the extent that option holders exercise their outstanding options, new investors will be further diluted. 22 <PAGE> SELECTED CONSOLIDATED FINANCIAL DATA This section presents our selected historical financial data. You should read carefully the consolidated financial statements included in this prospectus, including the notes to the consolidated financial statements. We do not intend the selected data in this section to replace the consolidated financial statements. We derived the statement of operations data for the years ended December 31, 1997, 1998 and 1999, and balance sheet data as of December 31, 1998 and 1999 from the audited consolidated financial statements in this prospectus, which Arthur Andersen LLP, independent public accountants, audited. We derived the statement of operations data for the years ended December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 from our audited consolidated financial statements that we have not included in the prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1995 1996 1997 1998 1999 --------- --------- --------- ---------- ---------- <S> <C> <C> <C> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues............................. $ 6,957 $ 15,017 $ 8,939 $ 2,422 $ 1,405 Research and development............. 5,499 5,626 6,926 11,933 17,163 General and administrative........... 1,707 1,165 2,230 3,431 8,582 --------- --------- --------- ---------- ---------- Total operating costs and expenses... 7,206 6,791 9,156 15,364 25,745 --------- --------- --------- ---------- ---------- Income (loss) from operations........ (249) 8,226 (217) (12,942) (24,340) Other income, net.................... 470 433 1,045 1,240 1,028 --------- --------- --------- ---------- ---------- Income (loss) before income taxes.... 221 8,659 828 (11,702) (23,312) (Provision) benefit of income taxes.............................. (10) (1,922) (198) 1,533 (34) --------- --------- --------- ---------- ---------- Net income (loss).................... $ 211 $ 6,737 $ 630 $ (10,169) $ (23,346) ========= ========= ========= ========== ========== Earnings (loss) per share: Basic........................... $ 0.01 $ 0.26 $ 0.02 $ (0.35) $ (0.75) ========= ========= ========= ========== ========== Diluted......................... $ 0.01 $ 0.23 $ 0.02 $ (0.35) $ (0.75) ========= ========= ========= ========== ========== Shares used in computing earnings (loss) per share: Basic........................... 26,215 26,215 27,909 29,105 31,113 Diluted......................... 29,418 29,382 31,190 29,105 31,113 </TABLE> <TABLE> <CAPTION> DECEMBER 31, ----------------------------------------------------- 1995 1996 1997 1998 1999 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........................ $ 15,443 $ 18,235 $ 36,857 $ 33,735 $ 47,254 Working capital...................... 13,847 15,575 35,871 34,323 42,718 Total assets......................... 18,147 25,871 44,831 43,422 55,328 Long term debt....................... 7,000 7,000 9,000 10,000 10,000 Retained earnings (deficit).......... (4,313) 2,424 3,054 (7,115) (30,461) Total stockholders' equity........... 8,470 15,811 34,428 31,540 40,007 </TABLE> 23 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YOU SHOULD READ THIS DISCUSSION TOGETHER WITH THE FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED IN THIS PROSPECTUS. OVERVIEW Tanox identifies and develops therapeutic monoclonal antibodies to address significant unmet medical needs in the areas of immunology, infectious diseases and cancer. E25, our most advanced product in development, is an anti-IgE antibody we are developing in collaboration with Novartis and Genentech. E25 has successfully completed Phase III clinical trials in both allergic asthma and seasonal allergic rhinitis (hay fever). Based on the results of these trials, in mid-2000, our collaboration partners intend to file for marketing approval in the United States and Europe for both indications. In addition, we are developing a number of monoclonal antibodies to treat other allergic diseases or conditions, such as severe allergic reactions to peanuts, autoimmune diseases, HIV and neutropenia. We currently have no products available for sale and are focusing on product development, clinical trials and process development. We have incurred substantial losses since inception and incurred an accumulated deficit through December 31, 1999, of $30.5 million. We expect to continue to incur substantial operating losses for the foreseeable future, particularly as we increase our research and development, manufacturing, clinical trial and administrative activities. We expect that losses will continue until such time, if ever, that we generate sufficient revenue from royalties on E25 to cover our expenses. Historically, we have earned revenues primarily from license fees, milestone payments and sponsored research under our collaboration agreements. In the future, we expect our principal revenues will be milestone payments, royalties and profit-sharing payments from Novartis and Genentech. We may also receive royalties from Hoffman-La Roche Ltd. should it participate in selling E25 in Europe. Our revenues will depend particularly on the success of our collaboration partners in developing, manufacturing, obtaining regulatory approvals for and marketing E25. Because a substantial portion of our revenues for the foreseeable future will depend on achieving development and commercialization milestones, we anticipate that our results of operations will vary substantially from year to year and even quarter to quarter. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 REVENUES. Revenues decreased to $1.4 million in 1999 from $2.4 million in 1998, a decrease of $1.0 million. This decrease was primarily due to a difference of $1.3 million in milestone and sponsored research revenues earned under our agreements with Novartis and Genentech. These agreements accounted for 76% of our revenues in 1999 and 98% of our revenues in 1998. The $1.3 million decrease was partially offset by higher revenues of $0.4 million from foreign government grants and technology licensing fees. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased to $17.2 million in 1999 from $II.9 million in 1998, an increase of $5.3 million. This increase was principally due to increased personnel, expansion of preclinical and clinical development activities and a $2.7 million non-cash charge resulting from extending the exercise periods for stock options to some research and development employees and consultants. In addition, we incurred a $3.4 million charge in 1999 and a $2.8 million charge in 1998 for in-process research and development costs from the first two purchase payments made to the former shareholders of PanGenetics B.V., a company we acquired in 1998. Please see "Acquisition of PanGenetics B.V." GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $8.6 million in 1999 from $3.4 million in 1998, an increase of $5.2 million. This increase was primarily attributable to recognizing an arbitration award of $3.5 million to the attorneys who represented us in our litigation against 24 <PAGE> Genentech, and a $1.9 million non-cash charge for stock-based compensation, which was due to extending some employee and consultant stock options. OTHER INCOME. Other income decreased to $1.0 million in 1999 from $1.2 million in 1998, a decrease of $0.2 million. This decrease was principally due to a decline in interest income as a result of lower average cash balances and a loss in 1999 on foreign currency transactions. NET LOSS. Net loss increased to $23.3 million in 1999 from $10.2 million in 1998. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 REVENUES. Revenues decreased to $2.4 million in 1998 from $8.9 million in 1997, a decrease of $6.5 million. This decrease was due to a $4.0 million decline in revenues from our agreements with Novartis and Genentech and a decline of $2.5 million in revenues from a former collaboration. Revenues from our collaboration agreements with Novartis and Genentech accounted for 98% of our 1998 revenues and 71% of our 1997 revenues. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased to $II.9 million in 1998 from $6.9 million in 1997, an increase of $5.0 million. This increase was primarily due to expanding our research organization, including $2.8 million of in-process research and development expenses associated with purchasing PanGenetics in the first quarter of 1998. Additionally, we incurred a $1.5 million charge in 1998 to license patents that we may need to commercialize one of our products. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $3.4 million in 1998 from $2.2 million in 1997, an increase of $1.2 million. This increase was principally due to increased expenses associated with our legal proceedings. OTHER INCOME. Other income increased to $1.2 million in 1998 from $1.0 million in 1997, an increase of $0.2 million. This increase was primarily due to a $0.4 million increase in interest income due to higher average cash balances, partially offset by a $0.2 increase in interest expense. NET LOSS/INCOME. Net loss totaled $10.2 million in 1998, compared to net income of $0.6 million in 1997. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations since inception primarily through collaboration and grant revenues, sales of equity securities, interest income and equipment financing agreements. From inception through 1999, we recognized approximately $59.3 million in collaboration, grant and other revenues. Additionally, we have raised approximately $54.9 million from sales of equity securities and $1.5 million from the exercise of stock options, and we have earned approximately $8.8 million of interest income. As of December 31, 1999, we had approximately $47.3 million in cash, cash equivalents and short-term investments available for working capital. During 1999, we used $8.2 million to finance our operating activities. The primary use of cash for operating purposes was our net loss of $23.3 million, although $10.0 million of this amount was attributable to non-cash items. In 1999, changes in working capital were our primary source of cash from operating activities, including a $2.0 million income tax refund and a $3.5 million increase in accrued liabilities for the arbitration award. Our investing activities generated $0.9 million in 1999. Financing activities generated $23.0 million in 1999, principally from selling our common stock. The combination of the above items resulted in a cash increase of $15.9 million during the year. During 1998, we used $6.5 million to finance our operating activities. The primary use of cash for operating activities was $10.2 million to finance our net loss, although the net loss included $4.8 million of non-cash items. In 1998, we used $1.2 million of cash for working capital. The primary use of cash for working capital was a $1.6 million increase in taxes receivable from the carry back of the 1998 net loss to prior years. Our acquisition of PanGenetics did not have a material impact on working capital. Investing activities used $6.2 million of cash in 1998, primarily for the purchase of short-term investments, purchases of fixed assets and leasehold improvements and the initial cash purchase payment for PanGenetics. 25 <PAGE> Financing activities generated $4.2 million in 1998, primarily from the sale of common stock to private investors and $1.0 million from the proceeds of a note payable to Novartis. As a result of the above items, our cash balance decreased by $8.5 million during 1998. Our current and anticipated development projects will require substantial additional capital to complete. We anticipate that the amount of cash we need to fund operations will grow substantially in the future as our projects move from research to preclinical and clinical development. We also expect that we will need to expand our administrative, clinical development, facilities and business development activities to support the future development of our programs and to support the ongoing requirements of a public company. From 1994 through 1998, Novartis advanced us $10.0 million, pursuant to a loan agreement to finance our new clinical manufacturing facility. The loan bears interest at the London Interbank Offered Rate, or LIBOR, plus two percent (7.3% and 8.1% at December 31, 1998 and 1999, respectively). Through December 31, 1999, Novartis has agreed to forgive interest on the loan. For the years 1997, 1998 and 1999, the interest Novartis has forgiven has been reflected as interest expense and a capital contribution. Although the loan is currently scheduled to be due in full on December 31, 2005, Novartis may partially or totally forgive the principal and future interest payments based on the future use of the facility. From inception through December 31, 1999, we have invested approximately $II.6 million in property and equipment, primarily to support research and product development activities and to construct our new clinical manufacturing facility. We pledged all of the assets of the new clinical manufacturing facility as security for the Novartis loan. We have agreed to loan some employees up to $1.5 million in April 2000 to pay tax obligations resulting from their stock option exercises in 1999. At December 31, 1999, we had a net operating loss of approximately $6.6 million for federal income tax reporting purposes, which begins to expire in 2019. We also have a foreign net operating loss carryforward of approximately $5.2 million. Additionally, we have an unused U.S. research and development tax credit carryforward of approximately $1.0 million, which begins to expire in 20II. Because we have incurred cumulative losses to date and there is no assurance of future taxable income, we have established a valuation allowance to fully offset the deferred tax asset at December 31, 1999. We expect to incur substantial additional capital, research and development, manufacturing and other costs as we continue to develop our products. Consequently, we may need to raise substantial additional funds. We expect that the net proceeds from this offering, together with our existing assets and revenue from operations, will fund our operations for the next three years. However, our future capital needs will depend on many factors, including successfully commercializing E25, receiving payments from our collaboration partners, progress in our research and development activities, the magnitude and scope of these activities, the progress and level of unreimbursed costs associated with preclinical studies and clinical trials, the costs and magnitude of product or technology acquisitions, the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaboration and licensing arrangements, the establishment of additional collaboration and licensing arrangements, and manufacturing scale-up costs and marketing activities, if we undertake those activities. We do not have committed external sources of funding and we cannot assure that we will be able to obtain additional funds on acceptable terms, if at all. If adequate funds are not available, we may be required to: o delay, reduce the scope of or eliminate one or more of our programs; o obtain funds through arrangements with collaboration partners or others that may require us to relinquish rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves; or o license rights to technologies, product candidates or products on terms that are less favorable to us than might otherwise be available. 26 <PAGE> We are currently engaged in litigation and arbitration relating to a fee dispute with the law firms that represented us in connection with the Genentech litigation. An arbitration panel issued an award entitling the attorneys to receive approximately $3.5 million, including interest, payments ranging from 33 1/3% to 40% of the future payments we would receive from Genentech following product approval, and 10% of the royalties that we would receive on all sales of anti-IgE products by Genentech and Novartis. We are contesting this award. During the appeals process, we will either post a bond or place amounts in escrow to secure payment of the award. See "Business -- Pending Legal Proceedings." ACQUISITION OF PANGENETICS B.V. In March 1998, we purchased PanGenetics B.V., now our subsidiary Tanox Pharma B.V., for an initial payment to its shareholders of $0.5 million in cash and 226,409 shares of our common stock, valued at $II.25 per share, for a total initial consideration of $3.1 million. In addition, we agreed to pay future consideration, in two installments, totaling up to $0.7 million in cash and 484,147 shares of our common stock upon occurrence of certain future events. In September 1999, we paid the second installment of $0.3 million in cash and 242,075 shares of our common stock, valued at $12.50 per share, for a total consideration of $3.4 million. If we make the final future payment as scheduled in March 2001, we will record an additional purchase price amount based on the cash paid and the fair value of the common stock issued at the time of payment. If we make the final payment in March 2001, we will allocate the final payment to acquired in-process research and development and goodwill based on the appraisal obtained as of the date of the acquisition. Tanox engaged an independent firm, KPMG LLP, to perform an appraisal of the assets acquired in the transaction. The appraisal was completed and the report issued in 1998. We accounted for the costs to acquire PanGenetics under the purchase method of accounting. At the time of the acquisition, we valued the total current and future consideration for accounting purposes at $9.2 million, based on the total of the cash and then fair value of common stock paid, or expected to be paid, to PanGenetics shareholders. Of this amount, we allocated approximately $7.2 million to in-process research and development and $2.0 million to goodwill and other assets. See "Note 2 of the Notes to Consolidated Financial Statements." QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to a variety of risks, including foreign currency exchange fluctuations and changes in interest rates. In the normal course of business, we have established policies and procedures to manage these risks. FOREIGN CURRENCY EXCHANGE RATES. During 1999, our operating results reflect foreign exchange losses of $0.1 million and our balance sheet reflects a foreign currency translation adjustment of $0.2 million. We are subject to foreign currency exchange risk because: o we invest in our foreign subsidiaries; o we incur a significant portion of our costs and expenses and a smaller portion of our revenues in the local currencies of the countries where we do business; and o we finance part of the cost of our subsidiaries' operations through dollar denominated inter-company loans and equity investments that are recorded on their books in the respective local currencies. Fluctuations in exchange rates have not had a material impact on our revenues or costs and expenses, but have affected the value of our equity investments and inter-company loans. As a result of our international operations and our current financing approach, fluctuations in exchange rates of the local currencies versus the U.S. dollar impact our operating results. We are primarily exposed to gains and losses with respect to Dutch guilders and Taiwan dollars because our subsidiaries conduct business in these currencies. To date, we have not implemented a program to hedge our foreign currency risk, but we may do so in the future. INTEREST RATE RISK. Cash and short-term investments were approximately $47.3 million at December 31, 1999. These assets were primarily invested in investment grade commercial paper which we hold to 27 <PAGE> maturity. We do not invest in derivative securities. Although our portfolio is subject to fluctuations in interest rates and market conditions, no gain or loss on any security would actually be recognized in earnings unless we sell the asset. In addition, our loan from Novartis is based on a premium over LIBOR. As such, if general interest rates increase, our interest costs will increase. THE YEAR 2000 During 1998 and 1999, we had a Year 2000 Project (Y2K Project) in place to address the potential exposures related to the impact on our computer systems and scientific and manufacturing equipment containing computer-related components for the Year 2000 and beyond. As of December 31, 1999, all scheduled Y2K work was completed. As of the date of this prospectus, we have not encountered any material Y2K system problems and we have not experienced any impact on operations or expenses. Nevertheless, we do use and rely on a wide variety of information technologies, computer systems and scientific and manufacturing equipment containing computer-related components (such as programmable logic controllers and other embedded systems). As a result, time-sensitive functions of those software programs and equipment may yet misinterpret dates after January 1, 2000, to refer to the twentieth century rather than the twenty-first century. Although we do not anticipate any material problems, we could suffer system or equipment shutdowns, failures or miscalculations. Such conditions could result in inaccuracies in computer output or disruptions of operations, including, among other things, inaccurate processing of financial information and/or temporary inabilities to process transactions, manufacture products, or engage in similar normal business activities. In addition, although all of our significant suppliers and our significant service providers indicated that they were or expected to be Year 2000 compliant by December 31, 1999, and although as of the date of this prospectus we are not aware of any material Year 2000 compliance problems with these third parties' systems, we cannot be certain that these third parties made accurate representations or that their systems are or will continue to be Year 2000 compliant. If any of our significant suppliers or significant service providers experience Year 2000 compliance problems and we cannot replace them with alternate sources, our business would be harmed. 28 <PAGE> BUSINESS OVERVIEW Tanox identifies and develops therapeutic monoclonal antibodies to address significant unmet medical needs in the areas of immunology, infectious diseases and cancer. In 1987, we discovered a novel approach for treating allergies and asthma by using monoclonal antibodies capable of inhibiting IgE. E25, our most advanced product in development is a genetically engineered monoclonal antibody that attaches to, and inhibits, the activity of IgE. We are developing E25 in collaboration with Novartis and Genentech for treatment of allergic asthma and allergic rhinitis (hay fever). We estimate that in the United States, allergic asthma afflicts approximately 11 million people, and allergic rhinitis afflicts approximately 40 million people, of whom approximately 32 million are seasonal sufferers. E25 has successfully completed Phase III clinical trials in allergic asthma and seasonal allergic rhinitis patients. Based on the results of these trials, our collaboration partners intend to file a BLA with the FDA concurrently with European registration for both indications in mid-2000. Using our extensive understanding of the human immune system, we are building a diverse pipeline of monoclonal antibody product candidates. We are conducting clinical trials with two additional monoclonal antibodies. Hu-901, an anti-IgE antibody distinct from E25, is currently in a Phase I/II trial for treating severe peanut allergy. 5D12, an anti-CD40 antibody, is currently in a Phase I/II trial for treating Crohn's disease and in preclinical studies for treating other autoimmune diseases. We are conducting preclinical and research studies with 5A8, an anti-CD4 antibody for treating HIV, 166-32, a complement factor D inhibiting antibody for treating acute inflammation and 163-93, an anti-G-CSF receptor activating antibody for treating neutropenia. STRATEGY Our objective is to leverage our expertise in monoclonal antibodies and understanding of the human immune system to advance our product pipeline and become a profitable biopharmaceutical company. We intend to accomplish this through the following strategic initiatives: o CONTINUING TO IDENTIFY AND DEVELOP NOVEL MONOCLONAL ANTIBODIES. We have focused on the research and development of monoclonal antibodies since our inception and have successfully identified and obtained patents for novel monoclonal antibodies with potential therapeutic applications. We believe that monoclonal antibodies will be one of the primary areas for pharmaceutical development for the foreseeable future, particularly as genomic research identifies novel disease targets. We will continue to apply our expertise in immunology to identify new antibodies that may bind to these novel targets. We will focus on diseases for which current therapies are substandard or unavailable and the market opportunities are large. With product candidates targeting autoimmune diseases, HIV, inflammation and cancer, we believe that we have a diverse monoclonal antibody product pipeline. o MAXIMIZING THE MARKET OPPORTUNITY FOR ANTI-IGE ANTIBODIES. We are focused on identifying diseases and conditions for which anti-IgE antibodies are likely to provide a safe and effective therapy. In this regard, we intend to work with our partners, Novartis and Genentech, in establishing market awareness for E25 in asthma, allergic rhinitis and potential future indications targeted through the collaboration. Concurrently with this effort, we are pursuing the independent development of Hu-901 to demonstrate the efficacy of anti-IgE antibodies for indications our partners are not currently pursuing. o IDENTIFYING ATTRACTIVE ACQUISITION AND IN-LICENSING CANDIDATES. In addition to our in-house development efforts, we will continue our efforts to identify opportunities to acquire or in-license products and technologies. We believe that we are well positioned to continue to attract in-licensing and acquisition candidates as a result of our demonstrated expertise in immunology and monoclonal antibodies. Our anti-CD40 and anti-CD4 programs are the result of in-licensing. 29 <PAGE> o FORMING STRATEGIC COLLABORATIONS TO SUPPORT DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS. We often deem it advantageous to partner with large pharmaceutical and biotechnology companies to obtain funding and marketing support for our development activities. These collaborations generally: - enable us to develop a greater number of products than otherwise would be possible; - lower the substantial financial investment that is required of us to develop our products; and - provide us with domestic and international marketing and sales expertise for our partnered products once approved. Under future collaborations, we expect to retain strategically important development, manufacturing or marketing rights in order to optimize the value of our drug development opportunities. o RETAINING STRATEGIC MARKETING RIGHTS TO OUR PRODUCTS. As we pursue strategic collaborations, we intend to reserve strategic marketing rights for our products. We will focus initially on markets for which our products have a clear advantage over other therapies or that we can market using a relatively small, targeted sales force. HUMAN IMMUNE SYSTEM The human immune system has three general mechanisms that protect the body against infections, toxins and cancer by responding to and clearing foreign agents, or antigens, that have penetrated the body's protective barriers. These mechanisms are: o ANTIBODIES. The body produces proteins called antibodies that deactivate and help remove the antigens from the body. Each antibody matches an antigen much as a key matches a lock. Antibodies are made by specialized white blood cells called B cells, with the help of other white blood cells, called helper T cells. When a B cell encounters its triggering antigen, it manufactures millions of identical antibody molecules and releases them into the bloodstream. o CELL-MEDIATED IMMUNE RESPONSE. The second protective immune mechanism relies on cells to recognize and destroy foreign antigens. This mechanism is known as cell-mediated immunity. T cells are important in cell-mediated immune responses. Some T cells, called killer T cells, seek out and kill cancer cells or virus-infected cells. Helper T cells also play a role in cell-mediated immune response by stimulating inflammatory cells called macrophages to actively destroy foreign antigens, microorganisms and cancer cells. o INNATE IMMUNE RESPONSE. Innate immunity is the body's first line of defense against injury and infection and serves a surveillance and maintenance role. One part of the innate immune system involves large white blood cells called phagocytes (literally, "cell-eaters") that can engulf and digest foreign microorganisms and other antigens. Important phagocytes include macrophages, that rid the body of dead cells and other debris, and granulocytes, including neutrophils, that contain granules filled with potent chemicals. These chemicals, in addition to destroying microorganisms, play a key role in acute inflammatory reactions. Another part of the innate immune response is known as the complement system. The complement system includes a series of proteins that work to "complement" the activity of antibodies in destroying bacteria, either by stimulating the macrophages and neutrophils, or by puncturing the bacterial cell membrane to kill the cells. These proteins also cause the neutrophils to accumulate at the site of infection or tissue damage. Most of the time, the immune system protects us from infections, cancer and some toxic agents. However, sometimes the immune system actually causes the disease or symptoms of the disease. For example, in the case of allergic diseases, such as asthma and hay fever, the immune system responds to the antigen, or allergen in this case, by producing an IgE form of antibody. IgE is instrumental in triggering the symptoms of the disease. In other cases, T and B cells may recognize a part of the body as foreign, triggering an immune response against the body resulting in an autoimmune disease and associated tissue destruction. MONOCLONAL ANTIBODIES AS THERAPEUTICS Monoclonal antibodies represent an exciting area of novel therapeutic product development. Genetically engineered monoclonal antibodies are man-made antibodies that target a specific antigen. Most monoclonal antibodies are derived from animals such as mice. Advances in antibody design technologies have enabled 30 <PAGE> scientists to develop humanized (human-like) and fully human antibody products that can be administered to patients on a chronic basis with reduced concern for adverse responses by the human immune system. Advances in antibody production technologies, such as high productivity fermentation and transgenic plants and animals, have enabled manufacturers to produce antibody products more cost-effectively. Because of these advances, a large number of monoclonal antibodies are currently undergoing clinical and preclinical investigation. According to a survey conducted by the Pharmaceutical Research and Manufacturers of America, 74 out of 350, or 21% of all, biotechnology medicines in clinical trials in 1998 were antibodies. The FDA has approved eight therapeutic antibodies, six of them in the last three years, with total sales in 1999 in excess of $1.3 billion. Generally speaking, there are three basic methods for using monoclonal antibodies as therapeutics. Each of the approaches described below capitalizes on the monoclonal antibody's ability to precisely target selected receptors on specific cells: o BLOCKING CELL ACTIVITY AND IMMUNE FUNCTIONS -- monoclonal antibodies can be produced to bind to specific bioactive molecules or cell receptors to prevent undesirable cell responses, such as allergic reactions and autoimmune diseases. o ACTIVATING CELL ACTIVITY AND IMMUNE FUNCTIONS -- monoclonal antibodies can be produced to bind to specific cell receptors in order to activate a desired cellular response. o DELIVERING THERAPEUTIC AGENTS -- monoclonal antibodies bind to specific target receptors. Consequently, antibodies can be used to deliver active agents, such as radioactive isotopes and toxins, to specific cells and tissues targeted for destruction. PRODUCT DEVELOPMENT PROGRAMS We have three products in clinical development and are evaluating several product candidates in preclinical and research studies. Our drugs target various elements or malfunctions of the immune system, and all are monoclonal antibodies. We have designed drugs to deactivate or reduce the activity of the immune system for diseases caused by over-activation or inappropriate activation of immune responses, such as autoimmune and allergic diseases and acute inflammation. We also have designed drugs to activate the immune system for treatment of diseases where boosting immune protection is desirable, such as AIDS, infectious diseases and cancer. Our products have either resulted from our internal research and development activities or were in-licensed or acquired. The table below summarizes the development status for our principal product candidates. <TABLE> <CAPTION> ANTIBODY PRODUCT DESCRIPTION INDICATION STATUS PARTNERS -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> E25 Anti-IgE Allergic Asthma Phase III Novartis/Genentech Completed Seasonal Allergic Phase III Novartis/Genentech Rhinitis Completed Hu-901 Anti-IgE Severe Peanut Phase I/II -- Allergy 5D12 Anti-CD40 Crohn's Disease Phase I/II -- Other Autoimmune Preclinical -- Diseases 5A8 Anti-CD4 HIV/AIDS Preclinical -- 166-32 Anti-complement Acute Research -- Factor D Inflammation 163-93 Anti-G-CSF Chemotherapy-Induced Research -- Receptor Neutropenia Novartis and Genentech are disputing our rights to independently develop Hu-901. We discuss the dispute in this prospectus in the section entitled "Business--Pending Legal Proceedings." In addition, we have the right to develop and commercialize 5D12 only in Europe and Japan. </TABLE> 31 <PAGE> ANTI-IGE DEVELOPMENT -- E25 E25 is a humanized anti-IgE monoclonal antibody designed to prevent symptoms of allergic asthma and allergic rhinitis. E25 works by preventing the ability of allergens to activate the immune system. We are developing E25 in collaboration with Novartis and Genentech. The product has successfully completed Phase III clinical trials in both allergic asthma and seasonal allergic rhinitis. Our partners intend to file a BLA with the FDA concurrently with European registration for both indications by mid-2000. We expect E25 to be administered by subcutaneous injections once or twice per month. In allergic diseases, the immune system responds to the antigen, or allergen in this case, by producing IgE. IgE binds to the surface of mast cells and basophils. These cells, which are found in tissue and also circulate in the blood, contain chemicals such as histamine and leukotrienes, which induce inflammation. The first time an allergy-prone person is exposed to an allergen, he or she makes large amounts of an IgE antibody specific to that allergen. These IgE molecules attach to the surfaces of mast cells or basophils. When an IgE antibody sitting on a mast cell or basophil next comes in contact with its specific allergen, the IgE antibody signals the mast cell or basophil to release its powerful chemicals, causing tissue inflammation and asthma and allergy symptoms, including wheezing, bronchospasm, sneezing, runny nose, watery eyes and itching. E25 blocks IgE from binding to mast cells and basophils, thereby inhibiting the allergic response. The diagram below shows how allergic reactions are triggered (The Allergy Cascade) and how E25 works to prevent or reduce allergy symptoms (How E25 Works). <TABLE> <CAPTION> The Allergy Cascade How E25 Works <S> <C> <C> <C> [graphic] When an allergy-prone [graphic] E25 binds person is exposed to an to IgE and allergen such as ragweed, [graphic] he or she makes large [graphic] prevents IgE from amounts of IgE antibody attaching to mast to ragweed. cells. [graphic] These IgE antibodies bind to receptors on mast cells. [graphic] The next time a person [graphic] Without IgE on the mast encounters ragweed, it cross- cell, ragweed cannot cause links the IgE antibodies on the mast cell to release its mast cells and the IgE-primed powerful chemicals, mast cell releases its powerful chemicals, including histamine. [graphic] These chemicals cause the [graphic] and the person's asthma person to suffer asthma and allergy symptoms and allergy symptoms, such as are prevented or reduced. wheezing, bronchospasm, sneezing, runny nose, watery eyes and itching. </TABLE> 32 <PAGE> MARKET OPPORTUNITY Allergic reactions triggered by IgE include allergic rhinitis and allergic asthma. ALLERGIC RHINITIS. Allergic rhinitis is a disease characterized by runny nose, sneezing, congestion, itchy eyes and similar symptoms, and includes hay fever. Allergic rhinitis afflicts at least 39.5 million people in the United States, most of whom have seasonal allergies. In 1993, it was estimated that the total cost associated with all forms of allergic rhinitis in the United States was $3.4 billion. Doctors commonly treat the symptoms of allergic rhinitis with antihistamines, decongestants, nasal steroids and other drugs. For many patients, however, these medications do not completely alleviate the allergic reactions or eliminate the symptoms. According to a 1997 study, only 26% of treated allergic rhinitis patients reported symptoms as "well" or completely controlled. Doctors sometimes prescribe allergy shots, called hyposensitization therapy, for severely allergic persons to treat allergic rhinitis and systemic allergic reactions. If the treating health care professional knows the allergen to which the patient is reacting, hyposensitization can be effective. However, it is difficult to identify which allergen causes the patient's allergy, and the frequent and lengthy treatment protocols, as well as the potential for serious adverse side effects, generally make hyposensitization undesirable. ASTHMA. Asthma makes breathing difficult and is potentially life threatening. According to a 1998 report by the Centers for Disease Control, approximately 17 million people in the United States suffer from asthma. Published reports also indicate that asthma's prevalence in the United States has increased 75% from 1980 to 1994. Approximately two-thirds of these patients have allergic asthma. The American Lung Association estimates that over $9.8 billion is spent annually on asthma-related costs in the United States. Corticosteroids and beta-agonists, the mainstay of asthma therapy, are sometimes effective, yet each is associated with specific safety drawbacks. Particular side effects of corticosteroid treatment include growth retardation in children, osteoporosis and cataracts. Beta-agonists offer only short-term relief and do not control the underlying inflammation. Leukotriene modifiers, a new class of controller medications with the potential to reduce steroid requirements, appear to be modestly effective for some patients. However, these modifiers have been associated with drug interactions and adverse events including liver injury. Increasing use of beta-agonists indicates inadequate control of the underlying inflammation causing asthma. DEVELOPMENT STATUS AND CLINICAL DATA SEASONAL ALLERGIC RHINITIS. A Phase III clinical trial of E25 for seasonal allergic rhinitis was conducted in Scandinavia during the spring 1998 birch season. The randomized, placebo-controlled, multicenter clinical trial examined symptoms of rhinoconjunctivitis and rescue medication usage in 251 adult and adolescent patients with a history of birch pollen allergy. Patients were treated with 300 mg of E25 or placebo via subcutaneous injection every three or four weeks and treatment lasted eight or nine weeks. Patients received rescue medications, such as antihistamines, when their symptoms were severe enough to require additional medication. This Phase III clinical trial confirmed the statistically significant results of an earlier pivotal Phase II trial in 536 patients conducted during the 1997 ragweed season in the United States. The statistical significance of clinical results is determined by a widely-used statistical method that establishes the par value, or p value, of the clinical results. A par value of less than 0.01 (p<0.01) means that the chance of the clinical results occurring by accident is less than 1 in 100. Results from the Phase III seasonal allergic rhinitis trial were reported in May 1999 and showed that: o E25 DECREASED THE SEVERITY OF NASAL AND OCULAR ALLERGY SYMPTOMS. Compared to placebo, E25 treatment improved average daily nasal (p<0.001) and ocular (p=0.031) symptom severity scores. Patients treated with placebo experienced recurring sneezing, itchy nose and similar symptoms that increased over the pollen season and were greatest during highest pollen exposure. In contrast, patients treated with E25 did not experience an increase in nasal symptoms over the whole E25 treatment period compared to symptoms reported before the pollen season began and before treatment began. 21% of patients treated with E25 reported complete control of symptoms and an additional 59% reported symptom control was improved compared to previous seasons. In addition, 6 of 7 patients 33 <PAGE> who discontinued treatment because of unsatisfactory treatment effects were in the placebo group, even though there were twice as many patients receiving E25. o E25 DECREASED USE OF RESCUE MEDICATION. Patients receiving E25 used an average 0.5 antihistamine tablets per day versus 1.3 tablets per day in the placebo group (p<0.001), and required rescue medication on half as many days (p<0.001). Increased use of rescue medication by placebo group patients may have blunted the difference in symptom scores reported. o E25 IMPROVED PATIENTS' QUALITY OF LIFE. E25 treatment delivered clinically meaningful and statistically significant improvement over placebo in total rhinitis quality of life score (p < 0.001) and in the specific categories of activity limitations, nasal symptoms, non-nose and non-eye symptoms and practical problems. E25 treated patients also experienced improvements in sleep, eye symptoms and emotional state. o E25 TREATMENT WAS SAFE AND WELL TOLERATED. In this and in the previous trials, no antibodies against E25 were detected and no serum sickness, immune complex disease, severe allergic reactions or other allergy-related side effects were reported. Less than two percent of patients experienced side effects of headache (1.8%) and upper respiratory infection (1.2%). Three subjects reported urticaria (skin itching and hives) following E25 injections (0.5% of all E25 injections). The incidence of adverse events was similar for the E25 and placebo groups. The difference between placebo and E25 in all instances was statistically significant. In addition, Novartis has announced the initiation of a Phase IV evaluation in perennial (year-round) allergic rhinitis in the third quarter of 1999. ALLERGIC ASTHMA. Two Phase III clinical trials in allergic asthma have been completed in the United States in adults (12-75 years) and children (6-12 years). The two randomized, placebo-controlled, multicenter clinical trials included 525 patients in the adult study and 334 patients in the pediatric study. Clinicians who participated in the Phase III clinical trials presented the results at the American Academy of Allergy Asthma & Immunology meeting in San Diego, California in March 2000. In both trials, patients who were experiencing asthma symptoms, despite taking inhaled corticosteroid therapy, were given either E25 or placebo via subcutaneous injection every two or four weeks. Patients were monitored for asthma exacerbations, which were defined as symptoms requiring a doubling of inhaled corticosteroids or initiation of oral corticosteroids to maintain adequate asthma control. These trials were conducted over 28 weeks in two phases, followed by the following treatment extensions: o a 16-week stable treatment period that monitored patients taking either E25 or placebo in addition to ongoing treatment with inhaled corticosteroids and rescue beta-agonists; o a 12-week steroid reduction period (immediately following the stable treatment period), where the dosage of inhaled corticosteroids was gradually reduced in both the E25 and placebo groups; and o a treatment extension so that long term safety could be evaluated for a one year period. In patients receiving E25 versus placebo, the reduction in steroid dosage was greater in both adults (p<0.001) and children (p=0.001). In the 525 patient adult trial, steroid dosage was reduced at least 75% in half of the patients receiving E25 compared to at least 50% in half of the patients receiving placebo. The percentage of E25 patients experiencing asthma exacerbations was reduced in both the stable treatment period and the steroid reduction period. Additionally, the average daily dose of rescue medication during this period was less in both treatment phases for the E25 group than for the placebo group. During the stable treatment period, 14.6% (39 of 268 patients) of patients receiving E25 demonstrated asthma exacerbations compared to 23.3% (60 of 257) of patients receiving placebo (p=0.009). During the steroid reduction period, 21.3% (57 of 268) of patients receiving E25 experienced asthma exacerbations compared to 32.3% (83 of 257) of patients receiving placebo (p=0.026). Additionally, 40% (107 of 268) of patients receiving E25 completely withdrew from inhaled corticosteroids during this period compared to 19% (49 of 257) of patients receiving placebo. 34 <PAGE> In the 334 patient pediatric trial, steroid dosage was reduced by 100% in more than half of the patients receiving E25, compared to at least 71% in half of the patients receiving placebo. The percentage of E25 patients experiencing asthma exacerbations also was reduced during both the stable treatment period and the steroid reduction period and the average daily dose of rescue medication was less in both treatment phases for the E25 group than in the placebo group. During the stable treatment period, 16% (35 of 225 patients) of patients receiving E25 demonstrated asthma exacerbations compared to 23% (25 of 109) of patients receiving placebo (p=0.095). During the steroid reduction period, 18% (41 of 225) of patients receiving E25 experienced asthma exacerbations compared to 39% (42 of 109) of patients receiving placebo (p<0.001). 55% (124 of 225) of patients receiving E25 completely withdrew from inhaled corticosteroids during this phase compared to 39% (43 of 109) of patients receiving placebo. Results from the two trials showed that despite decreasing dosages of conventional therapies, E25 treatment reduced the number of serious asthma exacerbations. These studies corroborated results from an earlier Phase II clinical trial in allergic asthma recently reported in THE NEW ENGLAND JOURNAL OF MEDICINE. Headache and upper respiratory tract infection were the most frequently reported adverse events. The incidence of adverse events during the Phase III trials was similar in both the E25 and placebo groups. Safety data from the five-month follow-up phase of the trials are pending. Novartis and Genentech intend to file a BLA for E25 in the United States and to concurrently file for registration in Europe in mid-2000 for both allergic asthma and seasonal allergic rhinitis. We and our collaboration partners have begun clinical development of E26, a humanized anti-IgE monoclonal antibody with improved binding to IgE. Although E26 may be several years behind the development of E25, we believe the product may require lower doses to achieve the same clinical benefits as E25. ANTI-IGE DEVELOPMENT -- HU-901 Hu-901 is a humanized anti-IgE monoclonal antibody that we are developing to prevent symptoms of peanut induced anaphylaxis, a severe, potentially life-threatening allergic reaction. Hu-901 binds IgE in a way similar to E25, and is designed to prevent allergic reactions. At the initiation of our collaboration with Novartis and Genentech in 1996, Novartis and we were developing Hu-901, and Genentech was developing E25. We agreed with our collaboration partners to select E25 for joint development primarily because commercial-scale manufacturing capability existed for E25. In July 1999, we initiated our first independent clinical trial with Hu-901. As discussed in this prospectus under the heading "Business -- Pending Legal Proceedings," Novartis and Genentech are contesting our right to independently develop Hu-901. Regardless of the outcome, we believe that our development program will highlight the potential for additional indications for the use of anti-IgE antibodies and will encourage our partners to expand the development of anti-IgE more rapidly into additional indications. If we lose the litigation, we will terminate independent development of Hu-901. MARKET OPPORTUNITY. We believe anti-IgE antibodies, such as Hu-901, have potential applications beyond asthma and allergic rhinitis in treating other allergic reactions and diseases, including peanut and other food allergies. For example, patients with severe peanut allergy suffer gastrointestinal, skin and respiratory symptoms, and may also suffer potentially life-threatening anaphylaxis in response to ingesting peanuts. According to a recently published survey, peanut or tree nut (e.g., walnut, almond and cashew) allergy affects about 3 million people in the United States, 1.1% of the U.S. population. Current treatment is avoiding peanuts and peanut oil, which is used in preparing many food products. Complete avoidance requires constant vigilance and is difficult because prepared food labeling does not always identify peanut-derived ingredients. Accidental exposures can result in serious allergic reactions and sometimes death. Patients with severe peanut allergy take antihistamines for accidental exposure and epinephrine for severe anaphylactic reactions. 35 <PAGE> Approximately 2 to 4% of children and 1 to 2% of adults in the United States suffer from food allergies. If Hu-901 effectively reduces sensitivity to peanuts, we may also investigate its use in other food allergies. There is no approved preventive therapeutic for food allergies. Another indication for possible treatment with our anti-IgE product is atopic dermatitis, or eczema, a disease resulting in itching, blisters, redness, swelling and scaling or hardness of the skin. Eczema correlates with higher IgE levels and is prevalent in asthma patients. Severe eczema causes much distress to patients and greatly impairs their quality of life. Eczema is usually treated with skin hydration and topical steroids, and sometimes treated with antihistamines. Some individuals resist conventional therapies or develop unacceptable side effects. Eczema is the most common skin condition in children under the age of eleven. The percentage of children diagnosed with eczema has increased in the United States from 3% in the 1960s to 10% in the 1990s. DEVELOPMENT STATUS. We recently initiated a randomized, placebo-controlled, multicenter Phase I/II trial with Hu-901. We designed the trial to determine the extent to which Hu-901 treatment of patients with histories of severe reactions to peanut products decreases sensitivity to eating small amounts of a peanut preparation. ANTI-CD40 DEVELOPMENT -- 5D12 5D12 is an anti-CD40 monoclonal antibody that we are developing for treatment of autoimmune diseases. 5D12 blocks the CD40 pathway. The CD40 pathway enables B cells to produce antibodies and regulates cellular immune responses, including activation of macrophages and killer T cells. T and B cells sometimes recognize a part of the body as "non-self," triggering an immune response against the body that results in an autoimmune disease and associated tissue destruction. We believe that 5D12 is the only antibody in clinical development that binds to CD40 and inhibits cellular activation. We have exclusive rights to 5D12 in Europe and Japan under a license from Chiron. Preclinical studies have shown that interfering with the CD40 pathway may be beneficial in treating autoimmune diseases, including multiple sclerosis and lupus, and in preventing grafted organ rejection. 5D12 has potently inhibited activation of B cells and macrophages in tissue culture systems. 5D12 also was biologically active in preventing or delaying the appearance of clinical signs and symptoms in a primate model for multiple sclerosis. MARKET OPPORTUNITY. Based on our research and preclinical studies with 5D12, we believe the product could reduce production of antibodies and the activation of cellular immune responses that cause autoimmune diseases. Examples of such diseases and estimated potential market sizes in Europe and Japan include: o Crohn's disease, an inflammatory disease of the bowel (over 165,000 people); o rheumatoid arthritis (approximately 3 million people); o multiple sclerosis (approximately 200,000 people); o lupus (approximately 320,000 people); and o psoriasis (approximately 1 million people). DEVELOPMENT STATUS. We have initiated a 20 patient Phase I/II clinical study with 5D12 in Crohn's disease in Europe. The trial is a single dose, dose-escalating study designed to provide data regarding the safety of the product, its behavior, including half-life and clearance characteristics, and its biological activity using histological examination of biopsy tissue. We expect the results of this study to play an important role in determining clinical indications that we will pursue with 5D12. 36 <PAGE> ANTI-CD4 DEVELOPMENT -- 5A8 5A8 is a humanized anti-CD4 monoclonal antibody that is in preclinical development to treat human immunodeficiency virus, or HIV. The virus enters the host cell by binding to the CD4 receptors on these cells. In lab studies, our 5A8 antibody binds to the CD4 receptor on the cell surface and prevents viral entry into the cell, thereby blocking infection. We have exclusive worldwide rights to 5A8 through a license with Biogen. MARKET OPPORTUNITY. According to the World Health Organization, HIV infects approximately 1.4 million people in North America and Western Europe. A number of drugs targeting viral replication are being used, often in combination. About 30% of the patients treated with drug combinations, however, no longer respond since HIV has become drug resistant. In addition, many drug combinations produce a variety of undesirable toxic side effects. DEVELOPMENT STATUS. 5A8 is now in preclinical development to determine its usefulness to treat HIV-infected patients. In preliminary preclinical testing, 5A8 has potently blocked infections in all twenty-five strains of primary HIV isolates tested in cell culture. In a primate model for HIV infection, 5A8 showed robust antiviral activity. Preclinical tests with our 5A8 antibody showed no reduction in CD4-positive cell numbers, no evidence that any function of the immune system was suppressed and no toxic effects. OTHER PRODUCT CANDIDATES ANTI-FACTOR D DEVELOPMENT. 166-32 is a monoclonal antibody that binds to Factor D, a component of the complement system, and is in research to treat acute inflammation. The complement system is the body's first line of defense against infection. 166-32 binds to Factor D and inhibits complement activation. While the complement system generally functions to protect the body, complement system activation can become excessive and uncontrolled resulting in inflammation and tissue damage. This can occur in cases of acute tissue injury or surgical procedures that reduce blood flow into a tissue. In addition, during heart surgery involving cardiopulmonary bypass (CPB), the shunting of blood outside the body for circulation through mechanical devices has been shown to activate complement and result in tissue injury. Research studies with 166-32 in laboratory models for heart injury showed that low levels of 166-32 prevented heart damage, and that 166-32 inhibited complement activation in a model for CPB. ANTI-G-CSF RECEPTOR DEVELOPMENT. 163-93 is a monoclonal antibody that binds to the receptor for granulocyte colony stimulating factor (G-CSF) to treat a condition known as neutropenia, which often afflicts cancer patients who have undergone chemotherapy. Neutropenia is a deficiency of a type of granulocyte (a specialized white blood cell that contains granules filled with potent chemicals) called neutrophils, which results in a compromised immune system and susceptibility to infection. Granulocytes engulf and destroy bacteria and other microbial pathogens. G-CSF binds specific receptors on the surface of granulocytes and stimulates their proliferation and controls their activities. Recombinant G-CSF is sold by Amgen as Neupogen and has been used in cancer patients to help restore their immune protection. Amgen reported 1999 sales of $1.3 billion for Neupogen. We are developing 163-93 to stimulate proliferation and activity of granulocytes just as does G-CSF. 163-93 activates the same intracellular signaling pathway as G-CSF and supports the production of granulocytes from human bone marrow as does G-CSF. In a preliminary study, injecting 163-93 into primates stimulated granulocyte production without affecting any other blood cells or causing any toxicity. We believe that 163-93 could provide an alternative to G-CSF for therapeutic use in cancer patients during chemotherapy and may have the advantage of less frequent dosing. ADDITIONAL PRODUCTS IN RESEARCH AND DEVELOPMENT. We have additional discovery research projects directed towards developing new products and technologies to treat immunological diseases and cancer. 37 <PAGE> COLLABORATION AND LICENSING AGREEMENTS COLLABORATION WITH NOVARTIS AND GENENTECH. We are developing our lead product, E25, in collaboration with Novartis and Genentech. In 1990, we established a collaboration with Novartis to jointly develop anti-IgE antibodies to treat allergic diseases. In 1996, Genentech joined our collaboration with Novartis and we agreed to combine our respective anti-IgE development programs in a three-party collaboration. We and our collaboration partners selected E25 as the lead product for development and commercialization. Currently, under the terms of the collaboration agreements: o DEVELOPMENT. Novartis and Genentech are responsible for completing the development of and obtaining the regulatory approval for E25 and the other anti-IgE products developed through the collaboration. Novartis and Genentech share all development costs relating to E25 and other anti-IgE products that the collaboration may select for development in the United States and Europe. We and Novartis equally share development costs relating to China, Hong Kong, Korea, Singapore and Taiwan. Novartis is responsible for development costs in the rest of the world. o MANUFACTURING. Novartis and Genentech are responsible for manufacturing E25 and other selected anti-IgE products worldwide, subject to our right to manufacture up to 50% of the worldwide requirements of those products. o MARKETING. Novartis and Genentech share U.S. marketing rights, and Novartis has marketing rights in Europe (with Roche retaining the option to participate in Europe) to products developed through the collaboration. Novartis is responsible for marketing these products in the rest of the world, including China, Hong Kong, Korea, Singapore and Taiwan. o PAYMENTS. We may receive payments of up to $63.5 million based on completing development and marketing objectives for E25, $6.5 million of which we have already received. We may also receive payments of up to $14.0 million based on completing development objectives for E26, $1.0 million of which we have already received. Our next payments totaling $12 million are due on filing the E25 BLA. o ROYALTIES AND PROFIT SHARING. We may receive royalties based on net sales of E25 and other selected anti-IgE products in the United States and a share of Novartis' profits on these sales. We also may receive royalties on net sales of E25 and other selected anti-IgE products in Europe and the rest of the world (except for China, Hong Kong, Korea, Singapore and Taiwan) and an equal share of Novartis' profits from sales of E25 and other selected anti-IgE products in China, Hong Kong, Korea, Singapore and Taiwan. Our rights to the full amount of the payments, royalties and profits that we receive could be affected by the on-going legal proceedings with our former attorneys described under "Business -- Pending Legal Proceedings." The collaboration agreements provide that we may independently develop, without our collaboration partners, any anti-IgE product that the partners are not developing through the collaboration. If we choose to independently develop a product, Novartis has a right of first refusal on the licensing of that anti-IgE product. As described in this prospectus under the heading "Business -- Pending Legal Proceedings," we are currently involved in a dispute with our collaboration partners regarding our rights to independently develop Hu-901 and our right to use certain know-how and other information in our independent development efforts. Roche has an option to participate in commercializing E25 and other anti-IgE products which the collaboration selects for development in Japan and Europe. Roche may exercise this option if specified events relating to commercializing the product occur. Roche has waived this option for E25 in Japan. In addition, Roche has an option to assume Genentech's position in the collaboration if Genentech withdraws from the collaboration, as described below. Either Novartis or Genentech may withdraw from the collaboration on short notice. If either Novartis or Genentech withdraws, rights to E25 and any other products developed by the collaboration (including by 38 <PAGE> the withdrawing partner) revert to us and the remaining collaborator and, if Genentech is the withdrawing party, to Roche if Roche exercises the option described above. If the collaboration is dissolved in its entirety, we would continue to retain rights to develop anti-IgE antibodies under the terms of separate agreements with Novartis and Genentech. In addition to the collaboration agreements, we and Genentech entered into a cross-license agreement under which each party has an option to license the other party's patents relating to the development of anti-IgE antibodies for use in developing specific products. This option may be exercised at any time if either party chooses to independently develop a product as permitted under the collaboration agreements, if our collaboration with Novartis and Genentech terminates or if we and Genentech may mutually agree. OTHER COLLABORATIONS AND LICENSE AGREEMENTS CHIRON LICENSE. In 1998, our European subsidiary Tanox Pharma, B.V. entered into an agreement to license from Chiron exclusive research and development rights (except as to Chiron) to Chiron's murine monoclonal antibodies against CD40. Subject to our obligations to develop an anti-CD40 product and, under certain circumstances, to pay maintenance fees, we have an option to obtain a commercial license to Chiron's anti-CD40 antibodies, patents and technology for Europe and Japan. Chiron retains its commercial rights in the United States and the rest of the world. Additionally, Chiron has an option to obtain a commercial license for the United States and the rest of the world outside Europe and Japan to use anti-CD40 patents and technology that Tanox Pharma develops. Chiron has two awarded U.S. patents and has patents pending in Europe, Japan and Canada. Upon registering a product in Japan, the United Kingdom, France or Germany, Tanox Pharma has agreed to pay Chiron a registration fee and royalties based on its European and Japanese sales. Tanox Pharma has also agreed to pay Chiron a milestone payment if Tanox Pharma develops and commercializes a product. Chiron has agreed to pay us royalties based on its sales in the United States and the rest of the world. We may make a $1.0 million product development milestone payment, in addition to royalty payments under this agreement. The license terminates on the later of the expiration of 10 years following the first commercial product sale or the expiration of the last to expire of licensed patents. The currently licensed patent expires in 2013. BIOGEN. In 1998, we entered into an agreement to license from Biogen its anti-CD4 monoclonal antibody and intellectual property on an exclusive worldwide basis with limited sublicense rights. Biogen owns issued U.S. and European patents and has pending applications in Australia, Canada and Japan. We paid Biogen a license fee and agreed to make additional development milestone payments and royalty payments to Biogen based on annual net sales revenue levels. Additionally, we agreed to make milestone payments to Biogen that increase as product development continues and if specified corporate development events occur. In addition to royalty payments, we may make up to an aggregate of $10.4 million in product development milestone payments under this agreement. The license terminates on a country-by-country basis on the later of the expiration of 12 years following the first commercial product sale or the expiration or invalidity of applicable patents. The licensed patents expire in Europe in 2011 and in the United States in 2016. BIOVATION. We entered into an agreement in 1999 with Biovation Limited of Aberdeen, United Kingdom, to apply Biovation's proprietary deimmunization technology to certain of our monoclonal antibodies and protein products. Biovation also licensed the patents needed to develop and commercialize any deimmunized monoclonal antibodies it developed, and if the deimmunized monoclonal antibodies meet certain criteria, we will pay royalties to Biovation. Additionally, Tanox Pharma and Biovation have agreed to jointly develop their respective protein engineering technologies. We paid Biovation a license fee that will decrease if Biovation products transferred to us under the agreement do not achieve certain specifications. In addition to royalty payments, we may make up to an aggregate of $1.3 million in product development milestone payments under this agreement. The license terminates on the earlier of 10 years from the first commercial product sale, a formal determination that any licensed patents are invalid or unenforceable or such patents have expired. Biovation has filed a patent application for the licensed technology; if a patent issues under the application, it will expire in 2018. 39 <PAGE> PATENTS AND PROPRIETARY RIGHTS We pursue patent protection for our proprietary technology and products. We typically file U.S. patent applications, then international treaty applications, usually followed by filing foreign patent applications on our technology and products in those regions or countries where business considerations warrant filings. These countries include Japan, Canada, Australia, countries of the European Union, other European countries, and certain other Asian countries. We have five U.S. patents that cover and/or relate to the use of anti-IgE and other allergy/asthma products. We also hold patents in Europe, Canada, Japan, Singapore, Hong Kong and Australia covering such products. We have additional anti-IgE patents pending in the United States and internationally. Some of our patents are co-owned with Novartis. We also cross license Genentech's patents covering anti-IgE products. We have filed U.S. and international patent applications relating to anti-Factor D antibodies and anti-G-CSF receptor antibodies. We anticipate filing corresponding national phase applications in selected jurisdictions at the appropriate time. We have a number of other U.S. and foreign patents covering certain other proprietary technology and products, with over forty U.S. patents granted to date. Our issued patents expire between 2008 and 2014. We cannot assure you that one or more of the patents noted above would not be rescinded, held invalid, successfully opposed or revoked or narrowed or held unenforceable. Patenting biotechnology-related products and processes can involve uncertain and complex legal and factual questions and, to date, policies regarding the breadth of claims allowed in biotechnology patents are not necessarily consistent. Patents, if issued, may be challenged, invalidated, limited in their scope of coverage, circumvented or held unenforceable. Thus, any patents that we own or license from third parties may not provide any protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. Also, patent rights may not provide us with proprietary protection or competitive advantages against competitors with similar technology or different technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. Moreover, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. Litigation may be necessary to enforce any patents issued or licensed to us or to determine the scope and validity of these patents. We could incur substantial costs and divert technical and management personnel's time and attention if we must participate in litigation or if we must defend ourselves against patent suits against us. If the outcome of litigation is adverse to us, third parties may be able to use our patented invention without paying us. Moreover, we cannot assure you that our patents will not be infringed or successfully avoided through design innovation. Any of these events may materially and adversely affect our business. In addition, other companies, some of which may be our competitors, have filed applications for or have been issued patents, and may obtain additional patents and proprietary rights, relating to products or processes used in, necessary to, competitive with or otherwise related to our patents and products. These products and processes include, among other items, patents covering technology relating to the type of humanized monoclonal antibodies that we anticipate developing. Protein Design Labs, Inc. owns certain patents and patent applications relating to these humanized antibodies. We have recently taken a non-exclusive license to these patents and patent applications for one of our products. We do not know if licenses from Protein Design Labs will be available for our other antibody products. The Medical Research Council also owns patents relating to humanized antibodies, for which we hold a license. Our Medical Research Council license includes a sublicense to the Boss patent relating to antibody co-expression owned by Celltech, Ltd. Genentech has a pending application (the Cabilly Application) that is involved in an interference before the U.S. Patent & Trademark Office with the Celltech Boss patent. We may also develop products that are chimeric antibodies. Genentech owns a patent (the Cabilly Patent) relating to chimeric antibodies and instituted suit against us in 1994 claiming that we infringed this patent. We settled the lawsuit and, pursuant to the settlement, we acquired a non-exclusive license to the Cabilly Patent, the Cabilly Application and other Genentech patents (or patents to which Genentech has a license 40 <PAGE> and is free to grant a sublicense) relating to our anti-IgE antibody products. We also have certain rights to acquire a non-exclusive license from Genentech for the Cabilly Patent, the Cabilly Application and certain other Genentech patents for products not exclusively or co-exclusively licensed by Genentech to a third party and for certain products that do not compete with those of Genentech or its affiliates. In addition, other parties also own patents covering chimeric and/or deimmunized antibodies and/or processes applicable to making these antibodies. In addition, we hold a non-exclusive license to certain patents and patent applications, including two U.S. patents, owned by Immunex Corporation, relating to the G-CSF receptor. The patents and applications cover certain reagents that may be involved in making our anti-G-CSF receptor antibodies and other products we are developing, under which we must pay license execution and maintenance fees, milestone payments for each developed product and royalties on net sales of the product. The scope, enforceability and validity of these patents, the extent to which we must obtain licenses under these patents or under other proprietary rights and the cost and availability of licenses are unknown, but these factors may limit our ability to market our products. Moreover, even if a license were available, the payments that would be required could render uneconomic our efforts to market certain of our products. If we elect to manufacture or market these products without either a license or a favorable result in litigation, damages could be assessed that could be materially adverse to us. Further, failure to obtain a license could result in an injunction prohibiting us from manufacturing or selling the affected lines of products. In addition to patents, we rely on trade secrets and proprietary know-how. We seek protection, in part, through confidentiality and proprietary information agreements. These agreements may not provide meaningful protection or adequate remedies for our technology if unauthorized use or disclosure of this information occurs. The parties to these agreements may breach them. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, our competitors. We require our employees, directors, consultants, advisors, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality agreements on commencing an employment, consulting or other contractual relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and certain other parties, the agreements provide that all inventions conceived by the individual shall be our exclusive property. We cannot assure you, however, that these agreements will provide meaningful protection for our confidential information or trade secrets against or in the event of unauthorized use or disclosure of such information. GOVERNMENT REGULATION Producing and marketing our products and our research and development activities are subject to regulations relating to product safety and efficacy by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products. Before we may market a pharmaceutical product in the United States, the FDA requires us to complete the following steps: o preclinical laboratory and animal tests; o submission to the FDA of an investigational new drug application, or IND, which must become effective before human clinical trials may commence; o adequate and well controlled human clinical trials conforming with good laboratory and clinical practices to establish the safety and efficacy of the product; o submission to the FDA of a New Drug Application, or NDA, with respect to drugs, and a BLA with respect to biological products; and o FDA approval of the NDA or BLA before any commercial sale or shipment of the product. 41 <PAGE> In addition, the FDA requires the registration of each drug and approval of each manufacturing establishment. For our monoclonal antibody products we are subject to the simplified, interim procedure for well-characterized biologicals. Domestic manufacturing establishments are subject to FDA inspection and must comply with current good manufacturing practices, or cGMP, for pharmaceutical products. To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP and are subject to periodic FDA or other regulatory authority inspection under reciprocal agreements with the FDA. Preclinical tests include laboratory evaluation and animal studies to assess the potential safety and efficacy of the product and its formulation. To comply with FDA regulations, laboratories must conduct these preclinical safety tests according to Good Laboratory Practices. The results of the preclinical tests are submitted to the FDA as part of an IND, and the FDA reviews the results before the commencement of human clinical trials. Unless the FDA objects, the IND will become effective 30 days following its receipt. There is no certainty that submission of an IND will result in FDA authorization to commence clinical trials. If we will ship a biological product produced within the United States to a foreign country for clinical trials, the product must comply with export regulations promulgated by the FDA before shipment. Human clinical trials involve the administration of the investigational compound to patients or other volunteers under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an independent institutional review board, or IRB, at the institution where the study will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Clinical trials are typically conducted in four sequential phases, which may overlap. In Phase I, the initial introduction of the product into human subjects, the product is tested for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase II involves studies in a limited patient population: o to determine the efficacy of the product for specific, targeted indications; o to determine dosage tolerance and optimal dosage; and o to identify possible adverse effects and safety risks. When a product is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken: o to continue to evaluate clinical efficacy; and o to test further for safety within an expanded patient population at geographically dispersed clinical study sites. We cannot assure you that we will successfully complete clinical testing of our products within any specified time period, if at all. Furthermore, the FDA or we may suspend clinical trials at any time if it is felt that the subjects or patients are being exposed to an unacceptable health risk. Phase IV studies are typically done post-FDA approval to address safety issues not addressed in the Phase I/II/III programs, for example, chronic use of the product. In the case of agents for life-threatening diseases, the initial human testing is generally done in patients rather than in healthy volunteers. Since these patients already are afflicted with the target disease, it is possible that these studies may provide results traditionally obtained in Phase II trials, potentially expediting the approval process. These trials are frequently referred to as "Phase I/II" trials. The results of the pharmaceutical development, preclinical studies and clinical studies are submitted to the FDA in the form of an NDA or BLA to approve marketing and commercial shipment of the product. The testing and approval process frequently requires substantial time and effort and we cannot assure you that any approval will be granted on a timely basis, if at all. The FDA may deny an NDA or BLA if applicable regulatory criteria are not satisfied, require additional testing or information or require postmarketing testing and surveillance to monitor the safety and efficacy of the product. Notwithstanding the submission of this data, the FDA may ultimately decide that the application does not satisfy its regulatory criteria for 42 <PAGE> approval. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for NDA or BLA approval is that the prospective manufacturer's quality control and manufacturing procedures conform to cGMP. In complying with standards set forth in these regulations, manufacturers must continue to expend time, monies and effort in the area of production and quality control to ensure full compliance. In addition to FDA regulations, we are subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and future federal, state or local regulations. For marketing outside the United States, we also are subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. Whether or not we obtain FDA approval,we must obtain approval of a product by the comparable regulatory authorities of foreign countries before manufacturing or marketing the product in those countries. The approval process varies from country to country and the time required for these approvals may differ substantially from that required for FDA approval. We cannot assure you that clinical trials conducted in one country will be accepted by other countries or that approval in one country will result in approval in any other country. For clinical trials conducted outside the United States, the clinical stages are comparable to the phases of clinical development established by the FDA. COMPETITION The pharmaceutical and biotechnology industries are characterized by rapidly evolving technology and intense competition. Many companies, including major pharmaceutical and chemical companies, as well as specialized biotechnology companies, perform activities similar to ours. Many of these companies have substantially greater financial and other resources, larger research and development staffs and more extensive marketing and manufacturing organizations than ours. Many of these companies have significant experience in preclinical testing, human clinical trials and other regulatory approval procedures. Consequently, we chose to enter into the collaboration agreements with Novartis and Genentech, in part to secure the benefit of their experience in these areas, as well as the contribution of their greater financial resources. In addition, colleges, universities, governmental agencies and other public and private research organizations conduct research and may market commercial products on their own or through joint ventures. These institutions are becoming more active in seeking patent protection and licensing arrangements to collect royalties for using technology that they have developed. We compete with these institutions in recruiting and retaining highly qualified scientific personnel. The diseases that we have targeted, including allergic diseases, autoimmune diseases, transplantation, cancer, inflammation, and HIV infection, are intensely competitive areas targeted by both pharmaceutical companies and other biotechnology companies, including our collaborators, Novartis and Genentech. All of these companies may have competitive products on the market, may be testing their products in clinical trials or may be focusing on product approaches that could prove to be superior to our approaches. For instance, we are aware that some of these companies, which may be our competitors, have filed applications for or have been issued patents and may obtain additional patent and proprietary rights relating to products or processes used in, necessary to, competitive with or otherwise related to, our products or processes. These patents include, among other items, patents relating to humanized monoclonal antibodies. Additionally, our competition will be determined in part by the potential indications for which our antibodies are developed and ultimately approved by regulatory authorities. For some of our potential products, an important factor in competition may be the timing of market introduction of our products or competitive products. Accordingly, we expect the relative speed with which we develop our products, complete the necessary approval processes and are able to generate and market commercial quantities of the products to be important competitive factors. We expect that competition among products approved for sale will also be based, among other factors, on product efficacy and safety, timing and scope of regulatory 43 <PAGE> approval, product availability, advantages over alternative treatment methods, price and cost-effectiveness, development, distribution and marketing capabilities, third-party reimbursement and patent position. We are aware that several companies, including Novartis, have existing products that will compete with E25, if it is approved for sale, including corticosteriods, beta-agonists, antihistamines, leukotriene inhibitors and allergen immunotherapy. In addition, several companies have products in development that may compete with E25. These companies include, but are not limited to, IDEC (Anti-CD23), Immunex (sIL-4R), CellTech/Schering-Plough (Anti-IL5), Merck/Biogen (VLA-4 inhibitors), Magainin/Genentech (anti-IL-9) and Protein Design Labs (Anti-IL4). Our competitive position also depends upon our ability to: o attract and retain qualified personnel; o obtain patent protection or otherwise develop proprietary products or processes; o discover new therapeutic products that successfully treat human diseases; o secure sufficient capital resources to complete product development and regulatory processes; o build or obtain manufacturing facilities; and o build or obtain a sales organization. MANUFACTURING We have a small-scale production and purification facility in which we have produced our products in compliance with cGMP standards for use in Phase I and/or Phase II clinical trials. With funding from Novartis, we recently completed construction of a pilot manufacturing facility that we may use for larger-scale process development and cGMP production of animal cell culture derived products. The facility includes a 1500L bioreactor and occupies approximately 14,000 square feet of space now under lease to us in Houston, Texas. The new manufacturing facility is not yet operational, and the Company is pursuing required cGMP validation. The facility is available to both us and other companies for production of monoclonal antibodies and other biologic products for large-scale clinical trials and initial market launch. Under our agreements with Novartis and Genentech, Novartis and Genentech must manufacture E25 and any other anti-IgE products selected by us and our collaboration partners for development, although we have retained the right to manufacture and supply up to 50% of the worldwide requirements for E25 and the other selected products. Genentech will supply the initial quantities of E25 for product launch. Novartis has announced that it intends to supply E25 from a facility now under construction that has a capacity of more than one ton of active substance per year. Our current facility will not be adequate for commercial scale manufacturing requirements if we successfully develop our products. If we decide to establish a full-scale manufacturing facility, we will require substantial additional funds and must hire and train significant numbers of employees and comply with the extensive FDA regulations applicable to that facility. MARKETING AND SALES Novartis and Genentech will market E25 and the other products selected for development by the collaboration. Novartis and Genentech share U.S. marketing rights, and Novartis has marketing rights in Europe (with Roche retaining the option to participate in Europe). Novartis can market these products in the rest of the world, including China, Hong Kong, Korea, Singapore and Taiwan, where we will share costs and profits with Novartis. To effectively serve the worldwide markets, we intend to continue to collaborate with major pharmaceutical companies or prominent pharmaceutical sales and distribution organizations that can successfully market our products on a worldwide basis or within specific geographic territories. As we pursue strategic collaborations, we intend to reserve marketing rights for our products, to the extent commercially reasonable, including rights in the United States and selected Asian countries. We will focus initially on markets for which our products have a clear advantage over other therapies or which we may target using a 44 <PAGE> relatively small sales force. We currently do not have an internal sales and marketing capability. If we elect to retain marketing rights, we will have to build a sales and marketing infrastructure. FACILITIES We currently lease 35,624 square feet of laboratory and office space in Houston, Texas, under a lease which expires in March 2002, subject to a five-year renewal option. This space includes a biological product manufacturing facility occupying approximately 14,000 square feet of space. We lease approximately 2,690 square feet of temporary laboratory and office space in the Amsterdam Science Park in The Netherlands and intend to lease approximately 10,760 square feet of space there when it becomes available in 2001. We also lease approximately 6,500 square feet of space in the Hsinchu Science Based Industrial Park in Taiwan. We plan to obtain temporary additional space, before the end of 2000, to expand our research, clinical development and production capabilities. We are exploring alternatives to meet our longer term facility requirements for our U.S. operations. We do not foresee any significant difficulties in obtaining additional facilities. HUMAN RESOURCES Including the employees of our subsidiaries, we have 71 full-time employees, 58 of whom are based in the United States, 12 of whom are based in The Netherlands and one of whom is based in Taiwan. Approximately 55 of our employees are involved in research and product development activities. Twenty-nine of our employees hold Ph.D., M.D. or Sc.D. degrees and ten employees hold other advanced degrees. We consider our relations with our employees to be good. None of our employees are covered by collective bargaining agreements. We enter into confidentiality agreements with all of our employees, directors and consultants. We do not maintain, and do not currently intend to obtain, key employee life insurance on any of our personnel. PENDING LEGAL PROCEEDINGS TANOX BIOSYSTEMS, INC. VS. AKIN, GUMP, STRAUSS, HAUER AND FELD, L.L.P., THE ROBINSON LAW FIRM AND WILLIAMS, BIRNBERG & ANDERSON, AMERICAN ARBITRATION ASSOCIATION NO. 70-199-0167-96. We are arbitrating a fee dispute with the law firms that represented us in connection with a lawsuit involving Genentech and Roche relating to, among other things, the intellectual property rights of the parties surrounding the development of anti-IgE technology. We settled the litigation contemporaneously with the formation of our collaboration with Genentech. We initiated the arbitration proceeding after we and our attorneys could not reach agreement on the fee owed pursuant to the terms of our written fee agreement. The arbitration panel issued an award entitling the attorneys to receive approximately $3.5 million, including interest, payments ranging from 33 1/3% to 40% of the future milestone payments received by us from Genentech under the collaboration following product approval and 10% of the royalties that we receive on sales of anti-IgE products. We sought a court order vacating the arbitration award on the grounds that the arbitration decision exceeds the scope of the fee agreement in dispute, deviates materially from the evidence presented and is unsupportable as a matter of law. However, a judgment was entered confirming the award. We intend to pursue all available remedies, including appealing the decision. TANOX, INC. VS. NOVARTIS PHARMA AG, AMERICAN ARBITRATION ASSOCIATION NO. 50 T 153 00119 99; GENENTECH, INC., GENENTECH INTERNATIONAL LIMITED AND NOVARTIS PHARMA AG VS. TANOX, INC., CASE NO. C 99-2060; AND TANOX, INC. VS. GENENTECH, INC. AND GENENTECH INTERNATIONAL LIMITED, AMERICAN ARBITRATION ASSOCIATION NO. 74 Y 181 1113 99. We are currently pursuing clinical development of Hu-901 to determine its potential in treating peanut induced anaphylaxis independently of Novartis and Genentech. Novartis and Genentech have disputed our right to pursue development of Hu-901 independently and have claimed that we are using unspecified confidential and proprietary information of Novartis and Genentech that we have no right to use. We believe our agreements with Novartis and Genentech allow us to pursue the development of Hu-901. 45 <PAGE> In an effort to resolve this dispute, we initiated an arbitration with Novartis in March 1999 pursuant to our agreement with Novartis. In the arbitration, we are seeking to confirm our rights to independently develop certain anti-IgE products, including Hu-901, and to use know-how we received from Novartis. Novartis has claimed that the dispute does not constitute a dispute which we must arbitrate under our agreements and that our claimed rights to independently develop Hu-901 do not exist. Novartis has also claimed damages arising from our action. In response to the arbitration initiated by us against Novartis, Novartis and Genentech jointly filed suit against us in April 1999 in the United States District Court for the Northern District of California. In the lawsuit, Novartis and Genentech seek declarations that we cannot develop Hu-901 independently, that we cannot use confidential and proprietary information obtained from Novartis or Genentech for independent product development, and that we cannot pursue separate arbitrations on these matters against both Novartis and Genentech. Novartis and Genentech also claim undetermined actual and punitive damages resulting from our independent development of Hu-901, and they also seek a permanent injunction stopping our Hu-901 development and preventing us from continuing with our arbitrations on these matters. At the time the lawsuit was filed, Novartis also asked the Federal court for an emergency temporary stay of the arbitration requested by us. The United States District Court Judge denied Novartis' request and ordered Novartis to proceed with the arbitration. In July 1999, we initiated an arbitration proceeding against Genentech. In this arbitration, we are seeking to confirm that Genentech expressly acknowledged our independent development rights in our agreement with them and that Genentech agreed to allow us to use and disclose their confidential and proprietary information for purposes contemplated by our separate agreement with Novartis. We also are seeking to confirm that we have not used any of their confidential and proprietary information and that Genentech's lawsuit claims are unsupportable and made in bad faith, have impaired our ability to exercise our rights under our agreements with Novartis, violate our agreed dispute resolution procedures and violate their agreement not to interfere in our separate disputes with Novartis. In response, Genentech asserts that their disputes with us are not subject to arbitration, and should remain in Federal court. Additionally, Genentech asserts that our arbitration with Novartis should be joined with Genentech's arbitration. In September 1999, the United States District Court Judge issued an order staying all proceedings in the lawsuit and both arbitrations, except for the parties' opportunity to engage in limited written discovery in the form of requests for production of documents and written questions to each other. The Judge's order required the parties, with their respective chief executive officers present, to undertake to mediate all matters in dispute between them. The mediation took place on November 2 and 3, 1999 in San Francisco, California, and concluded unsuccessfully. To continue our arbitration proceedings, we must ask the court to allow our respective arbitrations with Novartis and Genentech to proceed. We intend to continue to pursue independent development of Hu-901 during the pendency of the above-described actions. If we are unsuccessful in these actions, we may not independently develop Hu-901 and other anti-IgE products covered by the collaboration with Novartis and Genentech and could be required to pay damages that could be significant. 46 <PAGE> MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES Our directors, executive officers and key employees, and their ages and positions as of March 7, 2000 are: NAME AGE POSITION - ----------------------------------- --- ------------------------------ Nancy T. Chang, Ph.D............... 50 Chairman of the Board, President and Chief Executive Officer John C. Morris..................... 56 Senior Vice President of Operations David W. Thomas, Ph.D. ............ 52 Senior Vice President of Research and Development David Duncan, Jr................... 51 Vice President of Finance and Chief Financial Officer John Blickenstaff.................. 46 Vice President of Administration, Secretary and Treasurer George Y. Wang, Sc.D............... 46 Vice President of Process Development and Production Eric P. Mirabel, J.D., LL.M. ...... 43 Vice President of Intellectual Property Tse Wen Chang, Ph.D.(1)(2)......... 52 Director Osama I. Mikhail, Ph.D.(1)(2)...... 52 Director William J. Jenkins, M.D.(2)........ 52 Director - --------------------------- (1) Member of the compensation committee. (2) Member of the audit committee. NANCY T. CHANG, PH.D. is one of our co-founders and has served as our President and Chairman of the Board of Directors since our organization in March 1986. Dr. Chang has served as our Chief Executive Officer since June 1990. From 1986 to 1992, Dr. Chang served as an Associate Professor at Baylor College of Medicine in the Division of Molecular Virology. Between 1981 and 1986, Dr. Chang was employed by Centocor, Inc., serving as the Director of Research, Molecular Biology Group, from 1984 to 1986. From 1980 to 1981, she was employed by Roche Institute of Molecular Biology. Dr. Chang received her Ph.D. in biological chemistry from Harvard University. JOHN C. MORRIS has served as our Senior Vice President of Operations since September 1997. From September 1996 to September 1997, he served as our Vice President of Quality Assurance. Prior to coming to us, Mr. Morris served as President at Oread Laboratories, Inc. from 1995 to 1996. From 1992 to 1995, Mr. Morris served as Vice President of Production Development, Regulatory Affairs and Quality Assurance at Sanofi Animal Health Inc. Mr. Morris received an M.S. in microbial biochemistry from the University of Missouri. DAVID W. THOMAS, PH.D. has served as our Senior Vice President of Research and Development since November 1997. Prior to joining us, Dr. Thomas served as Vice President of Biological Research at Hybridon, Inc. in 1997. From 1988 to 1997, he served as Director of Cell Biology and Immunology at Biogen, Inc. Prior to his positions at Biogen and Hybridon, Dr. Thomas held professorships at the University of Michigan Medical School and Washington University in St. Louis, Missouri. He received his Ph.D. degree in microbiology and immunology from the University of Colorado Health Sciences Center, followed by a postdoctoral fellowship in the Laboratory of Immunology of the National Institute of Allergy and Infectious Disease at the National Institutes of Health. DAVID DUNCAN, JR. has served as our Vice President of Finance and Chief Financial Officer since August 1998. Prior to joining us, from 1994 to March 1998, he served as Chief Financial Officer at Neuromedical Systems, Inc., which filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. bankruptcy code on March 26, 1999. From 1988 to 1994, Mr. Duncan served as Chief Financial Officer at Telios 47 <PAGE> Pharmaceuticals, Inc. From 1983 to 1988, he served as the Controller at Hybritech Incorporated. Mr. Duncan received an MBA from Indiana University. JOHN BLICKENSTAFF has served as our Vice President of Administration since April 1989 and has also served as Vice President of Finance from that time until March 1996. Mr. Blickenstaff also served as our Chief Financial Officer from June 1990 until March 1996. He joined us in March 1987 as Director of Finance and Administration, becoming our Secretary and Treasurer in September 1987. Between 1984 and 1987, Mr. Blickenstaff served as Operations Manager at Montgomery Engineering Company. Mr. Blickenstaff holds a B.S. in health sciences and an MBA from Brigham Young University. GEORGE Y. WANG, SC.D. has served as our Vice President of Process Development and Production since October 1994. He joined us in 1991 as our Assistant Director, BioProcessing Development. Prior to joining us, Dr. Wang held various engineering and management positions at IDEC Pharmaceuticals Corp., BP Amoco Corporation and MGI Pharmaceuticals, Inc. Dr. Wang received his Sc.D. in biochemical engineering from Massachusetts Institute of Technology. ERIC MIRABEL has served as our Vice President of Intellectual Property since 1994. He joined us in 1990 as our Patent Counsel. From 1986 to 1990 Mr. Mirabel practiced intellectual property law with the Houston firm of Butler and Binion. Mr. Mirabel received a B.S. in biochemistry from the University of British Columbia, a J.D. from Northwestern School of Law at Lewis and Clark College, and an LL.M. in patent and trade regulation law from the National Law Center at George Washington University. TSE WEN CHANG, PH.D. is one of our co-founders and has served as a member of our board of directors since our organization in March 1986. Dr. Chang served as our Vice President of Research and Development and Chief Scientific Officer from March 1986 until January 1997 when he resigned that position to assume the position of Dean of the College of Life Sciences at National Tsing Hua University in Hsinchu, Taiwan. Dr. Chang is currently a professor there. Dr. Chang was a professor at Baylor College of Medicine in the Division of Molecular Virology from 1986 to 1991. From 1984 to 1986, Dr. Chang served as Vice President of Research at Centocor, Inc. Dr. Chang obtained his Ph.D. from Harvard University in cell and developmental biology. OSAMA MIKHAIL, PH.D. has served as a member of our board of directors since 1994, and also has served as a consultant to us since 1993. Dr. Mikhail is currently Senior Vice President and Chief Strategic Officer at St. Luke's Episcopal Health System and Professor of Management and Policy Sciences at the University of Texas, School of Public Health, both in the Texas Medical Center, Houston, Texas. Dr. Mikhail has been associated with St. Luke's and the University of Texas School of Public Health since 1989. Dr. Mikhail received an MBA from the University of Pennsylvania's Wharton School and an M.S. and Ph.D. from the Graduate School of Industrial Administration, Carnegie-Mellon University. WILLIAM J. JENKINS, M.D. has served as a member of our board of directors since November 1999. Since the beginning of 1999, Dr. Jenkins has been a strategic consultant to the pharmaceutical industry, primarily at Hoffman-La Roche Inc. Prior to that, he served as Head of Clinical Development & Regulatory Affairs and a member of the board of directors of Novartis Pharma AG in Basel, Switzerland since 1992. Dr. Jenkins served as Head of Clinical Research for the Glaxo Group from 1988 to 1992. Dr. Jenkins received his medical degrees from the University of Cambridge. 48 <PAGE> SCIENTIFIC ADVISORS An important component of our scientific strategy is to establish collaborative relationships with leading researchers in our fields of interest. Certain of our scientific advisors attend periodic meetings and provide us with specific expertise in both research and clinical development. In addition, we have collaborative research relationships with certain individual advisors. We do not employ our scientific advisors, and they may have commitments to or consulting or advisory agreements with other entities that may limit their availability to us. These companies may also compete with us. Several of our advisors have, from time to time, devoted significant time and energy to our affairs. In general, our scientific advisors may hold stock options, own our stock and/or receive financial remuneration for their services. Our scientific advisors include: NAME TITLE AND AFFILIATION - ------------------------------------------------------------------------- K. Frank Austen, M.D................ Director, Inflammation and Allergic Diseases Brigham and Women's Hospital, Boston, Massachusetts James Larrick, M.D., Ph.D........... Managing Director and Founder, Panorama Research, Inc. Ethan M. Shevach, M.D............... Chief, Cellular Immunology Section, National Institutes of Health COMPOSITION OF THE BOARD OF DIRECTORS Our amended and restated certificate of incorporation and bylaws divide our board of directors into three classes of equal number: Classes I, II and III. Our stockholders elected directors comprising Class I to a term of office to expire at the 2001 annual meeting of stockholders; directors comprising Class II to a term of office to expire at the 2002 annual meeting of stockholders; and directors comprising Class III to a term of office to expire at the 2003 annual meeting of stockholders. At each annual meeting of stockholders beginning in 2001, the stockholders will elect the successors to directors whose terms will then expire. These directors will serve from the time of election and qualification until the third annual meeting of stockholders following election and until a successor is duly elected and qualified. Our bylaws also authorize the board of directors to fix the number of directors at not less than one nor more than nine. The board of directors currently has four members. The board of directors is considering an increase in the number of directors. Currently, Osama Mikhail is designated as a Class I director, whose term expires at the 2001 annual meeting of stockholders; Tse Wen Chang is designated as a Class II director, whose term expires at the 2002 annual meeting of stockholders; and Nancy T. Chang and William J. Jenkins are designated as Class III directors, whose terms expire at the 2003 annual meeting of stockholders. Each officer serves at the discretion of the board of directors. There are no family relationships among any of our directors, executive officers or key employees, although Drs. Nancy T. Chang and Tse Wen Chang previously were married. Our bylaws also require the affirmative vote of holders of at least two-thirds of the issued and outstanding shares of common stock to remove any director or the entire board of directors. Directors can only be removed for "cause." DIRECTOR COMPENSATION As compensation for serving on the board of directors, we granted Dr. Mikhail options to acquire 108,000 shares of common stock, 96,000 of which were granted at an exercise price per share of $1.04 and are all currently exercisable, 8,000 of which were granted at an exercise price per share of $4.06, none of which are currently exercisable, and 4,000 of which were granted at an exercise price per share of $12.50, none of which are currently exercisable. All of his options vest over a three-year period. On February 17, 2000, we granted Dr. Jenkins options to acquire 24,000 shares of common stock at an exercise price per share of $12.50, none of which are currently exercisable, and all of which vest over a two-year period. Outside directors also receive $1,000 for each board meeting attended and $500 for each committee meeting attended, except for Dr. Tse Wen Chang, who is compensated under a consulting agreement with us. Other 49 <PAGE> than the foregoing, the directors receive no other compensation for their services as directors. We reimburse our outside directors, on request, for reasonable out-of-pocket expenses incurred in attending board meetings. COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors currently has two committees: an audit committee and a compensation committee. The audit committee makes recommendations to our board of directors regarding the selection of independent auditors, reviews the results and scope of audit and other services provided by our independent auditors and reviews the accounting principles and auditing practices and procedures to be used for our financial statements. The compensation committee reviews and makes recommendations to our board of directors regarding the compensation of officers and other managerial employees. The compensation committee also considers and recommends grants of stock options under our stock option plans. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee made decisions concerning the compensation of our executive officers for the years ended December 31, 1997, 1998 and 1999, during which time Nancy T. Chang, our Chairman of the Board, President and Chief Executive Officer has been a member of the committee. No interlocking relationship exists between any member of our board of directors or our compensation committee and any member of the board of directors or compensation committee of any other company. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the annual compensation we paid during the year 1999 to our chief executive officer and the four highest paid executive officers whose total annual salary and bonus exceeded $100,000. These individuals are referred to as the "named executive officers" here and elsewhere in this prospectus. <TABLE> <CAPTION> ANNUAL COMPENSATION ------------------------------------------- OTHER ANNUAL NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION - ------------------------------------- ----------- ----------- ------------- <S> <C> <C> <C> Nancy T. Chang....................... $ 368,622 $58,000 $12,132(1) Chairman of the Board, President and Chief Executive Officer John C. Morris....................... 154,587 10,000 -- Senior Vice President of Operations David W. Thomas...................... 199,548 10,000 -- Senior Vice President of Research and Development David Duncan, Jr..................... 164,221 5,000 10,569(2) Vice President of Finance and Chief Financial Officer George Y. Wang....................... 134,359 -- -- Vice President of Process Development and Production </TABLE> - --------------------------- (1) Dr. Chang's other annual compensation includes $7,549 of taxable income associated with a company car, $4,000 associated with 401(k) matching and $583 relating to group term life insurance. (2) Mr. Duncan's other annual compensation includes $8,800 related to housing expenses, $1,054 associated with 401(k) matching and $715 relating to group term life insurance. 50 <PAGE> 1999 OPTION GRANTS The following table sets forth information regarding options granted to each of our named executive officers during the year 1999. The exercise prices of the options we granted were the fair market value of our common stock on the date of grant, as determined by the compensation committee of our board of directors. In determining the fair market value, the compensation committee considered information contained in a then current valuation report made for tax purposes, market conditions, business prospects, and the absence of a market for our common stock. The potential realizable value is calculated based on the ten-year term of the option at the time of grant. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent our prediction of our stock price performance. The potential realizable values at 5% and 10% appreciation are calculated by: o multiplying the number of shares of common stock under the option by $28.50 per share; o assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table until the expiration of the options; and o subtracting from that result the aggregate option exercise price. The options in this table were granted under our 1997 Stock Plan, have 10-year terms, will terminate before their expiration dates if the optionee leaves his employment with us, and, unless otherwise noted, vest over a period of five years. We have not granted any stock appreciation rights. The percentage shown below of options granted is based on an aggregate of 117,120 options we granted to employees during 1999. <TABLE> <CAPTION> POTENTIAL REALIZABLE VALUES AT ASSUMED NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS GRANTED PRICE APPRECIATION FOR UNDERLYING TO EMPLOYEES OPTION TERM OPTIONS IN FISCAL EXERCISE PRICE EXPIRATION ---------------------- NAME GRANTED YEAR 1999 PER SHARE DATE 5% 10% - ------------------------------------- ------------ ---------------- ---------------- ------------ --------- ----------- <S> <C> <C> <C> <C> <C> <C> Nancy T. Chang....................... -- -- -- -- -- -- John C. Morris(1).................... 16,000 13.7% $ 8.13 01/25/09 $ 612,696 $ 1,052,667 8,000 6.8 12.50 12/01/09 271,388 491,373 David W. Thomas(2)................... 16,000 13.7 8.13 01/25/09 612,696 1,052,667 16,000 13.7 12.50 12/01/09 542,776 982,747 David Duncan, Jr..................... -- -- -- -- -- -- George Y. Wang(3).................... 4,000 3.4 12.50 12/01/09 135,694 245,687 </TABLE> - --------------------------- (1) The vesting start date for the options to purchase 16,000 shares of common stock granted to Mr. Morris is January 25, 1999. 9,600 of these options vest over a period of three years and the remaining 6,400 of these options vest over a period of five years. The vesting start date for the options to purchase 8,000 shares of common stock granted to Mr. Morris is December 1, 1999. 4,800 of these options vest over a period of three years and the remaining 3,200 of these options vest over a period of five years. (2) The vesting start date for the options to purchase 16,000 shares of common stock granted to Mr. Thomas is January 25, 1999. The vesting start date for the options to purchase an additional 16,000 shares of common stock granted to Mr. Thomas is December 1, 1999. (3) The vesting start date for these options is December 1, 1999. 51 <PAGE> 1999 OPTION VALUES The following table describes for the named executive officers the exercisable and unexercisable options held by them as of December 31, 1999. No options were exercised by the named executive officers during the fiscal year ended December 31, 1999. The "Value of Unexercised In-the-Money Options at December 31, 1999" shown in the table is based on an initial public offering price of $28.50 per share, less the per share exercise price, multiplied by the number of shares issued upon exercise of the option. <TABLE> <CAPTION> NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT AT DECEMBER 31, 1999 DECEMBER 31, 1999 ------------------------------ ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------- ------------ -------------- ------------ -------------- <S> <C> <C> <C> <C> Nancy T. Chang....................... 260,800 391,200 $ 5,476,800 $8,215,200 John C. Morris....................... 51,199 100,801 1,075,179 2,066,821 David W. Thomas...................... 80,000 152,000 1,980,000 3,552,000 David Duncan, Jr..................... 38,399 153,601 782,380 3,129,620 George Y. Wang....................... 201,600 4,000 5,523,171 64,000 </TABLE> EMPLOYMENT AGREEMENTS We do not have employment agreements with our executive officers, other than agreements that we maintain with all of our employees and option agreements under which we issue incentive and non-qualified stock options to employees. EMPLOYEE BENEFIT PLANS 1987 STOCK OPTION PLAN Our 1987 Stock Option Plan expired on June 24, 1997. This plan provided for the grant of incentive stock options, which were intended to qualify for favorable tax treatment, and non-qualified stock options to eligible parties who were employees. Our board of directors adopted and our stockholders approved the plan on June 25, 1987. Under the terms of the plan, as amended in April 1989, we could issue options on 4,320,000 shares of our common stock. Special provisions applied to incentive stock options granted under the plan, including requirements that the exercise price of incentive stock options be at least equal to the fair market value of the common stock on the date of the grant. There was also a $100,000 limit on the value of stock, determined at the time of grant, covered by incentive stock options that first become exercisable by a holder in any calendar year. No person could receive an incentive stock option under the plan if, at the time of grant, the person owned directly or indirectly more than 10% of our total combined voting power. This restriction did not apply, however, if the option price was at least 110% of the fair market value of the common stock, and the exercise period was limited to five years. If a reorganization, recapitalization, stock dividend, merger, consolidation or other change in corporate structure affecting the number of issued shares of our common stock occurred, then our board of directors could make equitable adjustments to the terms of this plan. In particular, the board could make an equitable adjustment in the number and type of shares authorized by this plan, the number and type of shares covered by outstanding awards under this plan and the exercise prices of these awards. After the adjustments, any incentive stock options granted under the plan must have continued to constitute incentive stock options under applicable tax laws. Our board of directors could amend or terminate this plan at any time, although certain amendments required stockholder approval and an amendment or termination could not adversely affect any rights under outstanding stock options without the holder's consent. 52 <PAGE> For the year ended December 31, 1999, we granted no options, we cancelled options to purchase 32,000 shares of common stock and the holders of options to purchase 1,738,320 shares of common stock exercised those options. As of December 31, 1999, options to purchase an aggregate of 2,242,800 shares of common stock held by 26 employees were outstanding under the plan at exercise prices ranging from $0.28 to $7.50 per share with a weighted average exercise price of $4.03 per share. These options consist of incentive stock options to purchase 856,264 shares at a weighted average exercise price of $3.78 per share and non-qualified options to purchase 1,386,536 shares at a weighted average exercise price of $4.19 per share. At December 31, 1999, no shares were available for future option grants under the plan. After December 31, 1999, employees exercised options to purchase 379,800 shares of common stock. 1997 STOCK PLAN The board of directors adopted our 1997 Stock Plan on September 19, 1997, and our stockholders approved the plan to be effective as of November 1, 1997. This plan provides for the grant of incentive stock options to our employees and the grant of non-qualified stock options, awards of stock, stock appreciation rights, purchase rights and performance units to all types of eligible parties. The board of directors or, in the discretion of the board, the compensation committee or other committee appointed by the board of directors, consisting of at least two members of the board of directors administers the plan. We may grant options or other rights under the plan to some of our and our subsidiaries' directors, employees, consultants and advisors. We may also, with the consent of the holder, convert a holder's incentive stock options into on-qualified stock options. We have reserved 8,000,000 shares of authorized but unissued common stock for issuance under the plan. The plan extends for a 10-year period, beginning November 1, 1997. Special provisions apply to incentive stock options granted under the plan in a manner that is similar to those granted under the 1987 Stock Option Plan. The 1997 Stock Plan also contains adjustment provisions that are similar to those in the 1987 Stock Option Plan. For the year ended December 31, 1999, we granted options to purchase an aggregate of 125,120 shares of common stock under the 1997 Stock Plan at a weighted average exercise price of $10.60 per share. This includes incentive stock options to purchase 102,720 shares at a weighted average exercise price of $10.59 per share and non-qualified options to purchase 22,400 shares at a weighted average exercise price of $10.63 per share. In 1999, options to purchase 3,200 shares of common stock were exercised and options to purchase 8,000 shares were cancelled. As of December 31, 1999, 30 individuals held options to purchase a total of 636,320 shares of common stock under the plan at exercise prices ranging from $3.75 to $12.50 per share with a weighted average exercise price of $7.05 per share. These options consist of incentive stock options to purchase 206,656 shares at a weighted average exercise price of $9.71 per share and non-qualified options to purchase 429,664 shares at a weighted average exercise price of $5.77 per share. At December 31, 1999, there were 7,360,480 shares available for future option grants under the plan. After December 31, 1999 we granted options to purchase 8,000 shares of common stock, and option holders exercised options to purchase 13,987 shares of common stock. 1992 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN Under our 1992 Non-Employee Directors Stock Option Plan, we may grant non-qualified stock options to certain directors who are not also our employees. The plan was adopted by the board of directors and approved by our stockholders on January 10, 1992. The number of shares of common stock eligible for issuance under the plan is 480,000. The compensation committee administers the plan. We may issue options under the plan at any exercise price determined by the compensation committee. Generally, options granted under the plan expire upon voluntary resignation of the holder from the board of directors. Upon termination of a holder's tenure as a director for any other reason, the holder must exercise the options within 60 days thereafter or within 180 days after the holder's death or disability, but in no event later than the originally prescribed term of the option. Unless otherwise determined by the compensation committee, 53 <PAGE> options granted under the plan vest over a three-year period. The plan terminates on January 10, 2002, unless earlier terminated by the board of directors. For the year ended December 31, 1999, we granted options to purchase a total of 12,000 shares of common stock under the plan at a weighted average exercise price of $6.88 per share. As of December 31, 1999, one director held options to purchase an aggregate of 108,000 shares of common stock under the plan at exercise prices ranging from $1.04 to $12.50 per share with a weighted average of $1.69 per share. At December 31, 1999, 372,000 shares were available for future option grants under the plan. After December 31, 1999, we granted options to purchase 24,000 shares of common stock to one of our directors at an exercise price per share of $12.50 that vest over a two-year period. No options issued under the plan have been exercised. 2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Our board of directors adopted, and our stockholders approved, the 2000 Non-Employee Directors' Stock Option Plan on February 17, 2000. The plan automatically grants options to purchase shares of our common stock to our non-employee directors. The board of directors administers the plan. We have reserved a total of 500,000 shares of our common stock for issuance under the plan. We have not issued any options under this plan. After this offering, we will automatically issue options to our non-employee directors under this plan as follows: o each person who is elected or appointed to be a non-employee director for the first time will automatically receive an initial grant to purchase 15,000 shares; and o each person who is re-elected or re-appointed as a non-employee director will automatically receive a grant to purchase 5,000 shares. Directors serving on the board as of February 17, 2000 may not receive any options under this plan. The options are exercisable immediately but vest 1/36th per month for each month after the date of the grant over three years. As long as the option holder continues to serve with us or with an affiliate of ours, whether in the capacity of a director, an employee or a consultant, the option will continue to vest and be exercisable during its term. The options have an exercise price equal to 100% of the fair market value of our common stock on the grant date. The option term is ten years. Options terminate on the earlier of normal option termination or three months after the option holder's service terminates. If this termination is due to the option holder's disability, the post-termination exercise period is extended to the earlier of normal option termination or 12 months. If termination is due to the option holder's death or if the option holder dies within three months of the date on which his or her service terminates, the post-termination exercise period is extended to the earlier of normal option termination or 18 months following death. The option holder may transfer the option by gift to immediate family members or for estate planning purposes. The option holder may also designate a beneficiary to exercise the option if the option holder dies. If the option holder does not designate a beneficiary, the option exercise rights will pass by the option holder's will or by the laws of descent and distribution. If an option holder does not purchase the shares subject to his or her option before the option expires or otherwise terminates, the shares that are not purchased will again become available for issuance under the plan. Transactions that do not involve our receiving consideration, including a merger, consolidation, reorganization, stock dividend and stock split, may trigger a change in the class and number of shares subject to this plan and to outstanding options. If any of these events occurs, the board of directors will appropriately adjust the plan as to the class and the maximum number of shares subject to the plan and the 54 <PAGE> automatic option grants. It will also adjust outstanding options as to the class, number and price of shares subject to these options. If we dissolve or liquidate, outstanding options will terminate immediately before this event. However, we treat outstanding options differently in the following situations: o a sale, lease or other disposition of all or substantially all of our assets; o a merger or consolidation in which we are not the surviving corporation; and o a reverse merger in which we are the surviving corporation but the shares of our common stock outstanding immediately before the merger are converted by virtue of the merger into other property. In these situations, any surviving entity will either assume or replace all outstanding options under the plan. Otherwise, the vesting of the options will accelerate. The board of directors may suspend or terminate the plan at any time. GENERAL We intend to file a registration statement on Form S-8 upon the completion of this offering to register the sale of common stock issuable upon exercise of stock options issued under our stock option plans. 401(K) PLAN Effective January 1, 1992, we adopted a qualified retirement plan, or 401(k) plan, covering all of our employees who are at least 21 years of age and have completed at least one year of service with us. Under the plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,500 in 2000) and have the amount of the reduction contributed to the plan. The plan is covered by the Employee Retirement Income Security Act of 1974. We also intend for the plan to satisfy certain federal income tax law requirements so that the contributions by employees or by us to the plan, and income earned on plan contributions, are not taxable to employees until they withdraw from the plan. We also intend for any contributions we make to the plan to be deductible by us for federal income tax purposes. The trustee of the plan, at the direction of each participant, invests the assets of the plan in any of nine investment options. The plan permits, but does not require, us to make additional matching contributions on behalf of all participants in the plan. For the year ended December 31, 1998, we contributed matching contributions of approximately $66,000 to the plan. Our matching contribution for the year ending December 31, 1999 was 50% of employee contributions up to a maximum employer contribution of 2.5% of each participant's total compensation. Our matching contribution for the year ending December 31, 2000 will be 50% of employee contributions up to a maximum employer contribution of 2.5% of each participant's total compensation. The compensation committee of the board of directors administers the plan. OTHER OPTIONS We have granted non-qualified stock options not covered by the 1987 Stock Option Plan, the 1997 Stock Plan or the 1992 Non-Employee Directors Stock Option Plan to an outside, non-affiliated director and to key advisors and consultants to purchase an aggregate of 196,800 shares of common stock, net of cancellations, as of December 31, 1999, at a weighted average exercise price of $1.31 per share. All of these options are currently exercisable. After December 31, 1999, consultants exercised options to purchase 74,400 shares of common stock. 55 <PAGE> PRINCIPAL STOCKHOLDERS The following table sets forth information regarding beneficial ownership of our common stock as of March 7, 2000 by: o each stockholder known by us to be the beneficial owner of more than 5% of the outstanding shares of common stock; o each of our directors; o each of our named executive officers; and o all directors and officers as a group. Beneficial ownership is determined according to the rules of the Securities and Exchange Commission, and generally means that person has beneficial ownership of a security if he or she possesses sole or shared voting or investment power of that security, and includes options that are currently exercisable or exercisable within 60 days. Each director, officer or 5% or more stockholder, as the case may be, has furnished us information with respect to beneficial ownership. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below, based on the information each of them has given to us, have sole investment and voting power with respect to their shares, except where community property laws may apply. This table lists applicable percentage ownership based on 33,788,731 shares of common stock outstanding as of March 7, 2000, and also lists applicable percentage ownership based on 40,788,731 shares of common stock outstanding after completion of this offering. Options to purchase shares of our common stock that are exercisable within 60 days of March 7, 2000, are deemed to be beneficially owned by the persons holding these options for the purpose of computing percentage ownership of that person, but are not treated as outstanding for the purpose of computing any other person's ownership percentage. Shares underlying options that are deemed beneficially owned are listed in this table separately in the column labeled "Shares Subject to Options." These shares are included in the number of shares listed in the column labeled "Total Number." Unless otherwise indicated, the principal address of each stockholder below is: c/o Tanox, Inc., 10301 Stella Link, Houston, Texas 77025. <TABLE> <CAPTION> SHARES BENEFICIALLY OWNED -------------------------------------------------------------- TOTAL SHARES SUBJECT PERCENT BEFORE PERCENT AFTER NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER TO OPTIONS OFFERING OFFERING - ------------------------------------- --------- -------------- -------------- ------------- <S> <C> <C> <C> <C> DIRECTORS AND NAMED OFFICERS Nancy T. Chang(1).................... 6,977,643 260,800 20.5% 17.0% Tse Wen Chang(2)..................... 6,564,239 -- 19.4 16.1 George Y. Wang....................... 209,925 142,000 * * Osama I. Mikhail(3).................. 103,467 103,467 * * David W. Thomas(4)................... 86,400 83,200 * * John C. Morris....................... 54,399 54,399 * * David Duncan, Jr. ................... 38,399 26,092 * * William J. Jenkins(5)................ -- -- -- -- All directors and officers as a group (10 persons)(6).................... 15,018,760 863,858 43.3 36.1 5% STOCKHOLDERS Novartis AG(7)....................... 6,373,732 -- 18.9% 15.6% Alafi Capital Company(8)............. 2,514,724 -- 7.4 6.2 </TABLE> (FOOTNOTES ON FOLLOWING PAGE) 56 <PAGE> - --------------------------- * Less than 1% (1) Includes 6,429,318 shares of common stock owned by Robinhood Ventures, L.P. and 34,816 shares of common stock owned by AMC Ventures, L.P. Apex Enterprises, Inc., a corporation wholly-owned by Dr. Chang, is the sole general partner of Robinhood Ventures, L.P. and AMC Ventures, L.P. and has voting and investment control over the common stock owned by them. Includes 248,847 shares held in trust by Dr. Chang for her children. Includes 3,862 shares held by Dr. Chang's minor daughter, with respect to which Dr. Chang disclaims beneficial ownership. (2) Includes 256,481 shares held in trust by Dr. Chang for his children. Dr. Chang's address is College of Life Sciences, National Tsing Hua University, Hsinchu, Taiwan, Republic of China. (3) Dr. Mikhail's address is 6720 Bertner Ave., Suite B111, Houston, Texas 77030. (4) Includes 2,400 shares held by Dr. Thomas' spouse and children, with respect to which Dr. Thomas disclaims beneficial ownership. (5) Dr. Jenkins' address is Gelham, Church Road, Waxham, Norfolk NR12 0DY, United Kingdom. (6) See footnotes 1, 2 and 4 above. Includes 790,388 shares of common stock and 193,900 shares subject to options held by officers not shown in the table above. (7) The address of Novartis AG is S-202.502, CH-4002, Basel, Switzerland. (8) Includes 216,000 shares of common stock held by the Alafi Family Foundation, a non-profit organization, with respect to which Mr. Alafi disclaims beneficial ownership. Mr. Alafi is the General Partner of Alafi Capital Company. Alafi Capital Company's address is P.O. Box 7338, Berkeley, California 94707. 57 <PAGE> CERTAIN TRANSACTIONS REGISTRATION RIGHTS Some of our stockholders, including Nancy T. Chang, our Chairman, President and Chief Executive Officer, and Novartis and Tse Wen Chang, each of whom owns more than 10% of our common stock, have certain registration rights, which they may exercise after this offering. They may request that we register their shares for sale with the Securities and Exchange Commission, and, if all of the conditions that are contained in our agreements with them are met, we must register their shares. We must bear all the expenses of a registration. There are some restrictions on their rights, including that we are not obligated to effect more than one registration for their shares, except that we may be required, in certain circumstances, to register their shares up to three times using a short-form registration. For a more detailed description see also "Description of Capital Stock -- Registration Rights." NOVARTIS NOTE PAYABLE We have a loan agreement with Novartis, which, prior to this offering, held 18.9% of our common stock. Under the agreement, Novartis loaned us $10.0 million, bearing interest at a rate equal to LIBOR plus two percent (8.1% at December 31, 1999). Novartis has agreed to forgive interest on the loan through December 31, 1999. The loan is due December 31, 2005. Tanox and Novartis have agreed in principle that Novartis may partially or totally forgive the principal and future interest payments based on our future use of the facility. COLLABORATION AGREEMENTS WITH NOVARTIS We also have agreements with Novartis to jointly develop anti-IgE antibody products. For a more detailed description see "Business -- Collaboration and License Agreements." TRANSACTIONS WITH DIRECTORS In addition to being one of our directors, Tse Wen Chang is a consultant to us. In 1999, we paid $48,000 to Dr. Chang under the terms of his consulting agreement. Our Taiwan subsidiary, TanAsia Pharma, Ltd., also entered into a collaboration agreement, which expired in June 1999, with Dr. Chang and the National Tsing Hua University. Dr. Chang is a professor, and was formerly Dean of the College of Life Sciences, at National Tsing Hua University. Under the agreement with the university, Dr. Chang and other scientists at the university participated in certain research and development activities for our benefit. In 1999, we paid the university $20,250 under the terms of that agreement. LOANS TO MANAGEMENT In April 1999, we loaned John Blickenstaff, our Vice President of Administration, Secretary and Treasurer, $161,250 to enable him to purchase 258,000 shares of our common stock, pursuant to stock options he held that were soon to expire. This full recourse loan is secured by shares of our common stock owned by Mr. Blickenstaff, bears interest at a rate of 8.5% and is due and payable in full in September 2001. In October 1999, we loaned David W. Thomas, our Senior Vice President of Research and Development, $150,000 to enable him to purchase a residence in Houston. The loan is unsecured, bears interest at a rate of 8.5% per annum and is due and payable in full on the first to occur of the sale of his Massachusetts residence or July 15, 2000. 58 <PAGE> DESCRIPTION OF CAPITAL STOCK We may issue up to 120,000,000 shares of common stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01 per share. As of March 7, 2000, there were 33,788,731 shares of common stock outstanding held by 185 stockholders of record, and no shares of preferred stock were outstanding. We do not intend the following summary description of our capital stock to be complete and we qualify the description by referring to the provisions of applicable law and to our amended and restated certificate of incorporation and our bylaws, filed as exhibits to the registration statement of which this prospectus is a part. COMMON STOCK Based on the number of shares outstanding as of March 7, 2000 and giving effect to the issuance of the 7,000,000 shares of common stock offered pursuant to this prospectus there will be 40,788,731 shares of common stock outstanding upon the completion of this offering. In addition, as of March 7, 2000, there were outstanding stock options to purchase 2,747,733 shares of common stock. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. Holders of common stock may receive ratably the dividends, if any, declared from time to time by the board of directors out of legally available funds. Holders of common stock have no conversion, redemption or preemptive rights to subscribe to any of our securities. If any liquidation, dissolution or winding-up of our affairs occurs, holders of common stock may share ratably in our assets remaining after provision for payment of liabilities to creditors. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of any shares of preferred stock that we may issue in the future. PREFERRED STOCK We have no present plans to issue any shares of preferred stock. However, the board of directors may, without action by the stockholders, designate and issue preferred stock in one or more series and designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock. REGISTRATION RIGHTS After the completion of this offering, the holders of 21,530,980 shares of common stock will be entitled to rights with respect to the registration of these shares under the Securities Act. These rights include demand registration rights. Under the terms of the agreements providing registration rights, the holders of a specified minimum number of shares can demand that we register their shares. We must use our best efforts to effect a registration, subject to conditions and limitations. We are not required to effect more than three of these registrations pursuant to these demand registration rights. Under the terms of the agreements providing registration rights, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, these holders are entitled to notice of the registration and may include shares of common stock in the registration. The rights are subject to conditions and limitations, among them the right of the underwriters of an offering subject to the registration to limit the number of shares included in the registration. These registration rights have been waived with respect to this offering. Furthermore, stockholders with demand registration rights may require us to file additional registration statements on Form S-3, subject to conditions and limitations. We generally must bear all of the expenses of all of these registrations, except underwriting discounts and selling commissions. We also have agreed to indemnify stockholders who include shares in a registration statement from losses arising from violations by us of applicable securities laws in connection with the registration. Registration of any of the shares of common stock held by stockholders with registration rights would 59 <PAGE> result in shares becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of the registration. ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate takeovers. Subject to some exceptions, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless: o before the date of the business combination, the board of directors of the corporation approves the transaction; o upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding stock; or o the board of directors and at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder approve the business combination. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to various exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. This statute could prohibit or delay mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us. In addition, various provisions of our amended and restated certificate of incorporation and our bylaws, which are summarized in the following paragraphs, may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. REMOVAL OF DIRECTORS; VACANCIES. Our bylaws provide that directors may be removed from office only for cause and only by the affirmative vote of the holders of at least two-thirds of our total outstanding voting stock. Vacancies on our board of directors, including those resulting from an increase in the number of directors, may be filled only by the remaining directors, not by stockholders. CLASSIFIED BOARD OF DIRECTORS. Our bylaws divide our board into three classes of directors serving staggered, three year terms. The classification of the board has the effect of requiring at least two annual stockholder meetings, instead of one, to replace a majority of the members of the board of directors. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. Our bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to or mailed and received at our principal executive offices not less than 30 nor more than 60 days prior to the annual meeting. If less than 40 days notice has been given to the stockholders for the meeting, notice by the stockholder, to be timely, must be received not later than the close of business on the 10th day following the date on which notice of the meeting is given to stockholders. Our bylaws also specify certain requirements as to the form and content of a stockholder's notice. These provisions may preclude stockholders from bringing matters before an annual meeting. SPECIAL MEETINGS OF STOCKHOLDERS. Our bylaws provide that only a majority of the board of directors, the chairman of our board of directors or our president or chief executive officer may call a special meeting of our stockholders. PREFERRED STOCK. The board of directors may, without action by the stockholders, designate and issue preferred stock in one or more series and designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock. We cannot predict the effect of the issuance of any shares of preferred stock upon the rights of holders of our common stock until the board of directors 60 <PAGE> determines the specific rights of the holders of our preferred stock. However, the effects could include one or more of the following: o restricting dividends on our common stock; o diluting the voting power of our common stock; o impairing the liquidation rights of our common stock; or o discouraging or preventing a change in our control. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Section 145 of the Delaware General Corporation Law authorizes a corporation's board of directors to indemnify directors and officers in terms sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act. As permitted by Delaware law, our amended and restated certificate of incorporation includes a provision that eliminates the personal liability of our directors for monetary damages for breach of fiduciary duty as a director, except for liability: o for any breach of the director's duty of loyalty to us or our stockholders; o for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; o under Section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or o for any transaction from which the director derived an improper personal benefit. As permitted by Delaware law, our bylaws provide that: o we must indemnify our directors and officers to the fullest extent permitted by Delaware law; o we must advance expenses, as incurred, to our directors and officers in connection with a legal proceeding, subject to certain limited exceptions; and o the rights conferred in the bylaws are not exclusive. We have entered into indemnification agreements with each of our officers and directors to give them additional contractual assurances regarding the scope of the indemnification provided in our amended and restated certificate of incorporation and bylaws and to provide additional procedural protections. These agreements, among other things, require us to indemnify each director and officer to the fullest extent permitted by Delaware law, including indemnification for expenses such as attorneys' fees, judgments, fines and settlement amounts incurred by the director or officer in any action or proceeding, including any action by or in the right of us, arising out of the person's services as a director or officer of us, any subsidiary of ours or any other company or enterprise to which the person provides services at our request. At present, we are not aware of any pending or threatened litigation or proceeding involving any of our directors, officers, employees or agents where indemnification would be required or permitted. We believe that the provisions of our amended and restated articles of incorporation, bylaws and these indemnification agreements are necessary to attract and retain qualified persons as directors and officers. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is American Stock Transfer and Trust Company, New York, New York. LISTING We have applied for quotation of the common stock on the Nasdaq National Market under the symbol "TNOX." 61 <PAGE> SHARES ELIGIBLE FOR FUTURE SALE Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market or the perception that sales could occur, could adversely affect the market price of our common stock and our ability to sell equity securities. When we complete this offering, we will have a total of 40,788,731 shares of common stock outstanding. The 7,000,000 shares offered by this prospectus will be freely tradeable unless they are purchased by our "affiliates," as defined in Rule 144 under the Securities Act. Shares purchased by affiliates may generally only be sold pursuant to an effective registration statement under the Securities Act or in compliance with Rule 144 as described below. The remaining shares are "restricted," which means they were originally sold in offerings that were not subject to a registration statement filed with the Securities and Exchange Commission. These restricted shares may be resold only through registration under the Securities Act or under an available exemption from registration, such as provided through Rule 144. Directors and officers and stockholders who together own 32,040,783 shares of common stock will be subject to lock-up agreements providing that they will not offer, sell or otherwise dispose of common stock owned by them, other than shares of common stock acquired in this offering for a period of 180 days after the date of this prospectus. CIBC World Markets Corp., however, may in its sole discretion, at any time, without notice, release all or any portion of the shares subject to lock-up agreements. Upon expiration of the lock-up agreements, 7,724,426 shares will become eligible for sale pursuant to Rule 144(k), 21,334,800 shares will become eligible for sale under Rule 144 and 1,749,884 shares will become eligible for sale under Rule 701. RULE 144 Generally, Rule 144 as currently in effect provides that, beginning 90 days after the first date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year may sell within any three-month period, a number of shares that does not exceed the greater of: o 1% of the number of shares of common stock then outstanding, which, based on the shares outstanding as of March 7, 2000 will equal approximately 337,887 shares; or o the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of the notice on Form 144 with respect to the sale. Rule 144 provides limitations on the manner of sales and imposes requirements as to notice and the availability of current public information about us. RULE 144(K) Under Rule 144(k), a person who has not been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, may sell his or her shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, a person who has been a non-affiliate for at least two years may sell his or her shares in the open market immediately after the lock-up agreements expire. RULE 701 Rule 701 permits any of our employees, officers, directors, or consultants who purchased their shares under a compensatory stock or option plan or other written agreement prior to the effective date of this offering and who are not an affiliate to sell these shares under Rule 144 without complying with the holding period, public information, volume limitation or notice requirements of Rule 144. Rule 701 permits these persons who are our affiliates to sell these shares without complying with the holding period requirement of Rule 144. All holders of Rule 701 shares may not sell their Rule 701 shares until 90 days after the date of this prospectus. However, substantially all shares of our common stock issued under Rule 701 are subject to lock-up agreements described above. 62 <PAGE> Shortly following the date of this prospectus, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of common stock reserved for issuance under our stock option plans. Shares registered under this registration statement will, subject to Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately after the lock-up agreements expire. As of March 7, 2000, an aggregate of 2,747,733 shares of common stock were subject to outstanding options. REGISTRATION RIGHTS As of March 7, 2000, holders of 21,530,980 shares of common stock will be entitled to certain rights with respect to the registration of those shares under the Securities Act. After we register these shares, they will be freely tradeable. For a description of these rights, see "Description of Capital Stock." 63 <PAGE> UNDERWRITING We have entered into an underwriting agreement with the underwriters named below. CIBC World Markets Corp., FleetBoston Robertson Stephens Inc., Warburg Dillon Read LLC, Adams, Harkness & Hill, Inc. and KBC Securities Inc. are acting as representatives of the underwriters. The underwriting agreement provides for the purchase of a specific number of shares of common stock by each of the underwriters. The underwriters' obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of shares of common stock set forth opposite its name below: UNDERWRITER NUMBER OF SHARES - ------------------------------------- ----------------- CIBC World Markets Corp.............. FleetBoston Robertson Stephens Inc.................................. Warburg Dillon Read LLC.............. Adams, Harkness & Hill, Inc.......... KBC Securities Inc................... ----------------- Total.............................. 7,000,000 ================= The underwriters have agreed to purchase all of the shares offered by this prospectus (other than those covered by the over-allotment option described below) if any are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances. The shares should be ready for delivery on or about , 2000, against payment in immediately available funds. The representatives have advised us that the underwriters propose to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representatives may offer some of the shares to other securities dealers at such price less a concession of $ per share. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $ per share to other dealers. After the shares are released for sale to the public, the representatives may change the offering price and other selling terms at various times. We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 30 days after the date of this prospectus, permits the underwriters to purchase a maximum of 1,050,000 additional shares from us to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares covered by the option at the initial public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to the public will be $__________, and the total proceeds to us will be $_________________. The underwriters have severally agreed that, to the extent the over-allotment option is exercised, they will each purchase a number of additional shares proportionate to the underwriter's initial amount reflected in the above table. The following table provides information regarding the amount of the discount to be paid to the underwriters by us: <TABLE> <CAPTION> TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE OF PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION ---------- -------------------------- ---------------------------- <S> <C> <C> <C> Tanox................................ $ $ $ </TABLE> We estimate that our total expenses of the offering, excluding the underwriting discount, will be approximately $__________. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act. 64 <PAGE> KBC Bank, N.V., an affiliate of KBC Securities, Inc., one of our underwriters, has agreed with John Blickenstaff, our Vice President of Administration, Secretary and Treasurer, and one of our other employees, to purchase, at the option of Mr. Blickenstaff and our other employee, shares of common stock having a value of up to $3.7 million at the initial public offering price or, if the offering is not completed by May 16, 2000, at $28.50 per share, less a discount of seven percent. KBC will not resell any shares acquired under the agreement in this offering. KBC has also agreed not to resell these shares except in limited circumstances where the resale would be registered with the Securities and Exchange Commission under the Securities Act or subject to an exemption therefrom. We and our officers and directors and substantially all other stockholders have agreed to a 180-day "lock up" with respect to 32,040,783 shares of common stock that they beneficially own, including securities that are convertible into shares of common stock and securities that are exchangeable or exercisable for shares of common stock. This means that, subject to certain exceptions, for a period of 180 days following the date of this prospectus, we and such persons may not offer, sell, pledge or otherwise dispose of these securities without the prior written consent of CIBC World Markets Corp. The representatives have informed us that they do not expect discretionary sales by the underwriters to exceed 5% of the shares offered by this prospectus. The underwriters have reserved for sale up to 350,000 shares for employees and their direct family members, directors and other persons associated with us. These reserved shares will be sold at the initial public offering price that appears on the cover page of this prospectus. The number of shares available for sale to the general public in the offering will be reduced to the extent reserved shares are purchased by such persons. The underwriters and we reserve the right to terminate this program. The underwriters will offer to the general public, on the same terms as other shares offered by this prospectus, any reserved shares that are not purchased by such persons. There is no established trading market for the shares. The offering price for the shares has been determined by us and the representatives, based on the following factors: o prevailing market and general economic conditions; o our financial information; o our history and prospects; o Tanox and the industry in which we compete; o an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues; and o the present stage of our development and the above factors in relation to the market values and various valuation measures of other companies engaged in activities similar to ours. Rules of the Securities and Exchange Commission may limit the ability of the underwriters to bid for or purchase shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules: o Stabilizing transactions -- The representatives may make bids or purchases for the purpose of pegging, fixing or maintaining the price of the shares, so long as stabilizing bids do not exceed a specified maximum. o Over-allotment and syndicate covering transactions -- The underwriters may create a short position in the shares by selling more shares than are set forth on the cover page of this prospectus. If a short position is created in connection with the offering, the representatives may engage in syndicate covering transactions by purchasing shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option. o Penalty bids -- If the representatives purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering. 65 <PAGE> Stabilization and syndicate covering transactions may cause the price of the shares to be higher than it would be in the absence of such transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resales of the shares. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq National Market or otherwise. If such transactions are commenced, they may be discontinued without notice at any time. LEGAL MATTERS Chamberlain, Hrdlicka, White, Williams & Martin, Houston, Texas will pass upon certain legal matters with respect to the legality of the issuance of the shares of common stock offered by this prospectus. Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois will pass upon certain legal matters in connection with this offering for the underwriters. Wilburn O. McDonald, Jr. and seven other shareholders of Chamberlain, Hrdlicka, White, Williams & Martin, hold an aggregate of 9,266 shares of our common stock. EXPERTS The financial statements as of December 31, 1998 and 1999, and for each of the three years in the period ended December 31, 1999 included in this prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. Certain legal matters with respect to the statements in this prospectus under the captions "Risk Factors -- We depend on our patents and proprietary rights. The validity, enforceability and commercial value of these rights are highly uncertain," and "Business -- Patents and Proprietary Rights" have been reviewed and approved by Chamberlain, Hrdlicka, White, Williams & Martin, Houston, Texas, our patent counsel who are experts in these matters and are subject to an opinion to be rendered to the underwriters. We are including this information relying on their review and approval. WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form S-1 with the Securities and Exchange Commission in connection with this offering. In addition, upon completion of the offering, we must file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy the registration statement and any other documents filed by us at the Securities and Exchange Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the Public Reference Room. Our Securities and Exchange Commission filings are also available to the public at the Securities and Exchange Commission's Internet site at "http://www.sec.gov." This prospectus is part of the registration statement and does not contain all of the information included in the registration statement. Whenever a reference is made in this prospectus to any contract or other document of ours, the reference may not be complete and you should refer to the exhibits that are a part of the registration statement for a copy of the contract or document. After the offering, we intend to provide annual reports to our stockholders that include financial information examined and reported on by an independent public accounting firm. 66 <PAGE> TANOX, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ----- Report of Independent Public Accountants........................... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999....... F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 1997, 1998 and 1999...... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999........................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999................................. F-6 Notes to Consolidated Financial Statements......................... F-7 F-1 <PAGE> REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Tanox, Inc.: We have audited the accompanying consolidated balance sheets of Tanox, Inc., a Delaware corporation, and subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tanox, Inc., and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period December 31, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 1, 2000 F-2 <PAGE> TANOX, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, ---------------------------- 1998 1999 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents....... $ 28,352,000 $ 44,242,000 Short-term investments.......... 5,383,000 3,012,000 Accounts receivable............. 74,000 125,000 Interest receivable............. 253,000 414,000 Income taxes receivable......... 2,052,000 132,000 Prepaid expenses................ 91,000 114,000 ------------- ------------- Total current assets....... 36,205,000 48,039,000 PROPERTY AND EQUIPMENT: Laboratory and office equipment...................... 8,709,000 9,369,000 Leasehold improvements.......... 1,902,000 2,102,000 Furniture and fixtures.......... 92,000 119,000 ------------- ------------- 10,703,000 11,590,000 Less -- Accumulated depreciation and amortization............... (3,577,000) (4,577,000) ------------- ------------- Net property and equipment............... 7,126,000 7,013,000 OTHER ASSETS, net of accumulated amortization of $25,000 and $59,000, respectively........... 91,000 276,000 ------------- ------------- Total assets............... $ 43,422,000 $ 55,328,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................ $ 802,000 $ 874,000 Accrued liabilities............. 1,080,000 947,000 Accrued arbitration award....... -- 3,500,000 ------------- ------------- Total current liabilities............. 1,882,000 5,321,000 NOTE PAYABLE TO RELATED PARTY........ 10,000,000 10,000,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 10,000,000 shares authorized; none outstanding............... -- -- Common stock, $.01 par value; 120,000,000 shares authorized; 29,310,175 shares in 1998 and 33,324,402 shares in 1999 issued and outstanding......... 293,000 333,000 Additional paid-in capital...... 39,266,000 71,701,000 Deferred compensation........... (902,000) (651,000) Loans receivable from employees...................... -- (1,086,000) Other comprehensive income, cumulative translation adjustment..................... (2,000) 171,000 Retained earnings (deficit)..... (7,115,000) (30,461,000) ------------- ------------- Total stockholders' equity.................. 31,540,000 40,007,000 ------------- ------------- Total liabilities and stockholders' equity.... $ 43,422,000 55,328,000 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. F-3 <PAGE> TANOX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) <TABLE> <CAPTION> FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1998 1999 ------------ -------------- -------------- <S> <C> <C> <C> REVENUES: Development agreement with related party................. $ 1,271,000 $ 2,369,000 $ 1,063,000 Other development agreements and licensing fees................ 7,668,000 53,000 342,000 ------------ -------------- -------------- Total revenues........ 8,939,000 2,422,000 1,405,000 OPERATING COSTS AND EXPENSES: Research and development........ 6,926,000 11,933,000 17,163,000 General and administrative...... 2,230,000 3,431,000 8,582,000 ------------ -------------- -------------- Total operating costs and expenses........ 9,156,000 15,364,000 25,745,000 ------------ -------------- -------------- LOSS FROM OPERATIONS................. (217,000) (12,942,000) (24,340,000) OTHER INCOME (EXPENSE): Interest income................. 1,684,000 2,061,000 1,884,000 Interest expense................ (639,000) (825,000) (741,000) Other........................... -- 4,000 (115,000) ------------ -------------- -------------- Total other income.... 1,045,000 1,240,000 1,028,000 ------------ -------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES.... 828,000 (11,702,000) (23,312,000) (Provision) benefit of income taxes........ (198,000) 1,533,000 (34,000) ------------ -------------- -------------- NET INCOME (LOSS).................... $ 630,000 $ (10,169,000) $ (23,346,000) ============ ============== ============== EARNINGS (LOSS) PER SHARE: Basic........................... $ 0.02 $ (0.35) $ (0.75) ============ ============== ============== Diluted......................... $ 0.02 $ (0.35) $ (0.75) ============ ============== ============== SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE: Basic........................... 27,909,000 29,105,000 31,113,000 ============ ============== ============== Diluted......................... 31,190,000 29,105,000 31,113,000 ============ ============== ============== COMPREHENSIVE NET INCOME (LOSS): Net income (loss)............... $ 630,000 $ (10,169,000) $ (23,346,000) Foreign currency translation adjustment.................... -- (2,000) 173,000 ------------ -------------- -------------- TOTAL COMPREHENSIVE NET INCOME (LOSS)............................. $ 630,000 $ (10,171,000) $ (23,173,000) ============ ============== ============== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-4 <PAGE> TANOX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 <TABLE> <CAPTION> LOANS COMMON STOCK RECEIVABLE --------------------- ADDITIONAL DEFERRED TREASURY FROM SHARES PAR VALUE PAID-IN CAPITAL COMPENSATION STOCK EMPLOYEES --------- --------- --------------- ------------ -------- ---------- <S> <C> <C> <C> <C> <C> <C> BALANCES, December 31, 1996.......... 26,215,004 $262,000 $13,125,000 $ -- $ -- $ -- Issuance of common stock for cash, $7.50 per share, net of issuance costs................. 2,331,262 23,000 17,308,000 -- -- -- Purchase of treasury stock, 10,425 shares.................. -- -- -- -- (78,000) -- Issuance of common stock upon exercise of stock options...... 36,614 1,000 (9,000) -- 78,000 -- Capital contribution from forgiveness of interest by related party.................. -- -- 639,000 -- -- -- Deferred compensation related to stock options.................. -- -- 750,000 (750,000) -- -- Amortization of deferred compensation related to stock options........................ -- -- -- 25,000 -- -- Net income....................... -- -- -- -- -- -- --------- --------- --------------- ------------ -------- ---------- BALANCES, December 31, 1997.......... 28,582,880 286,000 31,813,000 (725,000) -- -- Issuance of common stock for cash, $II.25 per share, net of issuance costs................. 273,686 3,000 3,046,000 -- -- -- Issuance of common stock upon exercise of stock options...... 230,400 2,000 223,000 -- -- -- Exchange of mature common stock to exercise stock options...... (3,200) -- (36,000) -- -- -- Issuance of common stock to acquire foreign subsidiary..... 226,409 2,000 2,545,000 -- -- -- Income tax benefit from stock options exercised.............. -- -- 400,000 -- -- -- Capital contribution from forgiveness of interest by related party.................. -- -- 825,000 -- -- -- Deferred compensation related to stock options.................. -- -- 450,000 (450,000) -- -- Amortization of deferred compensation related to stock options........................ -- -- -- 273,000 -- -- Exchange translation adjustment..................... -- -- -- -- -- -- Net loss......................... -- -- -- -- -- -- --------- --------- --------------- ------------ -------- ---------- BALANCES, December 31, 1998.......... 29,310,175 293,000 39,266,000 (902,000) -- -- Issuance of common stock for cash, $12.50 per share, net of issuance costs................. 1,896,000 19,000 22,907,000 -- -- -- Issuance of common stock upon exercise of stock options...... 1,789,520 18,000 1,131,000 -- -- -- Issuance of common stock on a net issuance basis upon exercise of warrants....................... 86,632 -- -- -- -- -- Issuance of common stock to acquire foreign subsidiary..... 242,075 3,000 3,023,000 -- -- -- Capital contribution from forgiveness of interest by related party.................. -- -- 738,000 -- -- -- Deferred compensation related to stock options.................. -- -- 4,636,000 (60,000) -- -- Amortization of deferred compensation related to stock options........................ -- -- -- 311,000 -- -- Loans receivable from employees...................... -- -- -- -- -- (1,086,000) Exchange translation adjustment..................... -- -- -- -- -- -- Net loss......................... -- -- -- -- -- -- ---------- --------- --------------- ------------ -------- ----------- BALANCES, December 31, 1999.......... 33,324,402 $333,000 $71,701,000 $ (651,000) $ -- $(1,086,000) ========== ========= =============== ============ ======== =========== <CAPTION> OTHER COMPREHENSIVE INCOME- CUMULATIVE RETAINED TOTAL TRANSLATION EARNINGS STOCKHOLDERS' ADJUSTMENT (DEFICIT) EQUITY ------------- ----------- ------------- <S> <C> <C> <C> BALANCES, December 31, 1996.......... $ -- $ 2,424,000 $15,811,000 Issuance of common stock for cash, $7.50 per share, net of issuance costs................. -- -- 17,331,000 Purchase of treasury stock, 10,425 shares.................. -- -- (78,000) Issuance of common stock upon exercise of stock options...... -- -- 70,000 Capital contribution from forgiveness of interest by related party.................. -- -- 639,000 Deferred compensation related to stock options.................. -- -- -- Amortization of deferred compensation related to stock options........................ -- -- 25,000 Net income....................... -- 630,000 630,000 ------------- ----------- ------------- BALANCES, December 31, 1997.......... -- 3,054,000 34,428,000 Issuance of common stock for cash, $II.25 per share, net of issuance costs................. -- -- 3,049,000 Issuance of common stock upon exercise of stock options...... -- -- 225,000 Exchange of mature common stock to exercise stock options...... -- -- (36,000) Issuance of common stock to acquire foreign subsidiary..... -- -- 2,547,000 Income tax benefit from stock options exercised.............. -- -- 400,000 Capital contribution from forgiveness of interest by related party.................. -- -- 825,000 Deferred compensation related to stock options.................. -- -- -- Amortization of deferred compensation related to stock options........................ -- -- 273,000 Exchange translation adjustment..................... (2,000) -- (2,000) Net loss......................... -- (10,169,000) (10,169,000) ------------- ----------- ------------- BALANCES, December 31, 1998.......... (2,000) (7,115,000) 31,540,000 Issuance of common stock for cash, $12.50 per share, net of issuance costs................. -- -- 22,926,000 Issuance of common stock upon exercise of stock options...... -- -- 1,149,000 Issuance of common stock on a net issuance basis upon exercise of warrants....................... -- -- -- Issuance of common stock to acquire foreign subsidiary..... -- -- 3,026,000 Capital contribution from forgiveness of interest by related party.................. -- -- 738,000 Deferred compensation related to stock options.................. -- -- 4,576,000 Amortization of deferred compensation related to stock options........................ -- -- 311,000 Loans receivable from employees...................... -- -- (1,086,000) Exchange translation adjustment..................... 173,000 -- 173,000 Net loss......................... -- (23,346,000) (23,346,000) ------------- ------------ ------------ BALANCES, December 31, 1999.......... $ 171,000 $(30,461,000) $40,007,000 ============= ============ ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-5 <PAGE> TANOX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------- 1997 1998 1999 ------------- -------------- -------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............... $ 630,000 $ (10,169,000) $ (23,346,000) Adjustments to reconcile net income (loss) to net cash used in operating activities -- Depreciation and amortization............. 199,000 934,000 1,034,000 Interest expense forgiven by related party......... 639,000 825,000 738,000 Amortization of deferred compensation related to stock options............ 25,000 273,000 4,887,000 In-process research and development.............. -- 2,798,000 3,359,000 Changes in operating assets and liabilities -- Increase in accounts and interest receivables and prepaid expenses......... (17,000) (15,000) (235,000) Change in taxes receivable or payable............... (463,000) (1,576,000) 1,920,000 (Decrease) increase in accounts payable and accrued liabilities...... (694,000) 391,000 3,439,000 Decrease in collaboration advances................. (500,000) -- -- ------------- -------------- -------------- Net cash used in operating activities.......... (181,000) (6,539,000) (8,204,000) ------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments................... -- (9,517,000) (12,082,000) Maturity of short-term investments................... -- 4,134,000 14,453,000 Purchases of property and equipment..................... (520,000) (455,000) (887,000) Increase in other assets........ -- -- (219,000) Purchase of wholly owned subsidiary (net of cash acquired)..................... -- (364,000) (333,000) ------------- -------------- -------------- Net cash provided by (used in) investing activities.......... (520,000) (6,202,000) 932,000 ------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of note payable to related party................. 2,000,000 1,000,000 -- Issuance of employee loans in connection with the exercise of stock options.............. -- -- (1,086,000) Proceeds from issuance of common stock......................... 17,401,000 3,238,000 24,075,000 Purchases of treasury stock..... (78,000) -- -- ------------- -------------- -------------- Net cash provided by financing activities..... 19,323,000 4,238,000 22,989,000 IMPACT OF EXCHANGE RATES ON CASH..... -- (2,000) 173,000 ------------- -------------- -------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 18,622,000 (8,505,000) 15,890,000 CASH AND CASH EQUIVALENTS, beginning of year............................ 18,235,000 36,857,000 28,352,000 ------------- -------------- -------------- CASH AND CASH EQUIVALENTS, end of year............................... $ 36,857,000 $ 28,352,000 $ 44,242,000 ============= ============== ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for taxes......................... $ 661,000 $ 37,000 $ 137,000 Noncash investing and financing activities -- Capital contribution from forgiveness of interest by a related party....... 639,000 825,000 738,000 Receivable related to income tax benefit from stock options exercised................ -- 400,000 -- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-6 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION, BUSINESS AND RISK FACTORS: Tanox, Inc. (Tanox), was formerly known as Tanox Biosystems, Inc. and was originally incorporated as a Texas corporation on March 19, 1986. Tanox was reincorporated in Delaware in January 2000. Tanox is engaged in the discovery and development of therapeutic products that beneficially influence or are derived from the immune system. Tanox is focusing its product development efforts on therapeutics in three broad areas: immunology (asthma/allergy, autoimmune diseases and inflammation), infectious diseases and oncology. Tanox has not yet generated any significant revenues from product sales, nor is there any assurance of significant future revenues from product sales. The research and development activities engaged in by Tanox involve a high degree of risk and uncertainty. The ability of Tanox to successfully develop, manufacture and market its proprietary products is dependent upon many factors. These factors could include, but are not limited to, the need for additional financing, the reliance on collaborative arrangements for research and development, marketing and product commercialization and the ability to develop or obtain manufacturing, sales and marketing capabilities. Additional factors could include resolution of ongoing contingencies, including legal proceedings, changes in the level of sponsored research revenue, uncertainties as to patents and proprietary technologies, technological change and risk of obsolescence, development of its products, competition, government regulations and regulatory approval, and product liability exposure. As a result of the aforementioned factors and related uncertainties, there can be no assurance of Tanox's future success. Tanox entered into a development and licensing agreement with Novartis Pharma AG (Novartis) in May 1990. Under this agreement, Tanox and Novartis agreed to jointly develop certain products for IgE-mediated diseases, including asthma and allergies. Tanox received a contract payment upon signing the agreement and has received additional contract payments and reimbursement payments upon the occurrence of specified events. Under a separate agreement (the Stock Agreement), Tanox and Novartis also agreed to the sale and purchase of shares of Tanox's common stock. Sales of these shares were completed in May 1990, May 1992 and June 1994. Tanox notified Novartis of the termination of the Stock Agreement as provided therein, and the termination was effective as of May 10, 1997. Novartis owned approximately 19.1 percent of Tanox's outstanding common stock at December 31, 1999. On December 22, 1993, Tanox sued Genentech, Inc. (Genentech), F. Hoffman-La Roche, Ltd., Roche Holdings, Inc., Roche Holding Ltd. and Hoffman-La Roche, Inc. (collectively referred to as "Roche"), in Harris County District Court in Houston, Texas. The action arose from collaboration discussions between Tanox and Genentech in 1989 and 1990 relating to Tanox's anti-IgE product as a treatment for IgE-mediated diseases, including allergy and asthma. In response, Genentech filed suit against Tanox for patent infringement and subsequently named Novartis in the suit. Tanox's litigation against Genentech and Roche and Genentech's litigation against Tanox and Novartis were settled in July 1996. Contemporaneously with the settlement, Genentech, Novartis and Tanox also entered into a binding agreement in principle to combine their existing anti-IgE antibody programs into a cooperative effort to develop and commercialize selected anti-IgE antibodies (the Three-Party Collaboration). Tanox also entered into additional licensing arrangements with Genentech. Tanox received an initial payment upon entering into the Three-Party Collaboration and settling the litigation. Tanox received and will receive additional milestone and royalty payments upon the accomplishment of specified subsequent events. Novartis or Genentech may terminate their participation in the Three-Party Collaboration on short notice, subject to reversion of product rights to Tanox and the remaining collaborator. F-7 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ACQUISITION OF PANGENETICS B.V.: In March 1998, Tanox acquired the common stock of Tanox Pharma B.V. (formerly PanGenetics), a biotechnology company located in Amsterdam, The Netherlands. Tanox recorded the transaction for accounting purposes as a purchase, and the consolidated financial statements include the operations of Tanox Pharma subsequent to the acquisition date. Under the terms of the agreement, Tanox purchased Tanox Pharma for an initial cash payment of $508,000 and 226,409 shares of common stock, valued at $II.25 per share, for a total initial consideration of $3,055,000. In addition, Tanox agreed to pay future consideration, in two installments, totaling up to $667,000 in cash and 484,147 shares of common stock upon occurrence of specified future events. These events include originating at least three additional reseach projects within a three year period, retaining the services of two individuals for 36 months and maintaining a certain level of government grants and subsidies. Any additional consideration will be paid to all shareholders in proportion to their ownership at the acquisition date. In September 1999, Tanox made the second installment payments of $333,000 in cash and 242,075 shares of common stock valued at $12.50 per share, for a total additional consideration of $3,359,000. If the specified future events take place and the final future payment is made in March 2001, Tanox will record an additional purchase price amount based on the cash paid and fair value of the common stock issued at the time of payment. Tanox engaged an independent firm to perform an appraisal of the assets acquired in the transaction. The appraisal was completed and the report issued in 1998. The acquisition of Tanox Pharma was accounted for under the purchase method of accounting in which the aggregate purchase price was allocated to tangible and intangible assets acquired based on their relative fair values as of the date of the transactions. At the time of the acquisition, the total current and future consideration of the acquisition was valued for accounting purposes at $9.2 million, based on the total of the cash and then fair value of common stock paid to Tanox Pharma shareholders. Of this amount, we allocated approximately $0.2 million to tangible fixed assets, $0.1 million to intangible assets, $7.2 million to in-process research and development and $1.7 million to goodwill. The valuation of acquired in-process research and development considered: o the current technological feasibility, scientific and development states of the anti-CD40 research project; o the expected amount of time and resources required to complete the projects; o the alternative future use of the acquired research and development; and o valuation and allocation approaches. Tanox's ability to commercialize the acquired anti-CD40 research project is affected by several risks. These risks include: o Tanox's ability to construct low cost versions of the antibody; o successful preclinical testing; o successful completion of Phase I, II and III clinical testing; o successful filing and acceptance of European and Japanese regulatory submissions; o Tanox's ability to successfully commercialize the anti-CD40 monoclonal antibody by itself or in connection with a collaborative partner; and o Tanox's ability to manufacture the anti-CD40 monoclonal antibody at a competitive cost. F-8 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At the time of the acquisition, the anti-CD40 monoclonal antibody required additional development work and preclinical testing to enter clinical trials. In order for anti-CD40 to become a marketable product, it was necessary to conduct several clinical trials and to improve the manufacturing of the product. Tanox estimated at the time of the acquisition that it would take from seven to nine years and cost at least $50 million to complete the development of the anti-CD40 product. The initial purchase price installment was allocated as follows: In-process research and development $2,798,000 Net working capital ............... 125,000 Intangible assets ................. 100,000 Tangible fixed assets ............. 22,000 Noncurrent financial assets ....... 10,000 ---------- Total ........................ $3,055,000 ========== The allocation of the second installment payment of $3,359,000 was assigned to in-process research and development based on the appraisal. Accordingly, Tanox's financial statements for the years ended December 31, 1998 and 1999 include a charge of $2,798,000 in 1998 and $3,359,000 in 1999 for expensing the cost of the in-process research and development. If the final purchase price payments are made to the former shareholders of Tanox Pharma in 2001, Tanox anticipates that the cost of such additional payments will be allocated to acquired in-process research and development and goodwill based upon the appraisal obtained as of the date of the acquisition. If Tanox had acquired PanGenetics prior to January 1, 1997, the unaudited pro forma financial results would have been as follows: <TABLE> <CAPTION> 1997 1998 1999 ------------- -------------- -------------- <S> <C> <C> <C> Total assets......................... $ 44,984,000 $ 43,422,000 $ 55,328,000 Total revenues....................... 9,384,000 2,439,000 1,405,000 Net income (loss).................... 557,000 (7,473,000) (19,988,000) Basic earnings (loss) per share...... 0.02 (0.25) (0.64) Diluted earnings (loss) per share.... 0.02 (0.25) (0.64) </TABLE> 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Tanox and its wholly owned subsidiaries, Tanox Pharma International, Inc., Tanox Pharma B.V. and TanAsia Pharma, Ltd. Intercompany transactions and balances are eliminated in consolidation. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. F-9 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION Revenues associated with development agreements which include rights to license or sublicense Tanox's technology or product rights are recognized when payments are earned. Revenues earned under development agreements include payments for milestone achievements and payments for sponsored research. Milestone payments are received under best efforts contracts, and such revenues are not refundable. Any revenue from milestones is recognized when the milestones are achieved and there are no remaining performance obligations. Revenues earned in connection with sponsored research are recognized as Tanox performs its obligations related to such research. Any revenue contingent upon future performance by Tanox is deferred and recognized as the performance is completed. Tanox recognized revenues of $6.3 million, $2.4 million and $1.1 million during 1997, 1998 and 1999, respectively, under the Three-Party Collaboration described in Note 1. Included in these revenues are milestone payments of $5.0 million, $1.5 million and $1.0 million, respectively. The remainder of the revenues related to sponsored research. Expenses incurred related to these agreements were approximately $1.3 million, $0.2 million and $0.1 million in 1997, 1998 and 1999, respectively. Revenues from collaborative agreements with Novartis accounted for 15 percent of 1997 revenues, 98 percent of 1998 revenues and 76 percent of 1999 revenues. Revenues from collaborative agreements with Genentech accounted for 56 percent of 1997 revenues and none of 1998 and 1999 revenues. At December 31, 1998, Tanox had accounts receivable of approximately $14,000 for estimated costs reimbursable under the Three-Party Collaboration. There were no receivables under the Three-Party Collaboration at December 31, 1999. Tanox recognized revenues of $2.5 million in 1997 from advances for sponsored research made to Tanox in 1996 and 1997 under a development and licensing agreement (the Takara Agreement) with Takara Shuzo, Ltd.. The Takara Agreement was concluded effective November 30, 1997. The Takara Agreement accounted for 28 percent of 1997 revenues. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. SHORT-TERM INVESTMENTS Short-term investments consist of U.S. Government agency debt obligations and investment grade commercial paper with an original maturity greater than three months but less than one year. Tanox's policy is to hold short-term investments until maturity. Short-term investments are recorded at cost, which approximates fair value. Tanox has no available-for-sale or trading securities. PROPERTY AND EQUIPMENT Property and equipment is carried at cost and depreciated on a straight-line basis over the estimated useful economic lives of the assets or, in the case of leasehold improvements, over the remaining term of the lease. The estimated useful lives employed in computing depreciation are three to seven years for laboratory and office equipment, five to seven years for furniture and fixtures, and the lesser of nine years or the remaining lease term for leasehold improvements. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. Maintenance and repairs are charged to expense when incurred. F-10 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Tanox has adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Management periodically reviews long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If factors indicate that an asset should be evaluated for possible impairment, management compares estimated undiscounted future operating cash flow from the related asset to the carrying amount of the asset. If the carrying amount of the asset were greater than undiscounted future operation cash flow, an impairment loss would be recognized. Any impairment loss would be computed as the excess of the carrying amount of the asset over the estimated fair value of the asset (calculated based on discounting estimated future operating cash flows). The application of SFAS No. 121 has had no material impact on Tanox's financial position or results of operations. RESEARCH AND DEVELOPMENT Research and development costs, including incidental patent costs, are expensed as incurred. ACCRUED LIABILITIES Accrued liabilities at December 31, 1998 and 1999, consist of the following: 1998 1999 ---------- ---------- Accrued payroll ......... $ 413,000 $ 282,000 Accrued vacation ........ 178,000 153,000 Accrued taxes ........... 122,000 55,000 Accrued rent ............ 7,000 24,000 Accrued professional fees 270,000 264,000 Other ................... 90,000 169,000 ---------- ---------- $1,080,000 $ 947,000 ========== ========== See Note 9 for discussion of accrued arbitration award as of December 31, 1999. INCOME TAXES Tanox accounts for income taxes using the liability method prescribed by SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred income tax assets and liabilities reflect the impact of temporary differences between the financial accounting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATIONS The balance sheet accounts of Tanox are translated into U.S. dollars at exchange rates in effect on reporting dates. These amounts are reflected in other comprehensive income. Income statement items are translated at average exchange rates in effect during the financial statement period. Gains and losses resulting from foreign currency transactions denominated in currency other than the functional currency are classified as other income (expense). F-11 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EARNINGS PER SHARE SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and diluted earnings per share (EPS). Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted EPS is computed in the same manner as basic EPS, except that diluted EPS reflects the potential dilution that would occur if outstanding options and warrants were exercised. The following table reconciles basic and diluted EPS for the year ended December 31, 1997. Since Tanox incurred net losses for the years ended December 31, 1998 and 1999, basic and diluted EPS are the same. NET PER SHARE INCOME SHARES AMOUNT ---------- ------------ --------- For the year ended December 31, 1997 -- Basic EPS....................... $ 630,000 27,909,000 $0.02 ========= Effect of dilutive securities -- Options and warrants outstanding................... -- 3,281,000 ---------- ------------ Diluted EPS..................... $ 630,000 31,190,000 $0.02 ========== ============ ========= OTHER COMPREHENSIVE INCOME (LOSS) SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and displaying comprehensive income and its components in an entity's financial statements, and is effective for fiscal years beginning after December 15, 1997. The standard requires that all items that meet the definition of components of comprehensive income be reported in Tanox's financial statements. Tanox has included comprehensive income in its consolidated statements of operations and comprehensive income (loss). CONCENTRATION OF CREDIT RISK Tanox's receivables are primarily associated with research collaborations with pharmaceutical and biotechnology companies and grants from foreign government entities. Tanox does not believe this concentration of credit risk presents a material risk to Tanox. Tanox does not require collateral from these entities. Tanox has invested its excess cash generally in high-quality commercial paper and U.S. Government agency debt obligations. As of December 31, 1999, these investments mature within 68 days of year-end and, therefore, management believes that they bear minimal risk. Tanox has not experienced any losses on its investments. F-12 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. GEOGRAPHIC AREAS: Tanox operates in a single business segment. Tanox's operations by geographic area for the years ended December 31, 1997, 1998 and 1999, are presented below: <TABLE> <CAPTION> TOTAL NET INCOME IDENTIFIABLE REVENUES (LOSS) ASSETS ------------ ------------ ------------ <S> <C> <C> <C> Year ended December 31, 1997 -- North America ............ $ 8,939,000 $ 630,000 43,330,000 Asia ..................... -- -- 1,501,000 ------------ ------------ ------------ $ 8,939,000 $ 630,000 $ 44,831,000 ============ ============ ============ Year ended December 31, 1998 -- North America ............ $ 3,089,000 $ (8,983,000) $ 42,794,000 Europe ................... 39,000 (1,192,000) 282,000 Asia ..................... -- 6,000 1,507,000 Interarea eliminations ... (706,000) -- (1,161,000) ------------ ------------ ------------ $ 2,422,000 $(10,169,000) $ 43,422,000 ============ ============ ============ Year ended December 31, 1999 -- North America ............ $ 3,865,000 $(19,242,000) $ 58,522,000 Europe ................... 244,000 (4,039,000) 754,000 Asia ..................... -- (65,000) 1,534,000 Interarea eliminations ... (2,704,000) -- (5,482,000) ------------ ------------ ------------ $ 1,405,000 $(23,346,000) $ 55,328,000 ============ ============ ============ </TABLE> 5. NOTE PAYABLE TO RELATED PARTY: Novartis has advanced Tanox $10.0 million pursuant to a loan agreement to finance a new clinical manufacturing facility. The loan bears interest at LIBOR plus two percent (7.3 percent and 8.1 percent at December 31, 1998 and 1999, respectively). Through December 31, 1999, Novartis has agreed to forgive interest on the loan. For the years ended December 31, 1997, 1998 and 1999, the interest forgiven by Novartis has been reflected as interest expense and a capital contribution. These amounts totalled $639,000, $825,000 and $738,000, respectively for the years 1997 through 1999. The loan is due December 31, 2005. Subject to modifications agreed to in principle concurrent with completion of the Three-Party Collaboration, the principal and future interest payments may be partially or totally forgiven by Novartis based on the future use of the facility. 6. INCOME TAXES: Tanox's pretax income (loss) consists of the following: 1997 1998 1999 ------------ -------------- -------------- U.S. ............................ $ 1,253,000 $ (7,973,000) $ (16,505,000) Foreign.......................... (425,000) (3,729,000) (6,807,000) ------------ -------------- -------------- $ 828,000 $ (11,702,000) $ (23,312,000) ============ ============== ============== F-13 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the provision (benefit) for income taxes are as follows: 1997 1998 1999 ---------- ------------- --------- Current.............................. $ 198,000 $ (1,533,000) $ 34,000 Deferred............................. -- -- -- ---------- ------------- --------- $ 198,000 $ (1,533,000) $ 34,000 ========== ============= ========= Tanox's effective income tax rate for 1997 was less than the statutory federal income tax rate of 35 percent primarily due to benefits from franchise tax adjustments and research and developments tax credits that were partially offset by increases in the valuation allowance. For 1998 and 1999, the benefit was less than that computed at the statutory rate primarily due to an increase in the valuation allowance and nondeductible foreign losses. At December 31, 1998, Tanox recorded a $2.1 million income tax receivable related to the carryback of 1998 losses to prior periods. Of this receivable $2.0 million was collected in 1999 and the remaining $0.1 million will be received in 2000. Significant components of Tanox's deferred tax assets are as follows: 1998 1999 ------------- -------------- Federal net operating loss carryforward....................... $ -- $ 1,821,000 In-process research and development........................ 979,000 2,038,000 Foreign net operating loss carryforwards...................... 417,000 1,831,000 Deferred compensation related to stock options...................... 360,000 1,909,000 Research and development tax credits............................ 278,000 1,019,000 Alternative minimum tax credit....... 171,000 248,000 Differences in book and tax depreciation....................... 211,000 -- Capitalized interest................. 308,000 300,000 Accruals not currently deductible.... 157,000 1,291,000 Other, net........................... 4,000 28,000 ------------- -------------- Total deferred tax assets....... 2,885,000 10,485,000 Differences in book and tax depreciation....................... -- (130,000) Deferred tax valuation allowance..... (2,885,000) (10,355,000) ------------- -------------- Net deferred taxes.............. $ -- $ -- ============= ============== At December 31, 1999, Tanox has a net operating loss of approximately $6,560,000 for federal income tax reporting purposes. Tanox's intent is to carry back approximately $1,360,000 of the net operating loss to prior years to obtain a refund of approximately $132,000. The remaining net operating loss will begin to expire in 2019. Tanox also has a foreign net operating loss carryforward of approximately $5,230,000 which will be available to offset the separate company taxable incomes of certain foreign subsidiaries. Additionally, Tanox has an unused U.S. research and development tax credit carryforward at December 31, 1999, of approximately $1,019,000 which will begin to expire in 20II. Tanox also has alternative minimum tax credit carryforwards of approximately $248,000 as of December 31, 1999. As Tanox has incurred cumulative losses to date and there is no assurance of future taxable income, a valuation allowance has been established to fully offset the deferred tax asset at December 31, 1998 and 1999. Tanox's valuation allowance increased from $2,885,000 at December 31, 1998, to $10,355,000 at December 31, 1999, primarily due to Tanox's increase in net operating loss carryforwards, tax credit carryforwards and deferred compensation. F-14 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LEASE OBLIGATIONS: Tanox leases its facilities pursuant to various operating leases that expire at various dates through March 2002. Future minimum lease obligations under noncancelable leases at December 31, 1999, are as follows: Year ending December 31 -- 2000 ................ $305,000 2001 ................ 258,000 2002 ................ 65,000 -------- Total .......... $628,000 ======== Tanox incurred rent expense of $287,000, $344,000 and $331,000 in 1997, 1998 and 1999, respectively. Certain of the facility leases include escalation clauses for operating expenses and real estate taxes. At December 31, 1999, Tanox had outstanding an unsecured, irrevocable letter of credit for $20,000 related to a lease agreement. 8. CAPITAL STOCK: PREFERRED STOCK Tanox is authorized to issue up to 10,000,000 shares of $.01 par value preferred stock. The board of directors has the authority to issue these shares in one or more series and to establish the rights, preferences and dividends. No shares of preferred stock have been issued. STOCK SPLIT On March 31, 1997, Tanox declared a stock dividend to effect a stock split that provided two shares of Tanox's common stock for every one share of Tanox's common stock held by stockholders of record as of March 21, 1997. On February 1, 2000, Tanox declared a stock dividend to effect a stock split that provided 1.6 shares of Tanox's common stock for every one share of Tanox's common stock held by stockholders of record as of January 31, 2000. In both cases the aggregate par value of the dividend was transferred from additional paid-in capital to common stock. The stock splits have been retroactively reflected in the accompanying consolidated financial statements. STOCK OPTIONS During 1987, Tanox established the 1987 Stock Option Plan (the 1987 Plan) covering key employees, officers and directors of Tanox. Under the terms of the 1987 Plan, as amended, the number of shares of common stock eligible for issuance was 4,320,000. Options issued under the 1987 Plan were generally granted at a purchase price equal to the fair market value at the date of grant and are generally exercisable beginning two years after the date of grant for 40 percent of the shares, with the balance to become exercisable cumulatively in three installments of 20 percent each year thereafter. Options expire ten years after the date of grant. At December 31, 1999, options to purchase 2,242,800 shares of Tanox's common stock were outstanding under the 1987 Plan. The 1987 Plan expired June 24, 1997, and no more shares may be granted under this plan. Tanox established the 1997 Stock Plan (the 1997 Plan) in November 1997. Under the terms of the 1997 Plan, Tanox may grant options to purchase up to 8,000,000 shares of Tanox's common stock to employees, F-15 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) directors, advisors and consultants. The 1997 Plan also provides for several types of grants including incentive stock options, non-qualified stock options, stock appreciation rights, stock awards, stock purchases and performance units. Incentive stock options provide the right to purchase common stock at a price not less than 100 percent of the fair value of common stock on the date of the grant. Non-qualified stock options provide the right to purchase common stock at a price not less than 50 percent of the fair value of the common stock on the date of the grant. The options granted under the 1997 Plan generally expire ten years after date of grant and are generally completely exercisable five years after the grant date. At December 31, 1999, options to purchase 636,320 shares of common stock were outstanding and 7,360,480 were available for future grants. The 1997 Plan will expire on October 31, 2007. In January 1992, Tanox established the 1992 Non-Employee Directors Stock Option Plan (the Directors Plan) and reserved 480,000 shares of common stock for issuance upon the exercise of options granted pursuant to the Directors Plan. Unless otherwise provided, options granted under the Directors Plan will vest one-third annually from the date of grant. The exercise price of the options granted will be determined by a committee appointed by Tanox's board of directors. At December 31, 1999, options to purchase 108,000 shares of Tanox's common stock were outstanding under the Directors Plan and options to purchase 372,000 shares were available for future grants. In addition to the plans discussed above, Tanox has entered into various stock option agreements with certain outside consultants and advisors. At December 31, 1999, options to purchase 196,800 shares of Tanox's common stock were outstanding under such agreements. All of the outstanding options issued under these agreements were issued prior to 1996, are currently exercisable and expire in either 2002 or 2003. At December 31, 1999, options to purchase 3,183,920 shares were outstanding with a weighted average exercise price of $4.39 per share, of which options to purchase 2,106,318 shares were exercisable at a weighted average exercise price of $2.79 per share. The following table summarizes stock option transactions since December 31, 1996: WEIGHTED NUMBER OF EXERCISE AVERAGE SHARES PRICE EXERCISE PRICE ------------ ------------- -------------- Outstanding, December 31, 1996.... 3,680,400 $ 0.21- 5.28 $ 0.95 Granted...................... 1,337,600 3.75- 7.50 6.94 Exercised.................... (47,040) 0.63- 2.50 1.50 Canceled..................... (54,240) 0.21- 3.02 1.47 ------------ ------------- -------------- Outstanding, December 31, 1997.... 4,916,720 0.21- 7.50 2.57 Granted...................... 322,400 5.63-II.25 7.81 Exercised.................... (230,400) 0.21- 2.29 0.98 Canceled..................... (127,600) 2.29- 7.50 6.86 ------------ ------------- -------------- Outstanding, December 31, 1998.... 4,881,120 0.21-II.25 2.88 Granted...................... 137,120 4.06-12.50 10.27 Exercised.................... (1,789,520) 0.63- 5.63 0.64 Canceled..................... (44,800) 2.29-II.25 7.61 ------------ ------------- -------------- Outstanding, December 31, 1999....................... 3,183,920 $ 0.21-12.50 $ 4.39 ============ ============= ============== Exercisable, December 31, 1999....................... 2,106,318 $ 0.21-12.50 $ 2.79 ============ ============= ============== F-16 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Tanox follows SFAS No. 123 which permits one of two methods of accounting for stock options. Tanox adopted Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options. SFAS No. 123, however, requires Tanox to disclose the income statement effect of the alternative fair value method assuming Tanox was required to record compensation expense for stock options equal to the assumed fair value on the grant date. Under APB No. 25, Tanox recognizes as compensation expense the excess of the estimated fair value of the common stock issuable upon exercise of such options over the aggregate exercise price of such options on the date of grant. This compensation expense is amortized ratably over the vesting period of each option. The compensation expense of such options, net of reversals for terminations, was $25,000, $273,000 and $311,000 during the years ended December 31, 1997, 1998 and 1999, respectively. The fair value of each option grant is estimated using the Black-Scholes option pricing model. The Black-Scholes model uses grant price, as stated in the option agreements, market price as established by stock sales in 1997, 1998 and 1999 and deemed market prices established by the Compensation Committee of Tanox's board of directors. The following assumptions were used for options granted in 1997: risk-free interest rate of six percent, expected option life of ten years, no expected dividends, no expected turnover and a 20 percent volatility factor. The following assumptions were used for options granted in 1998: risk-free interest rate of five percent, expected option life of six years, no expected dividends, expected turnover of 20 percent and a volatility factor of 20 percent. The assumptions used for options granted in 1999 were the same as those used in 1998, with the exception of the risk-free interest rate which was six percent and the volatility factor which was 42 percent. Assuming the compensation cost for these plans had been determined pursuant to the fair value method under SFAS No. 123, Tanox's pro forma net income (loss) would have been as follows: 1997 1998 1999 ---------- -------------- -------------- Net income (loss) -- As reported.................. $ 630,000 $ (10,169,000) $ (23,346,000) Pro forma.................... 176,000 (11,260,000) (24,551,000) Basic EPS -- As reported.................. 0.02 (0.35) (0.75) Pro forma.................... 0.01 (0.39) (0.79) Diluted EPS -- As reported.................. 0.02 (0.35) (0.75) Pro forma.................... 0.01 (0.39) (0.79) Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1996, the resulting pro forma compensation cost may not be representative of that to be expected in future years. F-17 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The number and weighted average fair value of options granted in 1997, 1998 and 1999 is as follows: <TABLE> <CAPTION> 1997 1998 1999 ------------------------ ------------------------ ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE ---------- ----------- ---------- ----------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> Option price equals fair market value.............................. 1,137,600 $3.69 234,400 $2.71 129,120 $5.24 Option price greater than fair market value.............................. -- -- 8,000 1.18 -- -- Option price less than fair market value.............................. 200,000 5.46 80,000 5.63 8,000 5.65 </TABLE> The following table summarizes information about fixed-price stock options outstanding at December 31, 1999: <TABLE> <CAPTION> OPTIONS OUTSTANDING - --------------------------------------------------------------------------------------------- WEIGHTED OPTIONS EXERCISABLE AVERAGE --------------------------------- OUTSTANDING REMAINING EXERCISABLE AS OF CONTRACTUAL WEIGHTED AS OF WEIGHTED RANGE OF DECEMBER 31, LIFE AVERAGE DECEMBER 31, AVERAGE EXERCISE PRICES 1999 (IN YEARS) EXERCISE PRICE 1999 EXERCISE PRICE - ------------------------------------- ------------ ------------- --------------- ------------ --------------- <S> <C> <C> <C> <C> <C> $ 0.21 - $ 2.50 1,386,000 2.3 $ 1.06 1,386,000 $ 1.06 2.50 - 5.00 354,400 5.7 3.46 226,400 3.28 5.00 - 7.50 1,080,000 7.1 7.35 443,839 7.30 7.50 - 10.00 264,800 8.8 8.13 42,079 8.13 10.00 - 12.50 98,720 8.9 12.20 8,000 12.50 ------------ ------------ $ 0.21 - 12.50 3,183,920 5.0 $ 4.39 2,106,318 $ 2.79 ============ ============ </TABLE> In April 1999, Tanox loaned 12 employees approximately $1,086,000 to enable the employees to exercise 1,738,320 options to purchase shares of Tanox's common stock, pursuant to stock options held by such employees. All of the loans are full-recourse, secured by shares of Tanox's common stock owned by the employees, bear interest at a rate of 8.5 percent, and are due and payable in full in September 2001. The loans have been reflected as a contra equity in the accompanying financial statements. Also during 1999, Tanox agreed to extend, for an additional three-year period, the term of 524,400 stock options held by certain employees and consultants that were scheduled to expire. In connection with this extension, Tanox expensed, for accounting purposes, approximately $4,576,000 of compensation expense representing the fair value of the options as of the remeasurement date. For employees, compensation expense was recorded for the difference between the fair value of the underlying stock on the date of the extension and the exercise price of the option. For consultants, compensation expense was calculated using the Black-Scholes valuation model on the date of the extension. WARRANTS In connection with the issuance of notes payable to an unrelated company for equipment financing in 1989, Tanox issued warrants to purchase 93,053 shares of Tanox's common stock at $0.86 per share. All of the F-18 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) warrants were exercised on a net issuance basis in 1999 and converted into 86,632 shares of common stock. As of December 31, 1999, there were no outstanding warrants. 9. COMMITMENTS AND CONTINGENCIES: ARBITRATIONS Following settlement of Tanox's lawsuit against Genentech and Roche referred to in Note 1, Tanox filed a demand for arbitration against the attorneys who represented Tanox in the litigation in order to resolve a dispute over the amount of attorneys' fees due by Tanox. On September 29, 1999, the arbitration panel issued an award entitling the attorneys to receive approximately $3.5 million, including interest, payments ranging from 33 1/3 percent to 40 percent of the future payments that Tanox may receive from Genentech following product approval and ten percent of the royalties that Tanox may receive on sales of anti-IgE products. At December 31, 1999, Tanox has reflected an accrued expense of $3.5 million for the arbitration award in its consolidated financial statements. Tanox sought a court order vacating this arbitration award. However, a judgment was entered confirming the award. Tanox intends to pursue all available remedies, including appealing the decision. If Tanox is ultimately required to pay all or part of the award to the attorneys, Tanox could be required to pay up to $3.5 million, plus accrued interest would become due, and the award would effectively reduce certain future milestone payments from Genentech by up to 40 percent and reduce future royalties from the Three-Party Collaboration by ten percent. Tanox's future revenues, results of operations, cash flows and financial condition could be materially adversely affected. During the appeals process we will either post a bond or place cash in escrow to secure payment of the award. Tanox is also engaged in a dispute with Novartis and Genentech over its right to independently develop certain of its anti-IgE monoclonal antibodies, which are not being developed in connection with the Three-Party Collaboration. Tanox is attempting to resolve the dispute in separate arbitrations with each of Novartis and Genentech and they are attempting to resolve the dispute in federal court. If Tanox ultimately loses its right to independently develop these anti-IgE monoclonal antibodies, Tanox may be required to discontinue development of Hu-901. LITIGATION From time to time, Tanox is a defendant in lawsuits incidental to its business. Management believes that the outcome of these lawsuits will not be material to Tanox's financial statements. MILESTONES AND ROYALTIES Tanox has agreements with several institutions that call for payments upon the achievement of milestones by Tanox and royalty payments based upon a percentage of product sales. No milestone or royalty expense has been incurred related to these agreements. LOAN COMMITMENTS Tanox has agreed that under certain conditions, it will lend certain of its employees up to $1,500,000 in April 2000 for payment of their tax obligations pursuant to the exercise of their stock options. F-19 <PAGE> TANOX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REGISTRATION RIGHTS Some of Tanox's stockholders including founders, some early investors and persons who hold 15 percent or more of our stock, have certain registration rights. 401(K) PLAN Effective January 1, 1992, Tanox adopted a qualified retirement plan (the 401(k) Plan) covering all of Tanox's employees who are at least 21 years of age and have completed at least one year of service with Tanox. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching contributions by Tanox on behalf of all participants in the 401(k) Plan. Tanox's contributions totaled approximately $81,000, $54,000 and $66,000 in 1997, 1998 and 1999, respectively, representing matching 50 percent of employee contributions, including those made by executive officers. Tanox's matching contribution only applies to the first five percent of each employee's total compensation. F-20 <PAGE> (This page has been intentionally left blank) <PAGE> - -------------------------------------------------------------------------------- [LOGO] TANOX, INC. 7,000,000 SHARES COMMON STOCK ------------------------------ PROSPECTUS ------------------------------ , 2000 CIBC WORLD MARKETS ROBERTSON STEPHENS WARBURG DILLON READ LLC ADAMS, HARKNESS & HILL, INC. KBC SECURITIES - -------------------------------------------------------------------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES. UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. <PAGE> PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than underwriting discounts and commissions payable by the Registrant in connection with the sale of the common stock being registered. All the amounts shown are estimates except for the registration fee, NASD filing fee and the Nasdaq National Market listing fee. Registration fee..................... $ 63,756 NASD filing fee...................... 24,650 Nasdaq National Market listing fee... 95,000 Printing and engraving expenses...... 170,000* Legal fees and expenses.............. 300,000* Accounting fees and expenses......... 200,000* Blue Sky fees and expenses........... 15,000* Transfer agent and registrar fees.... 15,500* Premium for directors and officers insurance............................ 150,000* Miscellaneous........................ 51,094* ------------ Total........................... 1,085,000* ============ - --------------------------- * Estimated ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Our amended and restated certificate of incorporation requires us to indemnify our directors and officers against liabilities they may incur in these capacities, including liabilities under the Securities Act, as amended, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law. Our bylaws require that we indemnify each of our directors and officers for the expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any type of threatened, pending or completed action, suit or proceeding (other than actions by us or on our behalf) if he or she: o acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests; and o in the case of a criminal proceeding (including preliminary), had no reason to believe his or her conduct was unlawful. Under our bylaws we also must indemnify a director and officer for expenses of an action brought by us or on our behalf if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests. We may not indemnify a director or officer for expenses of an action brought by us or on our behalf if the director or officer is adjudged liable to the corporation, unless a court determines that, despite such adjudication but in view of all of the circumstances, he or she is entitled to indemnification of such expenses. We have a duty to indemnify only if the director or officer has met the applicable standard of conduct described above. This is determined by: o a majority vote of the disinterested directors; or o a majority vote of a committee of disinterested directors designated by a majority vote of the disinterested directors; or II-1 <PAGE> o if there are no disinterested directors, or if the disinterested directors so direct, independent legal counsel in a written opinion; or o the stockholders. We must indemnify a director or officer for all expenses of litigation or other legal proceedings actually and reasonably incurred when he or she is successful on the merits or otherwise in defense of the litigation or proceeding or in defense of any claim, issue or matter therein. We must advance to a director or officer the actually and reasonably incurred expenses incurred in defending an action before the action is finally disposed if the director undertakes to repay these expenses if the director is ultimately determined not entitled to be indemnified in connection with the action to which the expenses relate. We may advance to an officer the expenses incurred in defending an action before the action is finally disposed if the board of directors authorizes the advance, and the officer undertakes to repay these expenses if the officer is ultimately determined not entitled to be indemnified in connection with the action to which the expenses relate. The board of directors may not consider the officer's financial ability to repay these advances in determining whether to authorize the advancement. We may purchase and maintain insurance on behalf of any director and officer to the extent permitted by Section 145. We intend to purchase liability insurance policies covering our directors and officers in certain circumstances. In addition to the indemnification rights described above, our amended and restated certificate of incorporation eliminates, in certain circumstances, our directors' liability for monetary damages for breach of fiduciary duty as a director. These provisions do not eliminate a director's liability: o for any breach of the director's duty of loyalty to us or our stockholders; o for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; o under Section 174 of the Delaware General Corporation Law, which relates to the declaration of dividends and purchase or redemption of shares in violation of this law; or o for any transaction from which the director derived an improper personal benefit. Prior to the completion of this offering, we have entered into indemnification agreements with each of our directors and officers to give them additional contractual assurances regarding the scope of the indemnification provided in our amended and restated certificate of incorporation and bylaws and to provide additional procedural protections. The underwriting agreement (exhibit 1.1 to this Registration Statement) provides that the underwriters must, under some circumstances, indemnify our directors, officers and controlling persons against specified liabilities, including liabilities under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since January 1, 1997, the Registrant has sold and issued the following unregistered securities: (a) Between February 21, 1997 and September 4, 1997, the Registrant issued and sold an aggregate of 2,331,260 shares of its common stock to 23 non-U.S. persons in reliance on Regulation S promulgated under the Securities Act for an aggregate consideration of $17,484,468. (b) Between February 16, 1998 and April 6, 1998, the Registrant issued and sold an aggregate of 273,684 shares of its common stock to 8 non-U.S. persons in reliance on Regulation S promulgated under the Securities Act for an aggregate consideration of $3,078,972. (c) Between August 31, 1999 and December 30, 1999, the Registrant issued and sold an aggregate of 880,000 shares of its common stock to 14 non-U.S. persons in reliance on Regulation S promulgated under the Securities Act for an aggregate consideration of $11,000,000. The placement agent was KBC Securities, NV. The Registrant paid to KBC Securities, N.V. a placement agent fee of $715,000. II-2 <PAGE> (d) Between October 25, 1999 and December 10, 1999, the Registrant issued and sold an aggregate of 1,016,000 shares of its common stock to 12 non-U.S. persons in reliance on Regulation S promulgated under the Securities Act for an aggregate consideration of $12,700,000. (e) Between March 12, 1998 and September 12, 1999, the Registrant issued 468,726 shares of its common stock, at a price per share (as of March 12, 1998) of $18, with an aggregate value of $4,395,150, to 3 United States residents and 5 non-U.S. persons in connection with the Registrant's acquisition of Tanox Pharma, formerly PanGenetics B.V. The sale and issuance were exempt from registration under Section 4(2) of the Securities Act. (f) From time to time since January 1, 1997, the Registrant has granted stock options to purchase shares of its common stock to various employees, directors and consultants pursuant to its 1997 Stock Plan and its 1992 Non-Employee Directors Stock Option Plan. With respect to all grants of options, exemption from registration was unnecessary in that the transactions did not involve a "sale" of securities as that term is used in Section 2(a)(3) of the Securities Act. (g) As of March 8, 2000, the Registrant had issued and sold, in the aggregate, 2,292,747 shares of its common stock for per share exercise prices ranging from $0.28 to $8.13 to employees and one consultant pursuant to their exercise of stock options granted under the Registrant's 1987 Stock Option Plan and 1997 Stock Plan. The Registrant relied on the exemption provided by Rule 701 under the Securities Act. (h) Between June 24, 1997 and February 9, 2000, the Registrant issued and sold 242,000 shares of its common stock for per share exercise prices ranging from $0.21 to $2.29, to consultants of the Registrant, pursuant to their exercise of stock options. The Registrant relied on the exemption provided by Rule 701 under the Securities Act. (i) On October 25, 1999, the Registrant issued and sold to Phoenix Leasing Incorporated 86,632 shares of its common stock, on a net issuance basis, at a price per share of $0.86, for an aggregate consideration of 6,421 shares of common stock, pursuant to the exercise by Phoenix Leasing Incorporated of warrants. All sales of common stock made pursuant to the exercise of stock options were made in reliance on Section 701 under the Securities Act or Section 4(2) of the Securities Act. All other sales were made in reliance on Section 4(2) of the Securities Act and Regulation S promulgated under the Securities Act. These sales were made without general solicitation or advertising, to investors who were sophisticated and had access to all relevant information necessary to evaluate the investment, and who represented to the Registrant that they were acquiring the securities for investment and appropriate legends were affixed to the share certificates issued in such transactions. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits 1.1+ -- Form of Underwriting Agreement. 3.1 -- Amended and Restated Certificate of Incorporation of the Registrant, as amended, as currently in effect. 3.2 -- Bylaws of the Registrant, as currently in effect. 4.1 -- Specimen of Common Stock Certificate, $.01 par value, of the Registrant. 4.2 -- Warrant to Purchase 6,462 Shares of Common Stock, dated November 1989, by and between the Registrant and Phoenix Venture Incorporated. 5.1+ -- Opinion of Chamberlain, Hrdlicka, White, Williams & Martin. II-3 <PAGE> 10.1 -- Form of Indemnification Agreement between the Registrant and its officers and directors. 10.2 -- 1987 Stock Option Plan of the Registrant, as amended. 10.3 -- 1992 Non-employee Directors Stock Option Plan of the Registrant. 10.4 -- 1997 Stock Plan of the Registrant. 10.5 -- Lease of premises at 10301 Stella Link, Suite 110, Houston, Texas, dated December 3, 1986, as amended. 10.6 -- Stock Purchase Agreement, dated July 14, 1987, by and among the Registrant and Tse Wen Chang, Nancy T. Chang, Alafi Capital Company, Shireen Alafi, Joseph Heskel, Trustee for Christopher Alafi, and Invitron Corporation. 10.7++* -- License for Winter Patent, dated June 26, 1989, by and between Medical Research Council and the Registrant. 10.8++* -- Amendment to the License for Winter Patent, dated February 9, 1990, by and between Medical Research Council and the Registrant. 10.9++* -- Development and Licensing Agreement, dated May 11, 1990, by and between the Registrant and Ciba-Geigy Limited. 10.10 -- Term Sheet for Secured Loan, dated December 14, 1994, by and between the Registrant and Ciba-Geigy Limited. 10.11++* -- Chiron-PanGenetics Research and Development License and Options for Commercial License, dated September 25, 1995, by and between PanGenetics, B.V., Panorama Research, Inc. and Chiron Corporation. 10.12 -- Stock Purchase Agreement, dated as of March 12, 1998, by and between the Registrant and the holders of shares of PanGenetics, B.V. 10.13++* -- License Agreement, dated June 1, 1998, by and between Biogen, Inc. and the Registrant. 10.14++* -- Outline of Terms for Settlement of the Litigations Among Genentech, Inc., Genentech International, Ltd., the Registrant and Ciba-Geigy Limited Relating to Anti-IgE Inhibiting Monoclonal Antibodies, dated July 8, 1996. 10.15++* -- Supplemental Agreement between the Registrant and Ciba-Geigy Limited, dated July 8, 1996. 10.16++* -- Settlement and Cross-Licensing Agreement, dated July 8, 1996, by and between the Registrant and Genentech, Inc. and Genentech International Limited. 10.17++* -- Settlement and Participation Agreement, dated July 8, 1996, by and between the Registrant and F. Hoffman-La Roche, Ltd., Hoffman-La Roche, Inc., Roche Holding Ltd. and Roche Holdings, Inc. 10.18++* -- Patent License Agreement, dated June 30, 1998, by and between Protein Design Labs, Inc. and the Registrant. 10.19++* -- Amendment to Patent License Agreement, dated June 28, 1999, by and between Protein Design Labs, Inc. and the Registrant. 10.20 -- Research and License Agreement, dated April 21, 1999, by and between the Registrant and Biovation Limited. 10.21 -- Material Transfer and Commercial Evaluation Agreement, dated March 9, 1999, by and between Tanox, Inc. and Biovation Limited. 10.22++* -- G-CSF Receptor Non-exclusive License Agreement, dated January 11, 2000, by and between Immunex Corporation and the Registrant. 10.23 -- 2000 Non-Employee Directors' Stock Option Plan. 21.1 -- List of Subsidiaries of the Registrant. 23.1 -- Consent of Arthur Andersen LLP dated March 6, 2000. 23.2+ -- Consent of Chamberlain, Hrdlicka, White, Williams & Martin (included in Exhibit 5.1). 23.3 -- Consent of KPMG LLP, dated March 5, 2000. 24.1* -- Power of Attorney. 27* -- Financial Data Schedule. - --------------------------- + To be filed by amendment. ++ Certain confidential material contained in the document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act. * Previously filed II-4 <PAGE> (b) Financial Statement Schedules All schedules are omitted because they are not applicable or because the required information is contained in the Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) That for the purposes of determining any liability under the Securities Act, each posteffective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To provide to the Underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-5 <PAGE> SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS ON MARCH 9, 2000. TANOX, INC. By: /s/ NANCY T. CHANG NANCY T. CHANG, PH.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON MARCH 9, 2000. By: /s/ NANCY T. CHANG NANCY T. CHANG, PH.D. ATTORNEY-IN-FACT Chairman of the Board, NANCY T. CHANG, PH.D. President, and Chief Executive Officer Vice President of Finance DAVID DUNCAN, JR. and Chief Financial Officer Director TSE WEN CHANG, PH.D. Director OSAMA MIKHAIL, PH.D. Director WILLIAM J. JENKINS, M.D. II-6 EXHIBIT 3.1 THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TANOX, INC. TANOX, INC., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is Tanox, Inc. The date of filing of its original Certificate of Incorporation with the Secretary of State was the 23rd day of December 1999. The date of filing of its Amended and Restated Certificate of Incorporation with the Secretary of State was the 28th day of December 1999. The date of filing of its Second Amended and Restated Certificate of Incorporation was the 1st day of February, 2000. 2. This Third Amended and Restated Certificate of Incorporation restates, integrates and also further amends the certificate of incorporation, as provided herein. 3. This Third Amended and Restated Certificate of Incorporation was duly adopted by the affirmative vote of a majority of its stockholders in accordance with Sections 242 and 245 of the Delaware General Corporation Law. ARTICLE ONE The name of the corporation is Tanox, Inc. ARTICLE TWO The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, New Castle County, Wilmington, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE THREE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the "DGCL"). ARTICLE FOUR The total number of shares of all classes of stock which the Corporation shall have authority to issue is 130,000,000 shares which shall be divided into (a) 10,000,000 1 <PAGE> shares, designated as Preferred Stock, having a par value of $.01 per share (the "Preferred Stock"), and (b) 120,000,000 shares, designated as Common Stock, having a par value of $.01 per share (the "Common Stock"). A statement of the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect of each class of stock of the Corporation is as follows: A. PREFERRED STOCK The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of this Certificate of Incorporation and the limitations prescribed by law, the Board of Directors is expressly authorized by adopting resolutions to issue the shares, fix the number of shares and change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (and whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), a redemption price or prices, conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, without any further action or vote by the stockholders. B. COMMON STOCK 1. DIVIDENDS. Subject to the preferred rights of the holders of shares of any class or series of Preferred Stock as provided by the Board of Directors with respect to any such class or series of Preferred Stock, the holders of the Common Stock shall be entitled to receive, as and when declared by the Board of Directors out of the funds of the Corporation legally available therefor, such dividends of the funds of the Corporation legally available therefor, such dividends (payable in cash, stock or otherwise) as the Board of Directors may from time to time determine, payable to stockholders of record on such dates, not exceeding 60 days preceding the dividend payment dates, as shall be fixed for such purpose by the Board of Directors in advance of payment of each particular dividend. 2. LIQUIDATION. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after the distribution or payment to the holders of shares of any class or series of Preferred Stock as provided by the Board of Directors with respect to any such class or series of Preferred Stock, the remaining assets of the Corporation available for distribution to stockholders shall be distributed among and paid to the holders of Common Stock ratably in proportion to the number of shares of Common Stock held by them respectively. 2 <PAGE> 3. VOTING RIGHTS. Except as otherwise required by law, each holder of shares of Common Stock shall be entitled to one vote for each share of Common Stock standing in such holder's name on the books of the Corporation. ARTICLE FIVE A. BOARD OF DIRECTORS. The number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the directors then in office. Except as otherwise provided in the initial Bylaws of the Corporation, at each annual meeting of stockholders, the successors to the directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the year following the year of their election and until their successors have been duly elected and qualified. At each annual meeting of stockholders at which a quorum is present, the persons receiving a plurality of the votes cast shall be directors. No director may be removed from office by a vote of the stockholders at any time except for cause. Election of directors need not be by written ballot unless the Bylaws of the Corporation so provide. B. VACANCIES. Any vacancy on the Board of Directors resulting from death, retirement, resignation, disqualification or removal from office or other cause, as well as any vacancy resulting from an increase in the number of directors which occurs between annual meetings of the stockholders at which directors are elected, shall be filled only by a majority vote of the remaining directors then in office, though less than a quorum, except that those vacancies resulting from removal from office by a vote of the stockholders may be filled by a vote of the stockholders at the same meeting at which such removal occurs. The directors chosen to fill vacancies shall hold office for a term expiring at the end of the next annual meeting of stockholders at which the term to which they have been elected expires. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Notwithstanding the foregoing, whenever the holders of one or more classes or series of Preferred Stock shall have the right, voting separately, as a class or series, to elect directors, the election, term of office, filling of vacancies, removal and other features of such directorships shall be governed by the terms of the resolution or resolutions adopted by the Board of Directors pursuant to ARTICLE FOUR applicable thereto, and each director so elected shall not be subject to the provisions of this ARTICLE FIVE unless otherwise provided therein. 3 <PAGE> C. POWER TO MAKE, ALTER AND REPEAL BYLAWS. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, amend and repeal the Bylaws of the Corporation subject to the power of the stockholders of the Corporation to adopt, amend and repeal any Bylaw whether adopted by them or otherwise. ARTICLE SIX The Corporation reserves the right to amend, alter, change or repeal any provision in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute. ARTICLE SEVEN No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. ARTICLE EIGHT The Corporation shall, to the fullest extent permitted by Section 145 of the DGCL, as the same may be amended and supplemented, indemnify each director and officer of the Corporation from and against any and all of the expenses, liabilities or other matters referred to in or covered by such section and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders, vote of disinterested directors or otherwise, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such persons and the Corporation may purchase and maintain insurance on behalf of any director or officer to the extent permitted by Section 145 of the DGCL. 4 <PAGE> ARTICLE NINE Special Meetings of the Corporation's stockholders may be called by the President, the Board of Directors, or such other person or persons as may be authorized in the Bylaws. ARTICLE TEN Any action required or permitted to be taken by the stockholders of the Corporation at an annual or special meeting of stockholders must be effected at a duly called meeting and may not be taken or effected by a written consent of stockholders in lieu thereof. IN WITNESS WHEREOF, Tanox, Inc. has caused this Third Amended and Restated Certificate of Incorporation to be signed by John Blickenstaff, its Vice President of Administration, Secretary and Treasurer this ___ day of _______________, 2000 to be effective as of the ___ day of ______________, 2000. TANOX, INC. _______________________________________ John Blickenstaff, Vice President of Administration, Secretary and Treasurer 5 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF TANOX, INC. ARTICLE I. OFFICES SECTION 1.1. REGISTERED OFFICE. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware until otherwise established by a vote of a majority of the board of directors in office, and a statement of such change is filed in the manner provided by statute. SECTION 1.2. OTHER OFFICES. The corporation may also have offices at such other places within or without the State of Delaware as the board of directors may from time to time determine or the business of the corporation requires. ARTICLE II. STOCKHOLDERS SECTION 2.1. ANNUAL MEETING. The annual meeting of Stockholders for the election of Directors and such other business as may in accordance with these Bylaws be properly brought before the meeting shall be held on such date and at such time and as shall be designated by the Board of Directors and stated in the notice of the meeting. To be properly brought before the annual meeting of Stockholders for consideration, business must be (a) specified in the notice of meeting given by or at the direction of the Board of Directors (or any supplement thereto); (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors; or (c) properly brought before the meeting by a Stockholder. If a Stockholder desires to bring business before the meeting for consideration, he must submit timely written notice of the proposed business to the Secretary of the Corporation, including with such notice the information specified below. To be timely, a Stockholder's notice of proposed business must be delivered to or mailed and received at the principal office of the Corporation, not less than thirty (30) nor more than sixty (60) days prior to the meeting. If, however, less than forty (40) days' 1 <PAGE> notice of the date of the annual meeting of Stockholders is given, a Stockholder's notice of proposed business must be received not later than the close of business on the tenth (10th) day following the day on which the notice of the date of the annual meeting of Stockholders was given. A Stockholder's notice of proposed business shall set forth as to each matter the Stockholder proposes to bring before the annual meeting of Stockholders the following information: (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the annual meeting; (b) the name and address of the Stockholder, as they appear in the Corporation's records, proposing such business; (c) the class, series (if applicable) and number of shares of the Corporation which are beneficially owned by the Stockholder; (d) any material interest of the Stockholder in the business proposed; and (e) any other information that is required to be provided by the stockholder under Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"). After receipt of Stockholder's notice and prior to commencement of the annual meeting of Stockholders, the Board of Directors, to the extent allowed by law, may consider the subject matter of the proposed business and reasons for conducting such business at the annual meeting to determine if such business should be considered. Business timely submitted by a Stockholder in accordance with the foregoing procedures will be considered at the annual meeting of Stockholders, unless the Board of Directors determines that the proposed business should not be conducted at the annual meeting. If the business will not be considered at the annual meeting, the Board of Directors shall notify the presiding officer of the annual meeting of such determination and the presiding officer shall declare to the meeting that such proposed business is not properly before the meeting and will not be considered. With respect to any business to be considered, the presiding officer of the annual meeting may determine that such business has not been brought properly before the meeting in accordance with the provisions of this Section and, if such determination is made, such business will not be considered. SECTION 2.2. SPECIAL MEETINGS. Special meetings of the Stockholders may be called by the Directors upon the affirmative vote of a majority of the Board of Directors, the Chairman of the Board, the Chief Executive Officer, if any, or the President. No other person or persons may call a special meeting. The business transacted at a special meeting shall be confined to the purposes specified in the notice thereof. 2 <PAGE> SECTION 2.3. PLACE OF MEETING. Meetings of Stockholders may be held at any place designated in the notice or waiver of notice of the meeting, either within or without the State of Delaware. If no designation is so made, meetings of Stockholders shall be held at the principal office of the Corporation. SECTION 2.4. NOTICE OF MEETING. Written or printed notice stating the place, day and hour of the meeting, and in case of a special meeting the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the President or the Secretary, or the officer or persons calling the meeting, to each Stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the Stockholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. Any notice required to be given a Stockholder by statute, the Certificate of Incorporation or these Bylaws need not be given if notice of two consecutive annual meetings and all intervening special meetings, if any, or all, but not less than two (2), payments of distributions or interest payable within a twelve (12) month period, have been mailed to the Stockholder at his address as shown in the records of the Corporation and returned undeliverable. All actions taken and meetings held without a Stockholder being given notice pursuant to this Section shall have the same force and effect as if notice had been duly given. Upon the Corporation's receipt of the Stockholder's written notice of his then current address, the notice requirements applicable to the Corporation shall be reinstated. SECTION 2.5. FIXING OF RECORD DATE. The Board of Directors may fix in advance a date as the record date for the purpose of determining Stockholders entitled to notice of or to vote at any meeting of Stockholders or any adjournment thereof, or Stockholders entitled to receive payment of a distribution by the Corporation (other than a distribution involving the purchase or redemption of its own shares) or a share dividend, or in order to make a determination of Stockholders for any other purpose, the date to be not more than sixty (60) days, and in case of a meeting of Stockholders not less than ten (10) days prior to the date on which the particular action requiring determination of Stockholders is to be taken. If no record date is fixed for determination of Stockholders entitled to notice of or to vote at a meeting of Stockholders, or Stockholders entitled to receive payment of a distribution or share dividend, the date on which the resolution of the Board of Directors authorizing such distribution or share dividend is adopted shall be the record date for determination of Stockholders. When a determination of Stockholders entitled to vote at any meeting of Stockholders has been made as provided in this Section, such determination shall apply to any adjournment thereof provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 2.6. VOTING LISTS. The officer or agent having charge of the stock transfer books of the Corporation shall make a complete alphabetical list of Stockholders entitled to vote at such 3 <PAGE> meeting, or any adjournment thereof, their addresses and the number of shares held by each. The last shall be kept on file at the registered office of the Corporation for a period of at least ten (10) days prior to such meeting and shall be subject to inspection by any Stockholder at anytime during ordinary business hours. The Stockholder lists shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any Stockholder during the entire meeting. The original stock transfer books shall be prima facie evidence as to Stockholders entitled to examine such lists or transfer books, or to vote at any meeting of Stockholders. Notwithstanding the foregoing, failure to comply with the requirements of this Section shall not affect the validity of any action taken at such meeting. SECTION 2.7. QUORUM. The holders of a majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of Stockholders unless otherwise provided in the Certificate of Incorporation of the Corporation. If the holders of less than a majority of the outstanding shares are represented at a meeting, the holders of a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, only such business may be transacted which might have been transacted at the meeting as originally noticed. The Stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough Stockholders to leave less than a quorum. SECTION 2.8. PROXIES. At all meetings of Stockholders, a Stockholder may vote by proxy executed in writing by the Stockholder or by his duly authorized attorney-in-fact. Any copy, facsimile telecommunication or other reproduction could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. No proxy will be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. If such proxy shall designate two (2) or more persons to act as proxies, unless, such instrument shall provide the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or giving consents thereby conferred, or if only one be present, then such powers may be exercised by that one; or, if an even number attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled, if so empowered by such proxy, to exercise such powers in respect to the proportion of the shares as he is of the proxies representing such shares. A proxy shall be revocable unless it shall conspicuously state that it is irrevocable and the proxy is coupled with an interest sufficient in law to support an irrevocable power. SECTION 2.9. VOTING OF SHARES. Each outstanding share entitled to vote shall be entitled to the number or percentage of votes accorded such share as set forth in the Certificate of Incorporation of the Corporation. SECTION 2.10. MAJORITY VOTE. When a quorum is present at any meeting of Stockholders, the vote of the holders of a majority of the then issued and outstanding shares entitled to vote at such 4 <PAGE> meeting, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which, by express provision of statute, the Certificate of Incorporation or these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. SECTION 2.II. ORDER OF BUSINESS AND RULES OF PROCEDURE. The Chairman of the Board, or in his absence, the Vice Chairman, if any, or in the absence of the Chairman and Vice Chairman of the Board, the President shall preside at a meeting of Stockholders. In the absence of the Chairman of the Board, the Vice Chairman of the Board and the President a chairman of the meeting shall be chosen by the Stockholders from the remaining Directors present at such meeting and such Director shall preside. The Secretary of the Corporation shall act as secretary of the meeting, or in the absence of the Secretary the Assistant Secretary, if any. In the absence of the Secretary and any Assistant Secretary, the presiding officer may appoint any person to act as secretary of the meeting. Minutes of the proceedings shall be kept and placed in the minute book of the Corporation. At all annual and special meetings of Stockholders the following order of business may be used to the extent the chairman of the meeting determines the order to be helpful: (a) Call to order; (b) Presentation of Proof of due calling and notice of the meeting; (c) Presentation and examination of proxies; (d) Ascertainment and announcement of presence of quorum; (e) Approval of or waiver of approval of prior minutes; (f) Report of officers; (g) Nomination of Directors; (h) Receipt of motions of resolutions; (i) Discussion of election of Directors, motions and resolutions; (j) Vote on Directors, motions and resolutions; (k) Any other unfinished business; (l) Any other new business properly brought before the meeting; (m) Receipt of the report of inspectors regarding the results of elections and votes on motions and resolutions; and 5 <PAGE> (n) Adjournment. SECTION 2.12. INSPECTORS OF ELECTION. In advance of any meeting of Stockholders, the Board of Directors shall appoint one (1) or more inspectors of election and may designate one (1) or more alternate inspectors to replace any inspector who fails to act. If any appointed person or alternate fails to serve, the person presiding at the meeting shall appoint one (1) or more inspectors to serve at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. The inspector of election shall: (a) ascertain the number of shares outstanding and the voting power of each; (b) determine the shares represented at a meeting and the validity of proxies and ballots; (c) count all votes and ballots; (d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors and (e) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of their duties. The date and time of the opening and closing of the polls for each matter upon which the Stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application of a Stockholder shall determine otherwise. In determining the validity and counting of proxies and ballots, the inspectors may examine and consider such records or factors as allowed by the General Corporation Laws of the State of Delaware. ARTICLE III. DIRECTORS SECTION 3.1. GENERAL POWERS. The property, business and affairs of the Corporation shall be managed and controlled by or under the direction of its Board of Directors. SECTION 3.2. NUMBER, ELECTION AND TERM. The initial number of Directors of the Corporation shall be the number of the members of the initial Board of Directors set forth in the Certificate of Incorporation. The number of Directors constituting the Board of Directors may be increased or decreased from time to time by resolution of the Board of Directors adopted by the affirmative vote of a majority of the entire Board of Directors then serving, but no decrease in such number shall have the effect of shortening the term of any incumbent director. The number of Directors of the Corporation shall never be less than one (1) nor more than nine (9). Directors need not be residents of the State of Delaware or Stockholders of the Corporation but they must have been 6 <PAGE> nominated in accordance with the provisions of these Bylaws in order to be eligible for election as directors. The Board of Directors shall be divided into three (3) classes designated Class I, Class II and Class III, each such class being as nearly equal in number as possible. At the first annual meeting of Stockholders, or at a special meeting of Stockholders called for such purpose, the Stockholders shall elect Directors comprising Class I to a term of office to expire at the first annual meeting of Stockholders occuring at least 12 months after their election, Directors comprising Class II to a term of office to expire at the second annual meeting of Stockholders occuring at least 12 months after their election, and Directors comprising Class III to a term to expire at the third annual meeting of Stockholders occuring at least 12 months after their election. At each annual meeting of Stockholders, Directors equal in number to the Class whose term then expires shall be elected to succeed the Class of Directors whose term expires and each Director elected to succeed a Director of the Class of Directors whose term expires shall be elected to hold office for a term of three (3) years and until his successor shall be duly elected and qualified, or until his death, resignation or removal in accordance with these bylaws and the Certificate of Incorporation. The number of Directors to be elected shall be set forth in the notice of each meeting of Stockholders held for the purpose of electing Directors. In the event of any increase or decrease in the authorized number of Directors, (a) each Director then serving shall nevertheless continue as a Director of the class of which he is a member until the expiration of his current term or until his prior death, retirement, reservation or removal from office in accordance with these Bylaws, and (b) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of Directors so as to maintain such classes as nearly equal in number as possible. SECTION 3.3. NOMINATION OF DIRECTORS. Nominations of persons for election to the Board of Directors of the Corporation at the annual meeting of Stockholders or any special meeting of Stockholders called for the specific purpose of electing Directors may be made at such meeting of Stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board to make such nominations, or by any Stockholder of the Corporation entitled to vote for the election of Directors at such meeting and who complies with the nominated procedures set forth in this Section. Except for nominations made by or at the direction of the Board of Directors or by any nominating committee or person appointed by the Board of Directors to make such nominations, nominations shall be made only pursuant to written notice of Stockholder's intent to nominate, given to the Secretary of the Corporation by delivering such notice to the principal office of the Corporation not less than forty (40) days prior to the annual meeting of Stockholders or special meeting at which Stockholder desires the nomination be made. However, in the event less than fifty (50) days' notice of the date of such meeting is given to Stockholders, Stockholder's notice must be received by the Secretary not later than the close of business on the tenth (10th) day following the day on which notice of such meeting is given. 7 <PAGE> Stockholder's notice shall set forth as to each person whom the Stockholder proposes to nominate for election or reelection as Director (the "Nominee"), (a) the Nominee's name, age, business and residence address; (b) the principal occupation or employment of such Nominee; (c) the class, series, if applicable, and number of shares of capital stock of the Corporation beneficially owned by the Nominee, if any, and (d) any other information relating to the Nominee that is required to be disclosed in solicitations of proxies for election of Directors pursuant to Regulation 14A promulgated under the 1934 Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and shall further include the name and address of record of the Stockholder giving the notice and the class, series, if applicable, and number of shares of capital stock of the Corporation beneficially owned by such Stockholder. The Corporation may require any proposed Nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed Nominee to serve as a Director of the Corporation. No person shall be eligible for Nomination as Director of the Corporation at any meeting of Stockholders unless nominated in accordance with the procedures set forth herein. If the chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedure, he shall indicate to the meeting that the defective nomination has been disregarded. SECTION 3.4. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held, if a quorum be present, without notice immediately after, and at the same place as, the annual meeting of Stockholders. By resolution, the Board of Directors may hold additional regular meetings, either within or without the State of Delaware, with or without notice as prescribed in these Bylaws and at such time and at such place as shall from time to time be determined by the Board of Directors. SECTION 3.5. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the Chairman or Vice Chairman of the Board, if any, or the President or by either of such officers at the request of a majority of the entire Board then serving. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Delaware, as the place for holding any special meeting of the Board of Directors called by them. SECTION 3.6. NOTICE. Notice of any special meeting, effective upon delivery in accordance herewith, shall be given at least three (3) days prior thereto, provided that any directors can waive requirement of such notice. Such notice can be given orally or in writing, delivered personally or by written notice mailed to each Director at his business address, or by telegram or facsimile transmission. If mailed, the notice shall be deemed to be delivered three (3) days following deposit in the United States Mail so addressed, postage prepaid. If notice is given by telegram, it shall be deemed to be delivered when delivered to the telegraph company. If notice is given by facsimile transmission, it shall be deemed to be delivered upon confirmation of successful facsimile transmission of the entire document sent. The attendance of a Director at a meeting shall constitute 8 <PAGE> a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting. SECTION 3.7. QUORUM. A majority of the number of Directors constituting the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at any meeting, a majority of Directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting until a quorum shall be present. SECTION 3.8. MANNER OF ACTING. The act of the majority of the Directors present at a meeting which a quorum is present shall be the act of the Board of Directors. SECTION 3.9. VACANCY. A vacancy occurring in the Board of Directors as a result of the increase in the number of Directors constituting the Board of Directors may be filled by the affirmative vote of a majority of Directors then serving. However, no more than two such vacancies shall be filled by the Board of Directors during any period between any two successive annual meetings of Stockholders. A Director elected to fill a vacancy due to the increase in the number of Directors shall hold office until the next election by the Stockholders of one or more Directors. Any vacancy occurring in the Board of Directors which is not the result of an increase in the number of Directors, whether caused by death, resignation, retirement, disqualification, removal or otherwise, may be filled by the affirmative vote of a majority of the remaining Directors, though less than a quorum of the Board of Directors. A Director elected to fill a vacancy resulting other than from increase in the number of Directors shall be elected for the unexpired term of his predecessor in office. SECTION 3.10. RESIGNATION AND REMOVAL. Any Director or the entire Board of Directors may be removed at any time, with cause, at a meeting expressly called for that purpose by the affirmative vote for removal by the holders of two-thirds (2/3) of the issued and outstanding shares entitled to vote generally in an election of Directors. Any Director of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors or the President. Such resignation shall take effect at the time of receipt of the notice or at such later time designated therein. SECTION 3.II. COMPENSATION. By resolution of the Board of Directors, the Directors may be paid a fixed sum and/or their expenses, if any, of attendance at each meeting of the Board of Directors, or may be paid a stated salary for acting as a Director. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 3.12. PRESUMPTION OF ASSENT. A Director who is present at a meeting of the Board of Directors shall be presumed to have assented to any action taken thereat unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with 9 <PAGE> the secretary of the meeting before adjournment thereof or shall forward his dissent by registered mail to the Secretary of the Corporation immediately after adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favor of such action. SECTION 3.13. ORDER OF BUSINESS AND RULES OF PROCEDURE. At meetings of the Board of Directors, business shall be transacted in such order as from time to time the Board of Directors may determine. At meetings of the Board of Directors, the Chairman of the Board, if any, shall preside. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside and in the absence of the Chairman and the Vice Chairman, the President shall preside. In the absence of the Chairman, Vice Chairman and President, a chairman shall be chosen from among the Directors present. The Secretary of the Corporation shall act as secretary of the meetings of the Board of Directors, and in the absence of the Secretary, the Assistant Secretary, if any, shall act as Secretary. In the absence of the Secretary and the Assistant Secretary, the presiding officer may appoint any person present to act as secretary of the meeting. The Board of Directors shall keep minutes of its proceedings which shall be placed in the minute book of the Corporation. ARTICLE IV COMMITTEES OF DIRECTORS SECTION 4.1. DESIGNATION, POWERS AND NAME. The Board of Directors may, by resolution passed by the affirmative vote of a majority of the whole Board of Directors, designate one or more committees, including, if they shall so determine, an Executive Committee; an Audit Committee and a Compensation Committee, each such committee to consist of two or more of the Directors of the Corporation. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and 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. Such committee or committees shall have such name or names and such limitations of authority as may be determined from time to time by resolution adopted by the Board of Directors. The designation of any committee and the delegation of authority thereof shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. SECTION 4.2. MINUTES. Each committee of Directors shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. SECTION 4.3. COMPENSATION. Members of special or standing committees may be allowed compensation for attending committee meetings, if the Board of Directors shall so determine. 10 <PAGE> ARTICLE V. ADVISORY DIRECTORS SECTION 5.1. DESIGNATION AND POWERS. The Board of Directors may, from time to time by resolution, name one or more persons to serve as advisory directors, to serve for such term and on such basis as may be set forth in the resolution appointing such advisory directors. Advisory directors may be identified by such titles or designations (such as Scientific Advisory Directors) as the Board of Directors may establish. Advisory directors upon invitation of the Board of Directors from time to time, may meet and confer with the Board of Directors with regard to their respective areas of expertise, knowledge and prominence, separately or in groups as may be specified by the Board of Directors in its invitation. The Board of Directors may further establish by resolution one or more advisory groups, comprised of two or more members. An advisory director's capacity shall be exclusively advisory to the Board of Directors and he shall not have the rights of or be subject to the liabilities imposable upon a member of the Board of Directors. Advisory directors may be indemnified to the full extent permitted pursuant to statute or these Bylaws. SECTION 5.2. MINUTES. If advisory directors meet separately as an advisory group, such advisory group, upon the request of the Board of Directors, shall keep regular minutes of its meetings and report the same to the Board of Directors if so requested. SECTION 5.3. COMPENSATION. Advisory directors may be compensated for their attendance at meetings in such amounts as the Board of Directors may determine. ARTICLE VI. OFFICERS SECTION 6.1. NUMBER. The executive officers of the Corporation shall be a President and a Secretary and, if the Board of Directors so determines, a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive Officer, a Chief Operating Officer, an Executive Vice President, a Chief Financial Officer, one or more Vice Presidents, a Treasurer and such other officers and assistant officers as may be elected or appointed by the Board of Directors. The Board of Directors may implement from time to time such organizational relationships and lines of authority among such officers as may be appropriate and may consider, in connection therewith, any multiple offices held by the same person, as permitted hereunder. Any two (2) or more offices may be held by the same person. If any two (2) or more offices are held by the same person, such person shall be entitled to exercise the rights and duties of each such office as set forth hereinafter. If the holder of two (2) or more corporate offices is required to sign any corporate documents, instruments, certificates, agreements, or any other documents on the 11 <PAGE> Corporation's behalf, then the signature of such person in any one (1) of his capacities shall be sufficient to bind the Corporation. The Chairman of the Board and Vice Chairman of the Board, if any, shall be elected from among the Directors. No other officer is required to be a Director, and no officer is required to be a Stockholder of the Corporation. SECTION 6.2. ELECTION AND TERM OF OFFICE. The officers of the Corporation shall be elected at the annual meeting of the Board of Directors. If the election of officers shall not be held at the annual meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his death, resignation or removal; until he is no longer qualified; or until his successor shall have been duly elected and shall have qualified. Election or appointment shall not of itself create any contract rights. SECTION 6.3. REMOVAL AND RESIGNATION. Any officer or agent elected or appointed by the Board of Directors may be removed with or without cause by the affirmative vote of a majority of the Board of Directors whenever, in its judgment, the best interests of the Corporation shall be served thereby. Such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Any officer may resign at any time by giving written notice to the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 6.4. VACANCIES. A vacancy occurring in any office of the Corporation by death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term, or, in its discretion, the Board of Directors may leave unfilled for any period as it may determine, or for an indefinite period, any office excepting that of the President. SECTION 6.5. CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors shall be responsible only for general supervision and control the affairs of the Corporation and assistance to the President, as necessary. The Chairman shall formulate and submit to the Board of Directors matters of general policy for the Corporation. He shall preside at all meetings of the Stockholders, and of the Board of Directors. He shall vote, or give a proxy to any other officer of the Corporation to vote, all shares of stock of any other corporation standing in the name of the Corporation, and shall perform such other duties as usually appertain to the office or as may be prescribed by the Board of Directors. In the Chairman's absence, such duties shall be attended to by the Vice Chairman (if such office has been created by the Board). SECTION 6.6. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall assist the Chairman of the Board, if any, in determining and effecting the general business policies and affairs of the Corporation. He shall preside at all meetings of the Executive Committee, if such a Committee has been designated by the Board of Directors, and shall formulate and submit matters of general corporate policy to the Board of Directors and the Executive Committee. In the absence 12 <PAGE> of the President, he shall perform any necessary duties of the President, or delegate same to the Chief Operating Officer or Executive Vice President, as he may determine. He shall perform such other duties as usually appertain to the office or as may be prescribed by the Board of Directors or the Executive Committee. In the Chief Executive Officer's absence, such duties shall be attended to by the President. SECTION 6.7. PRESIDENT. The President shall in general supervise and administer all of the business and affairs of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. In the absence of the Chairman of the Board and Vice Chairman, if any such officers have been elected, the President shall preside at all meetings of the Board of Directors and of the Stockholders. He may also preside at any such meeting attended by the Chairman or Vice Chairman of the Board if he is designated as the presiding officer. He shall have the power to appoint and remove subordinate officers, agents and employees, except those elected or appointed by the Board of Directors. The President shall keep the Board of Directors fully informed of the business of the Corporation and shall consult them concerning such business. He may sign with the Secretary or any other officer of the Corporation authorized by the Board of Directors, certificates for shares of the Corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board of Directors to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed. He shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors or the Executive Committee from time to time. SECTION 6.8. CHIEF OPERATING OFFICER. The Chief Operating Officer shall in general supervise and control all operations of the Corporation. He shall be responsible for formulation of operations policies and procedures and shall submit such policies to the Board of Directors, as necessary. He shall perform such other duties as usually appertain to the office or as may be prescribed by the Board of Directors. SECTION 6.9. EXECUTIVE VICE PRESIDENT. The Executive Vice President, subject to the control of the President, shall in general supervise and control all the business and affairs of the Corporation. In the absence of the President or Chief Operating Officer or in the event of either of their deaths, inability or refusal to act, the Executive Vice President shall perform all the duties and exercise all of the powers of and be subject to all the restrictions upon the President or Chief Operating Officer. The Executive Vice President may sign with the Secretary or an Assistant Secretary, certificates for shares of the Corporation, and shall perform such other duties as may be assigned to him by the Board of Directors or the Executive Committee, if such Committee has been established. SECTION 6.10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall in general supervise and control the financial affairs of the Corporation. He shall formulate and submit to the Board of Directors or the Executive Committee, if any, matters of general fiscal policy of the 13 <PAGE> Corporation. He shall further develop and maintain procedures necessary for the financial control of business and safeguarding of the assets of the Corporation, direct internal auditing, maintain internal accounting activities, and prepare, or cause to be prepared, for submission to the Board of Directors, the Executive Committee, the Chief Executive Officer or the President, upon instruction of the Board of Directors or at the request of the Chief Executive Officer, or the President, a statement of financial condition of the Corporation, in such detail as may be required. In the absence of a Treasurer, he shall also perform all of the duties of the Treasurer. The Chief Financial Officer shall perform such other duties as usually appertain to the office or as may be prescribed by the Board of Directors or the Executive Committee. SECTION 6.II. CHIEF SCIENTIFIC OFFICER. The Chief Scientific Officer of the Company generally shall supervise and control all scientific affairs of the Corporation. He shall be responsible for formulation of recommendations to the Board of Directors relating to the various scientific activities of the Corporation, as necessary. He shall perform such other duties as usually appertain to the office or as may be prescribed by the Board of Directors. SECTION 6.12. VICE PRESIDENTS. In the absence of the Executive Vice President or Chief Operating Officer or in the event of both the President's and the Executive Vice President's death, inability, or refusal to act, the Vice President (or in the event there be more than one (1) Vice President, the Vice Presidents in the order designated at the time of their election, or in the absence of any designation then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President shall perform such other duties as from time to time may be assigned to him by the President, Chief Operating Officer or by the Board of Directors. SECTION 6.13. SECRETARY. The Secretary shall (a) keep the minutes of the meetings of the Stockholders, the Board of Directors and each committee of Directors; (b) see that all notices are duly given in accordance with the provisions of these Bylaws and as required by law; (c) be custodian of the corporate records and of the seal of the Corporation, and see that the seal of the Corporation or a facsimile thereof is affixed to all certificates for shares prior to the issuance thereof; (d) keep or cause to be kept a register of the mailing address of each Stockholder which shall be furnished by such Stockholder; (e) sign with the President, or the Executive Vice President, certificates for shares of the Corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the Corporation; and (g) in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President, the Board of Directors, or the Executive Committee. SECTION 6.14. TREASURER. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine. He shall (a) have charge and custody of and be responsible for all funds and securities of the Corporation; receive and give receipts for moneys due and payable to the Corporation from any source whatsoever and deposit all such moneys in the name of the 14 <PAGE> Corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Section 8.4 of these Bylaws; (b) prepare, or cause to be prepared, for submission at each regular meeting of the Board of Directors, at each annual meeting of the Stockholders, and at such other times as may be required by the Board of Directors, the Chief Financial Officer, the President, or any Committee, a statement of financial condition of the Corporation in such detail as may be required; and (c) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the President or the Board of Directors or the Chief Financial Officer. SECTION 6.15. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Assistant Secretaries and Assistant Treasurers, in general, shall perform the duties of the Secretary or the Treasurer, respectively, in his absence and such other duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or by the President, the Board of Directors or the Executive Committee. SECTION 6.16. SALARIES. The salaries of the officers shall be fixed from time to time subject to approval of the Board of Directors, and no officer shall be prevented from receiving a salary by reason of the fact that he is also a Director of the Corporation. Any payments made to an officer of the Corporation such as salary, commission, bonus, interest, rent, or entertainment expense incurred by him which shall be disallowed the Corporation rent, or entertainment expense incurred by him which shall be disallowed the Corporation in whole or in part as a deductible expense by the Internal Revenue Service shall be reimbursed by the officer to the Corporation to the full extent of the disallowance if required by the Board of Directors. ARTICLE VII. INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER AUTHORIZED REPRESENTATIVES SECTION 7.01. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN THIRD PARTY PROCEEDINGS. The corporation shall indemnify any person who was or is an authorized representative of the corporation, and who was or is a party or is threatened to be made a party to any third party proceeding, by reason of the fact that such person was or is an authorized representative of the corporation, against expenses, judgments, penalties, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection with such third party proceeding if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal third party proceeding (including any action or investigation which could or does lead to a criminal third party proceeding) had no reasonable cause to believe such conduct was unlawful. The termination of any third party proceeding by judgment, order, settlement, indictment, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the authorized representative did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to, 15 <PAGE> the best interests of the corporation, and, with respect to any criminal third party proceeding, had reasonable cause to believe that such conduct was unlawful. SECTION 7.02. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN CORPORATE PROCEEDINGS. The corporation shall indemnify any person who was or is an authorized representative of the corporation and who was or is a party or is threatened to be made a party to any corporate proceeding by reason of the fact that such person was or is an authorized representative of the corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such corporate action if such person acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification shall be made in respect of 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 corporate proceeding was pending shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such authorized representative is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 7.03. MANDATORY INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES. To the extent that an authorized representative of the corporation has been successful on the merits or otherwise in defense of any third party or corporate proceeding or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses actually and reasonably incurred by such person in connection therewith. SECTION 7.04. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. Any indemnification under Section 7.01, 7.02 or 7.03 of this Article (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 authorized representative is proper in the circumstances because such person has either met the applicable standard of conduct set forth in Section 7.01 or 7.02 or has been successful on the merits or otherwise as set forth in Section 7.03 and that the amount requested has been actually and reasonably incurred. Such determination shall be made: (1) By the board of directors by a majority of a quorum consisting of directors who were not parties to such third party or corporate proceeding, or (2) If such a quorum is not obtainable, or, even if obtainable, a majority vote of such quorum so directs, by independent legal counsel in a written opinion, or (3) By the stockholders. SECTION 7.05. ADVANCING EXPENSES. Expenses actually and reasonably incurred in defending a third party or corporate proceeding shall be paid on behalf of a director by the corporation in advance of the final disposition of such third party or corporate proceeding upon receipt of an undertaking by or on behalf of the director to repay such amount if it shall ultimately 16 <PAGE> be determined that such person is not entitled to be indemnified by the corporation as authorized in this Article. Expenses actually and reasonably incurred in defending a third party or corporate proceeding shall be paid on behalf of an authorized representative other than a director by the corporation in advance of the final disposition of such third party or corporate proceeding as authorized by the board of directors upon receipt of an undertaking by or on behalf of such authorized representative to repay if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this Article. The financial ability of any authorized representative to make a repayment contemplated by this Section shall not be a prerequisite to the making of an advance, and shall not be considered by the board of directors in determining whether to authorize advancement of expenses. SECTION 7.06. DEFINITIONS. For purposes of this Article: (1) "authorized representative" shall mean a director, officer or employee of the corporation, or a person serving at the request of the corporation as a director, officer, employee or trustee, of another corporation, partnership, joint venture, trust or other enterprise; (2) "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, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent 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 Article with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued; (3) "corporate proceeding" shall mean any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor or investigative proceeding by the corporation; (4) "criminal third party proceedings" shall include any action or investigation which could or does lead to a criminal third party proceeding; (5) "expenses" shall include attorney's fees and disbursements; 17 <PAGE> (6) "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; (7) "not opposed to the best interests of the corporation" shall include such actions taken in good faith and in a manner the authorized representative reasonably believed to be in the interest of the participants and beneficiaries of a benefit plan; (8) "other enterprises" shall include employee benefit plans; (9) "party" shall include the giving of testimony or similar involvement; (10) "serving at the request of the corporation" shall include any service as a director, officer or employee of the corporation which imposes duties on, or involves service by, such director, officer or employee with respect to an employee benefit plan, its participants, or beneficiaries; and (11) "third party proceeding" shall mean 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. SECTION 7.07. INSURANCE. 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 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 such a capacity, or arising out of his status as such, whether or not the corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article. SECTION 7.08. SCOPE OF ARTICLE. The indemnification of authorized representatives and advancement of expenses, as authorized by the preceding provisions of this Article, shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, agreement, vote of stockholders or disinterested directors or otherwise, both as to the action in an official capacity and as to action in another capacity. The indemnification and advancement of expenses provided by or granted pursuant to this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be an authorized representative and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7.09. RELIANCE ON PROVISIONS. Each person who shall act as an authorized representative of the corporation shall be deemed to be doing so in reliance upon rights of indemnification provided by this Article. 18 <PAGE> ARTICLE VIII CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 8.1. CONTRACTS. Subject to the provisions of Section 6.1, the Board of Directors may authorize any officer, officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to special instances. SECTION 8.2. LOANS. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. This authorization may be general or confined to specific instances. SECTION 8.3. CHECKS, ETC. All checks, demands, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers or such agent or agents of the Corporation, and in such manner, as shall be determined by the Board of Directors. SECTION 8.4. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may select. SECTION 8.5. INTERESTED PARTIES. A 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 not be void or voidable solely as a result of such circumstances, 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 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 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 to the Corporation as of the time it is authorized, approved, or ratified by the Board of Directors, a committee thereof, or the Stockholders. 19 <PAGE> Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IX. CERTIFICATES OF STOCK SECTION 9.1. ISSUANCE. Each Stockholder of this Corporation shall be entitled to a certificate or certificates showing the number of shares of stock registered in his name on the books of the Corporation. The certificates shall be in such form as may be determined by the Board of Directors, shall be issued in numerical order and shall be entered in the books of the Corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the Chairman of the Board, the President or a Vice President and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, whose signatures may be sealed with the Seal of the Corporation or a facsimile thereof. Any or all of the signatures on the Certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. If the Corporation shall be authorized to issue more than one class of capital stock or more than one series of any class, the designations, preferences and relative participating, optional or other special rights of each class of capital stock or series thereof and the qualifications, limitations or restrictions of such preferences and rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of capital stock. Alternatively, except as otherwise provided by statute, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of capital stock a statement that the Corporation will furnish to each Stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of capital stock or series thereof and the qualifications, limitations or restrictions of such preferences and rights. All certificates surrendered to the Corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in the case of a lost, stolen, destroyed or mutilated certificate a new one may be issued therefor upon such terms and with such indemnity, if any, to the Corporation as the Board of Directors may prescribe. SECTION 9.2. LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact 20 <PAGE> by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the Certificate or certificates alleged to have been lost, stolen or destroyed, or both. SECTION 9.3. TRANSFERS. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Transfers of shares shall be made only on the books of the Corporation by the registered holder thereof, or by his attorney-in-fact authorized by power of attorney and filed with the Secretary of the Corporation or the Transfer Agent. SECTION 9.4. REGISTERED STOCKHOLDERS. Except as expressly provided by law, the Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE X. DISTRIBUTIONS AND SHARE DIVIDENDS SECTION 10.1. DECLARATION. Distributions and share dividends may be authorized by the Board of Directors subject to and in accordance with provisions of law, the Certificate of Incorporation and these Bylaws, at any regular or special meeting of the Directors. Distributions may be paid in cash, property or shares of the Corporation's capital stock. SECTION 10.2. RESERVE. Before payment of any distribution there may be set aside out of any funds of the Corporation available for distribution such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, of the Corporation or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors may determine to be in the best interest of the Corporation. The Directors may modify or abolish any such reserve in the manner in which it was created. SECTION 10.3. PAYMENT. Distributions of the Corporation whether cash or property, including distributions payable but not paid and being held in suspense, or which were paid or delivered into an escrow account, trust or to a custodian, shall be payable by the Corporation, escrow 21 <PAGE> agent, trustee or custodian to the registered owner as recorded in the Stock transfer records of the Corporation as of the record date determined pursuant to any provision of statute or these Bylaws. The Corporation nor any of its officers, directors or agents, shall be liable for making a distribution to the person in whose name the shares were so registered or to his heirs, successors or assigns, if applicable, even though such person, or his heirs, successors or assigns may not possess a share certificate representing such shares. ARTICLE XI. FISCAL YEAR The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. ARTICLE XII. SEAL The Board of Directors may provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the Corporation and its state of incorporation. ARTICLE XIII. NOTICE SECTION 13.1. METHODS OF GIVING NOTICE. Whenever under the provisions of the statutes, the Certificate of Incorporation or these Bylaws, notice is required to be given to any Director, member of any committee or Stockholder, such notice shall be writing and delivered either personally or by mail to such Director, committee member or Stockholder; provided that in the case of a Director or a member of any committee such notice may be given orally or by telephone or telegram. If mailed, notice to a Director, member of any committee or Stockholder shall be deemed given when deposited in the United States Mall postage prepaid, addressed, in the case of a Stockholder, to such Stockholder at his address as it appears in the records of the Corporation or, in the case of a Director or a member of any committee, to such person at his business address. Such notice shall be deemed to have been delivered three (3) days following the date it was mailed. If sent by telegraph, notice to a Director or member of any committee shall be deemed given when the telegram, so addressed, is delivered to the telegraph company. SECTION 13.2. WRITTEN WAIVER. Whenever any notice is required to be given under any provision of statute, the Certificate of Incorporation or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, 22 <PAGE> shall be deemed equivalent such required notice. Attendance of a person at a meeting shall constitute a waiver of such meeting, except when the person attends the meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors, any Committee, or Stockholders need be specified in the waiver of notice of meeting. ARTICLE XIV. ACTION WITHOUT MEETING SECTION 14.1. WRITTEN CONSENT. Any action required or permitted to be taken at a meeting of the Board of Directors or any Committee may be taken without a meeting if a written consent setting forth the action so taken is signed by all the Directors or Committee Members, as the case may be, and such action shall have the same force and effect as if it were approved by a unanimous vote at a meeting thereof, duly and regularly called. SECTION 14.2. CONFERENCE TELEPHONE. Stockholders, Directors, or members of any committee may participate in and hold a meeting thereof by means of a conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and such participation in that manner at a meeting shall constitute presence in person at the meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Minutes of any meeting involving participation by conference telephone shall be prepared and kept in the same manner as minutes of any other meetings. SECRETARY'S CERTIFICATION I hereby certify that the foregoing is the form of Bylaws of the Corporation duly adopted to be effective as of the 17th day of February, 2000. _________________________________ John Blickenstaff, Secretary 23 EXHIBIT 4.1 COMMON STOCK COMMON STOCK [TANOX LOGO] TANOX, INC. INCORPORATED UNDER THE LAWS SEE REVERSE FOR OF THE STATE OF DELAWARE CERTAIN DEFINITIONS CUSIP 87588Q 10 9 THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF TANOX, INC., transferable on the books of the Corporation in person or by duly authorized attorney on surrender of this certificate properly endorsed. This Certificate shall not be valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the signatures of its duly authorized officers. Dated: /s/ JOHN BLICKENSTAFF /s/ NANCY T. CHANG SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE [TANOX CORPORATE SEAL DELAWARE] <PAGE> Tanox, Inc. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUESTS SHALL BE MADE TO THE CORPORATION'S SECRETARY AT THE PRINCIPAL OFFICE OF THE CORPORATION. The following abbreviations, when used in the Inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: <TABLE> <CAPTION> <S> <C> TEN COM -- as tenants in common UNIF GIFT MIN ACT-________________Custodian_________________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of survivorship and not as tenants under Uniform Gifts to Minors in common Act _________________________ (State) </TABLE> Additional abbreviations may also be used though not in the above list. For value received,____________________________________________________________ hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ _________________________________________________________________________ Shares of the capital stock represented by the within Certificate and does hereby irrevocably constitute and appoint _____________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated _____________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRES- X_______________________________________ POND WITH THE NAME(S) AS (SIGNATURE) WRITTEN ON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTER- X_______________________________________ ATION OR ENLARGEMENT OR (SIGNATURE) ANY CHANGE WHATEVER. THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. - -------------------------------------------------------------------------------- SIGNATURE(S) GUARANTEED BY: EXHIBIT 4.2 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED , (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THIS WARRANT. TANOX BIOSYSTEMS, INC. WARRANT TO PURCHASE 6,462 SHARES OF COMMON STOCK THIS CERTIFIES THAT, for value received, Phoenix Venture Incorporated is entitled to subscribe for and purchase 6,462 shares (as adjusted pursuant to Paragraph 4 hereof, the "Shares") of the fully paid and non-assessable Common Stock of TANOX BIOSYSTEMS, INC., a Texas corporation (the "Company"), at the price of $12.38 per share (such price and such other price as shall result, from time to time, from the adjustments specified in Paragraph 4 hereof is herein referred to as the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term "Common Stock" shall mean the Company's presently authorized Common Stock, and any stock into or for which such Common Stock may hereafter be converted or exchanged, (b) the term "Date of Grant" shall mean November 15, 1989, and (c) the term Other Warrants" shall mean any other warrants issued by the Company in connection with the transaction with respect to which this Warrant was issued, and any warrant issued upon transfer or partial exercise of this Warrant. 1. TERM. The purchase right represented by this Warrant is exercisable, in whole or, subject to the provisions of Paragraph 2 hereof, in part, at any time and from time to time from the Date of Grant through the later of (i) ten (10) years after the Date of Grant or (ii) five (5) years after the closing of the Company's initial underwritten public offering of its Common Stock effected pursuant to a Registration Statement on Form S-l or Form S-18 (or their successor forms) filed under the Securities Act of 1933. 2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT. Subject to Paragraph 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by either, at the election of the holder hereof, (a) the surrender of this Warrant (with the notice 1 <PAGE> of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by check, of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased, or (b) if in connection with a registered public offering of the Company's securities, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-l duly executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by check or from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased. Notwithstanding anything herein to the contrary, the minimum number of Shares purchasable hereunder at each time of exercise shall be the lesser of (i) 2,000 Shares (as proportionately adjusted for stock splits, stock dividends or recapitalizations occurring after the Date of Grant), (ii) if the exercise is in connection with an underwritten public offering, then the number of Shares that the holder is entitled to include in such public offering under Paragraph 9 hereof, or (iii) the total number of Shares then purchasable under this Warrant. The person or persons in whose name(s) any certificate(s) representing shares of Common Stock shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the later of (A) the date upon which this Warrant or portion thereof is exercised, or (B) the date upon which the Company receives payment for such shares in accordance with the provisions of this Warrant. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty days of receipt of such payment and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period. 3. STOCK FULLY PAID; RESERVATION OF SHARES. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and non-assessable, and free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 2 <PAGE> 4. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) RECLASSIFICATION OR MERGER. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger or consolidation of the Company with or into another corporation (other than a merger or consolidation with another corporation in which the Company is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and substance satisfactory to the holder of this Warrant), so that the holder of this Warrant shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Common Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of the number of shares of Common Stock then purchasable under this Warrant. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Paragraph 4. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers, consolidations and transfers. (b) SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the Warrant Price shall be proportionately decreased in the case of a subdivision or increased in the case of a combination. (c) STOCK DIVIDENDS. If the Company at any time while this Warrant is outstanding and unexpired shall (i) pay a dividend with respect to Common Stock payable in Common Stock, or (ii) make any other distribution with respect to Common Stock (except any distribution specifically provided for in the foregoing subparagraphs (a) and (b)) of Common Stock, then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such 3 <PAGE> dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution. (d) PRICE ANTIDILUTION. The Warrant Price shall also be subject to adjustment from time to time as follows: (i) (A) If, at any time after the Date of Grant, the Company shall Issue any Additional Stock (as hereinafter defined) without consideration or for a consideration per share less than the Warrant Price in effect immediately prior to the issuance of such Additional Stock, then the Warrant Price in effect immediately prior to each such issuance shall forthwith be reduced to the Warrant Price determined by dividing (X) an amount equal to the sum of (a) the product derived by multiplying the Warrant Price in effect immediately prior to such issue or sale times the number of shares of Common Stock of the Company outstanding immediately prior to such issue or sale, plus (b) the consideration, if any, received or deemed to be received by the Company upon such issue or sale, by (Y) the number of shares of Common Stock of the Company outstanding immediately after such issue or sale. (B) No adjustment of the Warrant Price pursuant to this Paragraph 4(d) shall have the effect of increasing the Warrant Price above the Warrant Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefore before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors of the Company. (E) In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (where the shares of Common Stock issuable upon exercise of such options or rights or upon conversion or exchange of such securities are not excluded from the definition of Additional Stock), the following provisions shall apply: (1) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the 4 <PAGE> time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Paragraphs 4(d)(i)(C) and 4(d)(i)(D), if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (2) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Paragraphs 4(d) (i)(C) and 4(d) (i) (D)). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Paragraph 4(d) (i) (E) by the Company after the Date of Grant other than: (A) Common Stock issued pursuant to a transaction described in Paragraphs 4(b) or 4(c), or (B) Common Stock issued upon the conversion or exercise of any securities convertible into Common Stock or options to purchase Common Stock outstanding on the Date of Grant, or (C) Common Stock, options, or rights to subscribe issued or granted pursuant to employee, director, or consultant stock option, purchase, bonus, exchange, or other such plans or transactions, in each case approved by the Company's Board of Directors, or (D) Common Stock issued pursuant to a transaction described in Paragraph 4(h) hereof. (e) NO IMPAIRMENT. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying 5 <PAGE> out of all the provisions of this Paragraph 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against material impairment. (f) NOTICES OF RECORD DATE. In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of any class or any other securities or property, or to receive any other right, the Company shall mail to the holder of this Warrant, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (g) REDUCTION IN SHARES. If on December 31, 1990, the aggregate original principal amount of the Loans (as defined in the Loan and Security Agreement dated as of November 6, 1989 between Phoenix Venture Incorporated ("Phoenix") and the Company (the "Loan Agreement") made to the Company pursuant to the Loan Agreement is less than $800,000, and Phoenix has elected not to make a Loan to the Company pursuant to the Loan Agreement after a request by the Company in connection with which the Company has satisfied (or has agreed to, and has demonstrated the ability to, satisfy) all the conditions to funding set forth in the Loan Agreement other than those conditions set forth in Section l(a), subparagraphs (ix) and/or (x), then the number of Shares issuable upon exercise of this Warrant shall be reduced by a number of Shares which bears the same relationship to the number of Shares originally issuable under this Warrant as the aggregate amount of the Loans that Phoenix has so elected not to make to the Company pursuant to the Loan Agreement bears to $800,000. (h) ADJUSTMENT BASED ON NEW EQUITY. If the Company closes an equity offering of its capital stock after the Date of Grant but on or before 90 days after the initial Loan by Phoenix pursuant to the Loan Agreement, with net proceeds to the Company of at least $1,000,000 and at a price per common-share equivalent other than the Warrant Price, then the Warrant Price shall be adjusted immediately upon the closing of such offering to the average price per common-share equivalent received by the Company in such offering. In addition, if the Company closes an equity offering of its capital stock after the Date of Grant but on or before twelve months after the initial Loan by Phoenix pursuant to the Loan Agreement, with net proceeds to the Company of at least $1,000,000 and at a price per common-share equivalent less than the Warrant Price, then the Warrant Price shall be reduced immediately upon the closing of such offering to the average price per common-share equivalent received by the Company in such offering. 6 <PAGE> (i) ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment in the Warrant Price (including without limitation an adjustment pursuant to Paragraph 4(h) hereof), the number of Shares of Common Stock purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter. 5. NOTICE OF ADJUSTMENTS. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to Paragraph 4 hereof, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail, postage prepaid) to the holder of this Warrant. 6. FRACTIONAL SHARES. No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefore based on the fair market value of the Com- mon Stock on the date of exercise as reasonably determined in good faith by the Company's Board of Directors. 7. COMPLIANCE WITH SECURITIES ACT; DISPOSITION OF WARRANT OR SHARES OF COMMON STOCK. (a) COMPLIANCE WITH SECURITIES ACT. The holder of this Warrant, by acceptance hereof, acknowledges those representations set forth on Schedule 1 attached as a part of Exhibit A hereto, and agrees that this Warrant and the shares of Common Stock to be issued upon exercise hereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the "Act"). Upon exercise of this Warrant, unless the Shares being acquired are registered under the Act or an exemption from such registration is available, the holder hereof shall confirm in writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that the shares of Common Stock so purchased are being acquired for investment and not with a view toward distribution or resale. This Warrant and all Shares issued upon exercise of this Warrant (unless registered under the Act) shall be stamped or imprinted with a legend in substantially the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RE- 7 <PAGE> LATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THIS SECURITY WAS ISSUED." (b) DISPOSITION OF WARRANT OR SHARES. With respect to any offer, sale or other disposition of this Warrant or any shares of Common Stock acquired pursuant to the exercise of this Warrant prior to registration of such shares, the holder hereof and each subsequent holder of this Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of this Warrant or such shares of Common Stock and indicating whether or not under the Act certificates for this Warrant or such shares of Common Stock to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to insure compliance with the Act. Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such shares of Common Stock, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this subparagraph (b) that the opinion of counsel for the holder is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly after such determination has been made. Notwithstanding the foregoing, this Warrant or such shares of Common Stock may be offered, sold or otherwise disposed of in accordance with Rule 144 under the Act, provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 have been satisfied. Each certificate representing this Warrant or the shares of Common Stock thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to insure compliance with the Act, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to insure compliance with the Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 8. RIGHTS AS SHAREHOLDERS; INFORMATION. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to 8 <PAGE> vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. Notwithstanding the foregoing, the Company will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to the shareholders of the Company concurrently with the distribution thereof to such shareholders, including without limitation the following: (a) within 120 days after the end of each fiscal year of the Company, an audited consolidated balance sheet of the Company as of the end of such year and audited consolidated statements of income, shareholders' equity and changes in financial position for such year, which year-end financial reports shall be in reasonable detail and shall be accompanied by the opinion of the independent public accountants of recognized standing selected by the Company, and (b) such other information, documents and reports as the holder of this Warrant may reasonably request in order to assist such holder in determining whether to exercise its rights to acquire Shares under this Warrant. 9. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 9.1 DEFINITIONS. For purposes of this Section 9: (a) The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (i) the Common Stock issuable or issued upon exercise or conversion of this Warrant or upon exercise or conversion of the Other Warrants, and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Common Stock; excluding in all cases, however, any Registrable Securities sold or transferred by a person in a transaction in which his rights under this Section 9 are not assignable; (c) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 9.10 hereof; and (d) The term "Form S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the Securities and Exchange 9 <PAGE> Commission ("SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. 9.2 PIGGY-BACK REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company, at each such time, shall promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after receipt of such notice, the Company, subject to the provisions of Section 9.6 shall cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. The Company shall be obligated to effect only two (2) such registrations pursuant to this Paragraph 9.2. 9.3 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 9.2 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as shall be reasonably required to effect the registration of their Registrable Securities. 9.4 EXPENSES OF PIGGY-BACK REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 9.2 for each Holder, including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionate thereto provided, however, that the selling Holders shall bear the expenses of any underwriting discounts and commissions attributable to the sale of their shares and shall pay the fees and disbursements of any counsel, experts or other professionals selected by such Holders; and provided, further, that the fees and expenses of complying with blue sky laws shall be borne by the selling Holders if and to the extent that the appropriate administrative official of such state requires that such Holders (rather than the Company) pay such fees and expenses. 9.5 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares being issued by the Company, the Company shall not be required under Section 9.2 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it. If the total amount of securities, including Registrable Securities, requested to be included in such offering exceeds the amount of 10 <PAGE> securities that the underwriters reasonably believe compatible with the success of the offering or, in the initial public offering of the Company, exceeds twenty percent (20%) of the total number of shares proposed to be registered, then the Company shall be required to include in the offering only that number of such securities which the underwriters believe will not jeopardize the success of the offering or, in the initial public offering, only that number of such securities not exceeding such twenty percent (20%) (the securities so included to be apportioned pro rata among the selling shareholders according to the total amount of securities entitled to be included therein owned by each selling shareholder or in such other proportions as shall mutually be agreed to by such selling shareholders). 9.6 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 9: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers and directors or partners of each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, the 1934 Act or any state securities law; and the Company will reimburse each such Holder, officer or director or partner, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this section 9.6(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. 11 <PAGE> (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter and any other person selling securities in such registration statement or any of its directors or officers or partners or any person who controls such Holder, against any losses, claims, damages, or liabilities (joint or several) to which the Company or any such director, officer, controlling person, or underwriter or controlling person or other such person or director, officer or partner or controlling person may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or controlling person, other Holder, officer, director or partner, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 9.6(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld. (c) Promptly after receipt by an indemnified party under this Section 9.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 9.6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 9.6, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 9.6. 12 <PAGE> 9.7 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is reasonable to enable the Holders to utilize, except for any requisite financial, listing or quotation requirements, Form S-3 for the sale of their Registrable Securities when same becomes available, such action to be initiated as soon as reasonably practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith (i) upon request a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) upon availability, a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) upon request, such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. The Company's obligations under this Paragraph 9.7 shall terminate at such time as the Company may no longer be required to file reports or other documents under the 1934 Act and will terminate as to each Holder covered hereby at such time as such Holder shall be entitled to sell its Registrable Securities; under the provisions of Rule 144(k). 9.8 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders a written request or requests that the Company effect a registration on Form S-3 and any re- 13 <PAGE> lated qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Paragraph 9.8: (1) within 180 days of the effective date of any public offering of securities by the Company; (2) if the Company is not qualified as a registrant entitled to use Form S-3 for the sale of shares by its shareholders; (3) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $200,000; (4) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 120 days after receipt of the request of the Holder or Holders under this Paragraph 9.8; provided, however, that the Company shall not utilize this right more than once in any twelve (12) month period; (5) if the Company has, within the twelve (12) month period preceding the date for such request, already effected any registration in which each of the Holders was entitled to register at least twenty percent (20%) of the Registrable Securities then held by such Holder, whether pursuant to this Paragraph 9.8 or otherwise; (6) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance, or with respect to which such registration, qualification or compliance is unduly burdensome; or (7) if the Company has effected at least three (3) of such registrations pursuant to this Paragraph 9.8 for one or more of the Holders. (c) Subject to the foregoing, the Company will use its best efforts to file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as reasonably practicable after receipt of the request or requests of the Holders. All expenses incurred in connection with a registration requested pursuant to this 14 <PAGE> Paragraph 9.8, including (without limitation) all registration, filing, qualification, printers' and accounting fees and the reasonable fees and disbursements of counsel for the selling Holder or Holders and counsel for the Company (collectively, "S-3 Expenses") shall be borne as follows: The selling Holders shall pay the first $5,000, and 50% of any amounts over $5,000 but less than $10,000, of the selling Holders' pro rata portion of the S-3 Expenses attributable to the sale of their shares in any registration initiated by the Holders pursuant to this Paragraph 9.8, and all other S-3 Expenses shall be paid by the Company or by other parties pursuant to agreements with the Company; provided, however, that the selling Holders shall bear the expenses of any underwriting discounts and commissions attributable to the sale of their shares. Registrations effected pursuant to this Paragraph 9.8 shall not be counted as registrations effected pursuant to Paragraph 9.2 and registrations effected pursuant to Paragraph 9.2 shall not be counted as registrations effected pursuant to this Paragraph 9.8. 9.9 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 9 may be assigned by a Holder (after identification of such Holder under this Section 9 or with respect to registrations pursuant to Paragraph 9.8) to a transferee or assignee of such securities provided (a) such assignment complies with, and such transferee or assignee agrees in writing to comply with and be bound by all of the terms and provisions of this Section 9, (b) the Company is, within a reasonable time prior to such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 9.10 NO CONFLICTING AGREEMENTS. The Company represents and warrants to the Holders that the Company is not a party to any agreement that conflicts in any manner with the Holders' rights to cause the Company to register Registrable Securities pursuant to this Section 9. The Company covenants and agrees that it shall not, without the prior written consent of persons holding a majority of the outstanding securities registrable under this Section 9 or otherwise entitled to registration rights, enter into any agreement with any holder or prospective holder of any securities of the Company that would allow such holder to include such securities in any registration if the inclusion of such holder's securities would reduce on other than a pro-rata basis (based on the number of shares owned) the amount of the Registrable Securities of the holders that may be included in such registration. In addition, the Company covenants and agrees that it shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement that would adversely affect the registration rights of the Holders of Registrable Securities in a different manner than the registration rights of holders of other securities of the Company entitled to registration rights. 15 <PAGE> 9.11 MARKET STAND-OFF AGREEMENT. Each Holder hereby agrees that it shall not, to the extent requested by the Company and an underwriter of Common Stock (or other securities) of the Company, sell or otherwise transfer or dispose (other than to donees who agree to be similarly bound) of any Registrable Securities for such period of time (not to exceed 180 days) following the effective date of a registration statement of the Company filed under the Act as the Company and the underwriters may specify; provided, however, that all officers and directors of the Company and all other persons with registration rights (whether or not pursuant to this Warrant) enter into similar agreements. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of any such period specified. 9.12 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 9. 9.13 RIGHTS AND OBLIGATIONS SURVIVE EXERCISE AND EXPIRATION OF WARRANT. The rights and obligations of the Company, of the holder of this Warrant and of the holder of shares of Common Stock issued upon exercise or conversion of this Warrant, contained in this Section 9 shall survive the exercise, conversion and expiration of this Warrant. 10. ADDITIONAL LIQUIDITY RIGHTS. 10.1 SECONDARY SALES. The Company will promptly provide the holder of this Warrant with notice of any offer of which the Company is aware to acquire from the Company's security holders more than five percent (5%) of the total voting power of the Company. 10.2 MERGERS. The Company will provide the holder of this Warrant with at least 20 days' notice of the terms and conditions of any proposed (i) sale, lease, exchange, conveyance or other disposition of all or substantially all of its property or business, or (ii) merger into or consolidation with any other corporation (other than a wholly-owned subsidiary of the Company), or any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company is disposed of. 10.3 RIGHT TO CONVERT WARRANT INTO COMMON STOCK. (a) RIGHT TO CONVERT. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or 16 <PAGE> any portion thereof (the "Conversion Right") into shares of Common Stock as provided in this Paragraph 10.3 at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the "Converted Warrant Shares"), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Common Stock equal to the quotient obtained by dividing (x) the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in subparagraph (b) hereof), which value shall be determined by subtracting (A) the aggregate Warrant Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right from (B) the aggregate fair market value of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date (as herein defined) by (y) the fair market value of one share of Common Stock on the Conversion Date (as herein defined). Notwithstanding anything herein to the contrary, the minimum number; of Converted Warrant Shares convertible hereunder at any time, shall equal the minimum number of Shares then purchasable under the provisions of Paragraph 2 hereof. No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as herein defined). For purposes of Section 9 of this Warrant, shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant. (b) METHOD OF EXERCISE. The Conversion Right may be exercised by the holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in subparagraph (a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date" ) and, at the election of the holder hereof, may be made contingent upon the closing of the consummation of the sale of the Company's Common Stock to the public in a public offering pursuant to a Registration Statement under the Securities Act of 1933, as amended (a "Public Offering"). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date. 17 <PAGE> (c) Determination of Fair Market Value. For purposes of this Paragraph 10.3, fair market value of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (i) If the Conversion Right is exercised in, connection with a Public Offering, and if the Company's Registration Statement relating to such Public Offering ("Registration Statement") has been declared effective by the Securities and Exchange Commission, then the initial "Price to Public" specified in the final prospectus with respect to such offering. (ii) If the Conversion Right is not exercised in connection with and contingent upon a Public Offering, then as follows: (A) If traded on a securities exchange, the fair market value shall be deemed to be the average of the closing prices of the Common Stock on such exchange over the 30-day period ending five business days prior to the Determination Date; (B) If traded over-the-counter, the fair market value shall be deemed to be the average of the closing bid prices of the Common Stock over the 30-day period ending five business days prior to the Determination Date; and (C) If there is no public market for the Common Stock, then fair market value shall be determined by mutual agreement of the holder of this Warrant and the Company, and if the holder and the Company are unable to so agree, by an investment banker of national reputation selected by the Company and reasonably acceptable to the holder of this Warrant. II. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the holder of this Warrant as follows: (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms; (b) The Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and non-assessable; (c) The rights, preferences, privileges and restrictions granted to or imposed upon the Shares and the holders thereof are as set forth in the Company's Articles of Incorporation, as amended, a true and complete copy of which has been delivered to the original holder of this Warrant; 18 <PAGE> (d) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Articles of Incorporation or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person except such consents or approvals as have been obtained prior to the Date of Grant pursuant to Paragraph 10(e) below; and (e) The Company has obtained all consents required in order to issue this Warrant and grant the holder of this Warrant the rights described in section 9 hereof. 12. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 13. NOTICES. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant. 14. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Common Stock issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise or conversion of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights (including, without limitation, any right to registration of the shares of Registrable Securities) to which the holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 19 <PAGE> 15. LOST WARRANTS OR STOCK CERTIFICATES. The Company covenants to the holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, In lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 16. DESCRIPTIVE HEADINGS. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 17. GOVERNING LAW. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Texas. TANOX BIOSYSTEMS, INC. By: /s/ NANCY T. CHANG Nancy T. Chang, President Address: 10301 Stella Link Houston, Texas 77025 Date: November, 1989 20 <PAGE> EXHIBIT A NOTICE OF EXERCISE To: TANOX BIOSYSTEMS, INC. 1. The undersigned hereby elects to purchase _____ shares of Common Stock of TANOX BIOSYSTEMS, INC. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: ------------------------------------ (Name) ------------------------------------ ------------------------------------ (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. In support thereof, the undersigned has executed an Investment Representation Statement attached hereto as Schedule 1. ------------------------------------ (Signature) - --------------------------- (Date) 21 <PAGE> Schedule 1 INVESTMENT REPRESENTATION STATEMENT Purchaser : Company: TANOX BIOSYSTEMS, INC. Security: Common Stock Amount : Date : In connection with the purchase of the above-listed securities (the "Securities"), the undersigned (the "Purchaser") represents to the Company as follows: (a) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The Purchaser is purchasing the Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933 ("Securities Act"). (b) The Purchaser understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Securities and Exchange Commission ("SEC"), the statutory basis for such exemption may be unavailable if the Purchaser's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) The Purchaser further understands that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, the Purchaser understands that the Company is under no obligation to register the Securities. In addition, the Purchaser understands that the certificate 22 <PAGE> evidencing the Securities will be imprinted with the legend referred to in the Warrant under which the Securities are being purchased. (d) The Purchaser is aware of the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: The availability of certain public information about the Company; the resale occurring not less than two years after the party has purchased and paid for the securities to be sold: the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (e) The Purchaser further understands that at the time it wishes to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144, and that, in such event, the Purchaser may be precluded from selling the Securities under Rule 144 even if the two-year minimum holding period had been satisfied. (f) The Purchaser further understands that in the event all of the requirements of Rule 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Purchaser: ------------------------------------ Date: ________________, 19__ 23 <PAGE> EXHIBIT A-l NOTICE OF EXERCISE To: TANOX BIOSYSTEMS, INC. (the "Company") 1. Contingent upon and effective immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement on Form S- ____, filed ____________, 19__, the undersigned hereby elects to purchase shares of Common Stock of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant. 2. Please deliver to the custodian for the selling shareholders a stock certificate representing such _____ shares. 3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $_________ or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. -------------------------- (Signature) - ----------------------- (Date) 24 EXHIBIT 10.1 INDEMNIFICATION AGREEMENT This Agreement is made this _____ day of __________, 2000, between Tanox, Inc., a Delaware corporation (the "Company") and ________________________ ("Agent"). RECITALS 1. The Agent is serving as a director, officer, employee or other agent of the Company or, at the request of the Company, another corporation or enterprise, and the Company desires the Agent to continue to serve in this capacity. 2. The Company and the Agent recognize that qualified persons are often reluctant to serve publicly-held corporations as directors, officers, employees or agents of such corporations or, at the request of such corporations, other corporations or enterprises, unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to, and activities on behalf of, the corporation. 3. The Company's board of directors has determined that the inability to attract and retain qualified persons would be detrimental to the best interests of the Company's stockholders and that the Company should act to assure these persons that there will be increased certainty of adequate protection in the future. 4. The Company has adopted bylaws (the "Bylaws") providing for indemnification of the directors, officers, employees and other agents of the Company, including persons serving at the request of the Company in these capacities with other corporations or enterprises, to the fullest extent permitted under the Delaware General Company Law (the "GCL"). 5. The bylaws, and the GCL, by their non-exclusive nature, permit contracts between the Company and its directors, officers, employees and other agents with respect to indemnification. 6. To induce the Agent to continue to serve as a director, officer, employee or other agent of the Company or, at the request of the Company, other corporations or enterprises, the Company has determined it to be in its best interest to enter into this Agreement to indemnify the Agent to the fullest extent permitted by law. NOW, THEREFORE, for and in consideration of the mutual covenants and conditions contained herein, the receipt and sufficiency of which are hereby acknowledged, the Company and the Agent agree as follows: <PAGE> ARTICLE 1. AGREEMENT TO SERVE Agent will serve at the will of the Company as a director, officer, employee or other agent of the Company or, at the request of the Company, other corporations or enterprises, faithfully and to the best of her or his ability so long as she or he is duly elected and qualified unless she or he is removed or terminated in accordance with applicable law or until such time as she or he tenders her or his resignation in writing. ARTICLE 2. INDEMNIFICATION 2.1 INDEMNITY OF AGENT. In consideration of the Agent's service to the Company, the Company hereby agrees to hold harmless and indemnify Agent to the full extent authorized or permitted by the provisions of the Bylaws and the GCL, as same may be amended from time to time (but only to the extent that such amendment permits the Company to provide broader indemnification rights than the Bylaws or the GCL permitted before adoption of such amendment). 2.2 ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in Paragraph 2.3, the Company hereby further agrees to hold harmless and indemnify Agent against: (a) any and all expenses (including attorneys' fees), fees, damages, judgments, fines and amounts paid in settlement actually and reasonably incurred by Agent in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or on behalf of the Company) to which Agent is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Agent is, was or at any time becomes a director, officer, employee or agent of the Company, or is or was serving or at any time serves at the request of the Company as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise; and (b) otherwise to the fullest extent as may be provided to Agent by the Company under the non-exclusivity provisions of the GCL and the Bylaws. 2.3 LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Paragraph 2.2 may be paid by the Company: (a) if indemnity is not lawful (and, in this respect, both the Company and Agent have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication); (b) if judgment is rendered against Agent for an accounting of profits made from the purchase or sale by Agent of securities of the Company pursuant to the provisions of 2 <PAGE> Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local law; (c) if Agent's conduct is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful or intentional misconduct; (d) if Agent's conduct is established by a final judgment as constituting a breach of Agent's duty of loyalty to the Company or resulting in any personal profit or advantage to which Agent was not legally entitled; (e) for which payment is actually made to Agent under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement; or (f) in connection with any proceeding (or part thereof) initiated by Agent, or any proceeding by Agent against the Company or its directors, officers, employees or other agents, unless (i) such indemnification is expressly required to be made by law, or (ii) the proceeding was authorized by the Board of Directors of the Company. 2.4 CONTRIBUTION. If the indemnification provided in Paragraphs 2.1 and 2.2 is unavailable and may not be paid to Agent for any reason other than those set forth in Paragraph 2.3, then in respect to any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Agent (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Agent in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and by Agent on the other hand from the transaction from which such action, suite or proceeding arose, and (ii) the relative fault of the Company on the one hand and of Agent on the other hand in connection with the events that resulted in such expenses, judgements, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of Agent on the other hand shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this Paragraph 2.4 were determined by pro rata allocation or any other method of allocation that does not take account of the foregoing equitable considerations. 3 <PAGE> 2.5 CONTINUATION OF OBLIGATIONS. (a) All agreements and obligations of the Company contained herein shall continue during the period Agent is a director, officer, employee or agent of the Company or (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Agent shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Agent was serving in any capacity referred to herein. (b) If Agent is deceased and is entitled to indemnification under any provision of this Agreement, the Company shall indemnify Agent's estate and her or his spouse, heirs, administrators and executors against, and the Company shall, and does hereby agree to, assume any and all expenses (including attorneys' fees), penalties and fines actually and reasonably incurred by or for Agent or her or his estate, in connection with the investigation, defense, settlement or appeal of any such action, suit or proceeding. Further, when requested in writing by the spouse of Agent, and/or the heirs, executors or administrators of Agent's estate, the Company shall provide appropriate evidence of the Company's agreement set out herein, to indemnify Agent against and to itself assume such costs, liabilities and expenses. 2.6 NOTIFICATION AND DEFENSE OF CLAIM. Not later than 30 days after receipt by Agent of notice of the commencement of any action, suit or proceeding, Agent must, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof. Agent's omission so to notify the Company will relieve the Company from any liability that it may have to her or him under this Agreement. However, such omission will not relieve the Company from any obligation it may have to Agent other than under this Agreement. With respect to any such action, suit or proceeding as to which Agent notifies the Company of the commencement thereof: (a) The Company may participate therein at its own expense; (b) Except as otherwise provided below, to the extent that it may wish, the Company, jointly with any other indemnifying party similarly notified, may assume the defense thereof, with counsel reasonably satisfactory to Agent. After notice from the Company to Agent of the Company's election to assume the defense as provided above, the Company will not be liable to Agent under this Agreement for any legal or other expenses subsequently incurred by Agent in connection with the defense thereof, other than reasonable costs of investigation or as otherwise provided below. Agent may employ counsel in such action, suit or proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption 4 <PAGE> of the defense thereof shall be at the expense of Agent unless (i) the employment of counsel by Agent has been authorized by the Company, (ii) Agent shall have reasonably concluded that there may be a conflict of interest between the Company and Agent in conducting the defense of such action or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Company. The Company may not assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which Agent shall have made the conclusion provided for in (ii) above; and (c) The Company shall not be required to indemnify Agent under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company may not settle any action or claim in any manner that would impose any penalty or limitation on Agent without her or his written consent. Neither the Company nor Agent will unreasonably withhold its consent to any proposed settlement. 2.7 ADVANCEMENT AND REPAYMENT OF EXPENSES. (a) If Agent employs her or his own counsel pursuant to Paragraph 2.6(b)(i) through (iii) above, the Company shall advance to Agent any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative, within ten (10) days after receiving from Agent copies of invoices for such expenses and prior to any final disposition of any such action, suit or proceeding. (b) Agent agrees that she or he will reimburse the Company for all reasonable expenses paid by the Company in defending any civil or criminal action, suit or proceeding against Agent if and only to the extent it shall be ultimately determined that Agent is not entitled, under the provisions of the GCL, the Bylaws, this Agreement or otherwise, to be indemnified by the Company for such expenses. 5 <PAGE> 2.8 ENFORCEMENT. (a) Any right to indemnification or advances granted by this Agreement to Agent shall be enforceable by or on behalf of Agent in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Agent, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting her or his claim. It shall be a defense to any action for which a claim for indemnification is made under this Agreement (other than an action brought to enforce a claim for expenses pursuant to Section 2.7, provided that the required undertaking has been tendered to the Company) that Agent is not entitled to indemnification because of the limitations set forth in Section 2.3. Neither the failure of the Company (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Agent is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its stockholders) that such indemnification is improper shall be a defense to the action or create a presumption at Agent is not entitled to indemnification under this Agreement or otherwise. (b) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on the Company hereby to induce Agent to serve as a director, officer, employee or other agent of the Company or, at the request of the Company, other corporations or enterprises, and acknowledges that she or he is relying upon this Agreement in serving in such capacity. (c) If Agent is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, the Company shall reimburse Agent for all of her or his reasonable fees and expenses in bringing and pursuing such action. 2.9 SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Agent, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 2.10 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent by this Agreement shall not be exclusive of any other right which Agent may have or hereafter acquire under any statute, provision of the Company's Certificate of Incorporation or Bylaws, agreement, vote of stockholders or directors, or otherwise, both as to action in her or his official capacity and as to action in another capacity while holding office. 6 <PAGE> ARTICLE 3. MISCELLANEOUS PROVISIONS 3.1 SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision of this Agreement is held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other provisions. 3.2 BINDING EFFECT. This Agreement shall be binding upon Agent and upon the Company, its successors and assigns, and shall inure to the benefit of Agent, her or his heirs, personal representatives and assigns and to the benefit of the Company, its successors and assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assetsCompany,expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 3.3 AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 3.4 GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. 3.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which shall together constitute a single instrument. 3.6 HEADINGS. The headings of paragraphs in this Agreement are for convenience only and shall not be deemed to constitute part of this Agreement or affect the construction thereof. 3.7 NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to the party to whom such communication was directed or (ii) upon the third business day after the date on which such communication was mailed if mailed by certified or registered mail with postage prepaid: (a) if to Agent, at the address indicated on the signature page hereof; and (b) if to the Company, to: Tanox, Inc. 10301 Stella Link Houston, Texas 77025 Attn: President Facsimile: (713) 664-8914; 7 <PAGE> or to such other address as may have been furnished to Agent by the Company as provided in this paragraph. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. EXHIBIT 10.2 TANOX BIOSYSTEMS, INC. 1987 STOCK OPTION PLAN I. PURPOSE OF THE PLAN The Tanox Biosystems, Inc. 1987 Stock Option Plan (the "Plan") is intended to provide a means whereby certain employees of Tanox Biosystems, Inc., a Texas corporation (the "Company"), and its subsidiaries, if any, may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its shareholders. Accordingly, the Company may grant to certain employees the option ("Option") to purchase shares of the $0.01 par value common stock of the Company ("Stock"), in accordance with the terms and conditions of the Plan. Options granted under the Plan may be either incentive stock options ("Incentive Stock Options") within the meaning of section 422A(b) of the Internal Revenue Code of 1986, as amended (the "Code") or options which do not constitute Incentive Stock Options. II. ADMINISTRATION The Plan shall be administered by a Committee (the "Committee") of one or more persons appointed by the Board of Directors of the Company (the "Board") Members of the Committee shall be eligible to participate in the Plan or in any other stock, stock option or stock appreciation rights plan of the Company or any of its affiliates ("Company Stock Plan"). The Committee shall have sole authority to select the employees who are to be granted Options from among those eligible under the Plan and to establish the number of shares which may be issued under each Option. The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations, not inconsistent with the provisions of the Plan, as it may deem advisable to carry out the Plan. Without intending to limit its authority, the Committee is specifically authorized to adopt such limitations and requirements in connection with the exercise of Options granted under the Plan and have such information prepared for distribution to persons receiving such Options as may be necessary or appropriate to qualify the exercise of such Options EXHIBIT "B" <PAGE> and issuance of the Stock pursuant thereto for exemption from registration under applicable federal and state securities laws or, if desired, to register such stock under such securities laws. All decisions made by the Committee in selecting the employees to whom options shall be granted, in establishing the number of shares which may be issued under each Option, and in construing the provisions of the Plan shall be final. If a Committee is not appointed by the Board, the Board shall act as the Committee for purposes of the Plan. III. OPTION AGREEMENTS Each Option shall be evidenced by an option agreement ("Option Agreement") and shall contain such terms and conditions, and may be exercisable for such periods, as may be approved by the Committee. The terms and conditions of the respective Option Agreements need not be identical. Also, an Option Agreement may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Stock (plus cash if necessary) having a fair market value equal to such option price; provided, that the shares of such Stock delivered have been held for a sufficient period to meet criteria for "maturity" established by the Committee acting upon advice of the independent certified public accountants of the Company. For all purposes under the Plan, the fair market value of a share of Stock on a particular date shall be determined by the Committee in such manner as it deems appropriate. If the Stock is publicly traded at the time a determination of its fair market value is required to be made, fair market value of a share of Stock on a particular date shall be the average between the closing bid and ask price of the Stock on the most recent date the Stock was publicly traded. The Option and the rights granted under the Option shall not be transferable other than by will or the laws of descent and distribution, and shall be exercisable only by the optionee during the optionee's lifetime or at optionee's death only by the optionee's guardian or legal representative; subject, however, to any restrictions on transfer of, or any options of the Company or other shareholders to reacquire, any shares purchased by the optionee or the optionee's guardian or legal representative under the terms of any buy-sell or other agreement which the Company may require the optionee or the optionee's guardian or legal representative to execute prior to exercise of the option rights hereunder. -2- <PAGE> IV. ELIGIBILITY OF OPTIONEE Options may be granted only to individuals who are key employees, officers, or directors of the Company or any subsidiary corporation, if any, (as defined in section 425 of the Code) of the Company at the time the Option is granted. Options may be granted to the same employee on more than one occasion. Optionee shall not be required to exercise Options granted hereunder on more than one occasion in the order that they were granted and may exercise Options in such order as Optionee may determine. The aggregate fair market value (determined on the basis of the fair market value of the Stock at the time of the grant of the Incentive Stock Option) of Stock with respect to which such Incentive Stock Options are first exercisable by an optionee during any calendar year (under the Plan and any other incentive stock option plans of the Company and any parent and subsidiary corporations) shall not exceed $100,000; however, the value of Stock for which options may be granted to an optionee in any year may exceed $100,000. Further, no Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or any subsidiary corporation, within the meaning of section 422A(b)(6) of the Code, unless (i) at the time such Option is granted the option price is at least 110% of the fair market value of the Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. V. SHARES SUBJECT TO THE PLAN The aggregate number of shares which may be issued under Options granted under the Plan shall not exceed 2,700,000 (as amend and adjusted respectively, by resolution of the Board of Directors effective as of April 24, 1989, June 30, 1990, and March 31, 1997) shares of Stock. Such shares may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Options at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. Should any Option expire or terminate prior to its exercise in full, the shares previously subject to such Option may again be subject to an Option granted under the Plan. The aggregate number of shares which may be issued under the Plan shall be subject to adjustment as provided in -3- <PAGE> Paragraph VIII hereof. Exercise of an Option in any manner, shall result in a decrease in the number of shares of Stock which may thereafter be available, both for purposes of the Plan and for sale to any one employee, by the number of shares as to which the Option is exercised. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option which does not constitute an Incentive Stock Option. VI. OPTION PRICE The purchase price of Stock issued under each Option shall be determined by the Committee, but, in the case of an Incentive Stock Option, such purchase price shall not be less than the fair market value of Stock subject to the Option on the date the Option is granted. VII. TERM OF PLAN The Plan shall be effective upon the date of its adoption by the Board of Directors, provided the Plan is subsequently approved by the shareholders of the Company within 12 months thereafter. Except with respect to Options then outstanding, if not sooner terminated under the provisions of Paragraph IX hereof, the Plan shall terminate upon and no further Options shall be granted after the expiration of ten years from the date of its adoption by the Board of Directors. VIII. RECAPITALIZATION OR REORGANIZATION (a) The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board of Directors or the shareholders of the Company to make or authorize (i) any adjustment, recapitalization, reorganization, or other change in the Company's capital structure or its business, (ii) any merger or consolidation of the Company, (iii) any issue of debt or equity securities with priority to or affecting Stock or the rights thereof, (iv) the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business, or (v) any other corporate act or proceeding. The Committee shall be authorized to increase the number of shares -4- <PAGE> which may be issued under this Plan, as set forth in Paragraph V, if necessary to permit any adjustment in the number of shares under this Paragraph VIII, so long as sufficient authorized, unissued and otherwise unencumbered shares are available to permit such increase. (b) The shares with respect to which Options may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Option previously granted, the Company shall effect a subdivision or consolidation of shares of Stock or the payment of a stock dividend on Stock without receipt of consideration by the Company, then the number of shares of Stock with respect to which such Option may thereafter be exercised (i), in the event of an increase in the number of outstanding shares, shall be proportionately increased and the purchase price per share shall be proportionately reduced and (ii), in the event of a reduction in the number of outstanding shares, shall be proportionately reduced and the purchase price per share shall be proportionately increased. (c) If the Company recapitalizes or otherwise changes its capital structure, thereafter, upon any exercise of an Option previously granted, the optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Stock as to which such Option shall then be exercisable, the number and class of shares of stock and securities to which the optionee would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the optionee had been the holder of record of the number of shares of Stock as to which such Option is then exercisable. If (i) the Company shall not be the surviving entity in any merger or consolidation (or survives only as a subsidiary of another entity), (ii) the Company is to sell all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary), (iii) any person or entity (including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934) acquires or gains ownership or control of (including, without limitation, power to vote) more than 50% of the outstanding shares of Stock, (iv) the Company is to be dissolved and liquidated, or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board (each such -5- <PAGE> event is referred to herein as a "Corporate Change"), then the Committee, acting in its sole discretion without the consent or approval of any optionee, shall effect one or more of the following alternatives (subject to the limitation set forth in Paragraph IV as to the maximum amount of Stock as to which Incentive Stock Options may first become exercisable in any calendar year), which may vary among individual optionees: (1) acceleration of the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Committee, after which specified date all unexercised Options and all rights of optionees thereunder shall terminate; (2) require the mandatory surrender to the Company by selected optionees of each outstanding Option held by such optionees (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, and in such event the Committee shall cancel such Options as soon as reasonably possible and pay to each optionee an amount of cash equal to the excess of the fair market value of the aggregate shares subject to such Option over the aggregate option price of such shares; (3) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Corporate Change; provided, however, that the Committee in its sole discretion, may determine that no adjustment is necessary to Options then outstanding; or (4) provide that, upon any subsequent exercise of an Option theretofore granted, the optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Stock as to which such Option shall then be exercisable, the number and class of shares of stock and securities to which the optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution, the optionee had been the holder of record of the number of shares of Stock as to which such Option is then exercisable. -6- <PAGE> Such actions shall be taken and be effective as of a date selected by the Committee within (a) ten days after the approval by the shareholders of the Company of any such merger, consolidation, sale of assets or dissolution or (b) thirty days of any such change of control, as provided in (i) through (v) above. The Committee for purposes of the Corporate Changes described in (iii) and (v) above shall be the Committee as constituted prior to the occurrence of such Corporate Change. (d) Any adjustment provided for in Subparagraphs (b) and (c) above shall be subject to any required shareholder action. (e) Except as otherwise provided in this Plan, the issuance by the Company of shares of Stock, or any class of securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities and, in any case, whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Options previously granted or the purchase price per share. IX. AMENDMENT OR TERMINATION OF THE PLAN The Board of Directors in its discretion may terminate the Plan at any time with respect to any shares for which Options have not been granted prior to such termination. The Board of Directors shall have the right to alter or amend the Plan or any part of the Plan from time to time; provided, however, that no change in any Option granted before such alteration or amendment may be made which would impair the rights of the optionee without the consent of such optionee; and provided, further, that the Board of Directors may not make any alteration or amendment which would (i) materially increase the benefits accruing to participants under the Plan, (ii) increase the aggregate number of shares which may be issued pursuant to the provisions of the Plan, (iii) change the class of employees eligible to receive Options under the Plan, or (iv) extend the term of the Plan without the approval of the shareholders of the Company. -7- EXHIBIT 10.3 TANOX BIOSYSTEMS, INC. 1992 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN I. Purpose of the Plan The 1992 Non-Employee Directors Stock Option Plan (the "Plan") is intended to provide ownership of the capital stock of Tanox Biosystems, Inc., a Texas Corporation (the "Company"), to non-employee members of the Company's Board of Directors ("Board") in order to attract and retain highly qualified individuals to serve as directors of the Company; to provide competitive remuneration for Board service; and to strengthen the commonality of interest between directors and shareholders of the Company. Accordingly, the Company may grant to certain non-employee members of the Board options ("Options") to purchase shares of the common stock, $.01 par value, of the company ("Stock") in accordance with the terms and conditions of the Plan. Options granted under the Plan shall not be incentive stock options within the meaning of section 422 (a) of the Internal Revenue Code of 1986, as amended (the "Code"). The Plan is intended to conform to the provisions of Rule 16b-3 ("Rule 16b-3") of the Securities Exchange Act of 1934 (the "1934 Act") as presently in effect. II. Administration The Plan shall be administered by a Committee (the "Committee") consisting of two or more members of the Board who are employees of the Company. Members of the Committee and employee members of the Board shall not be eligible to participate in the Plan. The Committee shall have sole authority to select the non-employee members of the Board who are to be granted Options from among those eligible under the Plan and to establish the number of shares which may be issued under each of the Options. The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations, not inconsistent with the provisions of the Plan, as it may deem advisable to carry out the Plan. Without intending to limit its authority, the Committee is specifically authorized to adopt such limitations and requirements in connection with the exercise of <PAGE> Options granted under the Plan and have such information prepared for distribution to persons receiving such Options as may be necessary or appropriate to qualify the exercise of such Options and issuance of the stock Pursuant thereto for exemption from registration under applicable federal and state securities laws or, if desired, to register such stock under such securities laws. All decisions made by the Committee in selecting the non-employee members of the Board to whom Options shall be granted, in establishing the number of shares which may be issued under each Option, and in construing the provisions of the Plan shall be final. III. Option Agreements Each Option shall be evidenced by an option agreement ("Option Agreement") and shall contain such terms and conditions, and may be exercisable for such periods, as may be approved by the Committee. Unless otherwise provided by the Committee on the grant of an Option, an Option shall become exercisable annually as to one-third of the number of shares of Stock covered by such Option. The terms and conditions of the respective Option Agreements need not be identical. For all purposes under the Plan, the fair market value of a share of Stock on a particular date shall be determined by the Committee in such a manner as it deems appropriate. If, however, the stock is publicly traded at the time a determination of its fair market value is required to be made, fair market value of a share of Stock on a particular date shall be the average of (i) the closing bid and ask price of the Stock on the most recent date the Stock was publicly traded or, (ii) if the Stock is publicly traded on a securities exchange, the high and low quoted selling price of the Stock on the most recent date the Stock was publicly traded. The Option and the rights granted under the Option shall not be transferable other than by will or the laws of descent and distribution, and shall be exercisable only by the optionee during the optionee's lifetime or at the optionee's death only by the optionee's guardian or legal representative; subject, however, to any restrictions on transfer of, or any options of the Company or other shareholders to reacquire, any shares purchased by the optionee or the optionee's guardian or legal representative under the terms of any buy-sell or other agreement which the Company may require the optionee or EXHIBIT A <PAGE> the optionee's guardian or legal representative to execute prior to exercise of the option rights hereunder. Page 3 <PAGE> IV. Eligibility of Optionee Options may be granted only to individuals who are non-employee members of the Board at the time the Option is granted. Options may be granted to the same person on more than one occasion. An optionee shall not be required to exercise Options granted hereunder in the order that they were granted and may exercise Options in such order as the optionee may determine. V. Shares Subject to the Plan The aggregate number of shares which may be issued under Options granted under the Plan shall not exceed 100,000 shares of stock. Such shares may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Options at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. If any Option should expire or terminate prior to its exercise in full, the shares previously subject to such Option may again be subject to an Option granted under the Plan. The aggregate number of shares which may be issued under the Plan shall be subject to adjustment as provided in Paragraph VIII hereof. Exercise of an Option in any manner, shall result in a decrease in the number of shares of Stock which may thereafter be available, both for purposes of the Plan and for sale to anyone director, by the number of shares as to which the Option is exercised. VI. Method of Exercise (a) An option granted under the Plan shall be deemed exercised when the person entitled to exercise the Option (i) delivers written notice to the President of the Company of the decision to exercise, (ii) concurrently tenders to the Company full payment for the Shares to be purchased pursuant to the exercise, and (iii) complies with such other reasonable requirements as the Committee may establish. Payment for Shares with respect to which an Page 4 <PAGE> Option is exercised may be in cash, or by certified check, or wholly or partially in the form of unrestricted shares of Common Stock, as the Committee may determine; provided that such Common Stock has been held by the optionee for more than six months and has a fair market value equal to the exercise price. The Common Stock covered by any Option or portion thereof, as to which the right to exercise shall have been so surrendered, shall not again be available for the purposes of the Plan. (b) If the optionee ceases to be a director for any reason other than a Corporate Change (as defined below), voluntary resignation, death or disability, all Options held by the optionee shall lapse at the earlier of the end of the exercise period for such Options or 60 days after the last day that the optionee serves as a director; provided, however, the Option may be exercised only for the number of shares of Stock for which it could have been exercised on such cessation of service, subject to any provision to the contrary contained in the Option Agreement. (c) In the case of death of the optionee, the beneficiaries designated by the optionee shall have 180 days from the optionee's demise or to the end of the exercise period, whichever is earlier, to exercise the Option; provided, however, the Option may be exercised only for the number of shares of Stock for which it could have been exercised at the time the optionee died, subject to any provision to the contrary contained in the Option Agreement. (d) If the optionee ceases to serve as a director due to total and permanent disability (within the meaning of Section 22(e)(3) of the Code) the Option shall lapse at the earlier of the end of the exercise period or 180 days after the date of such cessation of service; provided, however, the Option may be exercised only for the number of shares of Stock for which it could have been exercised at the time the optionee became disabled, subject to any provision to the contrary contained in the Option Agreement. (e) If the optionee voluntarily resigns as a director, all Options shall lapse upon such Page 5 <PAGE> resignation. Page 6 <PAGE> VII. Term of Plan The Plan shall be effective upon the date of its adoption by the shareholders of the Company and no Options shall be exercisable unless and until the shareholders of the Company approve the Plan. In addition, no Option shall be exercisable until the information required by Rule 16b-3(b)(2) with respect to the Plan is disseminated in accordance with the provisions of such Rule on or prior to the date of the first annual meeting of shareholders held after the first registration of an equity security of the Company under Section 12 of the 1934 Act. Except with respect to Options then outstanding, if not sooner terminated under the provisions of Paragraph IX hereof, the Plan shall terminate upon, and no further Options shall be granted after, the expiration of ten years from the date of its adoption by the Board of Directors. VIII. Recapitalization or Reorganization (a) The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board of Directors or the shareholders of the Company to make or authorize (i) any adjustment, recapitalization, reorganization, or other change in the Company's capital structure or its business, (ii) any merger or consolidation of the Company, (iii) any issue or debt or equity securities with priority to or affecting Stock or the rights thereof, (iv) the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business, or (v) any other corporate as or proceeding. The Committee shall be authorized to increase the number of shares which may be issued under the Plan, as set forth in Paragraph V, if necessary to permit any adjustment in the number of shares under this Paragraph VIII, as long as sufficient authorized, unissued or otherwise unencumbered shares are available to permit such increase. (b) The shares with respect to which Options may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Option previously granted, the Company shall effect a subdivision or consolidation of shares of Stock Page 7 <PAGE> or the payment of a stock dividend on Stock without receipt of consideration by the Company, then the number of shares of Stock with respect to which such Option may thereafter be exercised (i), in the event of an increase in the number of outstanding shares, shall be proportionately increased and the purchase price per share shall be proportionately reduced and (ii), in the event of a reduction in the number of outstanding shares, shall be proportionately reduced and the purchase price per share shall be proportionately increased. (c) If the Company recapitalizes or otherwise changes its capital structure, thereafter, upon any exercise of an Option previously granted, the optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Stock as to which such Option shall then be exercisable, the number and class of shares of stock and securities to which the optionee would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the optionee had been the holder of record of the number of shares of Stock as to which such Option is then exercisable. If (i) the Company shall not be the surviving entity in any merger or consolidation (or survives only as a subsidiary of another entity), (ii) the Company is to sell all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary), (iii) any person or entity (including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934) acquires or gains ownership or control of (including, without limitation, power to vote) more than 50% of the outstanding shares of Stock, (iv) the Company is to be dissolved and liquidated, or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board (each such event is referred to herein as a "Corporate Change"), then the Committee, acting in its sole discretion without the consent or approval of any optionee, shall effect one or more of the following alternatives (only to the extent permitted by Rule 16b-3), which may vary among individual optionee: Page 8 <PAGE> (1) acceleration of the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Committee, after which specified date all unexercised Options and all rights of optionee thereunder shall terminate; (2) require the mandatory surrender to the Company by selected optionee of each outstanding Option held by such optionee (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, and in such event the Committee shall cancel such Options as soon as reasonably possible and pay to each optionee an amount of cash equal to the excess of the fair market value of the aggregate shares subject to such Option over the aggregate option price of such shares; (3) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Corporate Change; provided, however, that the Committee in its sole discretion, may determine that no adjustment is necessary to Options then outstanding; or (4) provide that, upon any subsequent exercise of an Option theretofore granted, the optionee shall be entitled to purchase under such Option, in lieu of the number of shares of Stock as to which such Option shall then be exercisable, the number and class of shares of stock and securities to which the optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution, the optionee had been the holder of record of the number of shares of Stock as to which such Option is then exercisable. Page 9 <PAGE> Such actions shall be taken and be effective as of a date selected by the Committee within (a) ten days after the approval by the shareholders of the Company of any such merger, consolidation, sale of assets or dissolution or (b) thirty days of any such change of control, as provided in (i) through (v) above. The Committee for purposes of the Corporate Changes described in (iii) and (v) above shall be the Committee as constituted prior to the occurrence of such Corporate Change. (d) Any adjustment provided for in Subparagraphs (b) and (c) above shall be subject to any required shareholder action. (e) Except as otherwise provided in this Plan, the issuance by the Company of shares of Stock, or any class of securities convertible into shares of stock of any class, for cash, property, labor, or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities and, in any case, whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Options previously granted or the purchase price per share. (f) Notwithstanding anything herein to the contrary, Options shall always be granted and exercised in a manner conforming to the provisions of Rule 16b-3, or any replacement rule adopted pursuant to the 1934 Act, as the same now exists or may, from time to time, be amended. IX. Amendment or Termination of the Plan The Board of Directors in its discretion may terminate the Plan at any time with respect to any shares for which Options have not been granted prior to such termination. The Board of Directors shall have the right to alter or amend the Plan or any part of the Plan from time to time; provided, however, that no change in any Option granted before such alteration or amendment may be made which would impair the rights of the optionee Page 10 <PAGE> without the consent of such optionee; and provided, further, that, the Board of Directors may not make any alteration or amendment which would (i) materially increase the benefits accruing to participants under the Plan, (ii) increase the aggregate number of shares which may be issued pursuant to the provisions of the Plan, (iii) expand or otherwise change the class of persons eligible to receive Options under the Plan, or (iv) extend the term of the Plan. In addition, the provisions of the Plan may not be amended more frequently than permitted by Rule 16b-3. X. Miscellaneous Matters (a) Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any director for reelection by the Company's shareholders, nor confer upon any director the right to remain a member of the Board for any period of time, or at any particular rate of compensation. (b) The Plan shall be governed by and construed in accordance with the laws of the State of Texas. Page 11 TANOX, INC. By:________________________________ _____________________________ Nancy T. Chang, President Agent and Chief Executive Officer Address: _____________________________ _____________________________ _____________________________ 8 EXHIBIT 10.4 TANOX, INC. 1997 STOCK PLAN SECTION 1. Purpose. The purpose of the 1997 Stock Plan (the "Plan") is to secure for TANOX, INC., (the "Company") and any parent or subsidiaries of the Company (collectively the "Related Company" or "Related Companies") the benefits arising from capital stock ownership by those employees, directors, officers and consultants of the Company and any Related Companies who will be responsible for the Company's future growth and continued success. The Plan will provide a means whereby (a) employees of the Company and any Related Companies may purchase stock in the Company pursuant to options which qualify as "incentive stock options" ("Incentive Stock Options") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), (b) directors (including non-employee directors), employees, advisors and consultants of the Company and any Related Companies may purchase stock in the Company pursuant to options granted hereunder which do not qualify as Incentive Stock Options ("Non-Qualified Option" or "Non-Qualified Options"); (c) directors (including non-employee directors), employees, advisors and consultants of the Company and any Related Companies may be awarded stock in the Company ("Stock Awards"); (d) directors (including non-employee directors), employees, advisors and consultants of the Company and any Related Companies may receive stock appreciation rights ("SARs"); (e) directors (including non-employee directors), employees, advisors and consultants of the Company and any Related Companies may make direct purchases of stock in the Company ("Stock Purchases"); and (f) directors (including non-employee directors), employees, advisors and consultants of the Company and any Related Companies may receive performance units ("Performance Units"). Both Incentive Stock Options and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options." With respect to Incentive Stock Options, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation" as those terms are defined in Section 424 of the Code. With respect to all other Plan Benefits, the terms (i) "parent" includes any entity in an unbroken chain of entities ending with the Company if, at the time of grant, each of the entities other than the Company owns 50 percent or more of the outstanding equity of one of the other entities in such chain and (ii) "subsidiary" includes any entity in an unbroken chain of entities beginning with the Company if, at the time of grant, each of the entities other than the last entity in such chain owns 50 percent or more of the outstanding equity in one of the other entities in such chain. Options, Stock Awards, SARs, Stock Purchases and Performance Units are referred to hereafter individually as a "Plan Benefit" and collectively as "Plan Benefits." Directors (including non-employee directors), employees, advisors and consultants of the Company and any Related Companies are referred to herein as "Participants." <PAGE> SECTION 2. Administration. 2.1 Board Of Directors And The Committee. The Plan will be administered by the Board of Directors of the Company, whose construction and interpretation of the terms and provisions hereof shall be final and conclusive. Any director to whom a Plan Benefit is awarded shall be ineligible to vote upon his or her Plan Benefit, but Plan Benefits may be granted any such director by a vote of the remainder of the directors, except as limited below. The Board of Directors may in its sole discretion grant Options, issue shares upon exercise of such Options, grant Stock Awards, grant SARs and approve Stock Purchases, all as provided in the Plan. The Board of Directors shall have authority, subject to the express provisions of the Plan, to construe the Plan and its related agreements, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective Option, Stock Award, SAR and Stock Purchase agreements, which need not be identical, and to make all other determinations in the judgment of the Board of Directors necessary or desirable for the administration of the Plan. The Board of Directors may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any related agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director shall be liable for any action or determination made in good faith. The Board of Directors may delegate any or all of its powers under the Plan to a Compensation Committee or other Committee (the "Committee") appointed by the Board of Directors consisting of at least two members of the Board of Directors. If the Company has a class of stock registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), then members of the Committee shall at all times be: (i) "outside directors" as such term is defined in Treas. Reg. 1.162-27(e)(3) (or any successor regulation); and (ii) "non-employee directors" within the meaning of Rule 16b-3 (or any successor rule) under the Exchange Act, as such terms are interpreted from time to time. If the Committee is so appointed, all references to the Board of Directors herein shall mean and relate to such Committee, unless the context otherwise requires. 2.2 Compliance With Section 162(M) of the Code. section 162(m) of the code, added by the Omnibus Budget Reconciliation Act of 1993, generally limits the tax deductibility to publicly held companies of compensation in excess of $1,000,000 paid to certain "covered employees" ("Covered Employees"). If the Company is subject to Section 162(m) of the Code, it is the Company's intention to preserve the deductibility of such compensation to the extent it is reasonably practicable and to the extent it is consistent with the Company's compensation objectives. For purposes of this Plan, Covered Employees of the Company shall be those employees of the Company described in Section 162(m)(3) of the Code. SECTION 3. Eligibility. 3.1 Incentive Stock Options. Participants who are employees shall be eligible to receive Incentive Stock Options pursuant to the Plan; provided that no person shall be granted any Incentive Stock Option under the Plan who, at the time such Option is 2 <PAGE> granted, owns, directly or indirectly, Stock (as defined in Section 4) possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its Related Companies, unless the requirements of Section 6.6(b) hereof are satisfied. In determining whether this 10% threshold has been reached, the stock attribution rules of Section 424(d) of the Code shall apply. Directors who are not regular employees are not eligible to receive Incentive Stock Options. 3.2 Non-qualified Options, Stock Awards, SARs, Stock Purchase Performance Units. Non-Qualified Options, Stock Awards, SARs, Performance Units and authorizations to make Stock Purchases may be granted to any Participant. 3.3 Generally. The Board of Directors may take into consideration a Participant's individual circumstances in determining whether to grant an Incentive Stock Option, a Non-Qualified Option, a Stock Award, an SAR or a Performance Unit or to approve a Stock Purchase. Granting of any Option, Stock Award, SAR or Performance Unit or approval of any Stock Purchase for any individual shall neither entitle that individual to, nor disqualify that individual from, participation in any other grant of Plan Benefits. SECTION 4. Stock Subject to Plan. Subject to adjustment as provided in Sections 11 and 12 hereof, the stock to be offered under the Plan shall consist of shares of the Company's Common Stock, $.01 par value, and the maximum number of shares of stock which will be reserved for issuance, and in respect of which Plan Benefits may be granted pursuant to the provisions of the Plan, shall not exceed in the aggregate 5,000,000 shares ("Common Stock" or "Stock"). Such shares may be authorized and unissued shares or may be treasury shares. If an Option or SAR granted hereunder shall expire or terminate for any reason without having been exercised in full, or if the Company shall reacquire any unvested shares issued pursuant to Stock Awards or Stock Purchases, the unpurchased shares subject thereto and any unvested shares so reacquired shall again be available for subsequent grants of Plan Benefits under the Plan. Stock issued pursuant to the Plan may be subject to such restrictions on transfer, repurchase rights or other restrictions as shall be determined by the Board of Directors. SECTION 5. Granting of Options, Stock Awards, Sars and Performance Units and Approvals of Stock Purchases. Options, Stock Awards, SARs and Performance Units may be granted and Stock Purchases may be approved under the Plan at any time during the 10-year period beginning November l, 1997 and ending October 31, 2007. The date of grant of an Option, Stock Award, SAR or Performance Unit or approval of a Stock Purchase under the Plan will be the date specified by the Board of Directors at the time the Board of Directors grants such Option, Stock Award, SAR or Performance Unit or approves such Stock Purchase; provided, however, that such date shall not be prior to the date on which the Board of Directors takes such action. The Board of Directors shall have the right, with the consent of a Participant, to convert an Incentive Stock Option granted under the Plan to a 3 <PAGE> Non-Qualified Option pursuant to Section 6.7. Plan Benefits may be granted alone or in addition to other grants under the Plan. SECTION 6. Special Provisions Applicable to Options and SARs. 6.1 Purchase Price and Shares Subject to Options and SARs. (a) The purchase price per share of stock deliverable upon the exercise of an Option shall be determined by the Board of Directors, PROVIDED, HOWEVER, that (i) in the case of an Incentive Stock Option, the exercise price shall not be less than 100% of the fair market value of such stock on the day the option is granted (except as modified in Section 6.6(b) hereof), and (ii) in the case of a Non-Qualified Option, the exercise price shall not be less than 50% of the fair market value of such stock on the day such Option is granted. (b) Options granted under the Plan may provide for the payment of the exercise price by delivery of (i) cash or a check payable to the order of the Company in an amount equal to the exercise price of such Options, (ii) shares of Common Stock of the Company owned by the Participant having a fair market value equal in amount to the exercise price of the Options being exercised, or (iii) any combination of (i) and (ii). The fair market value of any shares of the Company's Common Stock which may be delivered upon exercise of an Option shall be determined by the Board of Directors. The Board of Directors may also permit Participants, either on a selective or aggregate basis, to simultaneously exercise Options and sell the shares of Common Stock thereby acquired, pursuant to a brokerage or similar arrangement, approved in advance by the Board of Directors, and to use the proceeds from such sale as payment of the purchase price of such shares. (c) If, at the time an Option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the last business day for which the prices or quotes discussed in this sentence are available prior to the date such Option is granted (the "Determination Date") and shall mean (i) the average (on the Determination Date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if such Common Stock is then traded on a national securities exchange; (ii) the last reported sale price (on the Determination Date) of the Common Stock on the NASDAQ Stock Market if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on the Determination Date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the NASDAQ Stock Market. However, if the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall be deemed to be the fair value of the Common Stock as determined by the Board of Directors after taking into consideration all factors which it deems appropriate, including, 4 <PAGE> without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 6.2 Duration of Options and SARs. Subject to Section 6.6(b) hereof, each Option and SAR and all rights thereunder shall be expressed to expire on such date as the Board of Directors may determine, but in no event later than ten years (for Non-Qualified Stock Options and SARs granted in connection therewith, ten years and one day) from the day on which the Option or SAR is granted and shall be subject to earlier termination as provided herein. 6.3 Exercise of Options and Sars. (a) Subject to Sections 6.5 and 6.6(b)(ii) hereof, each Option and SAR granted under the Plan shall be exercisable at such time or times and during such period as shall be set forth in the instrument evidencing such Option or SAR. To the extent that an Option or SAR is not exercised by a Participant when it becomes initially exercisable, it shall not expire but shall be carried forward and shall be exercisable, on a cumulative basis, until the expiration of the exercise period. No partial exercise may be for less than ten (10) full shares of Common Stock (or its equivalent). (b) The Board of Directors shall have the right to accelerate the date of exercise of any installments of any Option or SAR; provided that the Board of Directors shall not accelerate the exercise date of any installment of any Option granted to a Participant as an Incentive Stock Option (and not previously converted into a Non-Qualified Option pursuant to Section 6.7) if such acceleration would violate the annual vesting limitation contained in Section 422(d)(1) of the Code, which provides generally that the aggregate fair market value (determined at the time the Option is granted) of the stock with respect to which Incentive Stock Options granted to any Participant are exercisable for the first time by such Participant during any calendar year (under all plans of the Company and any Related Companies) shall not exceed $100,000. 6.4 Nontransferability of Options and SARs. No Option or SAR granted under the Plan shall be assignable or transferable by the Participant, either voluntarily or by operation of law, except (i) by will or the laws of descent and distribution, (ii) with respect to Non-Qualified Options and SARs, pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act ("ERISA") or the rules promulgated thereunder, (iii) if the Participant's non-qualified stock option agreement granting such options (the "Non-Qualified Stock Option Agreement") or the Participant's SAR agreement granting such SARs (the "SAR Agreement") provides otherwise, or (iv) with respect to Incentive Stock Options, if the Board of Directors is advised by counsel that such transfer or assignment is or shall be permitted under applicable law or regulation without disqualifying such Options under Section 422 of the Code. Unless otherwise provided by the Non-Qualified Stock Option Agreement or the SAR Agreement, during the life of the Participant, the Option or SAR shall be exercisable 5 <PAGE> only by him or her. If any Participant should attempt to dispose of or encumber his or her Options or SARs, other than in accordance with the applicable terms of a Non-Qualified Stock Option Agreement or SAR Agreement, his or her interest in such Options or SARs shall terminate. 6.5 Effect of Termination of Employment or Death. (a) If a Participant ceases to be employed by the Company or a Related Company for any reason, including retirement but other than death, any Option or SAR granted to such Participant under the Plan shall immediately terminate; PROVIDED, HOWEVER, that any portion of such Option or SAR which was otherwise exercisable on the date of termination of the Participant's employment may be exercised within the three-month period following the date on which the Participant ceased to be so employed, but in no event after the expiration of the exercise period. Any such exercise may be made only to the extent of the number of shares subject to the Option or SAR which were purchasable on the date of such termination of employment. If the Participant dies during such three-month period, the Option or SAR shall be exercisable by the Participant's personal representatives, heirs or legatees to the same extent and during the same period that the Participant could have exercised the Option or SAR on the date of his or her death. The aforementioned three-month period may be extended at the discretion of the Board of Directors by written agreement, recognizing that such extension may cause reclassification of an ISO as a Non-Qualified Option. (b) If the Participant dies while an employee of the Company or any Related Company, any Option or SAR granted to such Participant under the Plan shall be exercisable by the Participant's personal representatives, heirs or legatees, for the purchase of that number of shares and to the same extent that the Participant could have exercised the Option or SAR on the date of his or her death. The Option or SAR or any unexercised portion thereof shall terminate unless so exercised prior to the earlier of the expiration of one year from the date of such death or the expiration of the exercise period. The aforementioned one year period may be extended at the discretion of the Board of Directors by written agreement. 6.6 Designation of Incentive Stock Options; Limitations. Options granted under the Plan which are intended to be Incentive Stock Options qualifying under Section 422 of the Code shall be designated as Incentive Stock Options and shall be subject to the following additional terms and conditions: (a) DOLLAR LIMITATION. The aggregate fair market value (determined at the time the option is granted) of the Common Stock for which Incentive Stock Options are exercisable for the first time during any calendar year by any person under the Plan (and all other incentive stock option plans of the Company and any Related Companies) shall not exceed $100,000. In the event that Section 422(d)(1) of the Code is amended to alter the limitation set forth therein so that following such amendment such limitation shall differ from the limitation set forth in this Section 6 <PAGE> 6.6(a), the limitation of this Section 6.6(a) shall be automatically adjusted accordingly. (b) 10% SHAREHOLDER. If any employee to whom an Incentive Stock Option is to be granted pursuant to the provisions of the Plan is on the date of grant the owner of stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Related Companies, then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: (i) The option price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the fair market value of one share of Common Stock on the date of grant; and (ii) The option exercise period shall not exceed five years from the date of grant. In determining whether the 10% threshold has been reached, the stock attribution rules of Section 424(d) of the Code shall apply. (c) Except as modified by the preceding provisions of this Section 6.6, all of the provisions of the Plan shall be applicable to Incentive Stock Options granted hereunder. 6.7 Conversion of Incentive Stock Options Into Non-qualified Options; Termination of Incentive Stock Options. The Board of Directors, at the written request of any Participant, may in its discretion take such actions as may be necessary to convert such Participant's Incentive Stock Options (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such Incentive Stock Options, regardless of whether the Participant is an employee of the Company or a Related Company at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such Options. At the time of such conversion, the Board of Directors (with the consent of the Participant) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Board of Directors in its discretion may determine, provided that such conditions shall not be inconsistent with the Plan. Nothing in the Plan shall be deemed to give any Participant the right to have such Participant's Incentive Stock Options converted into Non-Qualified Options, and no such conversion shall occur until and unless the Board of Directors takes appropriate action. The Board of Directors, with the consent of the Participant, may also terminate any portion of any Incentive Stock Option that has not been exercised at the time of such termination. 6.8 Stock Appreciation Rights. An SAR is the right to receive, without payment, an amount equal to the excess, if any, of the fair market value of a share of Common Stock on the date of exercise over the grant price, which amount will be 7 <PAGE> multiplied by the number of shares with respect to which the SARs shall have been exercised. The grant of SARs under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the express terms of the Plan, as the Board of Directors shall deem desirable: (a) GRANT. SARs may be granted in tandem with, in addition to or completely independent of any Plan Benefit. (b) GRANT PRICE. The grant price of an SAR may be the fair market value of a share of Common Stock on the date of grant or such other price as the Board of Directors may determine. (c) EXERCISE. An SAR may be exercised by a Participant in accordance with procedures established by the Board of Directors or as otherwise provided in any agreement evidencing any SARs. The Board of Directors may provide that an SAR shall be automatically exercised on one or more specified dates. (d) FORM OF PAYMENT. Payment upon exercise of an SAR may be made in cash, in shares of Common Stock or any combination thereof, as the Board of Directors shall determine. (e) FAIR MARKET VALUE. Fair market value shall be determined in accordance with Section 6.1(c) with the "Determination Date" being determined by reference to the date of grant or the date of exercise of an SAR, as applicable. 6.9 Rights as a Shareholder. The holder of an Option or SAR shall have no rights as a shareholder with respect to any shares covered by the Option or SAR until the date of issue of a stock certificate to him or her for such shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 6.10 Special Provisions Applicable to Non-qualified Options and SARs Granted to Covered Employees. If the Company is subject to Section 162(m) of the Code, in order for the full value of Non-Qualified Options or SARs granted to Covered Employees to be deductible by the Company for federal income tax purposes, the Company may intend for such Non-Qualified Options or SARs to be treated as "qualified performance-based compensation" as described in Treas. Reg. 1.162-27(e) (or any successor regulation). In such case, Non-Qualified Options or SARs granted to Covered Employees shall be subject to the following additional requirements: (a) such options and rights shall be granted only by the Board of Directors; and (b) the exercise price of such Options and the grant price of such SARs granted shall in no event be less than the fair market value of the Common Stock as of the date of grant of such Options or SARs. 8 <PAGE> SECTION 7. Special Provisions Applicable to Stock Awards 7.1 Grants of Stock Awards. The Board of Directors may grant a Participant a Stock Award subject to such terms and conditions as the Board of Directors deems appropriate, including, without limitation, restrictions on the pledging, sale, assignment, transfer or other disposition of such shares and the requirement that the Participant forfeit all or a portion of such shares back to the Company upon termination of employment. 7.2 Conditions. Approvals of Stock Awards may be subject to the following conditions: (a) Each Participant receiving a Stock Award shall enter into an agreement (a "Stock Restriction Agreement") with the Company, if required by the Board of Directors, in a form specified by the Board of Directors agreeing to such restrictions on and terms and conditions of the Stock Award as the Board of Directors deems appropriate. The Board may in its sole discretion provide that such restrictions, terms or conditions terminate, lapse or accelerate without regard to the terms of any Stock Restriction Agreement. (b) Shares issued and transferred to a Participant pursuant to a Stock Award may, if required by the Board of Directors, be deposited with the Treasurer or other officer of the Company designated by the Board of Directors to be held until the lapse of the restrictions upon such shares, and each Participant shall execute and deliver to the Company stock powers enabling the Company to exercise its rights hereunder. (c) Certificates for shares issued pursuant to a Stock Award shall, if the Company shall deem it advisable, bear a legend to the effect that they are issued subject to specified restrictions. (d) Certificates representing the shares issued pursuant to a Stock Award shall be registered in the name of the Participant and shall be owned by such Participant. Such Participant shall be the holder of record of such shares for all purposes, including voting and receipt of dividends paid with respect to such shares. 7.3 Nontransferability. Shares issued pursuant to a Stock Award may not be sold, assigned, transferred, alienated, commuted, anticipated, or otherwise disposed of (except, subject to the provisions of such Participant's Stock Restriction Agreement, by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA or the rules promulgated thereunder), or pledged or hypothecated as collateral for a loan or as security for the performance of any obligation, or be otherwise encumbered, and are not subject to attachment, garnishment, execution or other legal or equitable process, prior to the lapse of restrictions on such shares, and any attempt at action in contravention of this Section shall be null and void. If 9 <PAGE> any Participant should attempt to dispose of or encumber his or her shares issued pursuant to a Stock Award prior to the lapse of the restrictions imposed on such shares, his or her interest in such shares shall terminate. 7.4 Effect of Termination of Employment or Death On Stock Awards. If, prior to the lapse of restrictions applicable to Stock Awards, the Participant ceases to be an employee of the Company or the Related Companies for any reason, Stock Awards to such Participant, as to which restrictions have not lapsed, shall be forfeited to the Company, effective on the date of the Participant's termination of employment. The Board of Directors (i) shall have the sole power to decide in each case to what extent leaves of absence shall be deemed a termination of employment and (ii) may in its sole discretion provide for complete or partial exceptions to the requirements of this Section 7.4 as it deems appropriate. SECTION 8. Special Provisions Applicable to Stock Purchases. All approvals of Stock Purchases which provide that the Company has a right to repurchase the shares subject to such Stock Purchase (the "Restricted Shares") shall be subject to the terms and conditions set forth in the related agreement (the "Stock Purchase Restriction Agreement") approved by the Board of Directors, and shall be subject to the other terms and conditions of this Section 8. 8.1 Conditions. All approvals of Stock Purchases shall be subject to the following conditions: (a) Prior to the issuance and transfer of Restricted Shares, the Participant shall (i) pay to the Company the purchase price determined by the Board of Directors (the "Purchase Price") of the Restricted Shares in cash or in such other manner as shall be approved by the Board of Directors and (ii) enter into an agreement (a "Stock Restriction Agreement") with the Company, if required by the Board of Directors, in a form specified by the Board of Directors agreeing to the terms and conditions of the Stock Purchase. The Board may in its sole discretion provide that such restrictions, terms or conditions terminate, lapse or accelerate without regard to the terms of any Stock Restriction Agreement. (b) Restricted Shares issued and transferred to a Participant may, if required by the Board of Directors, be deposited with the Treasurer or other officer of the Company designated by the Board of Directors to be held until the lapse of the restrictions upon such Restricted Shares, and each Participant shall execute and deliver to the Company stock powers enabling the Company to exercise its rights hereunder. (c) Certificates for Restricted Shares shall, if the Company shall deem it advisable, bear a legend to the effect that they are issued subject to specified restrictions. 10 <PAGE> (d) Certificates representing the Restricted Shares shall be registered in the name of the Participant and shall be owned by such Participant. Such Participant shall be the holder of record of such Restricted Shares for all purposes, including voting and receipt of dividends paid with respect to such Restricted Shares. 8.2 Nontransferability. A Participant's Restricted Shares may not be sold, assigned, transferred, alienated, commuted, anticipated, or otherwise disposed of (except, subject to the provisions of such Participant's Stock Restriction Agreement by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA or the rules promulgated thereunder), or pledged or hypothecated as collateral for a loan or as security for the performance of any obligation, or be otherwise encumbered, and are not subject to attachment, garnishment, execution or other legal or equitable process, prior to the lapse of restrictions on such Restricted Shares, and any attempt at action in contravention of this Section shall be null and void. If any Participant should attempt to dispose of or encumber his or her Restricted Shares prior to the lapse of the restrictions imposed on such Restricted Shares, his or her interest in the Restricted Shares awarded to him or her shall terminate. SECTION 9. Performance Units. 9.1 General Requirements. The Board of Directors may grant performance units ("Performance Units") to Participants. Each Performance Unit shall represent the right of the Participant to receive an amount based on the value of the Performance Unit, if performance goals established by the Board of Directors are met. A Performance Unit shall be based on the fair market value of a share of Company Stock or on such other measurement base as the Board of Directors deems appropriate. The Board of Directors shall determine the number of Performance Units to be granted and the requirements applicable to such Units. 9.2 Performance Period and Performance Goals. When Performance Units are granted, the Board of Directors shall establish the performance period during which performance shall be measured (the "Performance Period"), performance goals applicable to the Units ("Performance Goals") and such other conditions of the Grant as it deems appropriate. Performance Goals may relate to the financial performance of the Company or its operating units, the performance of Company Stock, individual performance, or such other criteria as the Board of Directors deems appropriate. 9.3 Payment With Respect to Performance Units. At the end of each Performance Period, the Board of Directors shall determine to what extent the Performance Goals and other conditions of the Performance Units are met and the amount, if any, to be paid with respect to the Performance Units. Payments with respect to Performance Units shall be made in cash, in Company Stock, or in a combination of the two, as determined by the Board of Directors. 11 <PAGE> 9.4 Requirement of Employment. If the Participant ceases to be employed by the Company (as defined in Section 5(e)) during a Performance Period, or if other conditions established by the Board of Directors are not met, the Participant's Performance Units shall be forfeited. The Board of Directors may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. SECTION 10. Requirements of Law. 10.1 Violations of Law. No shares shall be issued and delivered upon exercise of any Option or the making of any Stock Award or Stock Purchase or the payment of any SAR unless and until, in the opinion of counsel for the Company, any applicable registration requirements of the Securities Act of 1933, as amended, any applicable listing requirements of any national securities exchange on which stock of the same class is then listed, and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery shall have been fully complied with. Each Participant may, by accepting Plan Benefits, be required to represent and agree in writing, for himself or herself and for his or her transferees by will or the laws of descent and distribution, that the stock acquired by him, her or them is being acquired for investment. The requirement for any such representation may be waived at any time by the Board of Directors. 10.2 Compliance With Rule 16B-3. If the Company has a class of stock registered pursuant to Section 12 of the Exchange Act, the intent of this Plan is to qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent any provision of the Plan does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Board of Directors and shall not affect the validity of the Plan. In the event Rule 16b-3 is revised or replaced, the Board of Directors may exercise discretion to modify this Plan in any respect necessary to satisfy the requirements of the revised exemption or its replacement. SECTION II. Recapitalization. In the event that dividends are payable in Common Stock of the Company (or other securities are distributed with respect to the Common Stock) or in the event there are splits, sub-divisions, combinations, reclassifications, exchanges of shares of Common Stock of the Company, through merger, consolidation, sale of all or substantially all the property of the Company, recapitalization or reorganization, (i) the number of shares available under the Plan shall be increased or decreased proportionately, as the case may be and (ii) the number of shares deliverable upon the exercise thereafter of any Option previously granted and the price for each share shall be increased or decreased proportionately, as the case may be, but without change in the aggregate purchase price. The number of shares to which granted SARs relate shall be increased or decreased proportionately, as the case may be, and the grant price of such SARs shall be decreased or increased proportionately, as the case may be. SECTION 12. Reorganization. 12 <PAGE> In case the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, or, in case the property or stock of the Company is acquired by any other corporation, or in case of a reorganization or liquidation of the Company, the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company hereunder, shall, as to outstanding Plan Benefits, either (i) make appropriate provision for the protection of any such outstanding Plan Benefits by the substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable in respect of the shares of Common Stock of the Company, provided only that the excess of the aggregate fair market value of the shares subject to the Plan Benefits immediately after such substitution over the purchase price thereof is not more than the excess of the aggregate fair market value of the shares subject to such Plan Benefits immediately before such substitution over the purchase price thereof, (ii) upon written notice to the Participants, provide that all unexercised Plan Benefits must be exercised within a specified number of days of the date of such notice or such Plan Benefits will be terminated, or (iii) upon written notice to the Participants, provide that the Company or the merged, consolidated or otherwise reorganized corporation shall have the right, upon the effective date of any such merger, consolidation, sale of assets or reorganization, to purchase all Plan Benefits held by each Participant and unexercised as of that date at an amount equal to the aggregate fair market value on such date of the shares subject to the Plan Benefits held by such Participant over the aggregate purchase price therefor, such amount to be paid in cash or, if stock of the merged, consolidated or otherwise reorganized corporation is issuable in respect of the shares of the Common Stock of the Company, then, in the discretion of the Board of Directors, in stock of such merged, consolidated or otherwise reorganized corporation equal in fair market value to the aforesaid amount. In any such case the Board of Directors shall, in good faith, determine fair market value and may, in its discretion, (i) advance the lapse of any waiting or installment periods and exercise dates, (ii) accelerate the vesting of any outstanding Options and SARs, (iii) advance the lapse of any restrictions and conditions on any outstanding Stock Awards or Stock Purchases and/or (iv) make payment in settlement of any outstanding Performance Units, in an amount determined by the Board of Directors, based on the Participant's target payment for the Performance Period and the portion of the Performance Period that precedes such event. SECTION 13. No Special Employment Rights. Nothing contained in the Plan or in any Plan Benefit documentation shall confer upon any Participant receiving a grant of any Plan Benefit any right with respect to the continuation of his or her employment by the Company (or any Related Company) or interfere in any way with the right of the Company (or any Related Company), subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of any Plan Benefit. Whether an authorized leave of absence, or absence in military or government service, shall constitute termination of employment shall be determined by the Board of Directors. 13 <PAGE> SECTION 14. Amendment of the Plan. The Board of Directors may at any time and from time to time modify or amend the Plan in any respect. The termination or any modification or amendment of the Plan shall not, without the consent of a recipient of any Plan Benefit, affect his or her rights under any Plan Benefit previously granted. With the consent of the affected Participant, the Board of Directors may amend outstanding agreements relating to any Plan Benefit, in a manner not inconsistent with the Plan. The Board of Directors hereby reserves the right to amend or modify the terms and provisions of the Plan and of any outstanding Options to the extent necessary to qualify any or all Options under the Plan for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, provided, however, that the consent of an optionee is required if such amendment or modification would cause unfavorable income tax treatment for such optionee. SECTION 15. Withholding. The Company's obligation to deliver shares of stock upon the exercise of any Option or the granting of a Stock Award or to make payment upon any exercise of any SAR or making of a Stock Purchase shall be subject to the satisfaction by the Participant of all applicable federal, state and local income and employment tax withholding requirements. SECTION 16. Effective Date and Duration of the Plan. 16.1 Effective Date. The Plan shall become effective on November 1, 1997, but no Incentive Stock Option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within 12 months after the date of the Board's adoption of the Plan, then any Incentive Stock Options previously granted under the Plan shall terminate and no further Incentive Stock Options shall be granted. Subject to such limitation, Options may be granted under the Plan at any time after the effective date and before the date fixed herein for termination of the Plan. 16.2 Duration. Unless sooner terminated in accordance with Section 12 hereof, the Plan shall terminate upon the earlier of (i) October 31, 2007, or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to any Stock Awards or Stock Purchases or the exercise or cancellation of Options and SARs granted hereunder. If the date of termination is determined under (i) above, then Plan Benefits outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such Plan Benefits. SECTION 17. Governing Law. The Plan and all actions taken thereunder shall be governed by the laws of the State of Texas. 14 EXHIBIT 10.5 L E A S E A G R E E M E N T This Lease Agreement ("Lease"), is made and entered into by and between MAIN LINK BUSINESS PARK ASSOCIATES ("LANDLORD"), A TEXAS PARTNERSHIP, AND TANOX BIOSYSTEMS, INC. ("TENANT"), A TEXAS CORPORATION, for 4,832 square feet in MAIN LINK BUSINESS PARK BUILDING "A". In consideration of the payment of the rent, and in consideration of the other covenants and conditions in this Lease, Landlord and Tenant agree as follows: 1. PREMISES. Landlord leases to Tenant, and Tenant accepts from Landlord the Premises in Harris County, Texas, described on the attached Exhibit "A" made a part hereof, together with all improvements situated or to be situated thereon and all rights privileges, easements and appurtenances related to the property ("Premises"). Landlord represents that it has the authority to enter this Lease, and upon Tenant's performance of its obligations, Tenant shall have quiet and peaceable possession of the Premises. Tenant accepts this Lease subject and subordinate to any mortgage or lien of Landlord now or at any time hereafter upon the Premises or improvements, and agrees to execute any releases or other documents which may be required by any mortgagee for the purpose of subordinating this Lease to any such mortgage or lien. Except as access may be reasonably limited as provided in the next sentence, Landlord and its agents shall have the right to enter and inspect the Premises during business hours for the purpose of determining the condition of the Premises, and to make any repairs. During the last six (6) months of the term of this Lease, Landlord and its agents shall have the right to enter and show the Premises, to inspect the same prior to Tenant vacating the Premises, subject to Tenant's right to restrict access to any areas which contain proprietary research or manufacturing facilities, and to erect a sign indicating the Premises are available for lease. 2. TERM. The Tenant shall have and hold the Premises for a term beginning on the Commencement Date and ending ONE HUNDRED TWENTY (120) months thereafter. The "Commencement Date" shall be the date when the improvements are completed to Tenant's reasonable satisfaction in accordance with the plans and specifications described in the attached Exhibit "B". Landlord represents and agrees that Landlord will complete the improvements in full compliance with the plans and specifications contained in the attached Exhibit B, provided to Landlord by Tenant's architect, on or before 75 days following the date on which Landlord obtains all permits. Barring acts of God, strikes or changes in the build-out scope made by Tenant, Landlord agrees to pay Tenant (or Tenant shall have the right to offset same against any rent due hereunder) the sum of $200 per day for each day the Commencement Date is delated beyond such date. If there is any dispute as to completion or repair performed by Landlord, the agreement of the same by Tenant's architect and Landlord's general contractor shall be conclusive. At the termination of this Lease, Tenant will deliver possession of the Premises to Landlord. Only upon the written consent of the Landlord, may Tenant hold over after the termination of this Lease. In the event of any hold over by Tenant, the same shall be under the terms and conditions of this Lease. Any hold over period may be terminated by Landlord upon ten (10) days advance written notice or by Tenant upon thirty (30) days advance written notice. 3. RENT. Tenant agrees to pay to Landlord before the first day of each calendar month rent for the Premises. In advance, without demand FOUR THOUSAND SEVEN HUNDRED EIGHTY-ONE DOLLARS ($4,781.00) per month during <PAGE> years one (1) through five (5) and FOUR THOUSAND SEVEN HUNDRED EIGHTY-ONE DOLLARS ($4,781.00) per month during years six (6) through ten (10 of this Lease. The first monthly installment shall be due and payable the eleventh (11th) month after the Commencement Date of this Lease. The Tenant may, at his election, make equal monthly payments beginning on the Commencement Date for years one (1) through five (5) at an effective rate of THREE THOUSAND NINE HUNDRED EIGHTY-FOUR DOLLARS ($3,984.00) per month. The rent shall be prorated for any fraction of a month included within the term of this Lease. The Tenant further agrees to pay when due, all other amounts specified herein as additional rent. At the termination of this Lease, if Landlord has consented to a hold over by Tenant, the rental for such hold over period shall be equal to one and one-half (1 1/2) of the rent in effect on their termination date computed on a daily basis. To secure the payment of the rent, in addition to any statutory lien, Tenant grants to Landlord a continuing security interest upon all property of Tenant situated in or upon the Premises; provided, that Landlord agrees to subordinate all liens which Landlord may have to any security interest of a commercial lender, or which such lender may request, upon request of Tenant to permit it to borrow and grant as security for such borrowing any furniture, fixtures, inventory and equipment contained in the Premises. Until all rent due hereunder is fully paid, Tenant shall not remove any property from the Premises without the consent of Landlord. Tenant agrees to execute any financing statements or other instruments requested by Landlord to perfect the security interest granted. 4. SECURITY DEPOSIT. Upon execution hereof, Tenant shall deposit with Landlord an irrevocable Letter of Credit in a form agreeable to Tenant and Landlord, for ONE HUNDRED THIRTY-FIVE THOUSAND DOLLARS ($135,000), as Security Deposit. The term of the Letter of Credit shall be for one (1) year, to be renewed annually by Tenant to Landlord, for five (5) years, from the "Commencement Date," and shall be drawn on a financial institution acceptable to the Landlord. Landlord will reimburse to Tenant fifty percent (50%) of the reasonable financial fee for the Letter of Credit, subject to a maximum participation by Landlord of one percent (1%) of the Letter of Credit value. Depending upon Tenant's election regarding rent payments, beginning at the Commencement Date for a period of five (5) years, the Irrevocable Letter of Credit may be reduced in value annually, at the Commencement Date Anniversary, to the following values: $3,984 OPTION $4,781 OPTION -------------- -------------- End Year 1: 108,000.00 135,000.00 End Year 2: 81,000.00 108,000.00 End Year 3: 54,000.00 81,000.00 End Year 4: 27,000.00 54,000.00 End Year 5: 0.00 0.00 Landlord shall hold the Security Deposit without any obligation for interest thereon, to secure Tenant's performance under this Lease. In the event of any default, Landlord may use the Security Deposit to pay any sums owing by Tenant to Landlord, including past due rent. 5. MAINTENANCE. Landlord shall maintain the roof, foundation, and structural soundness of the exterior concrete walls related to the Premises. This maintenance shall not include windows, any glass surface, doors, office entrys or other special installations of Tenant. After written notice from Tenant, Landlord shall have a reasonable opportunity to repair or cure any defect, and Landlord's liability for the same shall be limited to the cost of such repair or curing. Landlord shall maintain all landscaping, lawn irrigation, paving, parking areas, driveways, alleys, and exterior lighting. Tenant agrees to reimburse Landlord for such maintenance and service at the rate of $10.00 per 1,000 square feet of lease space, in the amount of forty-eight dollars thirty two cents ($48.32) per month as additional rent. After the first year of this Lease, should Landlord's reasonable cost hereof exceed its cost for the first full year, then Tenant agrees to pay to Landlord Tenant's prorata portion of the amount of such excess as additional rent. <PAGE> Tenant shall be responsible for any damage caused by its default or negligence, including that of its employees, agents, guests or invitees. Tenant shall maintain in good condition all other parts of the Premises including but not limited to windows, all glass areas, doors, office entry, special installations, interior finishes, floors, floor coverings, heating and air conditioning systems, plumbing and pest control. Should Tenant fail to perform such work, and Tenant shall pay as additional rent such costs and expenses for said maintenance. Tenant bears all responsibility and costs associated with the maintenance of the auxiliary generator and maintenance and testing of the sampling well, as requested by the City of Houston. If the improvements upon the premises should be totally destroyed by any casualty, or if they should be so damaged that rebuilding or repairs cannot in Landlord's estimation be completed within the lesser of 120 days or 90 days after release of both regulatory agencies and insurance companies for rebuilding to commence, after the date Landlord is notified by Tenant of such damage, at Tenant's election upon written notice to Landlord, this Lease shall terminate effective upon the date of such casualty or damage. If the improvements situated upon the Premises are damaged by a peril covered by insurance hereinafter provided, and subject to a mortgagee's right to insurance proceeds as hereinafter provided, to the extent rebuilding or repairs can, in Landlord's estimation, be completed within the lesser of 120 days or 90 days after release of both regulatory agencies and insurance companies for rebuilding to commence, after Tenant's notice, Landlord shall rebuild and repair such improvements to substantially the condition to which they existed prior to such casualty. Landlord shall not be responsible for any improvements placed in or upon the Premises by Tenant. During such repair, this Lease shall not terminate, but if the Premises cannot be used for the purpose intended, the rent payable during the period of rebuilding or repairs shall be reduced or abated to such extent as may be fair and reasonable under all circumstances. Should Landlord fail to complete the rebuilding and repairs within the lesser of 120 days or 90 days after release of both regulatory agencies and insurance companies for rebuilding to commence, after Tenant's notice, Tenant may terminate this Lease upon written notice to Landlord, effective upon the date of such casualty or damage. Landlord shall notify Tenant within 14 days following its receipt of notice of such damage of the estimated time of completion of repairs. Landlord represents and agrees that it will not advise Tenant that repairs or rebuilding can be completed within such period unless it is reasonably certain in the exercise of its best judgment that same can be accomplished. 6. TAXES. Landlord agrees to pay all ad valorem, real estate, and personal property taxes up to a maximum amount of the greater of $.50 per square foot per year, assessed against the property and improvements located thereon or the actual cost of same per square foot for 1987. Any excess per square foot per year above the maximum amount shall be paid by Tenant to Landlord upon demand, as additional rental. Should Landlord be required to pay a levy upon the rents received for the Premises, then such levy shall be considered a tax hereunder. Tenant shall be solely responsible for any taxes or other charges levied upon its property. 7. UTILITIES. Landlord shall provide metered water and electrical service connections to the Premises. Landlord shall provide telephone service connections in a common room for the entire building. Landlord shall not be liable for any interruption or failure of utility services to the Premises. Tenant shall pay for all utilities and services used on or from the Premises, and shall furnish all electric lightbulbs and tubes. Tenant shall pay its proportionate amount of charges as reasonably determined by Landlord for any jointly metered services. 8. ALTERATIONS. Tenant shall make no alternations or additions to the Premises without the prior written consent of Landlord. Prior to vacating the Premises upon termination of this Lease, Tenant shall, unless otherwise requested by Landlord, remove all alterations, additions and improvements erected by Tenant and restore the Premises to its original <PAGE> condition. At the completion of the Lease Term (10 years), TANOX BIOSYSTEMS, INC. shall have the right to remove all cabinets in the Lease Space, including stainless steel sinks, emergency power generator and other special furniture, fixtures and equipment installed by or for Tenant, with the provision that adjacent and surrounding improvements are not disturbed. 9. LIABILITY. Tenant shall repair and pay for any damage caused by the negligence of Tenant, its employees, agents, guests or invitees. Landlord shall not be liable to Tenant or its employees, agents, guests, invitees, visitors or any other person whomsoever, for any injury to person or damage to property on or about the Premises, resulting from or caused in part or in whole by the negligence or misconduct of Tenant, its agents, employees or of any other person entering upon the Premises. Unless injury to person or damage to property is caused by the negligence of Landlord or the failure of Landlord to repair the Premises as above provided, neither shall Landlord be liable for injury or damage caused by the improvements becoming out of repair or caused by leakage of gas, oil, water, steam or electricity emanating from the Premises, or due to any cause whatsover. Tenant covenants and agrees to indemnify and hold harmless the property, the Landlord and its agents and employees from any loss, liability, claims, suits, costs, expenses and attorneys fees arising out of any damage or injury caused by the negligence of the Tenant, its agents and employees, guests or invitees. 10. INSURANCE. Landlord agrees to maintain standard fire and extended coverage insurance for the improvements on the premises in any amount not less than eighty percent (80%) of the replacement costs thereof. Such insurance shall be under the sole control and benefit of Landlord. Should any improvements on the Premises sustain any casualty damage, and should any mortgagee holding to a lien on the Premises require that the insurance proceeds received be applied to its indebtedness, then Landlord shall have the right to terminate this Lease upon ninety (90) days written notice to Tenant. After the first (1st) year of this Lease, should Landlord's costs of maintaining insurance herein exceed $.10 per square foot per year, then Tenant agrees to pay to Landlord, as additional rent, Tenant's pro rata portion of the amount of such excess each year. Landlord represents that insurance costs for the first year will be equal to or less than $.10 per square foot per year. Tenant shall maintain during the term of this Lease, a policy of insurance, insuring both Landlord and Tenant against all claims related to the Premises, or its condition, and Tenant's operations, and use of the Premises. The limits of such policy shall be not less than Three Hundred Thousand and No/100 Dollars ($300,000.00) per occurrence for injury to persons, and Fifty Thousand and No/100 Dollars ($50,000.00) per occurence for property damage, destruction and loss of use thereof. Landlord shall have the right, as reasonable, to approve all such policies, the carriers thereof, and require that no cancellation may be had without thirty (30) days prior written notice to Landlord. Landlord and Tenant each release the other from any loss or damage to property caused by any insured peril, by way of subrogation even if caused by the negligence of the other party. This waiver of subrogation rights shall be included by both parties in all policies of insurance, and the costs therefore shall be paid by the insured party. II. DEFAULT. Tenant shall be deemed to be in default under this Lease should it: (a) fail to pay any installment of rent or any other amount due to Landlord for a period of fifteen (15) days after written notice thereof is received and at any time after the third such notice is given during the Lease term hereof, failure to pay such amounts for a period of five (5) days from the due date thereof; (b) abandon or vacate any substantial portion of the Premises; <PAGE> (c) become insolvent, make a transfer in fraud of creditors, make an assignment for the benefit of creditors, petition for or become adjudged bankrupt; (d) have a receiver or trustee appointed for all or substantially all of its assets; (e) except for the payment of rent or any other amounts required, fail to comply with any term or provision of this Lease for a period of thirty (30) days after written notice thereof is received. 12. REMEDIES. Upon default by Tenant, Landlord shall have the option to: (a) terminate this Lease, whereon Tenant agrees to pay Landlord all loss and damage it may suffer by reason of such termination; (b) enter the Premises and relet the same receiving the rent therefore, whereon Tenant agrees to pay Landlord any deficiency that may arise by reason of such reletting; and (c) exercise any other remedy available to it at law. Should Tenant refuse to deliver possession of the Premises, Landlord may expel or remove Tenant or any other person, by force if necessary, without being liable for prosecution or damages therefore. Should Landlord relet the Premises at a rental rate in excess of that being paid by Tenant under this Lease, Tenant specifically waives any claim to such excess rental. Exercise of any of the above remedies shall not constitute a forfeiture or waiver of any rent due to landlord. No waiver by Landlord of any violation or breach of this Lease, Landlord's acceptance of any rent or payments after an event of default, nor the failure of Landlord to enforce its remedies hereunder, shall be deemed or construed to constitute a waiver of any violations, breach or event of default nor of Landlord's right to enforce any remedies with respect to a subsequent default. Should a party be required to employ an attorney to enforce its rights hereunder, the losing party agrees to pay all reasonable attorneys fees incurred therefor. 13. MISCELLANEOUS (a) Landlord agrees that all space remaining vacant in the building will be first leased in such manner as to place other tenants in the building as far to the west side of the building as there is space available, so that no such leases result in any vacant space between any subsequent tenant in the building and the exterior wall located on the west side of the building, other than as a result of non-renewal of leased space. Tenant shall have a preferential right at any time, from time to time, during the first five (5) years of this Lease, to lease any and all remaining space in the building which is then unleased. Such right will terminate as to such part of the remaining space that Landlord intends to lease to another bona fide tenant if Tenant fails to exercise its preferential right to all remaining space, including such part to be leased, within thirty (30) days following notice from Landlord; provided, that if such space to be leased is not so leased within ninety (90) days following expiration of Tenant's preferential right as to such space, Tenant shall again have a preferential right to such space. In addition, Tenant shall have the option at any time or times during the first twelve (12) months of this Lease to lease up to an additional 8,000 square feet of space adjacent to the Premises. If the Tenant exercises this option for a minimum of 4,000 square feet adjacent to the Premises during the twelve (12) month period, <PAGE> Landlord will extend the option for the balance of the option space for an additional six (6) month period. Notice of the exercise of Tenant's option must be given by Tenant prior to the expiration of twelve (12) months from the Commencement Date of this Lease followed by a signed Lease Agreement within thirty (30) days. Any space leased by Tenant pursuant to its preferential right or option hereunder shall be on terms agreeable to both parties. The lease term for any such space shall expire concurrently with the term of this Lease unless otherwise agreed by Landlord and Tenant. The rental rate shall be calculated as follows. However, the total rental rate resulting from the combined Base Rate and amortized Build-out rate shall not be less than 50 per square foot per month on a five (5) year Lease Agreement. BASE RATE: Years 1986-1990 22.3/sq. ft./month Years 1991-1996: 38.6/sq. ft./month PLUS the annual adjustment in the CPI for Houston SMSA, not to exceed five percent (5%) per year, based on previous 12 months. BUILD-OUT RATE: Cost of build-out to be financed by Landlord at prime + one and one-half percent (1 1/2$) amortized over the term of the lease on such space. Tenant shall have the right to select a contractor of its choice to build-out any such additional space subject to review and approval of plans, specifications and workmanship by Landlord. (b) Tenant acknowledges the following provision of Main Link Business Park Restrictive Covenants regarding use restrictions: "No use shall be permitted which (1) is offensive by reason of odor, fumes, dust, smoke, noise or pollution, (2) is hazardous by reason of excessive danger of fire or explosion, (3) otherwise constitutes a nuisance, (4) is dangerous or unsafe, (5) is calculated to injure the reputation of the Building Site or any neighboring property, or (6) is in violation of city, county, state or Federal laws." Landlord acknowledges that Tenant's use of the Premises will be to conduct biomedical and chemical research and manufacturing. Landlord further acknowledges that Tenant's use will involve use of bio hazardous and radioactive substances. Subject to Tenant's compliance with existing and future industrial standards and governmental regulations concerning this use, Landlord agrees that Tenant's use of the Premises will not violate Main Link Business Park Restrictive Covenants. If the Restrictive Covenants are interpreted during the term of this Lease to exclude the Tenants acknowledged use and require relocation, Landlord will pay for the Tenant's reasonable relocation costs. 14. GENERAL PROVISIONS. (a) SIGNS. Signage to be provided by Landlord in accordance with Exhibit C. No other signage of any type, located inside or outside of any lease space which may be visible from any portion of the project, may be displayed or erected by tenant without the prior written consent of Landlord. (b) MULTIPLE OCCUPANCY. The Premises constitute a portion of a multiple occupancy building, and Landlord shall have the right to coordinate all repairs, maintenance, assessment of excess insurance premiums, assessment of excess taxes, assessment of common unmetered utilities and other like costs. <PAGE> Tenant agrees to pay its proportionate share of such costs, based upon its floor space in the Premises related to the total floor space in the building. If it can be established that any particular tenant of the building is responsible for any action which causes increased costs to the building as a whole, then Tenant, if responsible, or such other responsible party, shall pay the entire costs thereof upon demand as additional rent. (c) ASSIGNMENT AND SUBLETTING. This Lease may not be assigned or sublet in any manner without prior written consent of Landlord, which consent shall not be unreasonably withheld. Unless otherwise agreed by Tenant, assignee or sublessee shall be fully liable for the performance of all terms and provisions of this Lease, and all rents due hereunder, under a permitted assignment or sublease. (d) CONDEMNATION. If all or a substantial part of the Premises is taken by condemnation or deed in lieu thereof, and the Premises are no longer suitable for the use intended, this Lease shall terminate. Subject to Tenant's agreement, if only a portion of the Premises are taken, this Lease shall not terminate, but the rent due shall be reduced to such an extent as may be fair and reasonable under all circumstances from the date of such taking. (e) INTEREST AND LATE CHARGES. Except for the base rent, any other charges and additional rental required or provided in this Lease shall be paid by Tenant within ten (10) days after demand or invoice therefor. After such date, the unpaid amount shall bear interest at the rate of twelve percent (12%) per annum from the date due until paid. Upon the failure of Tenant to pay any installment of the base rent when due, the Tenant shall pay to Landlord a late charge in amount equal to five percent (5%) of such installment. Such interest and late charges provided herefore shall be an addition to Landlord's other rights and remedies. (f) LIENS. Tenant shall have no authority to create, nor shall it allow to be created, any lien or encumbrance to be placed upon the Premises by any person. Tenant agrees to pay any sums due for such, and to hold Landlord harmless from any cost or expense arising out of any such claim or lien asserted against the Premises. (g) NOTICES. All payments, notices and other correspondence between the parties shall be deemed delivered when received, but in no event, later than 7 days after being deposited in the United States Mail, Postage Prepaid, Certified Return Receipt Requested, to the parties at the respective addresses below: Landlord: MAIN LINK BUSINESS PARK ASSOCIATES 8989 NORTH LOOP EAST HOUSTON, TEXAS 77029 Tenant: TANOX BIOSYSTEMS, INC. 10301 STELLA LINK, SUITE 110 HOUSTON, TEXAS 77041 Either party may change such address by an instrument in writing delivered to the other party. (h) MISCELLANEOUS. This Lease shall inure to the benefit of and be binding upon the parties, their respective heirs, legal representatives, successors and assigns. Tenant and Landlord agree to <PAGE> execute and deliver upon request by the other any estoppel certificates or other similar documents related to the effectiveness of this Lease. This Lease may not be changed or amended except by an instrument in writing executed by both parties, and any determination of any part of this Lease being invalid shall not effect the validity and enforcement of the remainder of the Lease. Any of the terms and provisions of this Lease which are not fully performed upon termination of this Lease, shall specifically survive the same and be enforceable in accordance with the terms hereof. If any provision, term or condition herein is deemed by a court of law as being unenforceable, such decree shall not affect the enforceability of the remaining provisions of this agreement. This Lease is governed by the laws of the State of Texas and shall be enforceable in Harris County, Texas. Executed in multiple counterparts, each of which shall have the force and effect of an original this is the 4th day of December, 1986. Landlord: MAIN LINK BUSINESS PARK ASSOCIATES By: MICHAEL E. DAMSCHRODER ATTEST: ???????? Printed Name & Title: Michael Damschroder Vice President For: ALTA MAIN LINK INVESTMENTS, INC. (MANAGING PARTNER) Tenant: TANOX BIOSYSTEMS, INC. By: NANCY T. CHANG ATTEST: ????????? Printed Name & Title: Nancy T. Chang President 7 <PAGE> ADDENDUM TO THE LEASE AGREEMENT BY AND BETWEEN MAIN LINK BUSINESS PARK ASSOCIATES AND TANOX BIOSYSTEMS, INC. DATED DECEMBER 4, 1986 The above referenced Lease Agreement is hereby amended with the following addition: Tenant agrees to pay to Landlord the sum of $4,834.00 expended for improvements to the Lease Premises above and beyond the scope of work as defined in Exhibit "B" of the Lease Agreement. Tenant agrees that the $4,834.00 is to be financed by Landlord and that Tenant is to make monthly payments in the amount of $107.53 to Landlord in advance and without demand beginning the first day of the calendar month following the Commencement Date as defined in Section 2, of the Lease Agreement and ending sixty (60) months thereafter. Tenant has the option at any time during this period to remit the principle balance of the financed amount in full. Except for the foregoing change, all of the covenants, terms and conditions of the prior Lease Agreement will remain the same. This addendum and the Lease Agreement of December 4, 1986 constitute the entire understanding between the parties with regard to leasing space at 10301 Stella Link, Houston, Harris County, Texas. MAIN LINK BUSINESS PARK ASSOCIATES By: /s/ MICHAEL E. DAMSCHRODER ATTEST /s/ GWEN HARDEN Printed Name and Title MICHAEL E. DAMSCHRODER, Vice President Tenant: TANOX BIOSYSTEMS, INC. By: /s/ NANCY T. CHANG ATTEST /s/ ????? CHANG Printed Name and Title NANCY T. CHANG, President <PAGE> ADDENDUM II TO THE LEASE AGREEMENT BY AND BETWEEN MAIN LINK BUSINESS PARK ASSOCIATES AND TANOX BIOSYSTEMS, INC. DATED DECEMBER 4, 1986. The Lease Agreement as defined above is hereby amended this 24th day of December 1987 as follows, with all obligations under this Addendum to become effective upon the Commencement Date for this expansion space, except as otherwise specified below. The Commencement Date shall be the date of occupancy of the expansion space by the Tenant or June 1, 1988, whichever occurs earlier. 1. EXPANSION: 8,013 square feet as specified on Exhibit "A" to this Addendum. 2. IMPROVEMENTS: Build-out of improvements to the expansion space shall be funded and administered by the Tenant with the approval of the Landlord as to plans, specifications, construction agreements, workmanship and completeness. The scope of improvements are Build-out drawings/specifications as defined in Exhibit "B". The Landlord will fund a standard improvement allowance of $160,260 ($20.00 per square foot). This allowance shall be paid to the Tenant on a monthly basis during build-out in proportion to the overall completion of the space, with 10% retainage ($16,026) held until 45 days after the improvements are completed to the satisfaction of the Tenant and Landlord. Prior to the initiation of build-out construction work on the premises, and from time to time upon Landlord's request, Tenant must provide the Landlord with suitable documentation confirming the availability of additional funds (approximately $600,000) to complete the specified improvements. While the Tenant is referred to as "Owner" in its separate agreements with various construction engineers and contractors for this build-out, this agreement specifically recognizes and clarifies that Main Link Business Park Associates is the owner of all real property associated with this leasehold. <PAGE> Addendum II TANOX Page 2 Tenant shall provide to Landlord on a monthly basis during the expansion space build-out signed releases of lien from all parties providing labor and/or material for these improvements, using the form of Exhibit "C". Tenant further agrees to fully indemnify the Landlord and its property against any liens or other claims arising from the expansion space build-out. Tenant shall carry and provide copies to Landlord of acceptable Builder's Risk Insurance coverage and shall require its contractors to supply acceptable certificates of proof of liability and workman's compensation insurance. 3. EXPANSION RENT: The rent for the expansion space, payable in accordance with the terms of the Lease Agreement, shall be $4,599.50 per month, through December 31, 1990, and $5,905.62 per month (plus CPI adjustment; see Section 13, Paragraph (a)) from January 1, 1991 through March 31, 1997, such rent to begin as of the Commencement Date. 4. SECURITY DEPOSIT: In addition to the current Letter of Credit obligations defined in Paragraph 4 of the Lease Agreement, an Irrevocable Letter of Credit in a form agreeable to both Tenant and Landlord for $20,000 or a $15,000 cash security deposit shall be provided to the Landlord within 30 days of the execution of this Addendum to ensure that the additional premises are returned to the original condition per the terms of this agreement. This deposit will be returned to the Tenant within 30 days after the expiration of the Lease Term, providing there are no claims against it. Furthermore, Tenant does hereby grant to Landlord a contractual lien in those certain furniture, fixtures and equipment identified to be removable in Item (6), Page 3 of this Addendum II for a period of 5 years, to secure the standard build-out allowance ($160,260) funded hereunder by the Landlord. Upon written request by Tenant and a bona fide commercial lender, Landlord agrees to subordinate its building landlord's lien on the property of Tenant, subject to Landlord's reasonable approval of the form and content of the subordination agreement presented. <PAGE> Addendum II TANOX Page 3 5. SECTION 5 -- MAINTENANCE: A. Sentence to be added after the first sentence in Paragraph 2: "Landlord will provide window washing services for the exterior of the entire building two (2) times per year as scheduled by Landlord." B. Second sentence in Paragraph 2 is amended to read: "Tenant agrees to reimburse Landlord for such maintenance and service at the rate of $10.00 per 1,000 square feet, in the amount of one hundred twenty-eight dollars and forty-five cents ($128.45) per month as additional rent." This represents a CAM increase of $80.13 for the expansion space. 6. SECTION 8 -- ALTERATIONS: The third sentence is replaced for the expansion space in this Addendum to read: "At the completion of the Lease Term, TANOX BIOSYSTEMS, INC. shall have the right, and be required at the Landlord's request, to remove all lab cabinets/fume hoods, revolving darkroom door, automatic bi-fold door, mark board, cold room/freezer, darkroom sink, fire extinguishers, and miscellaneous special laboratory fixtures installed by or for Tenant, with the provision that adjacent and surrounding improvements are not disturbed or are satisfactorily restored. 7. SECTION 11 (E) SHALL BE AMENDED TO READ: (e) except for the payment of rent or any other amounts required, fail to comply with any term or provision of this Lease for a period of thirty (30) days after written notice thereof is received. However, if such term or condition reasonably requires more than thirty (30) days in order to fully comply therewith, there shall not be deemed an event of default unless Tenant either fails or refuses to commence in good faith such compliance within the thirty day time period, or, having so commenced, Tenant fails or refuses to diligently thereafter complete such compliance as determined by Landlord. 8. SECTION 13 (B) SHALL BE AMENDED TO READ: (b) Tenant acknowledges the following provisions of Main Link Business Park Restrictive Covenants regarding use restrictions: "No use shall be permitted which (1) is offensive by reason of odor, fumes, dust, smoke, noise or pollution as determined by Landlord, (2) ...." <PAGE> Addendum II TANOX Page 4 9. Paragraph 13 (a) shall be deleted and in its place shall be inserted the following: (a) All space remaining vacant in the building will be first leased in such manner as to place other tenants in the building as far to the west side of the building as there is space available, so that no such leases result in any vacant space between any subsequent tenant in the building and the exterior wall located on the west side of the building, other than as a result of non-renewal of leased space. Tenant shall have a preferential right at any time, from time to time, during the first five (5) years of this Lease, to lease any and all remaining space in the building which is then unleased. Such right will terminate as to such part of the remaining space that Landlord intends to lease to another bona fide tenant if Tenant fails to exercise its preferential right to all remaining space, including such part to be leased, within thirty (30) days following notice from Landlord; provided, that if such space to be leased is not so leased within ninety (90) days following expiration of Tenant's preferential right as to such space, Tenant shall again have a preferential right to such space. Space leased by Tenant pursuant to its preferential right shall be upon the terms and conditions contained in the Lease Agreement and this Addendum, unless otherwise agreeable to both parties. The lease term for any such space shall expire concurrently with the term of this Lease unless otherwise agreed by Landlord and Tenant. The rental rate shall be calculated as follows. However, the total rental rate resulting from the combined base Rate and amortized Build-out rate shall not be less than $.50 per square foot per month on a five (5) year Lease Agreement. BASE RATE: Years 1987 -- 1990: $.223/SF/MO Years 1991 -- 1996: $.386/SF/Mo plus the annual adjustment in the CPI for Houston SMSA, not to exceed five percent (5%) per year, based on previous twelve (12) months. <PAGE> Addendum II TANOX Page 5 BUILD OUT RATE: Cost of build-out to be financed by Landlord at Prime + one and one-half percent (1 & 1/2%) amortized over the term of the lease on such space. Tenant shall have the right to select a contractor of its choice to build out any such additional space subject to review and approval of plans, specifications and workmanship by Landlord. Except for the foregoing changes, all of the covenants, terms and conditions of the prior Lease Agreement remain the same. This Addendum II, and the Lease Agreement dated December 4, 1986, and the original Addendum to the Lease Agreement constitute the entire understanding between the parties with regard to leasing space at 10301 Stella Link, Suite 110, Houston, Harris County, Texas. Default under any of the aforesaid agreements will constitute default under all of the agreements. Landlord: MAIN LINK BUSINESS PARK ASSOCIATES By: /s/ MICHAEL E. DAMSCHRODER ATTEST: /s/ ????? Michael E. Damschroder -- Vice President For: AMEGA INVESTMENTS, INC. (MANAGING PARTNER) (SUCCESSOR TO ALTA MAIN LINK INVESTMENTS, INC.) Tenant: TANOX BIOSYSTEMS, INC. By: /s/ NANCY T. CHANG ATTEST: /s/ ????? Nancy T. Chang -- President <PAGE> DESCRIPTION OF LEASE PREMISES -- EXHIBIT "A" Description Lease Premises are located in Building # 10301 Stella Link which is part of Main Link Business Park situated on a tract containing 4.1684 acres out of that certain 22,2444 acre (984, 966 square feet), more or less, tract of land located in Harris County, Texas, conveyed from Marvin H. McMurry, Jr. et al, to Main Link Business Center Associates in deed dated June 6, 1982, and recorded under Clerk's File No. H471470 of the Harris County Deed Records, to which deed and the record thereof reference is here made for all purposes. TANOX -- PHASE I (Approx. 4832 SF) LEASE ADDENDUM PREMISES (Approx. 8013 SF) VACANT ________________________________Fischer & Porter________________________________ McDERMED STELLA LINK <PAGE> EXHIBIT "B" TANOX BIOSYSTEMS, INC. NEW EXPANSION / PHASE II BUILD-OUT DRAWINGS/SPECIFICATIONS DRAWINGS SHEET NUMBER REVISION NUMBER DATED - ------------- --------------------------------- --------- A.01 1 12-21-87 A.02 1 12-21-87 A.03 0 11-09-87 A.04 1 12-21-87 A.05 0 11-09-87 A.06 0 11-09-87 A.07 1 12-21-87 A.08 0 11-09-87 A.09 0 11-09-87 M-1 2 12-21-87 M-2 1 12-21-87 M-3 0 11-10-87 M-4 1 11-17-87 M-5 2 12-21-87 M-6 1 12-21-87 M-7 0 11-10-87 M-8 0 11-10-87 E-1 2 12-21-87 E-2 2 12-21-87 E-3 1 12-21-87 E-4 1 11-17-87 E-5 1 11-17-87 E-6 1 11-17-87 E-7 1 11-17-87 E-8 1 12-21-87 E-9 1 12-21-87 P-1 1 12-21-87 P-2 1 12-21-87 P-3 1 12-21-87 SPECIFICATIONS 11-09-87 Project Manual by HCH Architects <PAGE> EXHIBIT "C" LIEN WAIVER THE STATE OF TEXAS ) ) COUNTY OF HARRIS ) The undersigned has contracted with/has been employed by TANOX BIOSYSTEMS, INC. to furnish LABOR AND/OR MATERIALS for the Project known as TANOX BIOSYSTEMS, INC. NEW EXPANSION/PHASE II, and for certain improvements to real property located in Harris County, Texas, and owned by Main Link Business Park Associates, which improvements are described as follows: Leasehold improvements to Building # 10301 Stella Link which is part of Main Link Business Park situated on a tract containing 4.1684 acres out of that certain 22.2444 acre (984,966 square feet), more or less, tract of land located in Harris County, Texas, conveyed from Marvin H. McMurry, Jr. et al, to Main Link Business Center Associates in deed dated June 6, 1982, and recorded under Clerk's File No. H471470 of the Harris County Deed Records, to which deed and the record thereof reference is here made for all purposes. For and in consideration of the sum of $ _______________________________________ _________________ DOLLARS, and other good and valuable consideration, the receipt whereof is hereby acknowledged and confessed, the undersigned does hereby waive and release any and all mechanic's lien or materialman's lien and claim or right to lien on said above described real property and improvements on account of labor or materials, or both, furnished by the undersigned pursuant to the above mentioned contract with TANOX BIOSYSTEMS, INC. for said real property and improvements up to and including ______________, 19__ only, but not for any furnished subsequent to said date, and also waives and releases any constitutional lien that the undersigned may have. It is hereby warranted by the undersigned, who recognizes that TANOX BIOSYSTEMS, INC. is relying on such warranty to its potential detriment, that all the undersigned's subcontractors, materialmen and/or laborers have been paid all sums due to any of them for work done or materials furnished in connection with the job represented by this Lien Waiver, through the date mentioned above, and that no valid claim or right exists in favor of any such subcontractor, materialman or laborer. ______________________________________ BY: ________________________________________________ TITLE: __________________ SUBSCRIBED AND SWORN TO BEFORE ME BY __________________________________________, on this the ___ day of ___________, 19__, to certify which witness my hand and seal of office. (Notary Seal) ______________________________________ Notary Public in and for the State of Texas My commission expires: _____________________________________________ <PAGE> ADDENDUM III TO THE LEASE AGREEMENT BY AND BETWEEN MAIN LINK BUSINESS PARK ASSOCIATES AND TANOX BIOSYSTEMS, INC. DATED DECEMBER 4, 1986 This Lease Agreement as defined above is hereby amended this 12th day of September, 1991 as follows, with all obligations under this addendum to become effective upon the Commencement Date for this expansion space, except as otherwise specified below. Landlord and Tenant acknowledge that, except as changed by this Addendum III, the terms of the Lease Agreement dated December 4, 1986, and Addendum I & II, are applicable to this expansion space. The Commencement Date shall be the date of occupancy of the expansion space by the Tenant or September 1, 1991, whichever occurs earlier. 1. EXPANSION: 6569 square feet as specified on Exhibit "A" to this addendum. 2. IMPROVEMENTS: Build-out of improvements to the expansion space, as described in Exhibit "B", shall be funded and administered by the Tenant with the joint approval of the Landlord as to plans, specifications, construction agreements, workmanship and completeness. The Landlord will fund a standard improvement allowance of $131,380.00. This allowance shall be paid to the Tenant in five (5) equal monthly payments beginning January 1992. Prior to the initiation of the Phase III-A build-out construction work on the premises, and from time to time upon Landlord's request, Tenant must provide the Landlord with suitable documentation confirming the availability of additional funds to complete the specified improvements. While the Tenant is referred to as "Owner" in its separate agreements with various construction engineers and contractors for this build-out, this agreement specifically recognizes and clarifies that Main Link Business Park Associates is the owner of all real property and buildings associated with this leasehold. Tenant shall provide to Landlord on a monthly basis during the expansion space build-out signed releases of lien from all parties providing labor and/or material for these improvements, using the Exhibit "C". Tenant further agrees to fully indemnify Landlord and its property against any liens or other claims arising from the expansion space build-out. Tenant shall carry and provide copies to Landlord of acceptable Builder's Risk Insurance coverage and shall require its contractors to supply acceptable certificates of proof of liability and worker's compensation insurance. <PAGE> 3. EXPANSION RENT: The rent for the expansion space, payable in accordance with the terms of the Lease Agreement, shall be $1,559.51 per month, through May 31, 1992. From June 1, 1992 through December 31, 1992, the rent shall be $5,816.88 per month or $0.8633 per square foot plus the adjustment in the CPI for Houston SMSA for the period from July 1991 to June 1992. The rental rate for all subsequent years (thru March 31, 1997) will be the adjusted base rate plus the annual adjustment in the CPI for Houston SMSA, not to exceed five percent (5%) per year, based on the previous 12 months. 4. SECURITY: In addition to the current Letter of Credit obligations defined in Paragraph 4 of the Lease Agreement, an Irrevocable Letter of Credit in a form agreeable to both Tenant and Landlord for $131,380.00 or a $131,380.00 cash security deposit shall be provided to the Landlord January 1, 1992. The Letter of Credit will be reduced monthly by the full amount of Phase III generated rent. The cost of the Letter of Credit to be paid by the Landlord. <PAGE> 5. SECTION 5 -- MAINTENANCE: A. Sentence to be added after the first sentence in Paragraph 2: "Landlord will provide window washing services for the exterior of the entire building two (2) times per year as scheduled by Landlord." B. Second sentence in Paragraph 2 is amended to read: "Tenant agrees to reimburse Landlord for such maintenance and service at the rate of $10.00 per 1,000 square feet, in the amount of one hundred ninety-four dollars and fourteen cents ($194.14) per month as additional rent." This represents a CAM increase of $65.69 for Addendum III in addition to the $80.13 for Addendum II and $48.32 for the original space. 6. SECTION 8 -- ALTERATIONS: The third sentence is replaced for the expansion space in this addendum to read: "At the completion of the Lease Term, TANOX BIOSYSTEMS, INC. shall have the right, and be required at the Landlord's request, to remove all lab cabinets/fume hoods, revolving darkroom door, automatic bi-fold door, mark board, cold room/freezer, darkroom sink, fire extinguishers, and miscellaneous special laboratory and production fixtures installed by or for Tenant, with the provision that adjacent and surrounding improvements are not disturbed or are satisfactorily restored. <PAGE> OPTION TO EXTEND LEASE TERM: Tenant shall have the option to extend the Lease Agreement, including Addendum I and II and this Addendum III, for an additional term of five (5) years, from March 31, 1997 to March 31, 2002. Tenant may exercise such option to extend the lease term as follows: If Tenant notifies Landlord prior to June 1, 1993, Tenant shall have the right to extend the lease on the existing terms and conditions, subject to determination of the rental rate as follows. The rate will be the sum of the effective rates in effect May 31, 1997, for the Original Lease and Addendum II and III with a reduction of $5,816.88 MONTHLY. The rate for all subsequent years will be the current effective base rate plus the annual adjustment in the CPI for Houston SMSA, not to exceed five percent (5%) per year, based on the previous 12 months. If Tenant exercises its option hereunder, the twenty-thousand ($20,000.00) dollar security deposit secured by the Irrevocable Letter of Credit from Texas Commerce Bank (G-111 419) dated February 8, 1988, shall be extended from the expiration of June 30, 1997, to June 30, 2002. If Tenant does not exercise the above option by June 1, 1993, Tenant must notify the Landlord ninety (90) days prior to the original termination date of the lease to have the right to extend the lease on the existing terms and conditions, subject to determination of the rental rate as agreed by the fair market value as follows: The fair market value shall be as mutually agreed by Landlord and Tenant within fifteen (15) days after Tenant exercises its option to renew. If the parties are unable to agree upon the fair market value of the Premises, Landlord and Tenant shall each appoint an appraiser who is knowledgeable in commercial property values in the area in which the Premises are located and the two appraisers shall, then within ten (10) days after their selection, agree upon the fair market value of the Premises. <PAGE> If they are unable to agree, they shall appoint a third appraiser with the same qualifications and the three appraisers shall then, within fifteen (15) days thereafter, prepare appraisals of the Premises. The average of the three appraisals shall be used as the fair market value of the Premises for the Second Option Period; provided, however, that if any appraiser's estimate is either (a) less than ninety percent (90%) of the average figure, or (b) more than one hundred ten percent (110%) of such average then the fair market value of the Premises will be the average of the remaining figures which are between ninety percent (90%) and one hundred and ten percent (110%) inclusive of the average figure even if only one estimate remains. If all figures fall outside of the range between ninety percent (90%) and one hundred ten percent (110%), then the middle figure of the three appraisals shall be the fair market value even if the middle figure is the same as the higher or lower figure. Landlord and Tenant shall each bear the cost of its appraiser and shall share equally the cost of the third. After the Renewal Term rent for any Renewal Term has been determined in accordance with the provisions set forth herein, Landlord shall promptly give Tenant written notice of the annual renewal rent for the Renewal Term and Tenant shall thereafter have fifteen (15) days to decide whether the reaffirm or cancel its exercise of the option to renew by written notice of the Landlord. If Tenant exercises its option hereunder, the twenty-thousand ($20,000.00) dollar security deposit secured by the Irrevocable Letter of Credit from Texas Commerce Bank (G-111 419) dated February 8, 1988, shall be extended from the expiration of June 30, 1997, to June 30, 2002. This Addendum III, and the Lease Agreement dated December 4, 1986, and Addendum I and II to the Lease Agreement constitute the entire understanding between the parties with regard to leasing space at 10301 Stella Link, Suite 110, Houston, Harris County, Texas. Default under any of the aforesaid agreements will constitute default under all of the agreements. <PAGE> Except for the foregoing changes, all of the covenants, terms and conditions of the prior Lease Agreement, and Addendum I and II remain the same. Landlord: MAIN LINK BUSINESS PARK ASSOCIATES By: /s/ JAMES E. STUBBS ATTEST: /s/ RHONDA SHAW James E. Stubbs Assistant Vice President For: AMEGA INVESTMENTS, INC. (MANAGING PARTNER) (SUCCESSOR TO ALTA MAIN LINK INVESTMENTS, INC.) Tenant: TANOX BIOSYSTEMS, INC. By: /s/ NANCY T. CHANG ATTEST: ?????????? Nancy T. Chang -- President <PAGE> DESCRIPTION OF LEASE PREMISES -- EXHIBIT "A" Description Lease Premises are located in Building # 10301 Stella Link which is part of Main Link Business Park situated on a tract containing 4.1684 acres out of that certain 22.2444 acre (984,966 square feet), more or less, tract, land located in Harris County Texas, conveyed from Marvin H. McMurry, Jr. et al, to Main Link Business Center Associates in deed dated June 6, 1982, and recorded under Clerk's File No. H471470 of the Harris County Deed Records, to which deed and the record thereof reference is here made for all purposes. TANOX - PHASE I (Approx. 4032 SF) LEASE ADDENDUM PREMISES (Approx. 8013 SF) LEASE ADDENDUM III APPROX. 6569 SF Fischer & Porter McDERMED STELLA LINK <PAGE> EXHIBIT "B" PHASE III EXPANSION Build-out of improvements to the Phase III expansion is intended to provide for additional production capabilities, general administrative areas, storage space, or other research and development-related activities. Because Tenant intends to produce certain pharmaceutical products for human use, a part of the planned build-out must be undertaken with due consideration of applicable Food and Drug Administration requirements, including current Good Manufacturing Practices. Build out is planned to occur in the following stages: Phase III-A: In the Phase III-A build-out, tenant will construct additional administrative space and storage. Tenant will make certain modifications to the existing administrative and laboratory areas necessary to optimize its usage of the total leased premises. Phase III-B: In the Phase III-B build-out, tenant will construct additional space to provide for tenant's expanded production and/or research and development-related requirements. <PAGE> EXHIBIT "C" LIEN WAIVER THE STATE OF TEXAS COUNTY OF HARRIS The undersigned has contracted with/has been employed by TANOX BIOSYSTEMS, INC. to furnish LABOR AND/OR MATERIALS for the Project known as TANOX BIOSYSTEMS, INC. NEW EXPANSION/PHASE III, and for certain improvements to real property located in Harris County, Texas, and owned by Main Link Business Park Associates, which improvements are described as follows: Leasehold improvements to Building # 10301 Stella Link which is part of Main Link Business Park situated on a tract containing 4.1684 acres out of that certain 22.2444 acre (984,966 square feet), more or less, tract of land located in Harris County, Texas, conveyed from Marvin H. McMurry, Jr. et al, to Main Link Business Center Associates in deed dated June 6, 1982, and recorded under Clerk's File No. H471470 of the Harris County Deed Records, to which deed and the record thereof reference is here made for all purposes. For and in consideration of the sum of $ _______________________________________ _________________ DOLLARS, and other good and valuable consideration, the receipt whereof is hereby acknowledged and confessed, the undersigned does hereby waive and release any and all mechanic's lien or materialman's lien and claim or right to lien on said above described real property and improvements on account of labor or materials, or both, furnished by the undersigned pursuant to the above mentioned contract with TANOX BIOSYSTEMS, INC. for said real property and improvements up to and including ______________, 19_ only, but not for any furnished subsequent to said date, and also waives and releases any constitutional lien that the undersigned may have. It is hereby warranted by the undersigned, who recognizes that TANOX BIOSYSTEMS, INC. is relying on such warranty to its potential detriment, that all the undersigned's subcontractors, materialmen and/or laborers have been paid all sums due to any of them for work done or materials furnished in connection with the job represented by this Lien Waiver, through the date mentioned above, and that no valid claim or right exists in favor of any such subcontractor, materialman or laborer. ________________________________________________ BY: ________________________________________________ TITLE: __________________ SUBSCRIBED AND SWORN TO BEFORE ME BY __________________________________________, on this the ___ day of ___________, 19__, to certify which witness my hand and seal of office. (Notary Seal) ______________________________________ Notary Public in and for the State of My commission expires: ______________ Texas <PAGE> ADDENDUM IV TO THE LEASE AGREEMENT BY AND BETWEEN MAIN LINK BUSINESS PARK ASSOCIATES AND TANOX BIOSYSTEMS, INC. DATED DECEMBER 4, 1986 The Lease Agreement as defined above is hereby amended this 13th day of August, 1992 as follows, with all obligations under this Addendum to become effective June 1, 1992, except as otherwise specified below. Landlord and Tenant acknowledge that, except as changed by this Addendum IV, all the terms of the Lease Agreement dated December 4, 1986, and Addendum I, II & III, are applicable to this expansion space. Landlord and Tenant agree due to the delay in construction of Phase III-B, Addendum III shall be amended until the commencement of construction as follows: 2. IMPROVEMENTS: The last sentence in the first paragraph shall be amended to read: This allowance shall be paid to the Tenant in five (5) five equal monthly payments beginning (5) months prior to the scheduled completion of improvements as described in Exhibit "B", Phase III-B. The first sentence in the second paragraph shall be amended to read: Prior to the initiation of the Phase III-B build-out construction work on the premises, and from time to time upon Landlord's request, Tenant must provide the Landlord with suitable documentation confirming the availability of additional funds to complete the specified improvements. 3. EXPANSION RENT: The second sentence is hereby amended to read: From June 1, 1992 through December 31, 1992 the rent shall be $2,787.68 per month or $0,42437 per square foot plus the adjustment in the CPI for Houston SMSA for the period from July 1991 to June 1992. The rental rate for all subsequent years (thru March 31, 1997) will be the adjusted base rate plus the annual adjustment in the CPI for Houston SMSA not to exceed five percent (5%) per year based on the previous 12 months. The rent for the expansion space shall be adjusted when the $131,380.00 build-out allowance is funded and shall be calculated as follows: Present value: $131,380.00 Rate: Prime interest rate, at the beginning date of funding plus 1 1/2%. Term: Balance of lease term or agreed extended term. <PAGE> Tanox - Addendum IV August 6, 1992 Page Two 4. SECURITY: The first sentence is hereby amended to read: In addition to the current Letter of Credit obligations defined in Paragraph 4 of the Lease Agreement, an Irrevocable Letter of Credit in a form agreeable to both Tenant and Landlord for $131,380.00 or a $131,380.00 cash security deposit shall be provided to the Landlord prior to the funding of the improvement allowance up to $131,380.00. OPTION TO EXTEND LEASE: The first sentence in the first paragraph is hereby amended to read: Tenant shall have the option to extend the Lease Agreement, including Addendum I, II, III and this Addendum IV, for an additional term of five (5) years, from March 31, 1997 to March 31, 2002. The first sentence in the second paragraph is hereby amended to read: The rate will be the sum of the effective rates in effect May 31, 1997, for the Original Lease and Addendum II, III, and IV with a reduction of $2,849.42 monthly. This Addendum IV, and the Lease Agreement dated December 4, 1986, and Addendum I, II and III to the Lease Agreement constitute the entire understanding between the parties with regard to leasing space at 10301 Stella Link, Suite 110, Houston, Harris County, Texas. Default under any of the aforesaid agreements will constitute default under all of the agreements. Except for the foregoing changes, all of the covenants, terms and conditions of the prior Lease Agreement, and Addendum I, II and III remain the same. Landlord: MAIN LINK BUSINESS PARK ASSOCIATES By: /s/ JAMES E. STUBBS Attest: ???????? James E. Stubbs Assistant Vice President For: AMEGA INVESTMENTS, INC. (MANAGING PARTNER) (SUCCESSOR TO ALTA MAIN LINK INVESTMENTS, INC.) Tenant: TANOX BIOSYSTEMS, INC. By: /s/ NANCY T. CHANG Attest: John ??????? Nancy T. Chang -- President <PAGE> ADDENDUM V TO THE LEASE AGREEMENT BY AND BETWEEN MAIN LINK BUSINESS PARK ASSOCIATES AND TANOX BIOSYSTEMS, INC. DATED DECEMBER 4, 1986 The Lease Agreement as defined above is hereby amended this 29th day of December, 1993 as follows, with all obligations under this Addendum to become effective upon the Commencement Date for this expansion space, except as otherwise specified below. Landlord and Tenant acknowledge that, except as changed by this Addendum V, the terms of the Lease Agreement dated December 4, 1986, and Addendums I, II, III and IV are applicable to this expansion space. The Commencement Date shall be January 1, 1994. 1. EXPANSION: 7,342 square feet as specified on Exhibit "A" to this Addendum. 2. IMPROVEMENTS AND CONDITION OF PREMISES: Landlord shall provide the Premises its existing "as-is" condition, and shall at its sole cost and expense, connect the Expansion Space to the Existing Premises, subject to all applicable building codes and ordinances. (Method of connection is to be selected by tenant: (a) overhead rolling fire door, or (b) 3070 personnel door with lock.) In addition, Landlord warrants and represents that the Expansion Space is free of any hazardous waste. Landlord shall provide Tenant with a Tenant Improvement allowance of $2.00/SF or $14,684 for expenses associated with repainting and recarpeting or other flooring. The funding of the $14,684 will be paid against invoices from contractors for the work as described above, the funding shall be any time during the twelve (12) months following the commencement date of January 1, 1994. Tenant to have access to the Expansion Space on or before December 15, 1993 to start work on improvements. Tenant shall have the right to construct leasehold improvements without any supervisory fees owing to the Landlord. However, the Landlord is to approve any modification prior to the work being done, at any time during the term of the lease. Such approval shall not be unreasonably withheld or delayed by Landlord. <PAGE> Addendum V Tenant Page 2 While the Tenant is referred to as "Owner" in its separate agreements with various construction engineers and contractors for this build-out, this agreement specifically recognizes and clarifies that Main Link Business Park Associates is the owner of all real property and buildings associated with this leasehold. Tenant shall provide to Landlord signed releases of lien from all parties providing labor and/or material for these improvements, using the Exhibit "C". Tenant further agrees to fully indemnify Landlord and its property against any liens or other claims arising from the expansion space build-out. Tenant shall carry and provide copies to Landlord of acceptable Builder's Risk Insurance coverage and shall require its contractors to supply acceptable certificates of proof of liability and worker's compensation insurance. The Landlord would consent, if so requested by Tenant, to a reasonable third-party financing lien waiver agreement (as it did in November 1989) for any future construction which is to be funded by Tenant or any Tenant affiliate. 3. EXPANSION RENT AND TERM: The term shall be 39 months with a commencement date of January 1, 1994 and termination date of March 31, 1997. The rent for the expansion space, payable in accordance with the terms of the Lease Agreement, shall be $1,835.50 per month through May 31, 1994. From June 1, 1994 through March 31, 1997, the rent shall be $3,671.00 per month, or $0.50 per square foot and shall not be subject to C.P.I. escalation. 4. PARTIAL LEASE CANCELLATION: Tenant shall have the option to terminate the Expansion Space containing 7,342 SF upon providing Landlord no less than six (6) months prior written notice. In addition, Tenant shall pay to Landlord, the unamortized leasehold improvement allowance, calculated using the straight line method, with no interest factor. In the event, however, Tenant should construct any improvements other than those associated with standard office or warehouse configuration, the cancellation option shall be considered void and of no further force and effect. <PAGE> Addendum V Tenant Page 3 5. SECTION 5 -- MAINTENANCE: Second sentence in Paragraph 2 is amended to read: "Tenant agrees to reimburse Landlord for such maintenance and service at the rate of $10.00 per 1,000 square feet, in the amount of two hundred sixty-seven dollars and fifty-six cents ($267.56) per month as additional rent." This represents a CAM increase of $73.42 for Addendum V, in addition to the $65.69 for Addendum IV, $80.13 for Addendum II and $48.32 for the original space. 6. SECTION 6 -- TAXES: For expansion space of 7,342 square feet, change first sentence to read: "Landlord agrees to pay all ad valorem real estate and personal property taxes up to a maximum amount of the taxes for the base year 1994, assessed against the property and improvements located thereon." 7. SECTION 10 -- INSURANCE: For expansion space of 7,342 square feet, omit last two sentences of second paragraph. After the first (1st) year of this expansion, should Landlord's costs of maintaining insurance herein exceed the base year of 1994 costs, then Tenant agrees to pay to Landlord, as additional rent, Tenant's pro rata portion of the amount of such excess each year. Such expense shall not be subject to C.P.I. escalation. 8. SECTION 13 -- MISCELLANEOUS: (a) RIGHT OF FIRST REFUSAL. Tenant shall have a continuing Right of First Refusal on all or a portion of the remainder of the Building that becomes vacant. In the event Landlord receives a bona fide offer to lease any portion of the First Refusal Space which Landlord intends to accept, Landlord shall deliver notice to tenant, accompanied by a written summary of the economic terms of such offer. Tenant shall have ten (10) business days to deliver written acceptance of such offer to Landlord. If the term of such offer is longer than the remaining term of the Lease, Tenant shall only be obligated to lease such First Refusal Space for the remaining term. If the term of such offer is less than the remaining term of the Lease, Tenant shall have the option to lease such First Refusal Space for either the term of such offer or for a term that shall expire concurrently with the expiration of the Lease. In the event Tenant elects to lease <PAGE> Addendum V Tenant Page 4 such space and to adjust the term to expire concurrently with the expiration of the term hereof, and in the event the term of such offer is for a period that is twenty-five percent (25%) or more shorter or longer than the remaining term of the Lease, the Base Rental Rate provided for in such offer shall be adjusted based upon the Fair Market Value (as defined below) for such First Refusal Space for such adjusted period, as of the date of Tenant's election to lease such space. The First Refusal Space shall be leased in "as-is" condition, and the Fair Market Value shall be determined accordingly." (b) No change. <PAGE> Addendum V Tenant Page 4(a) (c) RENEWAL OPTION. The first five (5) paragraphs and the first sentence of Paragraph 6 on Page 3 of Addendum III shall be deleted in their entirety, and the following shall be added: Tenant shall have the right to extend the term of the Lease subject to all of the same terms, covenants and conditions for one (1) additional period of five (5) years, commencing on the day after the last day of the original term. Tenant at its option shall have the right to renew the entire Premises or a portion of the Premises excluding the Expansion Space of 7,342 SF. The rental rate for the renewal term shall be the prevailing Fair Market Value (as defined below) at the time for the notice, but in no event shall such rate be less than $0.55 per SF, per month, nor greater than $1.00 per SF, per month, including operating expenses as defined in the Lease, for calendar year 1994. The Fair Market Value ("FMV") shall mean the average of the annual rental rates being charged for space of comparable size and condition in comparable buildings in Houston Texas, taking into consideration use, location within the applicable building, definition of rentable area, the time the applicable rate first became effective, term, building standard leasehold improvements provided or to be provided, quality, age and location of the applicable building, and rental concessions. In order to exercise such renewal option, Tenant shall advise Landlord in writing of its desire to renew, no less than nine (9) months prior to the end of the original term. Within fifteen (15) days thereafter, Landlord shall advise Tenant in writing of its estimation of the FMV applicable during the renewal term. Within thirty (30) days after Tenant has received such rental information from Landlord, Tenant shall give Landlord written notice of its agreement or disagreement with Landlord's estimation of FMV. In the event Tenant and Landlord are able to reach a written agreement regarding FMV within such thirty (30) day period, Tenant shall thereafter have fifteen (15) days to notify Landlord in writing of the exercise of the Renewal option. In the event Landlord and Tenant are unable to agree on the FMV within such thirty (30) day period, the FMV shall be determined in accordance with the appraisal process set forth in Addendum III to the Lease Agreement, beginning with the second sentence of the last paragraph of Page 3 and continuing to, but not including, the last sentence of the first paragraph on Page 4. After the FMV has been determined in accordance with such appraisal procedures. Landlord shall advise Tenant in writing of the rental rate for the renewal term as determined by such appraisal, subject, if applicable, to the limitations set forth above. Tenant shall thereafter have fifteen days to notify Landlord in writing of the exercise of the Renewal option. Failure of Tenant to give the appropriate written notice within the specified periods of time, as provided above, shall cause the Renewal option to be void and of no further effect. <PAGE> Addendum V Tenant Page 5 (d) SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT. If there is currently a mortgage on the property, or should there be a mortgage placed on the property in the future, Landlord shall obtain an executed Subordination, Non-Disturbance and Attornment Agreement from the mortgagee, using a form reasonably satisfactory to Tenant. This Addendum V, and the Lease Agreement dated December 4, 1986, and Addendum I, II, III and IV to the Lease Agreement constitute the entire understanding between the parties with regard to leasing space at 10301 Stella Link, Suite 110, Houston, Harris County, Texas. Default under any of the aforesaid agreements will constitute default under all of the agreements. Except for the foregoing changes, all of the covenants, terms and conditions of the prior Lease Agreement, and Addendum I, II, III and IV remain the same. Landlord: MAIN LINK BUSINESS PARK ASSOCIATES By: /s/ JAMES E. STUBBS Attest: ONA L. ????? James E. Stubbs Assistant Vice President For: AMEGA INVESTMENTS, INC. (MANAGING PARTNER) (SUCCESSOR TO ALTA MAIN LINK INVESTMENT, INC.) Tenant: TANOX BIOSYSTEMS, INC. By: /s/ NANCY T. CHANG Attest: JOHN ?????? Nancy T. Chang President <PAGE> DESCRIPTION OF LEASE PREMISES -- EXHIBIT "A" Description Lease Premises are located in Building # 10301 Stella Link which is part of Main Link Business Park situated on a tract containing 4.1684 acres out of that certain 22.2444 acre (984,966 square feet), more or less, tract of land located in Harris County, Texas, conveyed from Marvin H. McMurry, Jr. et al, to Main Link Business Center Associates in deed dated June 6, 1982, and recorded under Clerk's File No. H471470 of the Harris County Deed Records, to which deed and the record thereof reference is here made for all purposes. TANOX -- PHASE I (Approx. 4832 SF) LEASE ADDENDUM PREMISES (Approx. 8013 SF) LEASE ADDENDUM III (Approx. 6589 SF) LEASE ADDENDUM V (Approx. 7342 SF) FISCHER & PORTER McDERMED <PAGE> ADDENDUM VI TO THE LEASE AGREEMENT BY AND BETWEEN MAIN LINK BUSINESS PARK ASSOCIATES AND TANOX BIOSYSTEMS, INC. DATED DECEMBER 4, 1986 The Lease Agreement as defined above is hereby amended this 4th day of January, 1995 as follows, with all obligations under this Addendum to become effective on the date hereof, except as otherwise specified below. Landlord and Tenant acknowledge that, except as changed by this Addendum VI, the terms of the Lease Agreement dated December 4, 1986, and Addendums I, II, III, IV and V shall remain in full force and effect. SECTION 2 -- IMPROVEMENTS AND CONDITION OF PREMISES: The second sentence in Paragraph 2 of Addendum V, shall be amended by deleting "twelve (12)" and inserting "eighteen (18)". SECTION 13 -- MISCELLANEOUS: RENEWAL OPTION: In addition to the expansion option contained in Addendum V, Paragraph 8(c), Tenant shall have the right to extend the term of the Lease, for the Premises then in effect, for one (1) additional period of five years (the "Second Renewal Term"), commencing on the day after the last day of the first renewal term, subject to all of the terms of such Paragraph 8(c) except as otherwise provided for herein. The rental for the Second Renewal Term shall be the prevailing Fair Market Value (as defined in Addendum V) at the time of the notice, but in no event shall such rate be less than $0.625 per SF, per month, including operating expenses as defined in the Lease, for calendar year 1994. This Addendum VI, and the Lease Agreement dated December 4, 1986, and Addendums I, II, III, IV and V to the Lease Agreement Constitute the entire understanding between the parties with regard to leasing space at 10301 Stella Link, Suite 110, Houston, Harris County, Texas. Default under any of the aforesaid agreements will constitute default under all of the agreements. Page 1 <PAGE> Except for the foregoing changes, all of the covenants, terms and conditions of the prior Lease Agreement, and Addendum I, II, III, IV and V remain the same. MAIN LINK BUSINESS PARK ASSOCIATES (Landlord) By: /s/ JAMES E. STUBBS ATTEST /s/ VANICE M. JONES James E. Stubbs Assistant Vice President For: AMEGA INVESTMENTS, INC. (MANAGING PARTNER) (SUCCESSOR TO ALTA MAIN LINK INVESTMENTS, INC.) TANOX BIOSYSTEMS, INC. By: /s/ NANCY T. CHANG ATTEST /s/ ???????????????? Nancy T. Chang President Page 2 <PAGE> ADDENDUM VII TO THE LEASE AGREEMENT BY AND BETWEEN MAIN LINK BUSINESS PARK ASSOCIATES AND TANOX BIOSYSTEMS, INC. DATED DECEMBER 4, 1986 The Lease Agreement as defined above is hereby amended this 1st day of June, 1995 as follows, with all obligations under this Addendum to become effective on the date hereof, except as otherwise specified below. Landlord and Tenant acknowledge that, except as changed by this Addendum VII, the terms of the Lease Agreement dated December 4, 1986, and Addenda I, II, III, IV, V and VI shall remain in full force and effect. 1. SECTION 1 -- PREMISES: The original Lease Premises of 4,832 square feet, expanded by 8,013 square feet in Addendum II to the Lease Agreement, and an additional 6,569 square feet in Addendum III to the Lease Agreement, and an additional 7,342 square feet in Addendum V to the Lease Agreement, shall be further expanded by 9,023 square feet ("Expansion"), as shown on the attached Exhibit "A". The entire Lease Premises as of the date of this Addendum VII to Lease Agreement shall be 35,779 square feet. 2. SECTION 2 -- EXPANSION TERM: The Commencement Date for the 9,023 square foot Expansion shall be June 1, 1995 and shall terminate twenty-two (22) months following such date on March 31, 1997. 3. SECTION 3 -- EXPANSION RENT: The monthly rent for the 9,023 square foot Expansion, payable in accordance with the terms of the Lease Agreement, shall be $4,962.65 through March 31, 1997, or $0.55 per square foot. Such rent shall not be subject to C.P.I. escalation. 4. SECTION 5 -- MAINTENANCE: The second sentence in Paragraph 2 shall be amended to read "Tenant agrees to reimburse Landlord for such maintenance and service at the rate of $10.00 per 1,000 square feet, in the amount of three hundred fifty-seven dollars and seventy-nine cents ($357.79) per month as additional rent." This represents a CAM increase of $90.23 for Addendum VII, in addition to the $73.42 for Addendum V, $65.69 for Addendum IV, $80.13 for Addendum II and $48.32 for original space. <PAGE> ADDENDUM VII TANOX BIOSYSTEMS, INC. 5. SECTION 6 -- TAXES: The following shall be added to the end of the first sentence in the paragraph: "however, for the Expansion space of 9,023 square feet, Landlord agrees to pay all ad valorem real estate and personal property taxes up to a maximum amount of the taxes for the Base Year 1994, assessed against the property and improvements located thereon." 6. SECTION 10 -- INSURANCE: The following shall be added to the end of the second sentence in Paragraph 2: "however, for the Expansion space of 9,023 square feet, should, after the first year of this Expansion, Landlord's cost of maintaining insurance herein exceed the Base Year 1995 costs, then Tenant agrees to pay to Landlord, as additional rent, Tenant's pro rata share of the amount of such excess each year. Such expenses shall not be subject to CPI escalation." 7. SECTION 13 -- MISCELLANEOUS: The expansion option contained in Addendum V, and amended in Addendum VI, shall be further amended as follows: The second sentence of the second paragraph of Addendum V, Section (c) shall be amended to read "Tenant, at its option, shall have the right to extend the Lease on (i) approximately 35,779 square feet (the entire "Premises") or (ii) approximately 26,756 square feet (excluding the 9,023 square foot Expansion) or (iii) approximately 19,414 square feet (excluding the Expansion Space of 7,342 square feet set forth in Addendum V and the 9,023 square foot Expansion). 8. SECTION 13 -- MISCELLANEOUS: Paragraph (e) shall be added as follows: (e) Telecommunications: Landlord shall allow Tenant to install, at its sole cost and expense, computer and telecommunications cabling which shall link Tenant's existing systems to the 9,023 square foot Expansion, along the service entrance wall or above the canopy of the office entrance of the lease space currently occupied by Formcraft, Inc. 9. SECTION 14(A) -- GENERAL PROVISIONS; SIGNS: The phase "except as set forth in Section 14(c) herein," shall be added to the end of the second sentence of Section 14(a). 10. SECTION 14(C) -- GENERAL PROVISIONS: SUBLEASE AND ASSIGNMENT: Section 14(c) shall be amended by inserting the following at the end of the paragraph: Page 2 <PAGE> ADDENDUM VII TANOX BIOSYSTEMS, INC. "In the event Tenant should elect to sublease all or a portion of the 9,023 square foot Expansion, Landlord shall allow Tenant to place a sign advertising such sublease space in the same location as Landlord's current advertisement for available space." "In the event Tenant secures a sublessee ("Proposed New Tenant") for the entire 9,023 square foot Expansion during the twelve (12) months following the commencement of the Expansion, Landlord, upon request, will agree to: (a) accept the Proposed New Tenant on a direct lease agreement, provided the financial conditions and use of the premises are acceptable to the Main Link Business Park directors; (b) a rental rate of $0.55 per square foot on an "as-is" basis, including a 1994 Base Year for Taxes and a 1995 Base Year for Insurance; (c) a term of five (5) years; (d) Common Area Maintenance and Common Metered Utilities as provided for in the Tanox lease; and (e) standard terms and conditions as provided for in the Texas Association of Realtors Commercial Lease." II. SECTION 2 -- IMPROVEMENTS AND CONDITIONS OF PREMISES (ADDENDUM V AND VI): The second sentence in Paragraph 2 of Addendum V, as amended in Addendum VI, shall be further amended by deleting the words "during the eighteen (18) months following the commencement date of January 1, 1994" and replacing with "prior to December 31, 1995." The following sentence shall be added after the second sentence in Paragraph 2 of Addendum V, as amended in Addendum VI: Tenant may, at its option, apply the unused improvement allowance provided for in Addendum V to the Lease Agreement, towards improvements to the 9,023 square foot Expansion." In addition, the following shall be added to the end of the preceding sentence: "(a) Improvements to the 9,023 square foot Expansion are for the benefit of the Tenant and not the Proposed New Tenant; and (b) If Tenant exercises the cancellation provisions as provided for in Addendum V (7,342 square feet), the improvement allowance may not be transferred to the 9,023 square foot Expansion, and if such allowance has been transferred prior to the date of such cancellation, the unamortized amount of such allowance shall be payable as if it had been spent on improvements to the Addendum V space (7,342 square feet)." This Addendum VII, and and the Lease Agreement dated December 4, 1986, and Addenda I, II, III, IV, V and VI to the Lease Agreement constitute the entire understanding between the parties with regard to leasing space at 10301 Stella Link, Suite 110, Houston, Harris County, Texas. Default under any of the aforesaid agreements will constitute default under all of the agreements. Page 3 <PAGE> Addendum VII Tanox Biosystems, Inc. Except for the foregoing changes, all of the covenants, terms and conditions of the prior Lease Agreement, and Addendum I, II, III, IV, V and VI remain the same. MAIN LINK BUSINESS PARK ASSOCIATES (Landlord) By: /s/ JAMES E. STUBBS Attest: VANICE M. JONES James E. Stubbs Assistant Vice President For: AMEGA INVESTMENTS, INC. (MANAGING PARTNER) (SUCCESSOR TO ALTA MAIN LINK INVESTMENT, INC.) TANOX BIOSYSTEMS, INC. By: /s/ NANCY T. CHANG Attest: JOHN ?????? Nancy T. Chang President Page 4 <PAGE> ADDENDUM VIII TO THE LEASE AGREEMENT (REPLACES ADDENDUM VII) BY AND BETWEEN MAIN LINK BUSINESS PARK ASSOCIATES AND TANOX BIOSYSTEMS, INC. DATED DECEMBER 4, 1986 The Lease Agreement as defined above is hereby amended this 7th day of December, 1995 as follows, with all obligations under this Addendum to become effective on the date hereof, except as otherwise specified below. Landlord and Tenant acknowledge that, except as changed by this Addendum VIII, the terms of the Lease Agreement dated December 4, 1986, and Addenda I, II, III, IV, V and VI shall remain in full force and effect. 1. SECTION 1 -- PREMISES: The original Lease Premises of 4,832 square feet, expanded by 8,013 square feet in Addendum II to the Lease Agreement, and an additional 6,569 square feet in Addendum III to the Lease Agreement, and an additional 7,342 square feet in Addendum V to the Lease Agreement, shall be further expanded by 8,868 square feet ("Expansion"), as shown on the attached Exhibit "A". The entire Lease Premises as of the date of this Addendum VIII to Lease Agreement shall be 35,624 square feet. 2. SECTION 2 -- EXPANSION TERM: The Commencement Date for the 8,868 square foot Expansion shall be June 1, 1995 and shall terminate twenty-two (22) months following such date on March 31, 1997. 3. SECTION 3 -- EXPANSION RENT: The monthly rent for the 8,868 square foot Expansion, payable in accordance with the terms of the Lease Agreement, shall be $4,877.40 through March 31, 1997, or $0.55 per square foot. Such rent shall not be subject to C.P.I. escalation. 4. SECTION 5 -- MAINTENANCE: The second sentence in Paragraph 2 shall be amended to read "Tenant agrees to reimburse Landlord for such maintenance and service at the rate of $10.00 per 1,000 square feet, in the amount of three hundred fifty-six dollars and twenty-four cents ($356.24) per month as additional rent." This represents a CAM increase of $88.68 per Addendum VIII, in addition to the $73.42 for Addendum V, $65.69 for Addendum IV, $80.13 for Addendum II and $48.32 for the original space. <PAGE> Addendum VIII Tanox Biosystems, Inc. Page 2 5. SECTION 6 -- TAXES: The following shall be added to the end of the first sentence in the paragraph: "however, for the Expansion space of 8,868 square feet, Landlord agrees to pay all ad valorem real estate and personal property taxes up to a maximum amount of the taxes for the Base Year 1994, assessed against the property and improvements located thereon." 6. SECTION 10 -- INSURANCE: The following shall be added to the end of the second sentence in Paragraph 2: "however, for the Expansion space of 8,868 square feet, should, after the first year of this Expansion, Landlord's cost of maintaining insurance herein exceed the Base Year 1995 costs, then Tenant agrees to pay to Landlord, as additional rent, Tenant's pro rata share of the amount of such excess each year. Such expenses shall not be subject to the C.P.I. escalation." 7. SECTION 13 -- MISCELLANEOUS: The expansion option contained in Addendum V, and amended in Addendum VI, shall be further amended as follows: The second sentence of the second paragraph of Addendum V, Section (c) shall be amended to read "Tenant, at its option, shall have the right to extend the Lease on (i) approximately 35,624 square feet (the entire "Premises") or (ii) approximately 26,756 square feet (excluding the 8,868 square foot Expansion) or (iii) approximately 19,414 square feet (excluding the Expansion Space of 7,342 square feet set forth in Addendum V and the 8,868 square foot Expansion). 8. SECTION 13 -- MISCELLANEOUS: shall be added as follows: (e) Telecommunications: Landlord shall allow Tenant to install, at its sole cost and expense, computer and telecommunications cabling which shall link Tenant's existing systems to 8,868 square foot Expansion, along the service entrance wall or above the canopy of the office entrance of the lease space currently occupied by Formcraft, Inc. 9. SECTION 14(A) -- GENERAL PROVISION; SIGNS: The phrase "except as set forth in Section 14(c) herein" shall be added to the end of the second sentence of Section 14(a). 10. SECTION 14(C) -- GENERAL PROVISIONS; SUBLEASE ASSIGNMENT. Section 14(c) shall be amended by inserting the following at the end of the paragraph. <PAGE> Addendum VIII Tanox Biosystems, Inc. Page 3 "In the event Tenant should elect to sublease all or a portion of the 8,868 square foot Expansion, Landlord shall allow Tenant to place a sign advertising such sublease space in the same location as Landlord's current advertisement for available space." "In the event Tenant secures a sublessee ("Proposed New Tenant") for the entire 8,868 square foot Expansion during the twelve (12) months following the commencement of the Expansion, Landlord, upon request, will agree to: (a) accept the Proposed New Tenant on a direct lease agreement, provided the financial conditions and use of the premises are acceptable to the Main Link Business Park directors; (b) a rental rate of $0.55 per square foot on an "as-is" basis, including a 1994 Base Year for Taxes and a 1995 Base year for Insurance; (c) a term of five (5) years; (d) Common Area Maintenance and Common Metered Utilities as provided for in the Tanox lease; and (e) standard terms and conditions as provided for in the Texas Association of Realtors Commercial Lease." II. SECTION 2 -- IMPROVEMENTS AND CONDITIONS OF PREMISES (ADDENDUM V AND VI): The second sentence in Paragraph 2 of Addendum V, as amended in Addendum VI, shall be further amended by deleting the words "during the eighteen (18) months following the commencement date of January 1, 1994" and replacing with "prior to December 31, 1995". The following sentence shall be added after the second sentence in Paragraph 2 of Addendum V, as amended in Addendum VI: "Tenant may, at its option, apply the unused improvement allowance provided for in Addendum V to the Lease Agreement towards improvements to the 8,868 square foot Expansion." In addition, the following shall be added to the end of the preceding sentence: "(a) Improvements to the 8,868 square foot Expansion are for the benefit of the Tenant and not the Proposed New Tenant; and (b) If Tenant exercises the cancellation provisions as provided for in Addendum V (7,342 square feet), the improvement allowance may not be transferred to the 8,868 square foot Expansion, and if such allowance has been transferred prior to the date of such cancellation, the unamortized amount of such allowance shall be payable as if it had been spent on improvements to the Addendum V space (7,342 square feet)". This Addendum VIII, and the Lease Agreement dated December 4, 1986, and Addenda I, II, III, IV, V and VI to the Lease Agreement constitute the entire understanding between the parties with regard to leasing space at 10301 Stella Link, Suite 110, Houston, Harris County, Texas. Default under any of the aforesaid agreements will constitute default under all of the agreements. <PAGE> Addendum VIII Tanox Biosystems, Inc. Page 4 Except for the foregoing changes, all of the covenants, terms and conditions of the prior Lease Agreement, and Addendum I, II, III, IV, V and VI remain the same. MAIN LINK BUSINESS PARK ASSOCIATES (Landlord) By: /s/ JAMES E. STUBBS Attest: VANICE JONES James E. Stubbs Assistant Vice President For: AMEGA CORPORATION (MANAGING PARTNER) (SUCCESSOR TO ALTA MAIN LINK INVESTMENTS, INC.) TANOX BIOSYSTEMS, INC. (Tenant) By: /s/ NANCY T. CHANG Attest: John ?????? Nancy T. Chang President <PAGE> ADDENDUM IX TO THE LEASE AGREEMENT BY AND BETWEEN MAIN LINK BUSINESS PARK ASSOCIATES AND TANOX BIOSYSTEMS, INC. DATED DECEMBER 4, 1986 The Lease Agreement as defined above is hereby amended this 3rd day of February, 1997 as follows, with all obligations under this Addendum to become effective on the date hereof, except as otherwise specified below. Landlord and Tenant acknowledge that, except as changed by this Addendum IX, the terms of the Lease Agreement dated December 4, 1986, and Addenda II, III, IV, V and VI and VIII shall remain in full force and effect. 1. SECTION 1 -- PREMISES: The original Lease Premises of 4,832 square feet, expanded by 8,013 square feet in Addendum II to the Lease Agreement, and an additional 6,569 square feet in Addendum III to the Lease Agreement, and an additional 7,342 square feet in Addendum V to the Lease Agreement, and an additional 8,868 square feet in Addendum VIII to the Lease Agreement -- all as shown on attached Exhibit "A". The Lease Premises as of the date of this Addendum IX to Lease Agreement shall be 35,624 square feet. 2. SECTION 2: The Commencement Date for the 35,624 square feet shall be April 1, 1997 and shall terminate sixty (60) months following such date on March 31, 2002. 3. SECTION 3 -- RENT: The monthly rent for the 35,624 square feet, payable in accordance with the terms of the Lease Agreement, shall be $20,187.00 through March 31, 2002, for a total lease contract amount of $1,211,220.00. Such rent shall not be subject to C.P.I. escalation. 4. SECTION 5 -- MAINTENANCE: The second sentence in Paragraph 2 shall be amended to read "Tenant agrees to reimburse Landlord for such maintenance and service at the rate of $10.00 per 1,000 square feet, in the amount of three hundred fifty six dollars and twenty-four cents ($356.24) per month as additional rent." This represents a CAM increase of $88.68 for Addendum VIII, in addition to the $73.42 for Addendum V, $65.69 for Addendum IV, $80.13 for Addendum II and $48.32 for the original space. 5. SECTION 6 -- TAXES: The following shall replace the first sentence in the paragraph: "Landlord agrees to pay all ad valorem, real estate and personal property taxes up to a maximum amount of the taxes for the Base Year 1995, assessed against the property and improvements located thereon." 6. SECTION 10 -- INSURANCE: The following shall replace the second and third sentence in Paragraph 2 and apply to the total premises of 35,624 square feet: "Should the Landlord's cost of maintaining insurance herein exceed the Base Year 1996 costs, then Tenant agrees to pay the Landlord, as additional rent, Tenant's pro rata share of the amount of such excess each year." <PAGE> Addendum IX Tanox Biosystems, Inc. Page 2 This Addendum IX, and the Lease Agreement dated December 4, 1986, and Addenda II, III, IV, V, VI and VIII to the Lease Agreement constitute the entire understanding between the parties with regard to leasing space at 10301 Stella Link, Suite 110, Houston, Harris County, Texas. Default under any of the aforesaid agreements will constitute default under all of the agreements. Except for the foregoing changes, all of the covenants, terms and conditions of the prior Lease Agreement, and Addendum II, III, IV, V, VI and VII remain the same. MAIN LINK BUSINESS PARK ASSOCIATES (Landlord) By: /s/ JAMES E. STUBBS Attest: KELLI MOSLEY James E. Stubbs Vice President For: AMEGA CORPORATION (MANAGING PARTNER) (SUCCESSOR TO ALTA MAIN LINK INVESTMENTS, INC.) TANOX BIOSYSTEMS, INC. (Tenant) By: /s/ NANCY T. CHANG Attest: JOHN ?????? Nancy T. Chang President <PAGE> DESCRIPTION OF LEASE PREMISES -- EXHIBIT A Description Lease Premises are located in Building # 10301 Stella Link which is part of Main Link Business Park situated on a tract containing 4.1684 acres out of that certain 22,2444 acre (984,966 square feet), more or less, tract land located in Harris County, Texas, conveyed from Marvin H. McMurry, Jr. et al, to Main Link Business Center Associates in deed dated June 6, 1982, and recorded under Clerk's File No. H471470 of the Harris County Deed Records, to which deed and the record thereof reference is here made for all purposes. Lease Premises Approx. 4832 Total S.F. Fisher & Porter (Approx. 15,530 S.F.) McDERMED STELLA LINK <PAGE> EXHIBIT "B" Based on Tanox Biosystem Inc. proposed office and laboratory layout drawing dated 12/03/86, Landlord will complete the 4,832 sq. ft. (4,002 sq. ft. air conditioned and 830 sq. ft. non-air conditioned space) as requested and as additionally specified below. The engineering will be by Amega's subcontractors complete with engineers seal on the electrical and air conditioning systems. The M.E.P. drawings and specifications will be given to the tenants for approval prior to starting of work. I. ELECTRICAL (ADDITIONS/CLARIFICATIONS) 400 AMP SERVICE EMERGENCY POWER 75 KVA diesel powered, automatic electrical generator will supply power to designated areas in the event of loss of power to the building from HL&P. Unit will be skid-mounted adjacent to the building on the north side, and will contain fuel capacity for 24 hours (maximum) of use. ITEMS TO BE ON EMERGENCY GENERATOR (*Added Items 11/20/86): ROOM P-2 o One (1) 2 x 4 lay-in light with wall switch Two (2) T.C. hoods (110v) One (1) incubator (110v) PREP LAB o One (1) 2 x 4 lay-in light with wall switch LAB #2 o Two (2) 220v outlets o One (1) F.H. 48 (2-J boxes) o One (1) 2 x 4 lay-in with wall switch LAB #1 o Two (2) 220v outlets o One (1) 2 x 4 lay-in light with wall switch EQUIPMENT ROOM o Three (3) 220v outlets o One (1) 110v outlet o Two (2) plug mold with plugs at 18 3/4 O.C. o One (1) 2 x 4 lay-in light with wall switch <PAGE> CONFERENCE ROOM o One (1) 2 x 4 lay-in light with wall switch MAIN HALL o Two (2) 2 x 4 lay-in lights with 3-way wall switch T.C. ROOM o One (1) 2 x 4 lay-in light with wall switch o One (1) 220V outlet o Two (2) T.C. Hood (One 78 and One 54) COLD ROOM Two (2) "J" boxes which operate package cooler room unit ADDITIONAL ELECTRICAL OUTLETS/REQUIREMENTS: EQUIPMENT ROOM Add one (1) 220V outlet for equipment MAIN HALL Two (2) Hubbill #2310-20A-125V-2P-3W twist lock single receptacle. Two (2) electrical outlets for flying bug killers in main hall way (equip. by Owner) Glass Wash Area ("J" Box Requirements) One (1) dryer - 208, 30, 30 AMP disconnect One (1) washer - 208, 30 - 100 AMP disconnect One (1) auto clevis 208, 30 - 60 AMP disconnect Omit one (1) J Box in original proposal T.C. ROOM Add three (3) ultraviolet lights surface mounted P-2 LAB Add Two (2) 2 1/4 ultraviolet lights surface mounted COLD ROOM Add One (1) 110V waterproof outlet PANTRY Add one (1) 110V outlet for a microwave oven <PAGE> CONFERENCE ROOM Add four (4) incandescent lights with a dimmer ADDITIONAL STORAGE Add three (3) 8 1/4-2 light fixtures for temporary lighting ANIMAL HOLDING Four (4) 110 volt waterproof outlets Two (2) 2 x 4 surface mounted light fixtures LOADING DOCK/STORAGE Delete rooms in their entirety which will offset the added requirements at the animal room. II. AIR CONDITIONING SYSTEM The units are to be roof top mounted with duct-returned air from a centrally filtered ceiling grill. The A/C system has been designed per the following heat loads: 2.5 watts lighting load 3.0 watts misc. load (equip) .1 "U" value for roof and wall 150 sq.ft. per person 1.13 "U" valve for exterior glass walls with a .59 shading coefficient Note: The restrooms are to be air conditioned by a exhaust fan and a undercut door. Special air-conditioning consideration has been provided for the T.C. room as a separate zone also the P-2 and Prep-Lab as a separate zone. The proposed air-conditioning systems will be as follows: 1. Air handlers above the ceiling modified to allow for the additional static pressure due to the HEPA filters 2. Compressors to be mounted on the roof 3. HEPA filters rated at .12 micron are to be installed at each air outlet into the room 4. The "zones" can be controlled by the operator to maintain a positive pressure by setting the fan to continuous run. ANIMAL HOLDING ROOM Provide one (1) air conditioned air inlet and one (1) fan with exhaust duct thru the roof, both to be connect to owners animal container. <PAGE> III. PLUMBING All laboratory drains are to be routed through an acid dilution tank complete with a City of Houston approved sampling well. The cost of testing and maintenance of the system is to be the responsibility of the lessee. One (1) 10 gal hot water heater for restrooms and pantry. One (1) 30 gal hot water heater for five (5) stainless steel lab sinks. Provide for additional water outlets and in line value with outlets for Owners connection and installation of three (3) "Metafor" water systems (outlet and pipings to be polypropylene). Three (3) stainless steel cabinet tops are to have a self draining top complete with a four inch splash. ADD Central floor drain in glass wash room and animal holding room. One (1) janitors sink at animal room with hot and cold water. One (1) exterior hose bibb near waste storage room. IV. FLOORING One (1) janitors sink at animal room with hot and cold water. Allowance of $14.00 per yard installed carpet in the offices, reception area and conference room. One (1) exterior hose bibb near waste storage room. Ceramic tile floor and 4 1/4 wainscote for men's and women's restrooms. Sealed concrete (epoxy finish) for the glass wash, waste storage, and small animal room. V.C.T. - all rooms not specified above to have 12 3/4 x 12 3/4 x 1/8 3/4 vinyl tile. IV. CABINETS & SHELVES All cabinets as shown are to be 3/4 3/4 oak plywood custom-built, finished (sealer and three coats lacquer), and installed. Countertops, other than specified plastic laminated, to be 3/4 3/4 CORIAN. <PAGE> Twenty-three (23) lin.ft. of the open wall shelves are to have sliding glass doors. VI. NON-AIR CONDITIONED The additional 830 sq.ft. will be partitioned off for Tanox Biosystem Inc's use as a storage area. <PAGE> TANOX BIOSYSTEM, INC. LEGEND: FOR DRWG. EXHIBIT "B" PAGE 4 OF 4 12/02/86 REV. 2 <TABLE> <S> <C> <C> STAINLESS STEEL SINK & COUNTER TOP SS48 * 48x30, 60x30, 8x30 W/SINK SIZE SHOWN ON PLAN SS60 W/4 3/4 S.S. SPLASH, CABINET UNIT BELOW. (USE #304 16 GA. SS84 S.S.) 036 * DRAWER 36 3/4 WIDE (SIZE VARIOUS) C36 * CABINET 36 3/4 WIDE (SIZE VARIOUS) KS24 * KNEE SPACE 24 3/4 WIDE (SIZE VARIOUS) SIDE-DOWN SPACE 42 3/4 WIDE/P.L. SD42 * COUNTER TOP FD12 * FILE DRAWER 12 3/4 WIDE 36H,3CH * INDICATE HEIGHT OF BENCH & COUNTER * TELEPHONE OUTLET PG * PEGBOARD 30 3/4x36 3/4 PLUG MOLD, PLUG @ 18 3/4 D.C., 40 3/4 * A.F.F. ON WALL * 208V, 30A, 42 3/4 AFF PROVIDE 2 1/4-0 3/4 FLUOR STRIP LIGHT IN WOOD POCKET. UNDERSIDE OF BOOKSHELF @ SIDE-DOWN SPACE W/RECEPTABLE ON FIXTURE (SURFACE * MOUNTED) G * GAS PEDESTAL FIXTURE W/3-COCKS * EMERGENCY EYE WASH * EMERGENCY SHOWER 110V DUPLEX @ 12 3/4 AFF UNLESS * OTHERWISE NOTED - --G * GAS LINE ROUGH-IN @ 12 3/4 AFF * CUP SINK ROUGH-IN JUN. BOX IN PLENUM SPACE FOR J * EQUIP </TABLE> <PAGE> EXHIBIT "C" SIGNAGE Alta Properties will provide one sign on the storefront fascia which will be designed and approved by Alta and which will read "TANOX BIOSYSTEM, INC." Illumination of sign to be by general site lighting only, controlled by timer. <PAGE> EXHIBIT "C" LIEN WAIVER THE STATE OF TEXAS COUNTY OF HARRIS The undersigned has contracted with/has been employed by TANOX BIOSYSTEMS, INC. to furnish LABOR AND/OR MATERIALS for the Project known as TANOX BIOSYSTEMS, INC. NEW EXPANSION/PHASE II, and for certain improvements to real property located in Harris County, Texas, and owned by Main Link Business Park Associates, which improvements are described as follows: Leasehold improvements to Building # 10301 Stella Link which is part of Main Link Business Park situated on a tract containing 4.1684 acres out of that certain 22.2444 acre (984,966 square feet), more or less, tract of land located in Harris County, Texas, conveyed from Marvin H. McMurry, Jr. et al, to Main Link Business Center Associates in deed dated June 6, 1982, and recorded under Clerk's File No. H471470 of the Harris County Deed Records, to which deed and the record thereof reference is here made for all purposes. For and in consideration of the sum of $ _______________________________________ _________________ DOLLARS, and other good and valuable consideration, the receipt whereof is hereby acknowledged and confessed, the undersigned does hereby waive and release any and all mechanic's lien or materialman's lien and claim or right to lien on said above described real property and improvements on account of labor or materials, or both, furnished by the undersigned pursuant to the above mentioned contract with TANOX BIOSYSTEMS, INC. for said real property and improvements up to and including ______________, 19_ only, but not for any furnished subsequent to said date, and also waives and releases any constitutional lien that the undersigned may have. It is hereby warranted by the undersigned, who recognizes that TANOX BIOSYSTEMS, INC. is relying on such warranty to its potential detriment, that all the undersigned's subcontractors, materialmen and/or laborers have been paid all sums due to any of them for work done or materials furnished in connection with the job represented by this Lien Waiver, through the date mentioned above, and that no valid claim or right exists in favor of any such subcontractor, materialman or laborer. ______________________________________ BY: ________________________________________________ TITLE: __________________ SUBSCRIBED AND SWORN TO BEFORE ME BY __________________________________________, on this the ___ day of ___________, 19__, to certify which witness my hand and seal of office. (Notary Seal) ______________________________________ Notary Public in and for the State of Texas My commission expires: _____________________________________________ EXHIBIT 10.6 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of the 14th day of July, 1987, by and between TANOX BIOSYSTEMS, INC., a Texas corporation (the "company") , TSE WEN CHANG, NANCY T. CHANG and ALAFI CAPITAL COMPANY, a California limited partnership ("Alafi Capital"), SHIREEN ALAFI, JOSEPH HESKEL, TRUSTEE FOR CHRISTOPHER ALAFI (collectively, "Alafi"), and INVITRON CORPORATION, a Delaware corporation ("Invitron"), (collectively, Alafi Capital, Alafi, and Invitron are referred to as the "Investors" or sometimes singly as "Investor"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. PURCHASE AND SALE OF STOCK. 1.1 SALE AND ISSUANCE OF COMMON STOCK. Subject to the terms and conditions of this Agreement, Investors hereby severally agree to purchase, and the Company hereby sells and issues to Investors an aggregate of 387,733 shares of the Company's Common Stock (the "Stock") for the aggregate purchase price of $4,000,000 paid in cash. Shares purchased severally by and sold to each of Investors hereby are as indicated on Schedule 1.1. 1.2 SALE OF ADDITIONAL COMMON STOCK. The Company shall have the right for a period of sixty (60) days from the date hereof to offer up to 193,867 shares of the Company's Common Stock (the "Additional Stock") for sale to other prospective investors (the "Prospective Investors") at a price per share of not less than $10.32 and on terms which, in all material respects (considered in the aggregate), will not be more favorable to such <PAGE> Prospective Investors than the terms hereof, unless the consent of Moshe Alafi, as the representative of Investors, is first obtained to any such more favorable terms. At the end of such sixty (60) day period, if the Company has not consummated the sale of the Additional Stock to one or more of the Prospective Investors, sale of such shares of the Common Stock of the Company shall thereafter be subject to the rights of the Investors under Section 9. 1.3 CLOSING. The purchase and sale of the Stock has taken place at the offices of Anderson, Harrell & Timby, P.C., 3400 MCorp Plaza, 333 Clay Street, Houston, Texas 77002, at 9:00 A.M., July 9, 1987, or at such other time and date as the Company and Moshe Alafi may agree, (which time and event are designated the "Closing"). At the Closing, the Company has delivered and each of Investors has received a certificate representing the Stock acquired by such Investor. The Company has received from Investors a wire transfer of funds or official bank check or checks in the aggregate amount of the purchase price. In addition, each party has made the additional deliveries identified in Sections 5 and 6. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth in schedules attached hereto or otherwise disclosed in documentation delivered to or reviewed by Investors in connection herewith, the Company, Tse Wen Chang and Nancy T. Chang hereby represent and warrant to each Investor the matters set forth below. Except where further qualified or the context otherwise requires, reference in this Section 2 to the "knowledge" of the Company or matters "known to the Company" shall mean matters actually known to the Board of Directors or -2- <PAGE> officers of the Company. The following representations and warranties as made by the Changs shall be deemed qualified to the extent of the actual knowledge of each of them after due inquiry. 2.1 ORGANIZATION GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and has all requisite corporate power and authority to carry on its business as now conducted. The Company is not qualified to transact business in any other jurisdiction and its failure so to qualify will not have a material adverse effect on its business or properties. 2.2 CAPITALIZATION. Excluding the sales and purchases referenced in this Agreement, the authorized capital of the Company consists of 10,000,000 shares of common stock ("Common Stock"), of which 1,163,200 shares are issued and outstanding and are owned of record by the persons indicated on Schedu1e 2.2 and 1,000,000 shares of preferred stock, of which no shares are issued and outstanding. Except for (i) the Common Stock issued or to be issued under this Agreement or to the Prospective Investors, (ii) the rights provided in or excluded from application of Section 9 hereof, and (iii) the stock options granted or which may be granted under the Tanox Biosystems, Inc. 1987 Stock Option Plan, a true and correct copy of which has been delivered to the Investors (the "Stock Option Plan"), and shares reserved for issuance thereunder, the Company does not have any equity securities outstanding, nor are there outstanding any options, warrants, rights, or securities convertible into or exercisable for equity securities to be issued by the Company nor any agreements to issue any such securities or rights. -3- <PAGE> 2.3 SUBSIDIARIES. The Company does not own or control, directly or indirectly, any interest in any other corporation, association, or other business entity; provided, that this representation is not intended to apply to any interest which may arise out of or result from license or other contractual arrangements between the Company and any other business entity. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and the authorization, issuance (or reservation for issuance) and delivery of the Stock being sold hereunder have been taken and this Agreement constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy and similar laws or generally applicable principles of equity. 2.5 VALID ISSUANCE OF STOCK. (a) The Stock purchased by Investors hereunder, as issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, is, or will be, duly and validly issued, fully paid and nonassessable and, based in part upon the representations of the Investors in this Agreement and to the Company's knowledge, is, or will be, issued in compliance with all applicable federal and state securities laws, as the case may be; and -4- <PAGE> (b) All of the outstanding shares of Common Stock of the Company were duly and validly authorized and issued, or the issuance thereof duly and validly ratified, and are fully paid and nonassessable. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, local or provincial governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for (a) filings which may be required under the Securities Act of 1933, as amended, and rules and regulations promulgated thereunder (collectively, the "Act"), and (b) the filing pursuant to Section 25102(f) and the rules thereunder of the California Securities Law of 1968, as amended ("CSL"), or filings which may be required I under the Texas Securities Act, as amended ("TSA"). 2.7 LITIGATION. There is no action, suit, proceeding or investigation pending or currently threatened against the Company which questions the validity of this Agreement or the right of the Company to enter into it, or to consummate the transactions contemplated hereby, or which might result, either individually or in the aggregate, in any material adverse changes in the assets, condition, affairs or prospects of the Company, financially or otherwise, nor is the Company aware of any basis for any of the foregoing. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 2.8 PROPRIETARY AGREEMENT. All of the Company's employees have executed a confidentiality agreement in the form attached hereto as Exhibit 2.8. The Company, after reasonable -5- <PAGE> investigation, is not aware that any of its employees is in violation thereof. 2.9 PATENTS AND TRADEMARKS. Subject to royalty and other obligations contained in those agreements referenced on Schedule 2.9, the Company has sufficient right, title and ownership of all patents, trademarks, service marks, trade names, copyrights, licenses, information and proprietary rights, or adequate licenses, rights or purchase options with respect to the foregoing, necessary for its business as now conducted. Except as indicated by Schedule 2.9, the Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would conflict with his obligation to use his best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. To the Company's knowledge, neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed will result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. Except for those inventions described on Schedule 2.9, the Company does not believe it is or will be necessary to utilize any inventions or ideas of any of its employees (or people it currently intends to hire) made prior to their employment by the Company. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or default of any provision of its Articles of Incorporation or Bylaws or any instrument or contract to which -6- <PAGE> it is a party or by which it is bound or, to its knowledge, of any provision of any federal or state judgment, writ, decree, order, statute, rule or governmental regulation applicable to the Company. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company. 2.11 AGREEMENTS; ACTION. (a) Except as explicitly contemplated hereby or identified on Schedule 2.11, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof; and (b) Except as may be identified on Schedule 2.11, the Company has not entered into any written agreement which provides for payments in excess of $25,000 thereunder by the Company or any non-cancellable agreements providing for payments in the aggregate of more than $150,000. 2.12 DISCLOSURE. The Company has fully provided Investors with all the information which Investors have requested for deciding whether to purchase the Stock and all information concerning the Company which it believes is material to enable such Investors to make such decision. Neither this Agreement nor any other statements or certificates made or delivered in -7- <PAGE> connection herewith contains any untrue statemant of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading; provided, that the foregoing does not include statements and information contained in the preliminary draft of the Company's business plan which has been reviewed by Investors and statements relating to potential products, product applications, markets, sales projections or other forward looking statements (as defined in or contemplated by Reg. 230.175 of the Act), except that the Company and the Changs represent and warrant that the business plan was prepared in good faith. 2.13 REGISTRATION RIGHTS. Except as provided in Section 7 of this Agreement, the Company has not granted or agreed to grant any registration rights, including piggy-back rights, to any person or entity. 2.14 CORPORATE DOCUMENTS. The Articles of Incorporation and Bylaws of the Company are in the form last provided to the Investors. 2.15 PROPERTIES. Except for (i) liens or encumbrances disclosed on Schedule 2.15, (ii) any lien for taxes or special assessments either not yet delinquent or being contested in good faith by appropriate proceedings, (iii) mechanics', materialmen's, carriers', workmen's, employees' or similar liens arising in the ordinary course of business that do not impair in any material respect the value, restrict the usefulness of the property, or are being contested in good faith by appropriate proceedings, and (iv) encumbrances represented by license or other agreements identified on schedules attached hereto or delivered to Investors prior to Closing, the tangible and -8- <PAGE> intangible property currently owned by the Company is free and clear of any liens, security interests, claims, charges, options or other encumbrances. The Company after due inquiry knows of no violation of any law, regulation or ordinance (including without limitation laws, regulations or ordinances relating to zoning, environmental, city planning or similar matters) relating to its properties (owned or leased) or its business which could have a material, adverse effect on the financial condition or operations of the business of the Company. The Company has not received notice of any developments affecting any of such tangible properties nor, to its knowledge, are any such developments threatened, which might curtail the present or future use of such tangible property for the purpose for which it was acquired or the purpose for which it is used which could have an adverse effect on the Company. All leases under which the Company leases any real or personal property are in good standing, valid and effective in accordance with their respective terms. 2.16 INSURANCE. To its knowledge, the Company is not in default with respect to any provisions of any fire, liability, title or other form of insurance held by it and has not failed to give any notice or present any claim thereunder in due and timely fashion. Such policies are in amounts and upon terms which are normal for the industry, are reasonable in light of the Company's size and business and provide insurance for business risks normally insured against. Such policies or binders evidencing same have been made available for review by Investors prior to the Closing. 2.17 TAXES. All tax returns required to be filed with respect to the operations or assets of the Company have been correctly prepared and timely filed or extended, and all taxes -9- <PAGE> required to be paid in respect of the periods covered by such returns have been paid and/or adequate reserves for the payment of all income, franchise, property, sales, employment or other taxes payable in respect of the period subsequent to the last of said periods have been established. No tax obligation of the Company will arise in connection with the consummation of the transactions contemplated hereby. The Company is not delinquent in the payment of any assessment or governmental charge or duty the delinquency of which could have an adverse effect on the business or operations of the Company. No deficiencies for any tax, assessment or governmental charge or duty have been claimed, proposed or assessed. The Company's federal income tax returns have never been audited by federal or state authorities and, to the best of the Company's knowledge, no such audit is currently planned. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Investors understand that the Stock and Additional Stock (under this Section 3, the term "Stock" includes the Additional Stock to the extent same is intended to be acquired or is acquired) has not been registered under the Act and applicable state laws and that it is being offered and sold pursuant to an exemption from registration contained in the Act and applicable state laws based in part on the representations and warranties of Investors contained herein. Each of Investors hereby severally represents and warrants to the Company the matters set forth below with respect to itself. 3.1 AUTHORIZATION. All action, corporate or otherwise, necessary for the authorization, execution and delivery of this Agreement and performance of Investors' obligations hereunder have been taken and this Agreement -10- <PAGE> constitutes the valid and binding obligation, of each of the, Investors, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy and similar laws or generally applicable principles of equity. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. It is acquiring the Stock for its own account and not for the benefit; of any other person (except for the respective beneficial interests of the Alafi Capital limited partners and the owners of Invitron) for investment purposes and not for sale or with a view to distribution of all or any part of such Stock. 3.3 APPLICABLE EXEMPTIONS. It understands that the Stock has not been registered under the Act by reason of its issuance in a transaction exempt from the registration and prospectus delivery requirements of the Act pursuant to Section 4(2) thereof, that the Company has no present intention of registering the Stock, that the Stock must be held by Investor indefinitely, and that Investor must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Act or is exempt from registration. Investor further understands that the Stock has not been registered under the CSL or TSA, or other applicable state laws by reason of its issuance in a transaction exempt from the registration requirements of such laws, which exemptions depend upon, among other things, the bona fide nature of Investor's investment intent expressed herein and Investors' wealth and sophistication in making similar investments. 3.4 ACCESS. During the negotiation of the transactions contemplated herein, Investor and its representatives have been afforded full and free access to -11- <PAGE> corporate books, financial statements, records, contracts, documents and other information concerning the Company and to its offices and facilities, have been afforded an opportunity to ask such questions of the Company's officers, employees, agents, accountants and representatives concerning the Company's business, operations, financial condition, assets, liabilities and other relevant matters as they have deemed necessary or desirable, and have been given all such information as has been requested, in order to evaluate the merits and risks of the prospective investment contemplated herein. The foregoing, however, does not limit or modify the representations or warranties of the Company contained in Section 2 of this Agreement, except to the extent that any such documents delivered to Investors reasonably disclose on the face thereof any conflicts with such representations and warranties. 3.5 DUE DILIQENCE. Investor and its representatives have been solely responsible for Investor's own "due diligence" investigation of the Company and its management and business, for Investor's own analysis of the merits and risks of this invesuent, and for its own analysis of the fairness and desirability of the terms of the invesuent. In taking any action or performing any role relative to the arranging of the proposed investment, Investor has acted solely in its own interest, and neither Investor (nor any of Investor's agents or employees) have acted as an agent of the Company. 3.6 CONSENTS. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of Investor is required in connection with the valid execution and delivery of this Agreement, except for -12- <PAGE> filings required under applicable securities and other governmental laws which will be made and will be effective within the period required by law. 3.7 ACCREDITED STATUS. Investor (other than Invitron) is an "accredited investor" as that term is defined in Regulation D promulgated under the Act and an "excluded purchaser" under Regulation 260.102.13 promulgated under the CSL. 3.8 INVESTMENT EXPERIENCE. Investor is an investor in securities of companies, and/or is familiar with the risks of investment in companies, in the development stage and acknowledges that it is able to fend for itself, can bear for an indefinite period of time the economic risk of its investment, including a complete loss of its investment, and has such knowledge, experience and sophistication in financial and business matters that it is capable of assessing the risks and merits of this investment. Investor also represents that it has not been organized for the purpose of acquiring the Stock. 3.9 RESTRICTED SECURITIES. Investor understands that the shares of Stock it is purchasing are characterized as "restricted securities" under the federal securities laws in as much as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances. In this connection, Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. -13- <PAGE> 3.10 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, Investor understands and further agrees that it cannot and will not make any disposition of all or any portion of the Stock unless and until: (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) Investor has notified the Company of the proposed disposition and has furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, including why such disposition will not require registration of such shares under the Act, and, if reasonably requested by the Company, Investor has furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Act, CSL, TSA, or any applicable state laws. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances (including circumstances where applicable state laws do not plainly except such transaction) or for transactions made in reliance on Rule 144 (k). 3.11 LEGENDS. It is understood that the certificates evidencing the Stock may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933 or any state securities laws. -14- <PAGE> These securities have been acquired for investment and may not be sold, offered for sale, pledged, hypothecated or otherwise disposed of in the absence of a registration statement in effect with respect to the securities under such Act and applicable state laws or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule l44 of such Act; and (b) Any legend required by the laws of the State of Texas or the State of California or required under that certain Voting Agreement dated effective of even date herewith among the Investors and the Changs. 4. CALIFORNIA NOTICE. THE SALE OF THE SECURITIES THAT IS THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, AND IN THE ABSENCE OF AN EXEMPTION FROM SUCH QUALIFICATION REQUIREMENT THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED UNLESS IN THE OPINION OF COUNSEL FOR THE COMPANY SUCH QUALIFICATION IS NOT REQUIRED. 5. DELIVERIES REQUIRED BY INVESTORS AT CLOSING. In satisfaction of Investors' conditions to Closing, Company has delivered and Investors have received the following: (a) Investors have received from Anderson, Harrell & Timby, P.C., counsel for the Company, an opinion, dated as of the Closing, in form and substance satisfactory to the Investors and substantially in the form of that attached hereto as Exhibit 5(a); and -15- <PAGE> (b) Investors have received stock certificates representing the shares of Stock and such other documents and agreements as they require in connection with the Closing. 6. DELIVERIES REQUIRED BY COMPANY AT CLOSING. In satisfaction of Company's conditions to Closing, Investors have delivered and Company has received the following: (a) Company has received from Investors (by way of wire transfer of funds or official bank check) the aggregate purchase price of the Stock being purchased by Investors; (b) Company has received from Brobeck, Phleger & Harrison, counsel for the Investors, an opinion, dated as of the Closing, in form and substance satisfactory to the Company and substantialy in the form of that attached hereto as Exhibit 6(b); and (c) Company has received, or Investors have executed and delivered to certain shareholders of the Company, such other documents and agreements as it requires in connection with the Closing, including, without limitation, confidentiality agreements and a voting agreement. 7. REGISTRATION RIGHTS. The Company covenants and agrees to provide certain registration rights in accordance with the terms and conditions of this Section 7. 7.1 DEFINITIONS. For purposes of this Section 7: (a) The term "register," "registered," and "registration" refer to a registration effected by preparing and -16- <PAGE> filing a registration statement or similar document in compliance with the Act and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means any Common Stock of the Company, including Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Common Stock, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 7 are not assignable; (c) The term "Holder" means any Investor, any Prospective Investor and any other person (spouses being considered one person for purposes hereof) provided such other person owns or has the right to acquire Registrable Securities amounting to at least fifteen percent (15%) of the outstanding Common Stock of the Company at any time the provisions of this Section 7 may become exercisable or be exercised and any assignee thereof in accordance with paragraph 7.11 hereof; and (d) The term "Form S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the Securities and Exchange Commission ("SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. -17- <PAGE> 7.2 DEMAND REQISTRATION. (a) If the Company shall receive at any time after six (6) months after the effective date of the first registration statement for a public offering of securities and prior to the time the Company is eligible to utilize Form S-3 for the sale of Registrable Securities, a written request from the Holders of at least fifteen percent (15%) of the Registrable Securities then outstanding that the Company file a registration statement under the Act covering the registration of Registrable Securities then outstanding having a market value of not less than $3,000,000, then the Company, within ten (10) days after the receipt thereof, shall give written notice of such request to all Holders and, subject to the limitations of subparagraph 7.2(b), shall effect the registration under the Act of all Registrable Securities which the Holders request to be registered as soon as reasonably possible after the mailing of such notice by the Company, but in any event within the time required pursuant to subparagraph 7.2(d). (b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this section 7.2 and the Company shall include such information in the written notice referred to in subparagraph 7.2(a). In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon participation in such underwriting and the inclusion of his securities therein to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company) enter -18- <PAGE> into an underwriting agreement in customary for with the underwriter or underwriters selected for such Underwriting by a majority in interest of the Initiating Holders and reasonably agreeable to the Company (the Company being permitted to consider in connection therewith the underwriters' agreement to a registration using incorporation of documents filed with the SEC, to the extent permitted by applicable laws, rules and regulations, and the relative cost of using such underwriters). Notwithstanding any other provision of this Section 7.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of securities that may be included in the underwriting shall be allocated among all Holders of Registrable Securities in proportion (as nearly as practicable) to the amount of Registrable Securities originally requested to be included by each in response to the written notice referred to in subparagraph 7.2(a). (c) The Company is obligated to effect only one (1) such registration pursuant to this Section 7.2. (d) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 7.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore reasonable to defer the filing of such registration statement, the Company shall have the -19- <PAGE> right to defer such filing for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve (12) month period. The Company shall be entitled to limit any such registration hereunder to the same extent as permitted under subparagraph 7.10(b), subpart (6). 7.3 COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register for its own issuance or for shareholders other than the Holders any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash, the Company, each such time, shall promptly give each Holder written notice of such registration; provided, that such notice shall not be required, and Holders shall have no rights hereunder, in connection with a registration relating solely to the sale of securities to employees of the Company pursuant to any employee stock option or stock purchase plans or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Paragraph 12.6, the Company, subject to the provisions of Paragraph 7.6, shall cause to be registered under the Act all of the Registrable Securities that each has requested to be registered. The Company shall be obligated to effect only two (2) such registrations pursuant to this Paragraph 7.3. 7.4 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 7 that the selling Holders shall furnish -20- <PAGE> to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as shall be required to effect the registration of the Registrable Securities. 7.5 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Paragraph 7.2 or 7.3 (which right may be assigned as provided in Paragraph 7.11), including (without limitation) all registration, filing, and qualification fees, printers' and accountinq fees relating or apportionable thereto: provided, however, that the selling Holders shall pay the fees and disbursements of any counsel, experts or other professionals selected by them and: provided, further, that the fees and expenses of complying with blue sky laws shall be borne by the selling Holders if and to the extent that the appropriate administrative official of such state requires that such Holders (rather than the Company) pay such fees and expenses. 7.6 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares being issued by the Company, the Company shall not be required under Paragraph 7.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it, and then only in such quantity as will not, in the opinion of the underwriters, jeopardize the success of the offering by the Company. If the total amount of Registrable Securities that all Holders thereof request to be included in such offering exceeds the amount of such securities that the underwriters reasonably -21- <PAGE> believe compatible with the success of the offering or, in the initial public offering of the Company, exceeds twenty percent (20%) of the total number of shares proposed to be registered, then the Company shall be required to include in the offering only that number of such securities which the underwriters believe will not jeopardize the success of the offering or, in the initial public offering, only that number of such securities not exceeding such twenty percent (20%) and the Holders shall be entitled to include their respective Registrable Securities in the offering pro rata to their ownership of same. 7.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 7. 7.8 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 7: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers and directors of each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions -22- <PAGE> or violations (collectively a "Violation") : (i) any untrue statement or alleged untrue statement of material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, the 1934 Act or any state securities law; and the Company will reimburse each such Holder, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subparagraph 7.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person; (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter (within the meaning of -23- <PAGE> the Act) for the Company or such other Holders, any person who controls such underwriter, and any other Holder selling securities in such registration statement or any of its directors or officers or any person who controls such Holder, against any losses, claims, damages, or liabilities (joint or several) to which the Company or any such director, officer, controlling person, or underwriter or controlling person, or other such Holder or director, officer or controlling person may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer; controlling person, underwriter or controlling person, other Holder, officer, director, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subparagraph 7.8(b) shall not apply to amounts paid in settlement for any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and (c) Promptly after receipt by an indemnified party under this Paragraph 7.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Paragraph 7.8, notify the indemnifying party in writing of the commencement thereof and the -24- <PAGE> indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to notify an indemnifying party within a reasonable time of the commencement of any such action, if prejudical to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Paragraph 7.8, but the omission so to notify the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Paragraph 7.8. 7.9 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company; -25- <PAGE> (b) Take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is reasonable to enable the Holders to utilize, except for the requisite financial, listing or quotation requirements, Form S-3 for the sale of their Registrable Securities when same becomes available, such action to be initiated as soon as reasonably practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) File with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (d) Furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith (i) upon request, a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) upon availability, a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) upon request, such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. -26- <PAGE> The Company's obligations under this Paragraph 7.9 shall terminate at such time as the Company may no longer be required to file reports or other documents under the 1934 Act and will terminate as to each Holder covered hereby at such time as such Holder shall be entitled to sell its shares under the provisions of Rule 144(k). 7.10 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders holding an aggregate of at least fifteen percent (15%) of the outstanding shares of Common Stock of the Company a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance to all other Holders; and (b) as soon as reasonably practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this -27- <PAGE> Paragraph 7.10: (1) within 180 days of the effective date of any public offering of securities by the Company; (2) if the Company is not qualified as a registrant entitled to use Form S-3; (3) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $3,000,000; (4) if the Company shall furnish to the Holders a certificate siqned by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 120 days after receipt of the request of the Holder or Holders under this Paragraph 7.1.0; provided, however, that the Company shall not utilize this right more than once in any twelve (12) month period: (5) if the Company has, within the twelve (12) month period preceding the date for such request, already effected any registration in which each of the Holders was entitled to register at least twenty percent (20%) of the Registrable Securities then held by such Holder, whether pursuant to this Paragraph 7.1.0 or otherwise; (6) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance, or with respect to which such registration, qualification or compliance is unduly burdensome: or (7) if the Company has effected at least three (3) of such registrations pursuant to this Paragraph 7.10 for one or more of the Holders. -28- <PAGE> Subject to the foregoing, the Company will use its best efforts to file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as reasonably practicable after receipt of the request or requests of the Holders. All expenses incurred in connection with a registration requested pursuant to this Paragraph 7.1O, including (without limitation) all registration, filing, qualification, printers' and accounting fees and the fees and disbursements of counsel for the selling Holder or Holders and counsel for the Company shall be borne pro rata by the Holder or Holders participating in the Form S-3 Registration. Registrations effected pursuant to this Paragraph 7.10 shall not be counted as registrations effected pursuant to Paragraph 7.2 and registrations effected pursuant to Paragraph 7.2 shall not be counted as registrations effected pursuant to this Paragraph 7.1O. 7.11 ASSIGNMENT OF REGISTRATION RIQHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 7 may be assigned by a Holder (after identification of such Holder under this Section 7 or with respect to registrations pursuant to Paragraph 7.10) to a transferee or assignee of such securities provided (a) such assignment complies with, and such transferee or assignee agrees in writing to comply with and be bound by all of the terms and provisions of this Agreement, (b) the Company is, within a reasonable time prior to such transfer, furnished with written notice of the name and address of such transferee or assignee which notice identifies the securities with respect to which such registration rights are being assigned and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. -29- <PAGE> 7.12 "MARKET STAND-OFF" AGREEMENT. Investors hereby agree that they shall not, to the extent requested by the Company and an underwriter of Common Stock (or other securities) of the Company, sell or otherwise transfer or dispose (other) than to donees who agree to be similarly bound) of any Registrable Securities for such period of time (not to exceed 180 days) following the effective date of a registration statement of the Company filed under the Act as the Company or underwriters may specify; provided, however, that all officers and directors of the Company and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of any such period specified. 8. COVENANTS OF THE COMPANY. 8.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each Investor: (a) as soon as practicable, but in any event within one hundred twenty (120) days after the end of each fiscal year of the Company commencing December 31, 1987, a copy of its audited report, an income statement for such fiscal year, a balance sheet of the Company as of the end of such year, and a schedule as to the sources and applications of funds for such year, such year-end financial reports to be in reasonable detail, -30- <PAGE> prepared in accordance with generally accepted accounting principles ("gaap") examined by and accompanied by a certificate or opinion of a nationally recognized firm of independent certified public accountants; (b) commencing June 30, 1987, within sixty (60) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited profit or loss statement for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter; (c) as and to the extent specifically and reasonably requested from time to time, such further financial statements, reports, information and plans regarding the Company as the Company may prepare or have prepared for its use; and (d) the financial statements called for in subparagraphs (b) and (c) of this Paragraph 8.1 shall be accompanied by an instrument executed by the Chief Financial Officer, Chief Executive Officer or Chief Operating Officer of the Company and certifying that such financials were prepared in accordance with gaap consistently applied, subject to normal year end adjustments with prior practice for earlier periods and that such fairly present the financial condition of the Company and its results of operation for the period specified. 8.2 TERMINATION OF COMPANY'S COVENANTS. The covenants set forth in Paragraph 8.1 shall terminate as to Investors and be of no further force or effect when the Company consummates an underwritten public offering of its securities or when the Company first becomes subject to the periodic reporting requirements of section 15(d) of the 1934 Act, whichever event shall first occur. -31- <PAGE> 9. INVESTOR'S RIGHT OF FIRST REFUSAL. Subject to the terms and conditions specified in this Section 9, the Company hereby grants to Investors a right of first refusal with respect to future sales by the Company of its Common Stock (but not including the Additional Stock for a period of sixty (60) days from the date hereof). Investors shall be entitled to apportion the right of first refusal hereby granted among themselves in such proportions as they deem appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for, any of its Common Stock (the "Shares"), the Company shall first make an offering of such Shares to Investors in accordance with the following provisions: (a) The Company shall deliver a notice ("Notice") to Investors stating (i) its bona fide intention to offer or issue such Shares, (ii) the number of such Shares to be offered, and (iii) the price, if any, for which it proposes to offer such Shares; (b) Within twenty (20) calendar days after receipt of the Notice, Investors may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held by such Investors bear to the total number of shares of Common Stock issued and held by all shareholders of the Company (*no Investor shall be entitled to acquire a greater percentage of the Shares than such Investor's ownership percentage in the Company's Common Stock at such time); provided, however, that if written notice of *Subject to the right to apportion as provided above. -32- <PAGE> Investors election, specifying the number of Shares to be purchased by each, is not received by the Company within such twenty-day period, Investors shall be deemed to have waived their riqht to acquire any of such Shares; (c) If all such Shares which Investors are entitled to acquire are not elected to be obtained as provided in subparagraph 9(b) hereof, the Company may, during the l8O-day period following the expiration of the period provided in subparagraph 9(b) hereof, offer the remaining unsubscibed Shares to any person or persons at a price not less than, and upon terms no more favorable to such person or persons than, those specified in the Notice; if the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated with 60 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to Investors in accordance herewith; and (d) The right of first refusal in this Section 9 shall (i) terminate as to any Investor and not be applicable to any offer or issue of the Shares to such Investor which may be initiated by the Company after the offering and/or sale of Shares pursuant to this Section 9 if such Investor fails in any offer under this Section 9 to exercise * its rights to the greatest extent permitted, (ii) terminate as to all Investors after consummation of an underwritten offering described in (iv) below, (iii) not be applicable to shares of Common Stock issued pursuant to any stock option or stock purchase plan to employees or consultants of the Company provided, such plan is approved by the Company's Board of Directors and the shares issued or issuable pursuant thereto do not exceed twenty percent (20%) of -33- <PAGE> the outstanding equity securities of the Company at any time outstanding, (iv) not be applicable to a bona fide, firmly underwritten public offering of shares of Common Stock registered under the Act, (v) not be applicable to the issuance of Shares in a transaction in which the Company is, in fact and irrespective of the form of the transaction, acquiring directly or indirectly some or all of the assets, business or equity interests of another corporation or entity, and (vi) terminate either as of the effective date of a registration of shares of Common Stock under the Act in which the total value of the shares registered is at least seven million dollars ($7,000,000.00) and the price per share of the Common Stock to be sold is based upon a total valuation of the Company of at least thirty million dollars ($30,000,000.00) or at such time as the total value of the Company, based upon the public trading price (whether quoted over-the-counter or otherwise) of such shares, is at least thirty million dollars ($30,000,000.00) . 10. COVENANTS OF INVESTORS. 10.1 CONFIDENTIALITY. The information provided to Investors shall be used by the Investors or any permitted assignee of the Investors solely in furtherance of their interests as an investor in the Company and shall be subject to confidentiality agreements executed by Investors and any such assignees in the form of same attached hereto as Exhibit 10.1, and executed and delivered by the Investors to the Company at the Closing. In addition to the obligations of confidence set forth in any such agreements, and except for the use of any information regarding the Company contained in the public filings of the Company under the Act or the 1934 Act or information previously reviewed by the Company pursuant to its rights hereunder, -34- <PAGE> Investors agree to permit the Company to review information regarding the Company and Investors' investment in the Company which Investors may release to the general public or publish in any manner, including its publication in any governmental or other filings available to the public and, as reasonable, Investors agree to consent in good faith with Company regarding any concerns which the company's representatives may have regarding publication of such information. Notwithstanding anything to the contrary contained in this Section 10.1, the obligation of Invitron to consu1t with the Company prior to any publication or filing with any governmental agency shall not be applicable if such consultation would not be reasonably practicable under time constraints to which Invitron may then be subject. 10.2 LIMITATIONS ON DISPOSITION. Each of Investors agrees that it shal1 comply fully with the limitations on disposition set forth in Paragraph 3.10 above. 10.3 TERMINATION OF INVESTORS' COVENANTS. The covenants set forth in Paragraphs 10.1 and 10.2 shall survive the closing, but the restrictions on the disclosure of confidential information sha11 be coterminous with the provisions of the confidentiality agreements pertaining thereto. II. MISCELLANEOUS. II.1 SURVIVAL OF WARRANTIES. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the closing for a period of six (6) months (except for those covenants contained in Sections -35- <PAGE> 7, 8, 9, and 10 which shall continue for such period as agreed thereunder and, in no way, shall be affected by any investigation of the subject matter thereof made by or on behalf of the Investors. II.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties; provided that this Agreement may not be transferred or assigned by Investors without the prior written consent of the Company, which consent will not be unreasonably withheld. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective permitted successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. II.3 GOVERNING LAW. This Agreement shall be governed by and construed under the internal laws of the State of Texas. 1l.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. II.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. II.6 NOTICES. Any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery, by personal or private -36- <PAGE> service with appropriate record of delivery, to the party to be notified or upon deposit with the United States Post Office, by first class mail, postage prepaid and addressed to the party to be notified at the address indicated for such party below, or at such other address as such party may designate by ten (1O) days, advance written notice to the other parties : THE COMPANY Tanox Biosystems, Inc.. OR THE CHANGS: 10301 Stella Link Houston, Texas 77025 Attn: Nancy T. Chang, President ALAFI CAPITAL: Alafi Capital Company Post Office Box 7338 Berkeley, California 94707 Attn: Moshe Alafi, General Partner ALAFI: c/o Moshe Alafi 6 Commodore Drive, Apt. 234C Emeryville, California 94608 INVITRON: Invitron Corporation 4649 LeBourget Drive St. Louis, Missouri 63134 Attn: Charles V. Benton, President Notice shall be deemed effectively received (i) five (5) business days after deposit properly addressed, with the United States Post Office, if sent first class mail, postage prepaid, (ii) as of the date delivery is acknowledged by appropriate record, if sent by express mail (public or private service), telex, telegram or facsimile mail or other similar communication, or (iii) when receipt is otherwise indicated by the receiving party to the noticing party by correspondence, telex or other reasonable communication. -37- <PAGE> II.7 FINDERS' FEE. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Investors or any of their officers, partners, employees, or representatives are responsible. Each party agrees to indemnify and hold harmless the other party from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which such party is responsible. II.8 EXPENSES. Each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. II.9 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provisions shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision or provisions were so excluded and shall be enforceable in accordance with its terms. II.10 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. -38- <PAGE> IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TANOX BIOSYSTEMS, INC . By: /s/ NANCY T. CHANG Nancy T. Chang, President ALAFI CAPITAL COMPANY By: /s/ MOSHE ALAFI Moshe Alafi, General Partner /s/ SHIREEN ALAFI Shireen Alafi Joseph Heskel, Trustee for Christopher Alafi INVITRON CORPORATION By: /s/ CHARLES V. BENTON Charles V. Benton, President /s/ NANCY T. CHANG Nancy T. Chang /s/ TSE WEN CHANG Tse Wen Chang -39- <PAGE> IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TANOX BIOSYSTEMS, INC. By: /s/ NANCY T. CHANGE Nancy T. Chang, President ALAFI CAPITAL COMPANY By: /s/ MOSHE ALAFI Moshe Alafi, General Partner /s/ SHIREEN ALAFI Shireen Alafi Joseph Heskel, Trustee for Christopher Alafi INVITRON CORPORATION By: /s/ CHARLES V. BENTON Charles V. Benton, President /s/ NANCY T. CHANG Nancy T. Chang /s/ TSE WEN CHANG Tse Wen Chang -39- <PAGE> IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TANOX BIOSYSTEMS, INC. By: /s/ NANCY T. CHANG Nancy T. Chang, President ALAFI CAPITAL COMPANY By: Moshe Alafi, General Partner Shireen Alafi /s/ JOSEPH HESKEL Joseph Heskel, Trustee for Christopher Alafi INVITRON CORPORATION By: /s/ CHARLES V. BENTON Charles V. Benton, President /s/ Nancy T. Chang Nancy T. Chang /s/ TSE WEN CHANG Tse Wen Chang -39- <PAGE> SCHEDULE 1.1 INVESTOR NO. OF SHARES PURCHASE PRICE - -------- ------------- -------------- Alafi Capital Company ........................ 121,167 $1,250,004.49 Shireen Alafi ................................ 24,234 250,007.10 Joseph Heskel, Trustee for Christopher Alafi . 48,466 499,993.56 Invitron Corporation ......................... 193,866 1,999,994.85 <PAGE> SCHEDULE 2 .2 NUMBER SHAREHOLDER OF SHARES - ----------- --------- Nancy T. Chang .......................................... 520,000 Tse-Wen Chang ........................................... 450,000 William & Cecily Sun .................................... 153,200 Baylor College of Medicine .............................. 30,000 Joseph L. Melnick ....................................... 10,000 --------- TOTAL ................................................... 1,163,200 <PAGE> EXHIBIT 2.8 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into with TANOX BIOSYSTEMS, INC., (referred to as "Tanox"), by the undersigned employee or prospective employee (referred to as "Employee"). INTRODUCTION. Tanox is engaged in certain research, development and manufacturing activities. Tanox also develops and manufactures equipment used in connection with such activities. Employee desires to obtain or continue his (pronouns should be construed as masculine, feminine or neuter as the context requires) employment with Tanox and, while employed, his activities may include invention, research, development, manufacturing, marketing and/or sale of products within the scope of the Tanox business. This Agreement is intended to cover all of Employee's activities as they may exist from time to time and certain of the provisions may not apply at all times to all Employees of Tanox. Because of his position and activities, Employee will have access to confidential and proprietary information, trade secrets and other intellectual property of Tanox. This Agreement will also cover Employee's activities as an employee of any subsidiary or affiliate of Tanox should any exist from time to time. In consideration of the Employee's employment by Tanox or continued employment and the compensation or increase in compensation to be paid, Employee agrees as follows: 1. FULL TIME RESPONSIBILITY TO TANOX. If Employee has been hired as a full-time employee, Employee agrees that he will devote all his working time and creative energies to the business of Tanox. Employee will perform those duties and responsibilities assigned to him from time to time. 2. AVOIDANCE OF CONFLICTS. Employee agrees to limit his outside activities to personal investments and activities which do not conflict with his duties with Tanox. Employee agrees that he will not be involved in or with, directly or indirectly, any other business enterprise which interferes with his independent exercise of judgement in the Company's best interest. Employee will advise Tanox immediately of any significant financial interest held by himself or any member of his family in a company which does business with Tanox or is a competitor. Employee will not become involved in any significant outside business interest without obtaining written approval of Tanox. 1 <PAGE> 3. CURRENT RELATIONSHIPS WITH OTHER BUSINESSES. Except as listed below, Employee is not involved as an employee, director, officer or partner of, or consultant to, any other business or institution (write none, if appropriate) : ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ 4. INVENTIONS, PATENTS, AND OTHER INTELLECTUAL PROPERTY. Employee agrees to inform Tanox promptly and fully of all inventions, ideas, trade secrets, formulas, techniques, discoveries, or improvements (whether or not patentable and whether or not reduced to writing or to practice) which he may make during the term of his employment and for a period of one (1) year thereafter (provided it is reasonably related to the Tanox business), whether conceived solely or jointly by him during or outside of Tanox's normal working hours. Disclosure of inventions and other Intellectual Property (as such term is defined below) should be made on forms such as the attached Invention Disclosure form. Tanox will own all right, title and interest to all Intellectual Property which is: (1) within the scope of Tanox's past, current, or reasonably anticipated business, which includes those areas of activities stated at the beginning of this Agreement (all such Tanox activities and business are referred to collectively as the "Business") ; and/or (2) related to work done for Tanox unless a specific agreement with a client or customer provides otherwise. Employee hereby assigns and agrees to assign to Tanox his entire right, title and interest in all such Intellectual Property. Employee agrees to protect Tanox's right to patent his discoveries and inventions by keeping written records, which are witnessed and dated, concerning dates of invention, and Employee agrees not to publish information concerning his discoveries and inventions without prior approval from Tanox. Intellectual Property, as defined in this Agreement, includes (but is not limited to) those matters of which Employee has agreed above to inform Tanox and all other information of a scientific, technical, or business nature such as know-how, manufacturing processes, chemical processes, product designs, writings and other works of authorship, theses, books, computer programs, lectures, illustrations, photographs, sales, profits and other financial figures, marketing plans, business methods, customer lists, and the like, which is reasonably related to the Business, including that of Tanox's affiliates or subsidiaries, if any. 5. BIOLOGICAL MATERIALS. Because of the importance of biological materials developed by Tanox to the success of its business, Employee specifically acknowledges that all biological 2 <PAGE> materials created, discovered, or isolated by Employee within the scope of his employment are a part of the Intellectual Property and are the property of Tanox. Biological materials include (but are not limited to) cells, cell lines or multicellular organisms, Microorganisms, transfected or transformed cells or cell lines, fused cells or cell lines (e.g. hybridoma cells) products of such cells or cell lines (e.g. natural or recombinant proteins such as enzymes, hormones, biological regulatory factors, antigens and immunoglobulins), nucleic acid vectors and recombinant DNA plasmids and clones harboring genes or DNA for biological products. Employee agrees that during his employment by Tanox and thereafter, he will not take for his own use or transfer or release or cause to be transferred or released to any other person or entity, any of the biological materials. Employee may do so only with the authority and permission of Tanox. 6. COPYRIGHTS. Employee agrees that any copyrightable material generated by him while employed by Tanox shall be presumed a "work made for hire" and shall vest in Tanox as the "AUTHOR" thereof. However, if any of the material is not properly considered a "work made for hire," Employee agrees, if requested by Tanox, to take out copyrights on Tanox's time and under direction of Tanox's attorneys and to assign such copyrights to Tanox or its clients or customers. Employee further agrees that rights to all royalties resulting from such copyrights will be the property of Tanox or its clients. Regardless of the above, it is understood, however, that copyrights in material resulting from professional activities of a general nature not relating to the Business or resulting from a specific assignment from Tanox or its clients or customers are Employee's own property. Employee agrees, however, to submit all such material to Tanox for review prior to public release so that Tanox may insure that the Employee's obligations of confidentiality are being met. 7. PATENT FILINGS. If requested to do so by Tanox, Employee agrees to do whatever is necessary, on Tanox's time and under direction of Tanox's attorneys, to obtain patents in any country and to assign to Tanox all patents and patent applications, whether U.S. or foreign, relating to them, before or after leaving Tanox's employment. It is understood that the cost of making such assignments and procuring patents shall be paid by Tanox or Tanox's clients or customers. Employee further agrees that rights to all royalties resulting from such patents will be the property of Tanox or its clients or customers. 8. CURRENT INVENTIONS. Except as set forth on the Invention Disclosure form attached, Employee agrees that he does not have an interest in any inventions, discoveries, improvements abstracts, articles, papers or other Intellectual Property which is not already patented or copyrighted, which were made or conceived of prior to employment with Tanox. 3 <PAGE> 9. NON-DISCLOSURE OF CONFIDENTIAL MATTERS. Employee acknowledges that he may have access to confidential information, concerning Tanox and its subsidiaries and affiliates, if any, and concerning its clients and customers, which may include (but not be limited to) the Intellectual Property, books and records relating to operations, finance, accounting, sales, personnel and management; policies and matters relating particularly to operations such as customer names, addresses and price lists, customer service requirements, costs of providing service and equipment, operating and maintenance costs and pricing matters. The Employee also recognizes that a portion of the Business is dependent upon a large number of trade secrets, including secret techniques, methods, processes, data and the like. The protection of these trade secrets and confidential information against unauthorized disclosure or use is of critical importance to Tanox, and the Employee therefore agrees that he will not at any time, either while employed by Tanox or afterwards, make any independent use of, or disclose to any other person or organization, except as authorized by Tanox, any of the trade secrets or confidential information of Tanox. Employee acknowledges that confidential matters and trade secrets include information not generally known by or available to the public about or belonging to Tanox and also includes proprietary information belonging to other companies to whom Tanox may have an obligation to maintain information in confidence. Employee agrees that authorization for public disclosure may only be obtained through Tanox's written consent. Employee, in addition, agrees not to disclose to Tanox, or induce Tanox to use, any trade secrets or confidential information of any of the Employee's previous employers. Employee represents that he is free to disclose all information he may now possess and bring with him, except as noted below: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 10. COMPETITIVE ACTIVITIES. (a) SCIENTIFIC/TECHNICAL. If employee has been or is employed by Tanox in a scientific, technical or other non-sales capacity, as an independent covenant, Employee further agrees to refrain, both during his employment and upon termination of his employment for any reason, for three (3) years after his termination, from becoming involved in any way in any business competitive with the Business, whether as an employee, consultant, partner, proprietor or in any other capacity, except as a shareholder owning less than five percent (5%) of the shares of a 4 <PAGE> corporation whose shares are publicly traded on a stock exchange or in the over-the-counter market or unless permission of Tanox is obtained. Employee understands that, because of the nature of his employment activities for Tanox, geographical limitation as to any activities by him after termination which would directly compete with the Business must include Tanox's reasonable market area to be effective and to protect its interests. Therefore, the foregoing restriction on competitive activities shall apply to the United States of America, such geographical restriction being agreed by Employee to be reasonable. (b) SALES/MARKETING. If Employee has been or is employed by Tanox in whole or in part in a sales capacity, as an independent covenant, Employee further agrees, in the event of the termination of his employment with Tanox for any reason, to refrain, for two (2) years thereafter, from contacting and/or soliciting, directly or indirectly, on behalf of himself or for others, for any purpose competitive with the Business, (a) any accounts, contracts, references or referrals of companies or persons which are potential customers or clients of, or investors in, Tanox, or (b) any accounts, contracts, references or refer- rals of companies, persons or other potential customers, clients or investors who have contacted Tanox regarding its Business. (c) INJUNCTION. If the provisions of this Paragraph 10 are violated, in whole or in part, Tanox shall be entitled, upon application to any court of proper jurisdiction, to restrain and enjoin the Employee from such violation without limiting any other remedies Tanox may have at law or in equity. Further, in the event that the provisions of Paragraph 10 should ever be determined to exceed the time, geographic or occupational limitations permitted by the applicable laws, the Employee and Tanox agree that such provisions shall be and are reformed to the maximum time, geographic or occupational limitations permitted by the applicable laws. II. IMPROPER PAYMENTS. Employee represents and agrees that he will make no payments of any kind which violate any policy of Tanox or any applicable statute or rule, regulation or order of any government or municipality, foreign or domestic. Employee will be responsible for any liabilities, obligations, claims, penalties, fines or losses resulting from any unauthorized or unlawful acts of Employee or from any violations by Employee of any such policies, laws or regulations, whether willful or not. The provisions of this Paragraph 11 will continue after termination of this Agreement. 12. EMPLOYEE POLICIES. Employee agrees that he will read and gain an understanding of all policies and procedures which may be contained from time to time in any employee policy and procedures manual and/or safety handbook applicable to Tanox. Employee understands that such policies and procedures, including 5 <PAGE> any revisions or supplements to same from time to time, are, or will be, applicable to the Employee in the performance of his duties and job performance for Tanox and he agrees to strictly observe all of such policies and procedures. 13. TERMINATION. Upon the termination of his employment for any reason, Employee will promptly turn over to Tanox all manuals, handbooks, programs, models, prototypes, notes, memorandums, notebooks, drawings, records, documents, and the like, and all copies of same, in his possession or under his control, whether prepared by Employee or others, relating to Intellectual Property and/or the Business. Employee acknowledges that all such items are the sole property of Tanox. 14. BINDING EFFECT. Employee agrees that this Agreement shall be binding upon him irrespective of the duration of his employment by Tanox, the reasons for the cessation of his employment, or the amount of his wages and/or salary. Employee acknowledges that his wages and/or salary shall be established from time to time by Tanox. Modification or variation of this Agreement must be accomplished by a subsequent written agreement signed by Tanox to be valid. Tanox may assign this Agreement in its entirety to a successor corporation carrying on all or a substantial part of the business of Tanox. 15. SEVERABILITY. Should any provision or any part of any provisions of this Agreement be held to be void or unenforceable, the validity of the remaining parts or provisions shall not be affected by such holding. EXECUTED this ___ day of ______, 198__, to be effective upon employment. ------------------------------- Employee's Name (Type or Print) ------------------------------- Employee's Signature Acknowledged and agreed: TANOX BIOSYSTEMS, INC. By: Its: 6 <PAGE> TANOX BIOSYSTEMS, IRC. Invention Disclosure INVENTOR(S) Name _______________________________ Name _______________________________ Name _______________________________ Name _______________________________ DESCRIPTIVE TITLE OF INVENTION: ______________________________________________________________________________ ______________________________________________________________________________ DESCRIPTION OF INVENTION: Please provide a concise description of your invention, including an explanation of the nature, purpose and operation of the invention; a summary of results achieved; features believed to be novel; further experimental work planned; and any additional information which you believe might be helpful in deciding whether a patent application should be filed. ADDITIONAL SHEETS CAN BE USED, but each must be attached to this form and EACH MUST BE SIGNED AND WITNESSED: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 7 <PAGE> CONCEPTION Date of which you conceived (thought of) the invention. ______________________________________________________________________________ NOTE PRINTED PUBLICATIONS, ABSTRACTS, ORAL PRESENTATIONS OR OTHER DIVULGATIONS MAY RESULT IN IMMEDIATE LOSS OF RIGHTS TO OBTAIN PATENT PROTECTION. PLEASE ATTACH A COPY OF ANY PAPER, ABSTRACT OR OTHER PRINTED PUBLICATION, INCLUDING A ROUGH DRAFT IF PUBLICATION IS NOT YET IN FINAL FORM. A SALE OR OFFER TO SELL MAY RESULT IN IMMEDIATE LOSS OF RIGHTS TO OBTAIN PATENT PROTECTION. PUBLICATION INFORMATION Please list any papers, abstracts, etc. describing the invention which have been published or submitted for publication. Include the title, journal and date or estimated date of publication. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Please indicate whether an oral presentation (including slide or poster presentation) of the invention or a sale or offer to sell the invention has been or will be made and, to whom. ______________________________________________________________________________ __________________________________________________________Date________________ FINANCIAL SUPPORT Please designate all sources of funding for the invention other than Tanox Biosystems:________________________________________________________ ______________________________________________________________________________ COMMERCIAL POTENTIAL OF THIS INVENTION Please provide your assessment of the commercial uses of the invention: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ INVENTOR(S) SIGNATURE (S) READ, UNDERSTOOD AND WITNESSED __________________________ ____ _________________________ ____ Date Date __________________________ ____ _________________________ ____ Date Date __________________________ ____ _________________________ ____ Date Date 8 <PAGE> SCHEDULE 2.9 AGREEMENT BETWEEN TANOX AND EFFECTIVE DATE - --------------------------- ----------------- Tse-Wen Chang January 1, 1987 Baylor College of Medicine January 1, 1987 Baylor College of Medicine February 25, 1987 <PAGE> SCHEDULE 2.11 AGREEMENT BETWEEN TANOX AND TYPE OF AGREEMENT AMOUNT - --------------------------- ----------------- ------- Tse-Wen Chang, Ph.D. R & D Consulting $12,000 Joseph IN Melnick, Ph.D. Scientific Advisor 10,000 shares Main Link Business Park Assoc. Building lease $490,380 Sorin Biomedica, S.p.A. Peptide Manufacture $60,000 <PAGE> SCHEDULE 2.l5 Lien dated June 4, 1987 in the amount of $25,079 for HVAC sub-contracting threatened but not FILED. Said lien affidavit INCORRECTLY identifies Tanox as property owner. <PAGE> July ___, 1987 Alafi Capita1 Company Attn: Mr. Moshe Alafi Ms. Shireen Alafi Mr. Joseph Heskel, Trustee Post Office Box 7338 Berkley, California 94707 Invitron Corporation Attn: Mr. Charles V. Benton, President 4649 LeBourget Drive St. Louis, Missouri 63134 Re: Purchase of 387,733 shares of Common Stock from Tanox Biosystems, Inc. Gentlemen: We have acted as counsel to Tanox Biosystems, Inc., a Texas corporation (the "Company"), and to Tse Wen Chang and Nancy T. Chang (the "Changs") in connection with the sale by the Company of 387,733 shares of common stock, $0.01 par value per share, in the aggregate (the "Stock"), to Alafi Capital Company, Shireen Alafi, Mr. Joseph Heskel, Trustee for Christopher Alafi, and Invitron Corporation (collectively, the "Purchasers"). This opinion is being provided to you pursuant to the provisions of that certain Stock Purchase Agreement dated effective July 9, 1987 (the "Agreement") between the Company and Purchasers. Unless otherwise required by the context thereof or separately defined herein, all capitalized terms used in this letter have the meanings set forth in the Agreement. Before rendering the opinions set forth below, we examined certain certificates of public officials, Restated Articles of Incorporation and Bylaws of the Company, the Agreement, that certain Voting Agreement dated effective July 9, 1987 (the <PAGE> Alafi Capital Company Invitron Corporation July __, 1987 Page 2 - ---------------------------------- "Voting Agreement") and such corporate and other available documents as we believed to be necessary for purposes of this opinion. In rendering this opinion, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified or photostatic copies. We have also assumed that such documents have been duly executed and delivered by all parties thereto other than the Company and the Changs and that there exists no facts arising out of or resulting from actions of such other parties which would impair in any manner the validity, binding effect, or enforceability of such documents against such other parties, as the case may be. In connection with rendering this opinion, we call your attention to the fact that our firm represents the Company only in connection with specific requests of the Company from time to time and that there may exist matters of a legal nature involving the Company with respect to which we have no knowledge. Nothing in this opinion is intended either to imply knowledge of matters or documents or the contents thereof of which we have no actual knowledge or to imply what we have made any independent factual investigations of such matters. We have discussed with representatives of the Company certain factual matters relative to our opinion. With respect to the accuracy of any factual matters relative to this opinion, we have relied upon such discussions, upon the representations of the Company contained in the Agreement, and upon certain certificates of government officials. We have also relied upon discussions with representatives of the Company to assess materiality with respect to any matters covered by our opinion which are so qualified. This opinion is further qualified by any exceptions, exclusions or other matters contained in the Agreement, the Voting Agreement, or set forth on exhibits or schedules attached to or incorporated as a part of the Agreement. We are licensed to practice only in the State of Texas and we have limited our opinion solely to the laws of the State of Texas and the federal laws of the United States. We express no opinions with regard to any matter which is covered by the laws of any other state or jurisdiction. Based upon and subject to the foregoing, we are of the opinion that: <PAGE> Alafi Capital Company Invitron Corporation July __, 1987 Page 3 - ---------------------------------- 1. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Texas and has the corporate power and authority to carry on its business as now conducted. The Company is not qualified to transact business in any other jurisdiction as a foreign corporation. We do not know of any activities of the Company which, with reasonable certainty, would give rise to an obligation of the Company to qualify in any other jurisdiction. 2. The authorized capital of the Company as established by the Restated Articles of Incorporation, filed with the Secretary of State on _________________, 1987, consists of ten million (10,000,000) shares of Common Stock and one million (1,000,000) shares of Preferred Stock. To our knowledge, there were outstanding immediately prior to the sale of the Stock to Purchasers, one million one hundred sixty-three thousand two hundred (1,163,200) shares of common stock. Two hundred thousand (200,000) shares have been reserved for issuance by the Company pursuant to the Tanox Biosystems, Inc. 1987 Stock Option Plan. 3. To our knowledge, the Company does not own, of record or beneficially, an equity interest in any other entity. 4. The Agreement has been duly executed by the Company and the Changs and constitutes a valid and binding obligation of the Company and the Changs, enforceable against each of the Company and the Changs in accordance with the terms thereof, except to the extent that enforcement thereof may be limited by applicable bankruptcy, insolvency, moratorium, and similar laws affecting creditors' rights generally, by the exercise of judicial discretion under generally applicable principles of equity or by the exercise of regulatory or judicial discretion under applicable securities laws. 5. The Stock to be sold by the Company to Purchasers in accordance with the Agreement has been duly authorized, and when delivered against payment for such Stock, will be validly issued, fully paid and nonassessable. We do not know of any matters relative to the status or actions of the Company in connection <PAGE> Alafi Capital Company Invitron Corporation July __, 1987 Page 4 - ---------------------------------- with the sale and issuance of the Stock pursuant to the Agreement which would eliminate the availability of exemptions from the registration or other qualification requirements of applicable state and federal securities laws, respectively, upon which the Company may rely. 6. To our knowledge, no consent, approval, order or authorization, or registration, qualification, designation, declaration or filing with, any federal, state, or local governmental authorition the part of the Company is legally required for the valid execution, delivery, and performance of the Agreement by the Company, except for such filings as may be required under applicable securities laws to claim the benefit of certain available exemptions from registration or other required qualification of securities. 7. To our knowledge, there is no action, suit, proceeding, or investigation pending, or currently threatened, against the Company which questions the validity of the Agreement or the right of the Company to consummate the sale of the Stock to Purchasers, or which might result, either individually or in the aggregate, in any material adverse change in the properties, financial condition or operations of the Company, and the Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or governmental agency or instrumentality. 8. The sale of the Stock pursuant to the Agreement does not violate and is not in conflict with any of the provisions of the Restated Articles of Incorporation or Bylaws, and, to our knowledge, does not result in a default under or violation of any agreement or instrument to which the Company is a party or by which the Company is bound, which breach or default would have a material adverse effect on the properties, financial condition, or operations of the Company. 9. The Voting Agreement has been duly executed and delivered by the Changs and constitutes a valid and binding obligation of the Changs. Under Article 2.30B of the Texas Business Corporation Act, upon deposit of a counterpart of a voting agreement with the corporation at its principal office and endorsement <PAGE> Alafi Capital Company Invitron Corporation July __, 1987 Page 5 - ---------------------------------- upon the certificate representing shares subject to such voting agreement of a statement that the shares represented by the certificate are subject to the provisions of a voting agreement, a counterpart of which has been deposited with the corporation at its principal office, such voting agreement shall be specifically enforceable in accordance with the principles of equity. The opinions expressed herein and the statements herein made are solely for the benefit of the addressees and may not be relied upon any other person without our prior written consent. ANDERSON, HARRELL & TIMBY, P.C. By:____________________________ David Anderson <PAGE> EXHIBIT 6(B) July __, 1987 Tanox Biosystems, Inc. 10301 Stella Link Houston, Texas 77025 Re: Stock Purchase Agreement with Invitron Corporation, Alafi Capital Company, Shireen Alafi and Joseph Heskel, as Trustee for Christopher Alafi Gentlemen: We have acted as counsel for Invitron Corporation, Alafi Capital Company ("ACC") , Shireen Alafi and Joseph Heskel, as Trustee for Christopher Alafi (collectively the "Investors") in connection with the issuance and sale by you of an aggregate of 387,733 shares of common stock, $0.01 par value per share (the "Stock") pursuant to a Stock Purchase Agreement dated as of July __, 1987 among the Investors, Tse Wen Chang, Nancy T. Chang and Tanox Biosystems, Inc. (the "Agreement") . As used in this opinion, the capitalized terms shall have the same meaning as ascribed to them in the Agreement unless the context otherwise requires. In connection with this opinion we have reviewed the Agreement, the Voting Agreement, the partnership agreement, as amended, of <PAGE> Tanox Biosystems, Inc. July __,1987 2. ACC, and limited partnership certificate of ACC, the trust agreement for Chistopher Alafi, the Certificate of Incorporation and Bylaws of Invitron Corporation and such other available documents as we believed necessary for this opinion. In rendering this opinion, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to original documents submitted to us as certified or photo- static copies. We have also assumed that such documents have been duly executed and delivered by all parties thereto other than the Investors and that there exist no facts arising out of or resulting from actions of such other parties which would impair in any manner the validity, binding effect, or enforceability of such documents against such other parties, as the case may be. While we are general counsel to ACC, there may exist matters of a legal nature involving ACC with respect to which we may have no knowledge. We are not general counsel to Invitron Corporation and represent it only in connection with specific matters referred to us. Nothing contained herein is intended either to imply knowledge of matters or documents or the contents thereof of which we have no actual knowledge or to imply that we have made any independent factual investigation of such matters. <PAGE> Tanox Biosystems, Inc. July __,1987 3. The opinions expressed herein are limited to the 1aws of the State of California and the federal laws of the United States. No opinion is expressed as to the law of any other jurisdiction. Based upon and subject to the foregoing, in accordance with the provisions of Section 6(b) of the Agreement, we hereby advise you of our opinion that: (a) ACC is a limited partnership duly organized, validly existing and in good standing under the laws of the State of California. (b) Invitron Corporation is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. (c) The Agreement has been duly executed by each of the Investors and constitutes a legal and valid binding obligation of each of them enforceable against each in accordance with the terms thereof, except as rights to indemnity may be limited by applicable laws and subject to laws of bankruptcy, insolvency and other laws of general application affecting rights and remedies of creditors, and further subject to general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). <PAGE> Tanox Biosystems, Inc. July __,1987 4. (d) We are not aware of any matters relative to the status or action of the Investors, or any of them, in connection with the purchase and receipt of the Stock pursuant to the Agreement which would eliminate the availability of exemptions from the registration or other qualification requirements of the Securities Act of 1933, as amended, or the California Corporate Securities Law of 1968, as amended, respectively, upon which the Company may rely. (e) To our knowledge, no consent, approval, order or authorization, or registration, qualification, designation, declaration or filing with, any federal, state, or local governmental authority on the part of the Investors, or any of them, is legally required for the valid execution, delivery, and performance of the Agreement by each of the the Investors, except for such filings as may be required under applicable securities laws to claim the benefit of certain available exemptions from registration or other required qualification of securities. (f) The purchase of the Stock pursuant to the Agreement does not violate and is not in conflict with any of the provisions, as applicable, of the Certificate of Incorporation or Bylaws of Invitron Corporation, the part- nership agreement of ACC, declaration of trust or other <PAGE> Tanox Biosystems, Inc. July __,1987 5. document or instrument by which the respective business affairs of each of the Investors is governed and, to our knowledge, does not result in a default under or violation of any agreement or instrument to which any of the Investors are a party or by which they are bound, which breach or default would have a material adverse effect on the properties, financial condition, or operations of the Company. (g) The Voting Agreement has been duly executed and delivered by each of the Investors and constitutes a valid and binding obligation of each of the Investors. The execution, delivery and performance thereof do not and will not violate any of the provisions, as applicable, of the Certificate of Incorporation or Bylaws of Invitron Corporation, the partnership agreement of ACC, declaration of trust or other document or instrument by which the respective business affairs of each of the Investors is governed. Very truly yours, BROBECK, PHLEGER & HARRISON By Robert E. Metz REM:tdn <PAGE> EXHIBIT 10.1 NON-DISCLOSURE AND SECRECY AGREEMENT THIS AGREEMENT (hereinafter referred to as the "Agreement") is made this the __ day of __, 1987, by and between TANOX BIOSYSTEMS, INC., a Texas corporation (referred to as the "Company"), and __________________________ (referred to as "Prospect"), affiliates of Prospect, and officials, agents, representatives, and employees of Prospect and such affiliates (the foregoing, collectively with Prospect, are referred to as the "Prospect Parties"). R E C I T A L S: A. The Company has certain know-how and rights to make, use and sell a patented process relating to the determination of antigenic substances by antibody-coated spots on a matrix (the "Patented Process") and, in addition thereto, has developed and in the future may acquire or develop certain other know-how, secret methods, procedures, and technology, ("Proprietary Technology") including, without limitation, know-how related to use of the Patented Process and know-how and trade secrets relating to, among other things, immunity against HTLV retro-viruses and medical diagnosis, prophylaxis and therapy against Acquired Immune Deficiency Syndrome ("AIDS") , which Proprietary Technology will be identified as such to the Prospect Parties at the time of any disclosure of same. The Prospect Parties desire to review the Patented Process and Proprietary Technology to assess the significance and value of same in connection with considering possible investment in the Company or such technology, in whole or in part, and, upon such investment, may continue to have certain access to such Proprietary Technology. B. During the course of such discussions and thereafter if an investment is made, the Company may disclose to the Prospect Parties or permit them to review both the Patented Process and Proprietary Technology and certain other information concerning the business of the Company which the Company desires to protect and preserve in confidence, including, without limitation, names of customers and suppliers, technical data, records, documents, specifications, operating and marketing techniques, business procedures and methods, financial reports and related proprietary information of the Company (all of which is referred to as the <PAGE> "Confidential Information"), which Confidential Information will be identified as such to the Prospect Parties at the time of any disclosure of same. C. Notwithstanding anything to the contrary contained in Recitals A or B above, no information supplied by the Company shall be deemed or considered to be Proprietary Technology or Confidential Information unless (i) if supplied in written form, the same is conspicuously identified as being proprietary or confidential, or (ii) if disclosed or supplied orally, the same is confirmed in written summary form within thirty (30) days of the oral disclosure and conspicuously identified as being proprietary or confidential. Accordingly, in consideration of the foregoing, and of the agreement of the Company to pursue such discussions, and subject to the acknowledgment hereby of the Prospect that such information is provided to them in reliance upon the relationship of confidence created hereby, the parties agree as follows: 1. OBLIGATIONS OF CONFIDENCE 1.l The Prospect agrees, represents and covenants that the Prospect Parties: (a) Will not disclose such Proprietary Technology or Confidential Information to others; (b) Will not use it, directly or indirectly, for their own account or benefit; (c) will not make, disclose or distribute, directly or indirectly, documents or copies of documents containing disclosures of such Proprietary Technology or Confidential Information, except to persons constituting the Prospect Parties; (d) As to any confidential documents which may be reviewed or delivered as a part of the meetings between the Company and the Prospect Parties, will treat them confidentially and mark them, if necessary, prior to distribution to other of the Prospect Parties, as proprietary, confidential documents not to be reproduced or otherwise used without the written consent of the Company; -2- <PAGE> EXHIBIT 10.7.1 <PAGE> [TANOX BIOSYSTEMS, INC. LETTERHEAD] October 27, 1989 Shireen Alafi and Christopher Alafi c/o Moshe Alafi P. O. Box 7338 Berkeley, California 94707 Dear Shireen and Christopher: As you know, we are currently seeking additional financing for the Company. Transactions currently being discussed include additional offerings of Tanox common stock and the equipment loan transaction now pending with Phoenix Venture Incorporated. Under the terms of the Stock Purchase Agreement dated July 14, 1987, among you, the Company and certain other shareholders, you retained certain rights with respect to subsequent offers of common stock and certain registration rights covering the shares which you acquired. To facilitate completion of the additional financing ttansactions contemplated, we would like to obtain your agreement to the following: 1. That you do not intend to exercise your right of first refusal with respect to future sales by the Company of its common stock and that your rights under Section 9 are agreed to be terminated and not be applicable to any financing transactions, including offers or sales of common stock, convertible securities, or options to acquire such securities, following this date; and 2. That the Company can enter into an agreement with any holder or prospective holder of securities of the Company that will allow such holder to include such securities in any registration of securities in which you would be entitled to participate under the provisions of Section 7, if the inclusion of such holder's securities would not reduce your registration rights on other than a prorata basis (based on the number of shares owned); and that such holders would be subject to any applicable limitations or obligations on a prorata basis, including the requirements of Section 7.6 "Underwriting Requirements" which permit the underwriters in any offering involving an underwriting of shares to limit, in accordance with such section, the number of shares which may be included by selling shareholders. <PAGE> If you are willing to agree to the above please sign and date the enclosed duplicate origina1 of this 1etter and return it to us your earliest convenience. Yours truly, /s/ NANCY T. CHANG Nancy T. Chang President ACKNOWLEDGED AND AGREED: /s/ SHIREEN ALAFI Shireen Alafi DATE: _________, 1989 /s/ CHRISTOPHER ALAFI Christopher Alafi DATE: _________, 1989 <PAGE> EXHIBIT 10.7.2 <PAGE> [TANOX BIOSYSTEMS, INC. LETTERHEAD] October 27, 1989 Alafi Capital Company Ann: Moshe Alafi, General Partner P.O. Box 7338 Berkeley, California 94707 Dear Moshe: As you know, we are currently seeking additional financing for the Company. Transactions currently being discussed include additional offerings of Tanox common stock and the equipment loan transaction now pending with Phoenix Venture Incorporated. Under the terms of the Stock Purchase Agreement dated July 14, 1987, among you, the Company and certain other shareholders, you retained certain rights with respect to subsequent offers of common stock and certain registration rights covering the shares which you acquired. To facilitate completion of the additional financing transactions contemplated, we would like to obtain your agreement to the following: 1. That you do not intend to exercise your right of first refusal with respect to future sales by the Company of its common stock and that your rights under Section 9 are agreed to be terminated and not be applicable to any financing transactions, including offers or sales of common stock, convertible securities, or options to acquire such securities, following this date; and 2. That the Company can enter into an agreement with any holder or prospective holder of securities of the Company that will allow such holder to include such securities in any registration of securities in which you would be entitled to participate under the provisions of Section 7, if the inclusion of such holder's securities would not reduce your registration rights on other than a pro rata basis (based on the number of shares owned); and that such holders would be subject to any applicable limitations or obligations on a pro rata basis, including the requirements of Section 7.6 "Underwriting Requirements" which permit the underwriters in any offering involving an underwriting of shares to limit, in accordance with such section, the number of shares which may be included by selling shareholders. <PAGE> If you are willing to agree to the above, please sign and date the enlcosed duplicate origina1 of this 1etter and return it to us your earliest convenience. Yours truly, /s/ NANCY T. CHANG Nancy T. Chang President ACKNOWLEDGED AND AGREED: Alafi Capital Company /s/ MOSHE ALAFI By: Moshe Alafi, General Partner Date: _____________, 1989. <PAGE> EXHIBIT 10.7.3 <PAGE> [INVITRON CORPORATION LETTERHEAD] November 13, 1989 Nancy T. Chang, Ph.D. President Tanox Biosystems, Inc. 10301 Stella Link Houston, TX 77025 Dear Nancy: This letter is being sent to you at your request to permit you to complete the equipment loan transaction now pending with Phoenix Venture Incorporated ("Phoenix Transaction"). Under the terms of the Stock Purchase Agreement dated July 14, 1987 (the "SPA"), among Invitron, Tanox Biosystems, Inc. ("the Company") and certain other shareholders, Invitron retained certain rights with respect to subsequent offers of common stock and certain registration rights covering the shares which Invitron acquired. To facilitate completion of the Phoenix Transaction, Invitron agrees to the following: 1. Invitron waives any rights that it may have under its right of first refusal with respect to the Phoenix Transaction and agrees that such transaction may be completed without violation of such rights; provided, that Invitron reserves its right of first refusal under Section 9 of the SPA with respect to future sales of securities by the Company, and Tanox agrees to extend such right. 2. Tanox can enter into an agreement with any holder or prospective holder of securities of Tanox that will allow such holder to include such securities in any registration of securities in which Invitron would be entitled to participate under the provisions of Section 7, if the inclusion of such holder's securities will not reduce Invitron's registration rights on other than a prorata basis (based on the number of shares owned); and that such holders will be subject to any applicable limitations or obligations on a pro rata basis, including requirements of Section 7.6 "Underwriting Requirements" which permit the underwriters in any offering involving an underwriting of shares to limit, in accordance with such section, the number of shares which may be included by selling shareholders. Please let us know if we can be of any further assistance in connection with the completion of the Phoenix Transaction. Sincerely, /s/ JOHN T. W. HAWKINS John T. W. Hawkins Senior Vice President, Finance Chief Financial Officer <PAGE> EXHIBIT 10.7.4 <PAGE> [TANOX BIOSYSTEMS, INC. LETTERHEAD] August 10, 1990 Via Federal Express Dr. H. F. Mohr Head of Pharma Licensing CIBA-GEIGY Limited CH4002 Basle, Switzerland Re: Acquisition of Tanox's Shares from Invitron Dear Dr. Mohr: This letter is intended to reflect the conclusions we have reached in our telephone conversation today as a follow-up to the correspondence from Dr. Nancy Chang to you on August 9 and your response of today. With respect to Ciba Geigy's anti-dilution rights, we agreed that purchase transactions, such as the Invitron transaction, will not influence at all the rights and obligations under our Stock Purchase Agreement (the "Agreement"), including those relating to anti-dilution under Section 6.04. Specifically, Ciba-Geigy will continue to have anti-dilution rights as they currently exist (at 7.3% ownership interest) or at the increased levels that result from additional purchases of Tanox Common Stock under the Agreement, notwithstanding any purchases of Tanox stock outside the Agreement. Tanox also will continue to provide Ciba-Geigy with notice of all applicable stock transactions as required under the Agreement so that Ciba-Geigy can exercise its anti-dilution rights, if desired. However, Ciba-Geigy also will have the right to timely advise Tanox that it desires to apply shares acquired from Invitron, as necessary, toward maintaining its anti-dilution rights at the level then applicable under the Agreement to avoid a reduction of such rights. Functionally, this means that after the closing of your transaction with Invitron, Tanox will still be obligated to give Ciba-Geigy the opportunity to purchase 7.3% of the shares being offered in the pending private placement transaction. Ciba-Geigy then will make a decision of whether or not it desires to acquire such shares. Also, as we have discussed, our consent to Ciba-Geigy's purchase of Tanox Common Stock owned by Invitron Corporation is based on our understanding as follows: (i) that such stock will be acquired subject to the provisions of that certain Voting Agreement among Invitron, Tanox, and other parties thereto, dated July 14, 1987 and (ii) that the only rights outstanding under that certain Stock Purchase Agreement among Invitron, Tanox, and other parties thereto, dated July 14, 1987, are the registration rights contained in Section 7, as supplemented by paragraph 2 of the Invitron letter dated November 13, 1989, included with <PAGE> Dr. H. F. Mohr August 10, 1990 Page Two this letter (the rights of first refusal referenced in paragraph one were subsequently terminated as a result of Invitron's failure to exercise them in connection with Ciba-Geigy's purchase of Tanox stock), and rights under Section 8 to receive certain financial information (which rights Ciba-Geigy already has under our Agreement). If this letter correctly reflects our mutual understandings and agreements, please execute the duplicate original of this letter to confirm same. To permit your transaction with Invitron to proceed without delay, we also are sending a copy of this letter via fax and will accept evidence of execution of this letter via fax, pending your return of one duplicate original. Please let me know if you have any questions or additional comments. Yours truly, /s/ DAVID ANDERSON David Anderson Executive Vice President Acknowledged and Agreed: CIBA-GEIGY Limited By: /s/ H. F. MOHR Name: H. F. Mohr Title: Head of Pharma Licensing By:: /s/ M. CLAUSEN Name: M. Clausen Title: Head of Licensing Office DA:nk cc: Dr. Nancy T. Chang EXHIBIT 10.10 CONFIDENTIAL TERM SHEET FOR SECURED LOAN BORROWER Tanox Biosystems, Inc. 10301 Stella Link Houston, Texas 77025 USA ("Tanox") LENDER CIBA-GEIGY Limited Klybeckstrasse 141, 4002 Easel, Switzerland ("Ciba") CREDIT U.S. $10,000,000 term loan ("the Loan"). No increase in the Loan may occur except on a subsequent decision of Ciba if additional funding is determined by both parties to be necessary to satisfy their mutual objectives. EFFECTIVE DATE The arrangements set out herein shall become effective at the time this Term Sheet is signed by both parties, subject as set forth in "Statement of Intent" below. STATEMENT OF INTENT This Term Sheet is intended to establish the basic terms of the above mentioned facility ("the Credit"), but should not be construed as including all the conditions and terms to which the Credit will be subject. Such terms will be contained in the definitive agreement(s) to be negotiated, executed and delivered in form and substance satisfactory to both parties and their legal counsel ("the Definitive Agreement(s)"). This Term Sheet will be binding on the parties with respect to the terms set forth herein and the parties agree to negotiate the Definitive Agreement(s) in good faith within the context of the terms and conditions outlined in this Term Sheet. The parties acknowledge that the Credit is intended as a loan arrangement between two joint development partners which will further the development of their shared product opportunity. This Term Sheet supersedes all previous conversations and negotiations between Tanox and Ciba regarding this matter. LOAN Ciba will advance to Tanox the total amount of the Loan in installments as hereinafter provided to enable Tanox to construct at its site in Houston, Texas, a plant for the scale up and optimization of a commercial production process for anti-IgE monoclonal antibodies and the production of such anti-IgE monoclonal antibodies in quantities sufficient for the conduct by Ciba of Phase III clinical trials and initial launch of the anti-IgE product ("the Anti-IgE Product") currently under development by Ciba and Tanox pursuant to the Development and Licensing Agreement between the parties dated <PAGE> 2 CONFIDENTIAL the 11th May, 1990 ("the Anti-Allergy Agreement"). The current status of, and details relating to, the Plant to be constructed and the principal equipment to be installed therein ("the Plant") as already discussed by the parties are set out in Schedule I hereto. A more definitive schedule relating to the Plant, including, if any, alterations and/or additions agreed by the parties since the date of such discussions will be included as a part of the Definitive Agreement(s). Tanox agrees to use the Loan solely to construct, validate and start-up the Plant, including without limitation, designing the Plant, or having it designed, and purchasing equipment therefor. Tanox will use commercially reasonable efforts in having the plant constructed in accordance with specifications and a timetable to be mutually agreed by the parties and to be set out in the Definitive Agreement(s). Ciba will cooperate in such efforts and will provide such timely advice, consultation and decisions regarding the design, construction, validation and start-up activities contemplated as may reasonably be requested by Tanox, or required under this Term Sheet or the Definitive Agreement(s). Any such costs incurred following completion of detailed engineering design which result from changes or modifications to the Plant specifically to improve its production capability or efficiency for CGP 56901 or other joint development products, if agreed by the parties, will be subject to reimbursement under procedures set forth in the Anti-A1lergy Agreement and any other agreements covering such other development products, as the case may be. WARRANTY In the Definitive Agreement(s) Tanox will make various representations and warranties customary in transactions comparable to the Credit, including, without limiting the generality of the foregoing, the following, and hereby warrants: (a) that it will not construct the Plant without first receiving or obtaining in good time all necessary permits of the appropriate authorities and/or its landlord for the construction of the Plant on the proposed construction site and Tanox is not aware of any reason why such permits would not be issued; and (b) that none of its assets is, or will at the time of the Definitive Agreement(s) be, subject to any charge or lien in favour of a third party which would rank senior in priority to the collateral security hereby proposed to be granted, except for statutory liens covering construction materials and services which will be eliminated on payment of bona fide charges. INSTALLMENTS - - The Loan will be made by Ciba in installments as follows: - - $3,000,000 within 7 days after the execution of this Term Sheet ("the Initial Date"); - - $4,000,000 within 14 days of the decision by both parties to proceed with development of the Anti-IgE Product based on the results of Phase IIa trials of the Anti-IgE Product which decision shall be taken within a reasonable time after the results of such trials are known, such period to be set forth in the Definitive Agreements(s); - - $2,000,000 within 14 days of start of validation of the Plant; - - $1,000,000 when the Plant has been completely constructed and the process fully demonstrated and validated for the above purpose ("the Commencement Date"). <PAGE> 3 CONFIDENTIAL If for any reason funding by Ciba is not continued following the initial $3,000,000 installment, Ciba agrees that it will forgive payment of one-half of such installment and Tanox shall remain obligated for repayment of the remaining one-half under the terms of this Term Sheet and the Definitive Agreement(s), including such provisions relating to termination which will be incorporated into the, Definitive Agreement(s) as provided below under "Loan Repayment". Tanox shall have the right to retain, to the extent possible, all drawings, equipment, materials, etc. which may have been funded by such installment; provided that Tanox will make available to Ciba for its use copies of any available drawings. Should Tanox dispose of such assets within 3 years, Tanox agrees to pay to Ciba one-half of any proceeds received, as well as any part of the $3,000,000 which has not been paid out or committed under contract by Tanox at the time funding is discontinued. LOAN REPAYMENT The principal and all accrued interest are due in full on the earlier of the eighth anniversary of the advance of the final installment of US $1,000,000 or December 31,2005, or earlier on the happening of an Event of Default as defined below. The Definitive Agreement(s) will include provisions, to be negotiated in good faith, which provide for the ways and means of easing the repayment terms/interest payments etc. to meet Tanox's needs at the relevant time, if Ciba should terminate the Anti-Allergy Agreement for any reason other than the default of Tanox under that Agreement or the Definitive Agreement(s). These measures will take into account the possibility of Tanox's using the Plant for the manufacture of other antibodies for Ciba, as well as ability to use the remainder of the Plant's capacity for other projects, none of which can be forecast at this moment in time. Tanox may repay the whole or any part of the Loan without penalty at any time prior to the due date of repayment on not less than 10 days prior written notice to Ciba; provided, that the amount of any partial repayment shall not be less than $100,000 and; provided, further, that any prepayment of principal shall be accompanied by a payment of the accrued unpaid interest on such principal balance prepaid. If Tanox elects to repay the Loan in full, it shall at the same time pay all outstanding interest. No part of the Loan following repayment thereof may be re-borrowed. All prepayments shall be applied fIrst to accrued unpaid interest, and then to principal. COLLATERAL SECURITY As security for the total amount of the Loan, Tanox will grant Ciba a fIrst priority perfected security interest on the Plant until such time as Ciba makes a decision regarding the joint venture as permitted in "Conversion Option" below. In the event of agreement to form a joint venture to own and operate the Plant, half the loan would be converted to Ciba's contribution to the joint venture and such assets would continue as security for the remainder of the Loan. Additionally, if no joint venture is formed, then should it be necessary for Ciba to enforce its security interests, Ciba will have a first priority perfected security interest on the remainder of Tanox's tangible assets (including, without limitation, cash and marketable securities) and such intangible assets as set forth below in "Intellectual Property" to the extent of the difference between the amount realized by reasonable disposal of the Plant and one-half of the total outstanding Loan amount. 4 CONFIDENTIAL <PAGE> 90 day Libor plus 2 per cent (but not to exceed 10% per year), reset quarterly on the first day of each calendar quarter using the previous business day's rate as published in the "Money Rates" section of the Wall Street Journal Southwest Edition, such interest not subject to compounding. INTEREST ACCRUAL Interest shall accrue daily as from the Initial Date on the amount of the Loan outstanding for the time being, using a 365/366 day year (as appropriate) as the basis for calculation. Ciba shall forgive interest on the Loan due at the end of each quarter between the Initial Date and the Commencement Date if Tanox, in the reasonable and fair judgment of Ciba, has fu1f1l1ed its obligations in relation to the construction of the Plant. To the extent applicable, if interest would otherwise be due hereunder, Ciba shall forgive interest on one-ha1f of the total amount of the Loan until such time as Ciba notifies Tanox of its decision not to proceed with a joint venture. INTEREST PAYMENT Interest shall be due and payable on the first day of each calendar quarter. Unless the Loan is repaid or repayable earlier, either voluntarily by Tanox or due to the occurence of an Event of Default, the first payment in respect of interest as from the Commencement Date shall fall due on the third anniversary of the Commencement Date. Tanox may defer until the third anniversary of the Commencement Date the payment of interest due at the end of any quarter between the Commencement Date and such third anniversary. PAYMENTS Any payments falling due on a date which is not a normal working day for both of the fInancial institutions (to be defined in the DefInitive Agreement(s)) used by Tanox and Ciba in performing their payment obligations shall instead be due on the next day which is a regular working day for both such institutions. CONVERSION OPTION At any time following the decision to proceed with Phase III clinical trials of the Anti-IgE Product pursuant to the Anti-Allergy Agreement, or following receipt from Tanox of notice of its intention to repay the whole or any part of the Loan as provided for in the paragraph headed "Loan Repayment" above, Ciba shall have an option to call for the establishment between the parties of a joint venture to own and operate the Plant, the detailed terms of the joint venture to be negotiated in good faith at the relevant time but to accord with the outline of terms annexed hereto as Schedule 2. In such event, Ciba shall forgive interest accrued on one-half of the total amount of the Loan and that one-half of the Loan shall be regarded as Ciba's contribution to the joint venture, the balance, Tanox's contribution, being repayable and bearing interest according to the terms of the Loan. <PAGE> 5 CONFIDENTIAL EVENTS OF DEFAULT The following shall be Events of Default: (a) if Tanox fails to pay any moneys due to Ciba beyond the tenth day after receipt of notice that payment is due; (b) if Tanox commits any act of bankruptcy, or it or a creditor files a petition for reorganization or liquidation under the Bankruptcy Code; (c) if Tanox enters into a compromise with its creditors, including, but not limited to, making an assignment or attempted assignment of the whole or a substantial portion of its assets for the benefit of its creditors; or (d) if Tanox makes any significant departure from the design of the Plant without Ciba's agreement or uses the Loan proceeds otherwise than for the construction of the Plant in accordance with the objectives of the Loan as outlined in the Term Sheet. CONSEQUENCES OF DEFAULT On the occurrence of an Event of Default the balance of the Loan outstanding at that time together with all accrued, unpaid interest from the Commencement Date shall be immediately due and payable. On non-repayment of the Loan and interest by Tanox within 30 days following the happening of an Event of Default, Ciba shall be entitled to enforce the security interests granted by Tanox, including taking over the Plant, Intellectual property (as defined below), ELAs/PLAs etc. INTELLECTUAL PROPERTY All Tanox's know-how and patents involved in the design, construction and operation of the Plant, as well as a first priority security interest on future revenues which Tanox or any permitted assignee would be entitled to receive from the exercise of its rights under the Anti-Allergy Agreement ("the Intellectual Property") shall be security for the Loan. Tanox shall not grant a license of such know-how and patents to a third party without the consent of Ciba pending Ciba's decision regarding the joint venture. If a joint venture is formed, then such know-how and patents shall be subject to the terms of the joint venture. USE OF PLANT Should Tanox use the Plant for the manufacture of products other than the Anti-IgE Product, it will give priority to the manufacture of the requirements of the parties for the Anti-IgE Product. TRANSFER OF CONTROL If partnership or control of Tanox is about to pass out of the hands of the present shareholders, except as the result of the normal dilutive effects of capital fund raising appropriate for the continuation of its business, Tanox will advise Ciba of such event prior to its occurrence and Ciba will have the right to require a modification or repayment of the Loan if Ciba, in its reasonable and fair judgement, determines that the person/persons or legal entity is/are unacceptable to Ciba. PUBLICITY Each party will keep confidential all information relating to the terms hereof and of the Loan, and to the conclusion or intended conclusion of the financial arrangements and other transactions hereby contemplated, provided however that reference to such terms, the loan arrangements and other <PAGE> 6 CONFIDENTIAL transactions required by law or regulation sha11 not be regarded as a breach of this confidentiality obligation. APPLICABLE LAW The terms of the Loan, the Definitive Agreement(s) and any other instruments executed in connection therewith shall be governed by and interpreted in accordance with the laws of the State of New York. ASSIGNMENTS The Loan and the Definitive Agreement(s) evidencing the same and any other rights or duties of Ciba and Tanox may be assigned and delegated to affiliates of Ciba and Tanox without the consent of the other in the event of a decision to form the joint venture, provided, that the collateral security hereby granted to Ciba is not thereby prejudiced, or by Ciba alone if Ciba should enforce the security for the Loan. In any other case, neither party sha11 assign its rights or obligations hereunder without the written consent of the other party. As WITNESS the signatures of the representatives of the parties hereto Tanox Biosystems, Inc. By: D. ANDERSON Name: D. Anderson Title: Exe. V.P. Date: 12/9/94 CIBA-GEIGY Limited By: M. SUNDMAN Name: M. Sundman Title: Head of Business Development Date: 13th December, 1994 By: R.E. WALKER Name: R.E. Walker Title: Division Counsel Date: 13th December, 1994 <PAGE> SCHEDULE 1 ATTACHMENTS (1) The projected pilot/1aunch facility schedule (2) The preliminary pilot/launch facility floor plan (3) The pilot/launch facility major equipment list <PAGE> (1) THE PROJECTED PILOT/LAUNCH FACILITY SCHEDULE 1994 1995 1996 1997 |_____|______||_____|______|_____|______||_____|______|_____|______||____|____| BIOREACTOR DELIVERY INSTALLATION |________________________|_____| DESIGN BID/AWARD |______________|_______| CONSTRUCTION |____________________| VALIDATION |______________| START-UP PRODUCTION |____________| <PAGE> GRAPHIC OF THE PRELIMINARY PILOT/LAUNCH FACILITY FLOOR PLAN <PAGE> (3) THE PILOT/LAUNCH FACILITY MAJOR EQUIPMENT LIST 3.1 Fermentation Area: a. One 20 liter skid-mounted bioreactor systems b. One 225 liter bioreactor system c. One 1500 liter bioreactor system d. Three medium supplement cans 3.2 Inoculum Preparation Lab: a. One CO2 incubator b. One laminar flow hood c. One lab centrifuge d. One liquid nitrogen canister 3.3 Intermediate Purification: a. One 1500 liter harvest tank b. One 500 liter permeate tank c. One cell removal transmembrane filtration skid 3.4 purification: a. One protein A column b. One HIC column c. One anion exchange column d. One tangential flow filtration system e. One column processing skid f. One laminar flow hood, horizontal, class 100 g. Two product tanks, lOO liter, with agitator and filter h. One product tank, 300 liter, with agitator and filter 3.5 Wash/Sterilization: a. One autoclave, 2' x 3', double door b. One glassware washer c. One sink d. One CIP system 3.6 Solution Preparation: a. One 1200 liter medium preparation tank with agitator and. filter b. One medium transfer/filtration skid c. One 300 liter medium tank with agitator and filter <PAGE> d. One 300 liter buffer tank with agitator and filter e. One buffer transfer/filtration skid f. Two 700 liter buffer tanks with agitators and filters g. Two 150 liter buffer tanks with agitators and filters h. Two lOO liter buffer tanks with agitators and filters i. One laminar flow hood j. One WFI point-of-use cooler k. One CIP system 3.7 Utility Room: a. One USP purified water system, 60 LPM peak demand b. One WFI still, 105 GPH c. One WFI storage tank, 4000 liter d. One clean steam generator, 730 lb/HG e. One boiler, 2500 lb/HR f. One chiller, 90 tons g. One decontamination autoclave, 2' x.2', single door h. Two neutralization tanks, 4000 liter 3.8 Miscellaneous: a. One cold room, 110 sq. ft. <PAGE> -8- SCHEDULE 2 PROPOSED JOINT VENTURE AGREEMENT BETWEEN TANOX BIOSYSTEMS, INC. ("TANOX") AND CIBA-GEIGY LIMITED ("CG") OR AFFILIATES THEREOF COVERING A PILOT PLANT FOR THE MANUFACTURE OF THERAPEUTIC MONOCLONAL ANTIBODIES. This Schedule 2 is intended as an outline of the basic structure of a joint venture and should not be construed as including all the conditions and terms of such joint venture. It is a statement of intent only, is not intended as a binding agreement, and is subject to the negotiation of definitive agreements setting forth the terms and provisions hereof. Any such definitive agreements would be subject to approval of (i) the applicable regulatory authorities, (ii) the managements of Tanox and CG, and (iii) any other parties to such definitive agreements. 1. BACKGROUND Tanox and CG are engaged in a project aimed at the development of anti-IgE monoclonal antibodies (i.e., CGP 51901 and CGP 56901) to treat IgE-mediated reactions such as allergies, under the agreement between the partners dated May 11, 1990 (the " Allergy Project"). Neither party has as yet the manufacturing facilities which can provide antibody products in amounts sufficient for large scale clinical trails or for commercialization. The parties therefore intend to plan jointly and make available the necessary manufacturing facilities in a location close to Tanox's present site. While the parties now contemplate the eventual construction or acquisition of a commercial manufacturing facility, such a decision will be reserved for a later date. The scope of the proposed joint venture ("JV") is the construction and operation of a pilot plant manufacturing facility ("Pilot Facility"). 2. STATEMENT OF OBJECTIVES: The Joint Venture ("JV") will establish a Pilot Facility for animal cell culture derived products, in particular CGP 56901. Specific objectives of the JV wi11 be the: - Production of clinical materials for pivotal trials, with top initial priority given to the manufacture of product for the Anti-Allergy Project. - Scale-up and optimisation of the commercial production process. - Development of technology, know-how, expertise and resources for later integration into large scale commercial facility applications. <PAGE> -9- - Initial launch of small volume products. 3. PRINCIPLES OF FORMATION 3.1 NAME The name for the JV wi11 be agreed by the parties, but will include the names Ciba and Tanox mentioned clearly for regulatory and marketing purposes. 3.2 LEGAL ENTITY The parties contemp1ate formation of a legal entity which will be taxed as a partnership. It may be in the form of a general partnership, limited partnership or limited liability company as the parties may agree to be in their best interests. 3.3 LOCATION Location of the Pilot Facility will be Houston, Texas within facilities subleased to the JV by Tanox on commercially reasonable terms. 3.4 CAPITAL STRUCTURE Both parties shall contribute equally to the JV the initial and all future capital contributions. The parties intend to enter into separate agreements whereby CG would finance a portion of Tanox's 50% commitment at terms to be agreed between the parties. An estimate of costs prior to the start of operations and a planned schedule of investment outlays is provided as Attachment 1. (NB THE ORIGINAL IS OUT OR DATE AND REQUIRES REVISION.) 3.5 OWNERSHIP OR ELA/PLA Ownership of the Establishment License Application and the Product License Application will be by the JV as an independent entity. 3.6 ALLOCATION OF PROFITS AND LOSSES Both parties will share in start-up and operating expenses and share profits and losses according to a formula to be agreed taking into account the relative financial and management contributions each of the parties will agree to make to the JV. 4. PRINCIPLES OF OPERATION 4.1 MANAGEMENT STRUCTURE/STAFFING: 4.1.1 MANAGEMENT COMMITTEE - 2 members from each partner - approves annual budget and operation plans <PAGE> -10- - approves all contracts (including manufacturing and supply contracts) having individually a value or cost in excess of $50,000 with each partner or third party - approves the compounds to be manufactured by the JV - provides conflict resolution - approves appointment and dismissal of senior personnel - approves transfer pricing - decides on such other matters as shall be agreed by the partners. 4.1.2 OPERATIONS COMMITTEE - up to 3 members for each partner, plus the plant manager and other JV employees, as agreed. - submits budgets and operational plans of the JV annually - submits contracts with each partner and with third parties - reviews technologies used, in order to assure a "state of the art" situation - monitors progress of the build-up of the JV against plan - proposes compounds to be manufactured by the JV - supervises staffing and plant management The Chairmanship of the Operations and Management Committees will rotate annually between the partners. Meetings of the Management Committee will take place two times per year, or for specific requirements. The Operations Committee will meet as often as required. 4.1.3 It is envisaged that the JV will be initially staffed by employees of either partner. and that there will be JV employees once the pilot plant becomes operational. Management and staff of the JV may continue to be employees of either partner. <PAGE> -11- 4.2 POLICIES AND PROCEDURES The Management and Operations Committees prior to the start of the Pilot Facility operations will establish policies and procedures covering operations of the Joint Venture with particular emphasis on policies intended to assure compliance by the Joint Venture with all regulatory, safety, and environmental requirements, and to assure establishment of quality assurance and control procedures necessary to ensure the highest product quality commercially reasonable. The Management and Operations Committees will also establish estimates of running costs of the facility and procedures for proper allocation of costs of the facility. subject to the guidelines set forth in the JV agreement 5. SCOPE OF ACTIVITIES 5.1 CONSTRUCTION ACTIVITIES To the extent that the plant has not already been completed, the JV will be responsible for the planning and construction of the Pilot Facility. The Pilot Facility should be validated and ready to be used for the production of material for pivotal trials in the Allergy Project in the second quarter of 199*. This plant is planned to have an initial capacity of **** (about * active substance / per annum), with possible expansion capabilities. 5.2 PRODUCTION ACTIVITIES The Pilot Facility will manufacture for the projects of both partners as outlined in paragraph 2 (Statement of Objectives). Priority will be given to collaborative anti-IgE monoclonal antibody product under CGI/Tanox joint development. Preference will always be given to such joint projects in situations of short capacity. When capacity is available, the JV will also manufacture other cell culture derived products generated by CG and other cell culture derived products generated by Tanox. If there is spare capacity available, the JV will also accept all toll manufacturing for third parries. 6. TRANSFER PRICING The JV will set the transfer prices of compounds to the partners so that the profit will reasonably compensate for the risk of the investment in the JV. Establishment of transfer prices for the respective products manufactured by the JV will be based on the following guidelines: - For Allergy Project products transfer prices would not be less than total manufacturing cost plus 20%. <PAGE> -12 - - For Allergy Project products, if the JV can successfully reduce transfer prices by achieving cost reductions prior to or following product launch, the JV would be entitled to share in such benefits by an appropriate increase in its profit percentage. - For products manufactured for other projects of the partners, guidelines to be agreed would apply. - For allocation of costs not directly chargeable to product manufacturing such as overhead, the operating capacity required for the Allergy -Project will be assumed to be......% - For other activities undertaken by the JV, including toll manufacturing for third parties, the JV would establish prices based on market conditions and achievement of its operating objectives. 7. OWNERSHIP OR KNOW-HOW AND TECHNOLOGIES: In principle, know-how and technology developed by JV employees will be owned by the JV, whereby the partners and their affiliates will have a free license to use such know-how and technology for their own purposes. Know-how developed by employees of each partner in the context of JV activities will flow freely between the two partners, and may be used by them and their affiliates. Technology (represented by patents) developed by employees of either partner will be owned by such partner and will flow freely to the JV for JV purposes. If either partner should desire to use such technology in the context of its own manufacturing operations separate from the JV, the partner holding such technology will negotiate in good faith a license for such technology on reasonable terms. Use by third parties, if any, will be negotiated by the JV or the partner owning such technology at arm's length. 8. DURATION OF THE JV: The JV will exist as long as the parties agree to continue in the venture or until one party buys out the other. 9. CONFLICT RESOLUTIONS: Problems that cannot be resolved or agreed upon by the Management Committee of the JV shall go to Top Management of Tanox and CG's Pharma Division (For Tanox Dr. N. Chang, and for CG Mr. P.E. Douaze or another member of CG's Pharma Division Management). If the Management Committee so chooses, opinion of outside experts may be solicited in order to resolve such problems in a procedure <PAGE> -13 - to be agreed mutually prior to finalisation of the JV documentation. Should an agreement using such procedures not be possible, then either party will have the right to submit the matter to arbitration. 10. TERMINATION: The following principles shall apply: 10.1 in the event of change of control of one of the partners, the other partner will have the possibility to buy out the other partner at a "fair market value" in a procedure to be mutually agreed. 10.2 In the event of breach or bankruptcy of one partner, the other partner should have the possibility to buy-out at the lesser of "fair market value" less a certain percentage (penalty), or the cash input at time value. 10.3 If either partner wishes to leave the JV. it must offer its share first to the other party, at a price equal to such partner's capital contribution plus interest at a rate to be agreed. If the other partner does not accept this offer within three months of receipt of the offer, then the partner which made the offer may sell its share to another interested party within a period of one year at a price not less than that at which it offered its share to the other partner. The remaining partner has the right to approve the choice of purchaser; such approval not be unreasonably withheld. 10.4 The JV can be terminated any time by mutual agreement of the partners. EXHIBIT 10.12 STOCK PURCHASE AGREEMENT Agreement entered into as of March 12, 1998, by and among Tanox Biosystems, Inc., a Texas corporation having its principal office in Houston, Texas ("Tanox"), and the holders of shares of the capital stock of PanGenetics B.V. (the "Company") affixing their signatures hereto and listed on Annex I hereto (collectively, the "Sellers"). Tanox and the Sellers are sometimes referred to singularly as a "Party" or collectively as the "Parties." BACKGROUND The Sellers own all of the outstanding capital stock of the Company, a private limited liability company organized under the laws of The Netherlands having its principal office in Amsterdam, The Netherlands. Subject to the suspensive conditions and contingencies contained herein and as more particularly described hereinafter, this Agreement sets out the terms and conditions of a transaction in which Tanox is purchasing from the Sellers, and the Sellers are selling to Tanox, all of the outstanding capital stock of the Company in return for cash and shares of the common capital stock of Tanox, .01 USD par value. Now, therefore, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows. ARTICLE I DEFINITIONS SECTION 1.1 DEFINITIONS. Where used in this Agreement, the following words and terms shall have the respective definitions (and such definitions shall be equally applicable to the singular and plural forms, and all grammatical variations, of such terms): "Adverse Consequences" means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, liabilities, obligations, Taxes, liens, losses, expenses, and fees, including court costs and attorneys' fees and expenses, resulting from or arising out of a breach of this Agreement, including any of the representations, warranties, covenants and other obligations contained herein. "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified Person. <PAGE> "Confidential Information" shall have the meaning ascribed to it in that certain Confidentiality Agreement between Tanox and the Company effective December 12, 1997. "Employee Benefit Plan" means any pension or other retirement plan or arrangement or material fringe benefit plan or program. "GAAP" means generally accepted accounting principles as in effect in The Netherlands from time to time. "Intellectual Property" means (i) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, divisions, revisions, extensions, and reexaminations thereof, (ii) all trademarks, service marks, trade dress, logos, trade names, and corporate names, including all goodwill associated therewith, and. all applications, registrations, and renewals in connection therewith, (iii) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (iv) all mask works and all applications, registrations, and renewals in connection therewith, (v) all trade secrets and all other proprietary or confidential, technical, scientific, financial or business information (including ideas, inventions, research and development data, protocols and results, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, and business and marketing plans and proposals), (vi) all computer software (including data and related documentation), (vii) all other proprietary information or rights, and (viii) all copies and tangible embodiments thereof (in whatever form or medium). "Liability" means any liability (whether or not known, asserted, contingent, accrued, liquidated, or due), including any liability for Taxes, which is not included in the Financial Statements [as defined in Section IV(E)]or otherwise disclosed in the Disclosure Schedule (as defined in Article IV) attached hereto. "Person" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "R&D Programs" means any and all research and development activities currently being pursued by the Company or in which the Company has an interest of any kind, whether or not such activities or interest relate to the Intellectual Property of the Company or of a third party. "Security Interests" means any mortgage, pledge, lien, encumbrance, charge, or other security interest. "Taxes" means any state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, profits, withholding, social security (or similar), real property, personal property, sales, use, transfer, registration, value added, 2 <PAGE> estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. SECTION 1.2 OTHER DEFINITIONS. The terms used in this Agreement which are defined in (a) the preface of this Agreement, (b) the recitals of this Agreement and (c) the further Sections of this Agreement shall have the respective definitions therein ascribed to them. ARTICLE II PURCHASE AND SALE OF COMPANY SHARES SECTION II.1 PURCHASE AND SALE (A) Basic Transaction. On and subject to the terms and conditions of this Agreement, Tanox hereby purchases from the Sellers (including those Sellers which acquired their shares by exercise of options as of the date hereof), and the Sellers hereby sell and shall transfer to Tanox, such number of their shares of capital stock of the Company (the "Company Shares") as is set forth in Annex 2, for an aggregate consideration of up to 278,629 shares of the common stock of Tanox ("Tanox Stock") and up to 613,870 USD cash (collectively, the "Consideration"). The total amount of the Consideration shall be payable in three installments as follows: . (a) In accordance with the closing procedure specified in Section II.3 below, Tanox will deliver to Sellers, in the aggregate, 92,878 shares of Tanox Stock and 204,620 USD cash contemporaneously with the execution of this Agreement; (b) Subject to the Contingencies, Tanox will deliver to Sellers, in the aggregate, 92,877 shares of Tanox Stock and 204,624 USD cash 18 months following the date of this Agreement ("Closing Date"); and (c) Subject to the Contingencies, Tanox will deliver to Sellers, in the aggregate, 92,874 shares of Tanox Stock and 204,626 USD cash 36 months following the Closing Date. If for any reason Tanox should fail to complete both the second and third installments as required above, except to the extent same may not be required due to the Contingencies, Tanox shall be required to reassign, transfer and deliver to Sellers two-thirds of the Company Shares. If only the third installment is not made when due, except to the extent same may not be required due to the Contingencies, Tanox shall be obligated to reassign, transfer and deliver to Sellers a sufficient number of the Company Shares to reduce Tanox's ownership in the Company to 49 %. Additionally, any technology rights received 3 <PAGE> by Tanox at Closing shall be reassigned by Tanox to the Company, subject to Tanox's right or joint right of ownership, respectively, in any technology and/or products invented or jointly invented by Tanox and the Company and/or Sellers (or anyone of them). Until such time as Tanox has completed delivery of the Total Consideration, as required under this Agreement, the Company, except with consent of M. de Boer as the authorized representative of Sellers, shall not sell, transfer or assign any of its technology or products listed in the Disclosure Schedule except in accordance with the requirements of any obligations existing as of the Closing Date. The signature of M. de Boer on any such sale, transfer or assignment documents shall be conclusive evidence of such consent. Notwithstanding the foregoing, the Company shall be entitled to enter into license or collaboration transactions with third parties without Sellers consent and with Tanox, with the consent of M. de Boer as provided above. (B) Suspensive Condition. On and subject to the terms and conditions of this Agreement, Tanox shall be obligated to purchase, and M. de Boer shall be obligated to sell, all of those Company Shares owned by M. de Boer and not included with the Basic Transaction in Section II.1 (A) above (the "Suspended Shares") at such time as the securities of Tanox are registered in an initial public offering under the Securities Act of 1933, as amended, or comparable registration procedures in a foreign jurisdiction or otherwise become publicly tradable, whether directly or indirectly by merger (collectively an "IPO Transaction"). Additionally, M. de Boer shall have the right in his sole discretion to require the purchase of all his Suspended Shares by Tanox in accordance with this Section II.1 (B) (the "Put Option") at any time within five (5) years following the Closing Date; provided, however, that if such Put Option has not been executed within five (5) years following the Closing Date, M. de Boer shall be obligated to sell the Suspended Shares to Tanox at such time in accordance with the terms and conditions applicable to the exercise of such Put Option set forth herein. If an IPO Transaction or Put Option occurs prior to 18 months following the Closing Date, all of the Suspended Shares shall be acquired by Tanox for the total consideration in USD cash and Tanox Stock set forth below ("Suspended Consideration"), such Suspended Consideration to be paid at the times indicated, subject to the Contingencies (as defined below): Suspended Consideration ----------------------------- Cash Tanox Shares ------- ------------------ When acquired ......................... 128,710 58,420 At 18 months after .................... 128,710 58,420 Closing Date At 36 months after .................... 128,710 58,420 Closing Date 4 <PAGE> If an IPO Transaction or Put Option occurs after 18 months following the Closing Date, all of the Suspended Shares shall be acquired by Tanox for the Suspended Consideration set forth below J such Suspended Consideration to be paid the times indicated I subject to the Contingencies: Suspended Consideration ----------------------------- Cash Tanox Shares ------- ------------------ When acquired ......................... 257,420 116,840 At 36 months after .................... 128,710 58,420 Closing Date If the IPO Transaction or Put Option occurs after 36 months following the Closing Date then all of the Suspended Consideration shall be due and payable at the time of closing of the purchase of the Suspended Shares. The closing of the purchase of the Suspended Shares shall occur within thirty days following the closing of the IPO Transaction or receipt of written notice from M. de Boer of the exercise of the Put Option. At closing, all Suspended Shares shall be transferred and delivered to Tanox and Tanox shall deliver the Suspended Consideration then due. Tanox and M. de Boer shall cooperate in good faith and execute all documents and take all actions necessary to accomplish a sale and purchase of the Suspended Shares as required hereunder. The transaction contemplated by this Section II.1 (8) shall be effected if and when Tanox may receive written notice from M. de Boer that he desires to effect a Put Option or upon the occurrence of an IPO Transaction. Sellers, including M. de Boer, acknowledge that the total amount of the Consideration and Suspended Consideration to be paid by Tanox under Section II.1 (A) and this section II.1 (8), respectively, is contingent on certain facts and circumstances regarding the Company's R&D Programs and key employees, as set forth in Section II.4 below (collectively, the "Contingencies"). SECTION II.2 ALLOCATION OF THE CONSIDERATION. Tanox shall allocate the Tanox Stock and cash portions of the Consideration to the Sellers pro rata to their respective interests in the Company Shares. The allocation of the Consideration in accordance with the foregoing is set forth in Annex 2. The Parties agree that delivery of the Consideration to Sellers as specified in Annex 2 (or as otherwise agreed in Section II.4(A) below) shall satisfy all obligations of Tanox to pay the Consideration and that Tanox shall not have or incur any liability to any Seller as a result of such agreed allocation. Further, for the sole purpose of providing M. de Boer with additional cash to satisfy any liability for taxes, Tanox has agreed that it will accelerate payment of the cash portion of the Consideration to be delivered at 18 and 36 months and also the Suspended Consideration if the Put Option or IPO Transaction has occurred, upon receipt of notice of such request of M. de Boer, accompanied by satisfactory evidence of the amount of the Taxes then due; provided, that the amount accelerated hereunder will not exceed the amount of any such 5 <PAGE> liability for Taxes less the aggregate amount of the cash portion of the Consideration paid at Closing. Tanox shall make any accelerated payment of cash due hereunder within 10 days prior to the date payment of any such Taxes is due. SECTION II.3 THE CLOSING. The Parties' acknowledge that closing of the transactions contemplated by this Agreement (the "Closing") and deliveries required in connection with the Closing have taken place in the following manner at the offices of Sellers' attorneys before a notary ("Notary") with legal authority to acknowledge and register the transfer of the notorial deeds of transfer: (a) Sellers and Tanox have furnished evidence that all actions r6quired prior to Closing have been completed and any required certificates, instruments, and documents have been executed and delivered, including a Voting Agreement in the form of Exhibit A as provided in Section III.1 (I); (b) Sellers have transferred to Tanox the required Company Shares, free and clear of all liens, claims, restrictions, encumbrances, or other impediments to the complete, fu)1 and unfettered transfer of ownership thereof, by means of the execution and delivery of a notarial deed of transfer in accordance with the draft of such deed attached as Exhibit B; (c) Tanox has delivered to the Sellers the Consideration specified in Section II.1 (A) (a) above by delivering a stock certificate to each of the Sellers in the number of shares of Tanox Stock stated beside Sellers' name at the Closing Date on Annex 2 and by wire transfer of the aggregate cash to be paid to Sellers on the Closing Date into the account of the Notary for disbursement to Sellers in accordance with Annex 2; and (d) As soon as possible following Closing, shareholders resolutions will be executed to authorize amendment of the articles of association of the Company to read in full as set forth in Exhibit C (subject to a change of the name of the Company in the manner determined by Tanox), and to increase the managing board to include Nancy T. Chang, as chair person, and David Thomas. At Closing, Sellers, in their position as shareholders of the Company, together with M. de Boer, in his position as managing director, and Tanox, as. purchasing shareholder, expressly agree and consent to appointment of David Anderson as a member, with M. de Boer, of the managing board of the Company and to the requirement that the signatures of at least two managing directors, acting jointly, shall be required to obligate the Company. David Anderson, as a newly appointed managing director, also agrees with the requirement of two signatures. The additional Consideration anticipated in accordance with Section II.1 (A) (b) and (c) above and the Suspended Consideration as provided in Section II.1 (B) above, both of which are subject to the Contingencies and shall be reduced by any amount accelerated under Section II.2 above, shall be delivered at 18 months and 36 months, respectively, (or as otherwise required) in the manner reasonably requested by the respective Sellers. 6 <PAGE> SECTION II.4 CONTINGENCIES. In the event that certain Contingencies (set forth below) occur, the aggregate maximum amount of the Consideration and Suspended Consideration to be delivered to Sellers and M. de Boer, respectively, in Section II.1 above shall be reduced by the specific amount directly related to each such Contingency as agreed below. (A) Key Services. Included as Sellers are a key employee and a key consultant of the Company. The Parties agree that Dr. M. de Boer and Dr. J.W. Larrick (as described and agreed to in their respective employment and consultant agreements, which are intended to be executed simultaneously with this Agreement) will continue with the Company as employee and consultant, respectively, for a minimum of 36 months following the execution of those agreements. The loss of services of Dr. M. de Boer and Dr. J.W. Larrick or their failure to continue, in good faith, to provide the Company with the full benefit (as specified in their respective employment and consulting agreements with the Company) of their scientific capabilities in connection with the pursuit of the R&D Programs and the origination of new research ideas will have a material adverse effect on the Company. Therefore, the loss of services of either or both Dr. M. de Boer or Dr. J. W. Larrick at any time before the end of the 36 month period shall cause the termination, without further liability or obligation of any kind, of Tanox's obligations to deliver the portion of the Consideration and Suspended Consideration (collectively, the "Total Consideration") set forth below for the person whose services have been lost to the Company, or for both of them, if the services of both have been lost to the Company. Total Consideration Reduced Services Lost Cash / Tanox Stock ------------- --------------------------- Prior to 18 months Dr. M. de Boer .............................. 271,720 126,667 Dr. J.W. Larrick ............................ 271,720 126,667 Between 18 and 36 months Dr. M. de Boer .............................. 135,860 63,333 Dr. J.W. Larrick ............................ 135,860 63,333 Such reduction of the Total Consideration shall be deducted from the Consideration due Sellers under Section II.1 (A)(C) above and the Suspended Consideration due M. de Boer under Section II.1 (B) above pro rata to their respective amounts due. Notwithstanding the above, if, during the 36 month period following the Closing Date, either the Company or Tanox decides that either Dr. M. de Boer or Dr. J. W. Larrick, or both of them, are no longer needed by either the Company or Tanox and requests their termination (for other than breach of their respective employment and consulting agreements for an important or urgent cause as 7 <PAGE> defined in the Dutch Civil Code), all remaining Consideration and Suspended Consideration otherwise due will continue to be due and will be delivered as provided in Section II.1 in accordance with Annex 2. (B) Upither B. V. The Company and the Faculty of Veterinary Medicine of Utrecht University ("FVM-UU") are parties to a shareholders' agreement and letter of intent which provide certain rights to the Company to license technology, including patents and biological materials, owned in whole or in part by FVM-UU, relating to HSP vaccines and MT hsp 60 peptides (collectively; "HSP Products") and novel autoantigens ("Other Products"). The Company and FVM-UU are currently pursuing negotiations to finalize an agreement(s) to clearly establish the objectives of Upither B. V. and the rights of the Company to technologies, biological materials and patents necessary to permit the Company to develop and commercialize HSP Products and Other Products alone or in collaboration with other third parties, including Yamanouchi. The Company has represented that such negotiations can be concluded on a basis at least as. favorable to the Company as contemplated by the shareholders' agreement dated as of June 6, 1996, and/or letter of intent dated as of June 17, 1997, which agreements are identified more -particularly on the Disclosure Schedule and that certain letter of intent, a copy of which is attached to this Agreement as Exhibit D, which is intended to supersede the shareholder's agreement and prior letter of intent. Failure of the Company to be able to secure rights to the HSP Products and Other Products within six (6) months following Closing at least in the manner and to the extent contemplated by foregoing agreements (providing that sufficient funds are available as required to conclude the contemplated transactions with FVM-UU) shall result in a termination of Tanox's obligation to deliver the third installment of the Consideration due Sellers under Section II.1 (A)(c) above and one-third of (i) the sum of the Consideration paid to M. de Boer at Closing plus (ii) the total Suspended Consideration due M. de Boer under Section II.1 (B) above. If the rights to be secured as contemplated in the preceding sentence are secured in part but not in full, the Parties shall agree on an appropriate reduction of the Total Consideration that is less than the reduction contemplated by the preceding sentence. (C) Origination of Additional Projects. An objective of the Company following Closing is to originate at least three (3) additional projects ("New Projects") which may be pursued by either the Company and/or Tanox (excluding any projects or ideas identified on the summary description of the Company's "Project priorities 1998" dated January 1998 and provided to Tanox prior to the Closing). New Projects which are originated shall be projects of evident scientific merit based on review and recommendation for further research and development by both (i) an internal scientific review committee which includes representatives of both Tanox and the Sellers and (ii) the independent scientific advisors to Tanox which are members of Tanox's Scientific Advisory Board or similar scientific consultants. Failure of the Company to originate at least three New Projects prior to delivery of the Consideration due Sellers under Section II.1 (A)(c) above shall result in a reduction of the Total Consideration as follows: 8 <PAGE> No. of Projects Originated % of Total Consideration Reduced -------------------------- -------------------------------- -0- 30% 1 20% 2 10% Such reduction of the Total Consideration shall be deducted from the Consideration due Sellers under Section II.1 (A)(c) above and the Suspended Consideration due M. de Boer under Section II.1 (B) above. pro rata to their respective amounts due. (D) Subsidy Agreements. The Company is a party to certain subsidy agreements pursuant to which it receives certain funding, including an agreement with the Dutch government relating to the B7 imrnunotoxin/P8TS project and an agreement including the European Community relating to the Company's project to develop CD40 Products. The Company has certain obligations under these agreements and the agreements also require certain notices and approvals in connection with changes of ownership of the Company. Any net negative change in aggregate subsidy received from the current status of the subsidies the Company has received, or has received notice of commitments to receive, which occurs during the 36 months following the Closing Date, will be deducted from the third installment of the Consideration due Sellers under Section II.1 (A)(c) above and the Suspended Consideration due at such time to M. de Boer under Section II.1 (B) above. Such deduction will be allocated among the Sellers pro rata to their respective amounts due. (E) Adverse Consequences. If Tanox or the Company should suffer any Adverse Consequences or incur any Liability, Tanox shall have the right to set-off any costs and expenses incurred as a result of such Adverse Consequences or Liability pro rata against the Total Consideration remaining undelivered at such time as it becomes due. If such costs and expenses exceed the outstanding cash portion of the Total Consideration, Tanox shall have the right to reduce the Total Consideration by an agreed number of shares of Tanox Stock equivalent in value to all of such costs and expenses. SECTION II.5 DISAGREEMENTS REGARDING CONTINGENCIES. If any disagreement should arise regarding Tanox's obligation hereunder to deliver the Total Consideration or regarding the amounts of any off-sets or reductions to the Total Consideration required pursuant to the Contingencies, as set forth above, the Parties first will attempt to resolve such disagreement with good faith negotiations between senior management of Tanox and the Sellers, which shall be represented by one or more duly authorized representatives. If such negotiations between senior management of Tanox and the Sellers are not successfully resolved within 60 days following the written request of Sellers to initiate such negotiations, Sellers may require that any such disagreement be resolved by appointment of an expert by each Party, in accordance with the customary practice for such appointment in The Netherlands, who together shall have authority to reach an agreed determination of whether or not or to what extent the Total Consideration should be delivered and/or an offset to the Total Consideration should be permitted under 9 <PAGE> the circumstances. Should the two experts fail to reach agreement within 45 days after their appointment, then they shall jointly select a third expert within 30 days who, in consultation with each Party's expert, shall reach a decision within 30 days following his appointment and whose opinion will be binding on the Parties. Following resolution of any such disagreement, Tanox shall immediately deliver any portion of the Total Consideration which may then be due. This Section II.5 shall be applicable only to disagreements regarding the affect of the Contingencies on the Total Consideration due under this Agreement and shall not apply to any other disputes, breaches or defaults claimed by a Party. ARTICLE III REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION SECTION III.1 REPRESENTATIONS AND WARRANTIES OF THE SELLERS. The Sellers jointly and severally represent and warrant to Tanox that the statements contained in this Section III.1 are true, correct and complete as of the date of this Agreement and, with respect to M. de Boer, as of the date of the closing for any Suspended Shares. (A) Legal Form of the Sellers. M. de Boer, L. Boon, and M.T. den Hartog are individual residents of The Netherlands. J.S. Price, J. W. Larrick, and R.F. Balint are individual residents of the United States. Each of PanResources International and Andries de Nooij B. V. is duly organized and validly existing under the laws of the jurisdiction of its incorporation. (B) Authorization of Transaction. Each of the Sellers has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of each of the Sellers, enforceable in accordance with its terms and conditions. None of the Sellers need give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement. (C) Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which any of the Sellers are subject or (if applicable) any provision of its charter, bylaws, or articles of association or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of or right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which any 1 of the Sellers is a party or by which any of the Sellers is bound. (D) Company Shares. At Closing, the Sellers hold of record and own beneficially 100% of the outstanding Company Shares and any and all other interests of any nature in and to the Company Shares, and there are no restrictions on transfer which prohibit or are violated by this transaction. The 10 <PAGE> Company Shares are free and clear of all Taxes, Security Interests, contracts, commitments, claims, or other encumbrances of any nature. The total Company Shares set forth under "Consideration for Basic Transaction" in Annex 2 includes all of the Company Shares owned by all Sellers except for M. de Boer. All of the Company Shares owned by M. de Boer are included in the aggregate under "Consideration for Basic Transaction" and "Consideration Subject to Suspensive Condition" on Annex 2. (E) Company Properties. None of the Sellers has any right, title or interest in or to any property , asset or right owned or used by the Company in the conduct of its business, except as has been transferred, assigned, and conveyed to the Company and/or Tanox on or prior to the Closing Date as a part of this transaction (which transfer includes the individual rights of Mark de Boer to gene therapy applications for anti-CD40 monoclonal antibodies.) (F) Brokers' Fees. None of the Sellers has any Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which Tanox could become liable or obligated. (G) Investment. Each of the Sellers (i) understand that Tanox Stock has not been, and will not be, registered under the Securities Act of 1933, as amended ("Securities Act"), or under any state securities laws, and are being offered and sold in reliance upon federal and state exemptions for transactions not involving any public offering, (ii) is acquiring Tanox Stock solely for its own account for investment purposes, and not with a view to the distribution thereof, (iii) is a sophisticated investor with knowledge and experience in business and financial matters, (iv) has received certain information concerning Tanox and has had the opportunity to obtain additional information as desired in order to evaluate the merits and the risks inherent in holding Tanox Stock, and (v) is able to bear the economic risk and lack of liquidity inherent in holding Tanox Stock. (H) No Transfer; Holding Requirements. Each Seller covenants that in no event will such Seller sell, transfer, convey, hypothecate or otherwise dispose of any interest in Tanox Stock (other than in conjunction with an effective registration statement under the Securities Act or in compliance with Rule 144 promulgated under the Securities Act) unless and until (i) each Seller shall have notified Tanox of the proposed disposition and shall have furnished Tanox with a statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by Tanox, each Seller shall have furnished Tanox with an opinion of counsel reasonably satisfactory in form and substance to Tanox to the effect that (x) such disposition will not require registration under the Securities Act and (y) appropriate action necessary for compliance with the Securities Act and any other applicable state, local or foreign law has been taken. Each Seller understands that if Tanox does not register its common stock under Section 12 or become subject to Section 15( d) of the Securities Exchange Act of 1934, as amended ("Securities Exchange Act") or supply information 11 <PAGE> pursuant to Rule 15c2-11 thereunder or if a registration statement covering the Tanox Stock (or a filing pursuant to the exemption from registration under Regulation A of the Securities Act governing Tanox Stock) under the Securities Act is not in effect when it desires to sell Tanox Stock, such Seller may be required to hold Tanox Stock for an indeterminate period. Each Seller also understands that any sale of Tanox Stock that might be made by such Seller in reliance upon Rule 144 under the Securities Act may in certain instances be made only in limited amounts in accordance with the terms and conditions of that rule. (I) Unregistered Securities; Restrictions; Legend. Each Seller understands that the Tanox Stock has not been registered under the Securities Act and will be issued in reliance upon an exemption from the registration requirements thereof. Additionally, each Seller acknowledges that the Tanox Stock is subject to a Voting Agreement executed by Sellers on the Closing Date in the form of agreement attached hereto as Exhibit A. Each Seller acknowledges that the certificates representing Tanox Stock shall each bear restrictive legends-. substantially as follows: "THESE-SECURIT1ES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. PREEMPTIVE RIGHTS TO ACQUIRE UNISSUED OR TREASURY SHARES OF THE COMPANY AND CUMULATIVE VOTING OF SHARES ARE DENIED TO THE SHAREHOLDERS BY THE ARTICLES OF INCORPORATION. A COMPLETE STATEMENT OF THE DENIAL OF SUCH RIGHTS IS SET FORTH IN THE ARTICLES OF INCORPORATION AS FILED IN THE OFFICE OF THE SECRETARY OF STATE AND A COPY OF SAME WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER OF RECORD OF THIS CERTIFICATE UPON REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS. THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A VOTING AGREEMENT, ENTERED INTO AS OF, 1998, A COUNTERPART OF WHICH HAS BEEN DEPOSITED WITH THE COMPANY AT ITS PRINCIPAL OFFICE." SECTION III.2 REPRESENTATIONS AND WARRANTIES OF TANOX. Tanox represents and warrants to the Sellers that the statements contained in this Section III.2 are true, correct 12 <PAGE> and complete as of the date of this Agreement and as of the date of the closing for any Suspended Shares. (A) Organization of Tanox. Tanox is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. (B) Authorization of Transaction. Tanox has full power and authority to execute and deliver t is Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of Tanox, enforceable in accordance with its terms and conditions. Tanox need not give any notice to, make any f ling with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this agreement. (C) Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Tanox is subject or any provision of its charter or bylaws or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of or, right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which Tanox is a party or by which it is bound. (D) Brokers' Fees. Tanox has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which the Sellers could become liable or obligated. (E) Investment Tanox is not acquiring the Company Shares with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act or wit the intention of effecting any sale or transfer thereof in contravention of any applicable laws, rules or regulations of The Netherlands. ARTICLE IV REPRESENTATIONS AND WARRANTIES ONCERNING THE COMPANY For the benefit and with full authority of all Sellers, and with all Sellers agreeing to be bound thereby, M. de Boer and J.W. Larrick, jointly and severally, represent and : warrant to Tanox that the s1atements contained in this Article IV are true, correct and complete as of the date of this Agreement and as of the date of the Closing for any Suspended Shares, except a set forth in the disclosure schedule arranged in paragraphs corresponding to the numbered Sections contained in this Article IV and attached hereto (the "Disclosure Schedule"). (A) Organization, Qualification, and Corporate Power. The Company is a 13 <PAGE> private limited liability company duly organized and validly existing under the laws of the jurisdiction of its incorporation. The Company has full corporate power and authority and all licenses, permits, and authorizations necessary to carry on the businesses in which it is engaged and in which it presently proposes to engage and to own and use the properties owned and used by it. M. de Boer is the managing director of the Company and there are no other directors and officers of the Company, except for J.W. Larrick (President of the Company) and J.S. Price who occupy informal positions as a board of directors or business advisors to the Company. The Sellers have delivered to Tanox correct and complete copies of the articles of association of the Company (as amended to date). The minute books (containing the records of meetings of the stockholders, the board of directors, and any committees of the board of directors), and the register of shareholders of the Company are correct and complete (following inclusion in the minute books of a resolution ratifying issuance of Company Shares to Andries de Nooij B.V. and inclusion in the register of Shareholders the names of the Sellers which have exercised options immediately preceding this transaction). The Company is not in default under or in violation of any provision of its articles of association. (B) Capitalization. At Closing, the entire authorized capital stock of the Company consists of 2,000,000 Company Shares, of which 466, 164 Company Shares are issued and outstanding. All of the issued and outstanding Company Shares are now duly authorized, validly issued, fully paid, and are held of record and beneficially by the Sellers. Following the exercise of options concurrently with this transaction, there remain no outstanding or authorized options, warrants, subscription rights, or other contracts or commitments that could require the Company to issue, sell, or otherwise cause to become outstanding any of its capital stock. There are no other agreements or understandings with respect to the voting of the capital stock of the Company. (C) Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which the Company is subject or any provision of the articles of association of the Company or (ii) except as set forth on the Disclosure Schedule relating to certain grant or subsidiary funding, conflict with, result in a breach of, constitute a default under, result in the acceleration of or right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Company is a party or by which it is bound. The Company need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement, although notices are required in connection with agreements relating to certain of the R&D Programs as disclosed on the Disclosure Schedule. (D) Brokers' Fees. The Company has no Liability or obligation to pay any 14 <PAGE> fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement. (E) Financial Statements. Attached hereto as Exhibit E are the most current financial statements (collectively the "Financial Statements") for the Company. The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, present fairly the financial condition of the Company as of such dates and the results of operations of the Company for such periods, are correct and complete, and are consistent with the books and records of the Company (which books and records are correct and complete); provided, however, that they may be subject to normal year-end adjustments (which will not be material individually or in the aggregate). (F) Title to Assets; Business. The Company owns the furniture, equipment and other properties used in its business free and clear of any Security Interests or other encumbrances and is not in default under any leases covering its facilities, all as shown on its Financial Statements. Sellers have fairly described the R&D Programs and their current status to Tanox and the Contingencies accurately reflect the material issues associated with such R&D Programs. (G) Subsidiaries. The Company has no Subsidiaries. The Company owns a one-third interest in Upither B.V., a company formed jointly with FVM-UU (which owns a two-thirds interest). (H) Events Subsequent to Financial Statements. Except as set forth on the Disclosure Schedule, since the date of the Financial Statements there has not been any material adverse change in the business, financial condition, operations, results of operations, or future prospects of the Company. (I) Undisclosed Liabilities. The Company has no Liabilities or possible Liabilities which are known, except for (i) Liabilities set forth on the face of the Financial Statements or which may have arisen in the ordinary course of business since the date of the Financial Statements, (ii) Liabilities which could result from or relate to the Contingencies and (iii) Liabilities which may arise under the material contracts and agreements disclosed in Section IV(N) below. (J) Legal Compliance. The Company has complied with all applicable laws to which it is subject, and no actions, proceedings or investigations of any nature have been commenced against the Company alleging any failure so to comply. (K) Tax Matters. The Company has filed all Tax Returns that it is required to file (and no extension of time to file is in effect) and all Taxes owed have been paid. All such Tax Returns are correct and complete in all respects and there is no reason for any claims or disputes to be asserted by any taxing authority. The Company has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party. The Sellers have delivered to 15 <PAGE> Tanox correct and complete copies of all Tax Returns, and any documents or correspondence relating thereto. There will be no liability for Taxes incurred by Tanox as a result of this transaction except for a 1% capital tax owed by the Company as a result of the exercise by certain Sellers of their respective options as of the date of this Agreement. The Tax Returns delivered to Tanox disclose the following information with respect to the Company as of their respective dates: (i) the basis of the Company in its assets and (ii) the amount of any net operating loss, net capital loss, unused investment or other credit, or unused foreign taxes. (L) Real Property. The Company owns no real property. The Sellers have delivered to Tanox correct and complete copies of all leases and subleases for all real property leased or subleased to the Company. With respect to each lease and sublease delivered to Tanox, there are no disputes or oral agreements among, or defaults of any party to, such leases or subleases. All facilities leased or subleased thereunder have received all approvals of governmental authorities (including licenses and permits) required in connection with the operation thereof and have been operated and maintained in accordance with applicable laws, rules, and regulations. (M) Intellectual Property. (a) As disclosed to Tanox in writing prior to the Closing Date, the Company owns or has the right to use pursuant to license, sublicense, agreement, or permission all Intellectual Property necessary to pursue the R&D Programs as presently conducted and as presently proposed to be conducted. Each item of Intellectual Property owned or used by the Company immediately prior to the Closing will be owned or available for use by the Company on identical terms and conditions immediately subsequent to the Closing. The Company has taken reasonable actions to maintain and protect each item of Intellectual Property that it owns or uses. (b) As disclosed to Tanox prior to the Closing Date, Sellers are aware of certain material Intellectual Property rights of third parties which could adversely affect the Company's ability to pursue the R&D Programs and commercialize any resulting products or technologies. None of the Sellers of the Company has ever received any complaint, claim, demand, or notice alleging any opposition, interference, infringement, misappropriation, or violation (including any claim that the Company must license or refrain from using any Intellectual Property rights of any third party), except as disclosed in writing to Tanox prior to the Closing Date or included in the Contingencies. The Sellers are not aware that any third party has interfered with, infringed Upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of the Company. (c) The Disclosure Schedule identifies each patent and each pending patent application which has been issued or which the Company has submitted with respect to any of its Intellectual Property, and identifies under Section IV (N) each license, collaboration agreement, or other consent which the Company has granted to or received from any third party with respect to Intellectual Property (excluding any confidentiality and material transfer agreements made available to Tanox for review prior to the Closing Date). The Sellers have delivered to Tanox 16 <PAGE> correct and complete copies of all such patents, registrations, applications, licenses, agreements, and permissions (as amended to date) and has made available to Tanox correct and complete copies of all other written documentation evidencing ownership and prosecution (if applicable) of each such item. The Disclosure Schedule also identifies each trade name or unregistered trademark used by the Company in connection with its businesses. Sellers have disclosed in writing to Tanox prior to the Closing Date all material facts and circumstances of which they are aware which would adversely affect either the Intellectual Property of the Company or its R&D Programs. (N) Contracts. Except as disclosed in this Agreement or listed on the Disclosure Schedule, there are no other material contracts and agreements to which the Company is a party, excluding employment, confidentiality and material transfer agreements entered into the normal course of the Company's business, which have been provided to Tanox for review and which Sellers represent and warrant will have no material adverse effect on the R&D Programs or Intellectual Property of the Company. With respect to all agreements of the Company, except as may be contemplated by the Contingencies, Sellers are aware of no breach or default by any p-arty, and no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the agreements, and no party has repudiated any provision of any of the agreements except for such of the foregoing circumstances which have been disclosed in writing to Tanox. (O) Notes and Accounts Receivable. All notes and accounts receivable of the Company are reflected properly on the Financial Statements and on its books and records, are valid receivables subject to no material setoffs or counterclaims, are current and collectible, and will be collected in accordance with their terms at their recorded amounts. (P) Powers of Attorney. There are no outstanding powers of attorney executed on behalf of the Company. (Q) Insurance. The Disclosure Schedule sets forth the following information with respect to each insurance policy (including policies providing property, casualty , liability , and workers' compensation coverage) to which the Company has been a party, a named insured, or otherwise the beneficiary of coverage at any time within the past two years: (a) the name, address, and telephone number of the agent; (b) the name of the insurer, the name of the policy holder, and the name of each covered insured; (c) the policy number and the period of coverage; (d) the scope (including an indication of whether the coverage was on a claims made, occurrence, or other basis) and amount (including a description of how deductibles and ceilings are calculated and operate) of coverage; and (e) a description of any retroactive premium adjustments or other loss-sharing arrangements. 17 <PAGE> With respect to each such insurance policy: (i) the policy is in full force and effect; and will continue on identical terms until renewal is required according to its terms; and (ii) neither the Company (whether or not known to the other party) nor any other party to the policy is in breach or default under the policy. (R) Litigation. There is no litigation or existing or potential claims or disputes of which Sellers are aware, except as may have been disclosed in the Contingencies, whether with a governmental or administrative agency or other third party. The Company has fulfilled or can timely fulfill all of its contractual obligations under research and other contracts with third parties, except as otherwise stated on the Disclosure Schedule. (S) Research Product Liability. The Company has no Liability (and Sellers are not aware of any reason for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand against the Company or Sellers giving rise to any Liability) arisil:1g out of any injury to individuals or property as a result of any research conducted for third parties or the ownership, possession, or use of any product manufactured, sold, leased, or delivered by the Company. (T) Employees. The Sellers are not aware that any key employee has any plans to terminate employment with the Company. The Company is not a party, to or bound by any collective bargaining agreement, nor has the Company experienced any collective bargaining disputes of any nature. The Company has not committed any unfair labor practice. None of the Sellers is aware of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to employees of the Company. (U) Employee Benefits. The Disclosure Schedule lists each Employee Benefit Plan that the Company maintains or to which the Company contributes. Each such Employee Benefit Plan complies with and has been maintained in all respects in accordance with the applicable requirements of any applicable law or regulation and all required contributions have been made. The Sellers have delivered to Tanox correct and complete copies of the plan documents, including all agreements or documents related to the plan, summary plan descriptions and the most recent correspondence and reports received from or filed with applicable governmental authorities. (V) Guaranties. The Company is not a guarantor or otherwise liable for any Liability or obligation (including indebtedness) of any other Person, including the Sellers. (W) Environment, Health, and Safety. The Company has complied with any and all applicable environmental, health, and safety laws, rules and regulations relating to its business or covering its employees. (X) Certain Business Relationships with the Company. Except for agreements evidencing employment and consulting relationships with the i 18 <PAGE> Company which have been provided to Tanox prior to the Closing Date and any other arrangements or relationships disclosed in the Disclosure Schedule, none of the Sellers has been involved in any business arrangement or relationship with the Company within the past 12 months, and none of the Sellers or any of their Affiliates owns any asset, tangible or intangible, which is used in the business of the Company. (Y) Disclosure. The representations and warranties contained in this Article IV do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Article IV not misleading. ARTICLE V PRE-CLOSING ACTIVITIES Prior to the execution of this Agreement, the Parties have completed the following necessary activities and/or operated in accordance with the following from the date of the Financial Statements. (A) Notices; Consents; Etc. The Sellers and/or the Company, as appropriate, have given any notices to third parties, and obtained any third-party consents, authorizations or approvals that are necessary or reasonably requested by Tanox in connection with this transaction and any matters specifically referenced in this Agreement, including any from governmental agencies. Without limiting the generality of the foregoing, each of the Parties have filed (and the Sellers will cause the Company to file) any reports or other filings that it may be required or advisable to file with any applicable governmental authority regarding the transactions contemplated by this Agreement. (B) Business Activities. The Sellers have not permitted the Company to engage in any practice, take any action, or enter into any transaction outside the normal activities required to maintain and preserve the R&D Programs and other business of the Company. (C) Closing Preparations. The Sellers have accomplished all actions necessary to assure that the representations and warranties are true and correct and all activities necessary to the Closing are completed, including, without limitation, the exercise by certain Sellers of options for depository receipts issued by the Foundation Trust Office PanGenetics 8. V. ("FTO-PG") and subsequent dissolution of FTO-PG and delivery to such Sellers, respectively, of the Company Shares due them upon such dissolution. (D) Resignations. Tanox has received the resignations, effective as of the Closing, of Sellers from all positions they hold with the Company other than those as employees under their respective employment agreements or as otherwise required by Tanox to be continued, as specified in this Agreement or in writing prior to the Closing. 19 <PAGE> ARTICLE VI POST-CLOSING COVENANTS The Parties agree as follows with respect to the period following the Closing. (A) General. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Section VII.2 below). The Sellers acknowledge and agree that from and after the Closing Tanox will be entitled to possession of all documents, books, records (including Tax records), agreements, and financial data of any sort relating to the Company. (B) Litigation Support. In the event and for so long as any Party actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving the Company, each of the Parties will cooperate with it and its counsel in the contest or defense, make available their personnel, and provide such testimony and access to their books and records as shall be necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Section VII.2 below). (C) Transition. Except as agreed by Tanox, the Sellers will not take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, vendor, supplier, or other business associate of the Company from maintaining the same business relationships with the Company after the Closing as it maintained with the Company prior to the Closing. (D) Confidentiality. The Sellers will treat and hold as such all of the Confidential Information, refrain from using any of the Confidential Information except in connection with their continuing duties as employees, consultants and/or collaborators to Tanox and/or the Company, and deliver promptly to Tanox or the Company or destroy, at the request and option of Tanox or the Company, all tangible embodiments (and all copies) of the Confidential Information which are in its possession. In the event that the Sellers are requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, the Sellers will notify Tanox or the Company promptly of the request or requirement so that Tanox may seek an appropriate protective order and/or take reasonable and lawful actions to avoid or minimize the degree of 20 <PAGE> such disclosure or waive compliance with the provisions of this Section VI.4. The foregoing provisions shall not apply to any Confidential Information which was generally available to the public at the time of disclosure. (E) Covenant Not to Compete. For a period of five years from and after the Closing Date, the Sellers will not develop any products or initiate any scientific, technical or drug development programs directly competitive with any of the Company's active projects; provided, however, that ownership of less than 1% of the outstanding stock of any publicly traded corporation shall riot be deemed to engage solely by reason thereof in any of its businesses. If the final judgment of a court of competent jurisdiction declares that any term or provision of this Section VI.(E) is invalid or unenforceable, the Parties agree that the court making the determination of validity , or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. ARTICLE VII REMEDIES FOR BREACHES OF THIS AGREEMENT SECTION VII.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; All of the representations and warranties of the Parties contained in this Agreement shall survive the Closing hereunder and continue in full force and effect thereafter until the expiration of 36 months following the Closing Date. Except as otherwise provided in Article VI and this Article VII the terms and conditions of this Agreement will expire four (4) years following the date hereof . SECTION VII.2 INDEMNIFICATION. In the event a Party breaches (or in the event any third party alleges facts that, if found to be true, confirm that a Party has breached) any of its representations, warranties, covenants, and other obligations contained herein, then the breaching Party agrees to indemnify the other Party from and against any Adverse Consequences the other Party may suffer through and after the date of the claim for indemnification (including any Adverse Consequences the other Party may suffer after the end of any applicable survival period but not including the Contingencies except to the extent any Adverse Consequences resulting from the Contingencies exceed the Consideration not yet delivered to Sellers, but in no case is it intended that such indemnification exceed the total value of the Consideration) resulting from, arising out of, relating to, in the nature of, or caused by the breach. SECTION VII. 3 OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification provisions are in addition to, and not in derogation of, any statutory I equitable, or common law remedy any Party may have for breach of representation, warranty, or covenant. The Sellers jointly and severally agree that they will not make any claim for indemnification against the Company by reason of the fact that they were a stockholder, director, officer, 21 <PAGE> employee, or agent of the Company or were serving at the request of the Company as a partner, trustee, director, officer, employee, or agent of another entity with respect to any action, suit, proceeding, complaint, claim, or demand brought by Tanox against the Sellers. ARTICLE VIII MISCELLANEOUS SECTION VIII.1 RESCISSION. On or before 90 days from the Closing Date Tanox shall notify the Sellers pursuant to the provisions of Section VIII.7 of any Adverse Consequences exceeding 500,000 USD that Tanox will experience as a result of the Contingencies or from a breach of this Agreement by Sellers occuring on or before 90 days from the Closing Date. If such Adverse Consequences are not resolved to the mutual satisfaction of the Parties, Tanox may elect to rescind this Agreement or recoup such Adverse Consequences as set forth in Section II.4. In the event of rescission, Tanox shall give two business days' notice to the Sellers. Upon the expiration of "such notice period, the following shall occur, as applicable: (i) Tanox shall endorse and tender to the Sellers stock certificates representing all Company Shares delivered, (ii) the Sellers shall pay to Tanox the cash portion of the Total Consideration paid to Sellers at the Closing, plus interest thereon which Tanox lost from the Closing Date through the date of payment, (iii) Tanox Stock shall be canceled, and all certificates returned by Sellers to Tanox, and (iv) the Parties shall use all reasonable efforts and shall execute and deliver such other documentation as may be necessary to effectuate the rescission of this Agreement and the transactions contemplated thereby. SECTION VIII.2 PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. Except for an agreed press release which will be issued following the Closing Date, the Sellers shall not issue any press release or make any public announcement relating to the subject matter of this Agreement without the prior written approval of Tanox. SECTION VIII.3 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. SECTION VIII.4 ENTIRE AGREEMENT. This Agreement (including the agreements and documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, to the extent they related in any way to the subject matter hereof . SECTION VIII.5 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and assigns. SECTION VIII.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. SECTION VIII.7 NOTICES. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or 22 <PAGE> other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by, registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE SELLERS: Jim Larrick AND Mark deBoer 2462 Wyandotte Street 1105 BE Amsterdam Mountain View, CA 94043 The Netherlands Fax: 415-694-7717 Fax: 011-31-20-4332317 IF TO TANOX: Nancy Chang, President and CEO Tanox Biosystems, Inc. 10301 Stella Link Houston, Texas 77035 Fax: 713-664-8914 Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary, mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the person or address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth. SECTION VIII.9 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Texas without giving effect to any choice or conflict of law provision or rule (whether of the State of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Texas. The courts in Houston, Harris County, Texas shall have personal jurisdiction over the parties hereto. If service of process cannot otherwise be effected, it is agreed that the Secretary of State for the State of Texas shall be an agent of each of the parties hereto to receive service of process. SECTION VIII.10 AMENDMENTS AND WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Tanox and the Sellers. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any, prior or subsequent default, misrepresentation, or .breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. SECTION VIII.11 SEVERABILITY. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability, of the offending term or provision in any other situation or in any other jurisdiction. 23 <PAGE> SECTION VIII.12 EXPENSES. Each of the Parties and the Company will bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby. The Sellers agree that the Company has not borne or will not bear any of the Sellers' costs and expenses (including any of their legal fees and expenses) in connection with this Agreement or any of the transactions contemplated hereby. SECTION VIII.13 CONSTRUCTION. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean including without limitation. The Parties intend that each representation, warranty, and covenant contained herein shall have independent significance. SECTION VIII.14 INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits, Annexes, and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 24 <PAGE> IN WITNESS WHEREOF. the Parties hereto have executed this Agreement as of the date first above written. SELLERS: PanResources International N.V. TANOX BIOSYSTEMS, INC. By:/s/ HERMAN J. BEHR By:__________________________ Name: HB Management N.V. Name:________________________ Title: Managing Director Title:_______________________ Andries de Nooij B.V. Managing Board of PanGenetics B.V By:__________________________ _____________________________ M. de Boer, Ph.D. Name:________________________ _____________________________ David Anderson Title:_______________________ _____________________________ M. de Boer, Ph.D. /s/ J.W. LARRICK J.W. Larrick, M.D., Ph.D. /s/ J.S. PRICE J.S. Price, Ph.D. /s/ R.F. BALINT R.F. Balint, Ph.D. _____________________________ M. T. den Hartog. Ph.D. _____________________________ L Boon, Ph.D. 25 <PAGE> ANNEX I LIST OF SELLERS AND SHARES PURCHASED NAME SHARES % OWNERSHIP - ---- ------- ----------- PanResources International N. V ...................... 200,000 42.904 Andries de Nooij B.V ................................. 21,164 4.540 M. de Boer ........................................... 10,000 2.145 J.W. Larrick ......................................... 20,000 4.290 J.S. Price ........................................... 10,000 2.145 R.F. Balint .......................................... 10,000 2.145 M. T den Hartog ...................................... 7,500 1.609 L. Boon .............................................. 7,500 1.609 ------- ----------- Total ................................................ 286,164 6.387 <PAGE> ANNEX 2 CONSIDERATION FOR BASIC TRANSACTION NAME CASH* TANOX SHARES ---- ------- ------------ CLOSING DATE PanResources International N.V 143011 51174 Andries de Nooij B. V 15134 20607 M. de Boer 7150 3246 J.W. Larrick 14301 6491 J.S. Price 7150 3246 R.F. Balint 7150 3246 M.T. den Hartog 5362 2434 L. Boon 5362 2434 204,620 92,878 18 MONTHS PanResources International N.V 143011 71780 Andries de-Nooij B.V 15133 M. de Boer 7151 3246 J.W. Larrick 14301 6491 J.S. Price 7151 3246 R.F. Balint 7151 3246 M.T. den Hartog 5363 2434 L. Boon 5363 2434 204,624 92,877 36 MONTHS PanResources International N.V 143011 71780 Andries de Nooij B.V 15133 M. de Boer 7151 3245 J.W. Larrick 14301 6491 J.S. Price 7151 3245 R.F. Balint 7151 3245 M.T. den Hartog 5364 2434 L. Boon 5364 2434 204,676 92,874 CONSIDERATION SUBJECT TO SUSPENSIVE CONDITION NAME CASH* TANOX SHARES ---- ------- ------------ M.deBoer 386130 175260 *USD <PAGE> EXHIBIT A Form of Voting Agreement <PAGE> VOTING AGREEMENT This Voting Agreement ("Agreement") is entered into as of March ___, 1998 by and among PanResources International, Ltd.J Andries de Nooij B.V., M. de Boer, J.W. Larrick, J.S. Price, R.F. Balint, M.T. den Hartog, and L. Boon (hereinafter referred to as the "Share Recipients") and Nancy T. Chang (collectively, Nancy T. Chang and the Share Recipients are referred to as "Shareholders"). RECITALS: Share Recipients have entered into an agreement ("Stock Purchase Agreement") with Tanox Biosystems, Inc. (the "Company"), under which the Company has acquired all of Share Recipients' shares of capital stock in PanGenetics, B. V. for the consideration agreed in the Stock Purchase Agreement, which consideration includes certain shares of the common stock of the Company. Nancy T. Chang (sometimes referred to hereinafter as "Dr. Chang") is a substantial shareholder of the Company and is also the Chairman of the Board of the Company. Dr. Chang also is a party to certain other voting agreements and is the trustee under certain voting trust agreements. It is the objective of the Shareholders to vote their shares together to make more effective the Share Recipients' participation in the election of directors of the Company and to secure continuity and stability of policy and management of the Company by uniting the Shareholders' voting power pursuant to their ownership of the common stock of the Company. All shares of common stock of the Company owned or held, legally or beneficially, directly or indirectly, of record or otherwise, by the Shareholders shall be collectively referred to herein as the "Stock". Any additional shares of common stock or other voting securities of the Company which may be owned, held or acquired in any manner, legally or beneficially, directly or indirectly, of record or otherwise, by the Shareholders at any time during the term of this Agreement, whether issued incident to the terms of the Stock Purchase Agreement or through any stock split, reverse stock split stock, dividend, increase in capitalization, recapitalization, merger, consolidation or other reorganization or like transaction and received with respect to Stock then subject to this Agreement, shall be included within the term "Stock" as used herein and shall be subject to the terms of this Agreement. In consideration of the premises, the mutual covenants and agreements contained in this Agreement, and other good and valid consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. JOINT ACTION. During the term of this Agreement, all of the shares of Stock subject to this Agreement shall be voted as a unit together with the shares held by Nancy T. Chang for the election of Nancy T. Chang, or a replacement designated by her, and such other persons as,may be nominated by the Board of Directors or a 1 <PAGE> nominating committee, as provided in the Bylaws of the Company, as directors of the Company. Such persons are referred to herein singularly as a "Designated Director" and collectively as the "Designated Directors" to reflect their status as directors, if elected. The Share Recipients have each executed an irrevocable proxy, incorporated herewith and attached hereto for execution as Attachment 1, for purposes of implementing this Agreement and have appointed Nancy T. Chang and/or a substitute identified therein as their attorney and agent to vote their shares in accordance with this Agreement in all elections of directors so long as this Agreement remains in effect. 2. DEATH. INCAPACITY. RESIGNATION OR REMOVAL OF DESIGNATED-DIRECTOR. In the event of the death, incapacity, resignation or removal of any Designated Director other than Dr. Chang, the vacancy on the Board of Directors created by such event shall be filled by the Board of Directors in accordance with the Company's Bylaws. In the event of the death, incapacity, or resignation of a Designated Director of Dr. Chang, she shall be entitled to nominate a replacement for her Designated Director and to fill any such vacancy at a special meeting of the shareholders of the Company, called in accordance with the Company's Bylaws. 3. ACCESS TO AGREEMENT. A copy of this Agreement and of every amendment or supplement hereto shall be filed at the principal office of the Company in Houston, Texas, and shall be open to inspection by any holder of Stock, in person or by agent or attorney, daily during business hours, to the same extent as such holder would be entitled to examine the books and records of the Company. 4. Stock Certificates. During the term of this Agreement, each certificate representing ownership of the Stock, and each certificate which may be issued and delivered by the Company upon transfer of such certificate, shall contain a legend in substantially the following form: "THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A VOTING AGREEMENT, ENTERED INTO AS OF MARCH I 1998, A COUNTERPART OF WHICH HAS BEEN DEPOSITED WITH THE COMPANY AT ITS PRINCIPAL OFFICE." The Company shall place the above legend on the Stock of the Share Recipients' certificates prior to the issuance of such certificates. The Share Recipients, for so long as this Agreement remains in effect, hereby constitute and appoint the Company, and its duly authorized representative, as such Share Recipients' attorney and agent, with authority to place the legend required above on certificates issued or to be issued to the Share Recipients or to any transferee of the Stock while this Agreement remains in effect, and to take such other actions as may be required by the Company under the terms Of this Agreement. The Company shall not be required to take any action unless and until requested and authorized to do so in writing by each and all of the Shareholders, if the Share Recipients shall notify the Company of its 2 <PAGE> objection to any actions otherwise to be taken by the Company pursuant hereto. The Shareholders agree that they will indemnify and hold harmless the Company and its directors, officers and other representatives (but only to the extent they are acting in such capacity) from any claims, damages, expenses (including attorney's fees) and other liabilities of any nature which may arise out of or result from actions taken in good faith as authorized hereunder or which may result from any such actions, including all costs and expenses incurred by the Company in any proceeding which it may institute pursuant hereto. The Company shall have the right, if desired, to institute appropriate proceedings in any court of competent jurisdiction to determine the rights of the Share Recipients hereunder. 6. TERM. This Agreement shall commence and be effective as of the date specified on the signature page of this Agreement, and shall terminate on the expiration of ten (10) years from such date; but this Agreement shall sooner terminate upon (i) the written agreement of all of the Shareholders owning Stock then subject to this Agreement; or (ii) the closing date on which any securities of the Company are registered by the Company in an initial public offering under the Securities Act of 1933, as amended ("IPO Transaction"). Upon the termination of this Agreement, the Company shall be authorized to remove the legend required above from the Stock. 7. NOTICES. Any notice required or permitted to be given under this Agreement shall be given in writing and shall be deemed effectively given upon delivery , by personal or private service with appropriate record of delivery, to the party to be notified, upon deposit with the United States Post Office, by first class mail, postage prepaid and addressed to the party to be notified at the address indicated for such party below or upon delivery by fax transmittal to the fax number for such party below, or at such other address or fax number as a party, including the Share Recipients, may designate by ten (10) days' advance written notice to the other party. Nancy T. Chang: c/o Tanox Biosystems, Inc. 10301 Stella Link Houston, Texas 77025 Fax No: 713-664-8914 3 <PAGE> Share Recipients: Jim Larrick and Mark de Boer 2462 Wyandotte Street 1105 BE Amsterdam Mountain View, CA 94043 The Netherlands Fax: 650-694-7717 Fax: 011-31-20-434-2317 Notice shall be deemed effectively received (i) five (5) business days after deposit properly addressed, with the United States Post Office, if sent first class mail, postage prepaid, (ii) as of the date delivery is acknowledged by appropriate record, if sent by express mail (public or private service), telegram or fax or other similar communication, or (iii) when receipt is otherwise indicated by the receiving party to the noticing party by correspondence, fax or other reasonable communication. 8. INCONSISTENCIES. The provisions of this Agreement shall control in the event that there is an inconsistency between this agreement and any other instrument or document by which all the parties hereto are bound. 9. SUCCESSORS. This Agreement and any power of attorney granted by Share Recipients hereunder, shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the Shareholders. Reference to "Share Recipients" or "Shareholders" hereunder shall include any such successor upon the effectiveness of such transfer. If any Share Recipient transfers or assigns the Stock, he shall notify the Company and the other Shareholders of such transfer at least thirty (30) days prior to the date thereof. The Company shall have the right to require any personal representative, transferee, successor, or assignee of the Share Recipients to acknowledge and agree in writing that any such shares of the Stock transferred are subject to all of the terms and conditions of this Agreement prior to issuing a share certificate(s) to any such personal representative, transferee, successor, or assignee. 10. ENFORCEABILITY. The Share Recipients agree that this Agreement shall be specifically enforceable in a court of competent jurisdiction, which remedy shall be in addition to any other remedies that may be available at law or in equity. II. APPLICABLE LAW. The laws of the State of Texas will govern the interpretation, validity and effect of this Agreement without regard to the place of execution or the place of performance thereof, and the courts in Houston, Harris County, Texas shall have personal jurisdiction over the parties hereto. If service of process cannot otherwise be effected, it is agreed that the Secretary of State for the State of Texas shall be an agent of each of the parties hereto to receive service of process. 12. SEVERABILITY. If a court of competent jurisdiction shall adjudge to be invalid any clause, sentence, subparagraph or section of this Agreement, such judgment or decree shall not affect, impair, invalidate or nullify the remainder of this Agreement, but 4 <PAGE> the effect thereof shall be confined to the clause, sentence, subparagraph, paragraph or section so adjudged to be invalid. 13. AMENDMENT OF AGREEMENT. This Agreement may be changed, modified or amended by a written instrument signed by all of the Shareholders. 14. PARAGRAPH HEADINGS. The paragraph heading in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 15. NUMBERS AND GENDER. When required by the context, each number (singular or plural) shall include all numbers and each gender shall include all genders. 16. COUNTERPARTS. This Agreement is being executed in multiple counterparts, all of which taken together shall constitute one and the same instrument. 5 <PAGE> IN WITNESS WHEREOF, the Shareholders have executed this Agreement as of the date set forth above. _______________________________ Share Recipients: Nancy T. Chang PanResources International Ltd. By:____________________________ Name:__________________________ Title:_________________________ Andries de Nooij B.V. By:____________________________ Name:__________________________ Title:_________________________ _______________________________ J.W. Larrick, M.D., Ph.D. _______________________________ J.S. Price, Ph.D. _______________________________ R.F. Balint, Ph.D. _______________________________ M.T. den Hartog, Ph.D. _______________________________ L. Boon, Ph.D. 6 <PAGE> Deposit of a counterpart of this Agreement with the Company is hereby acknowledged this ___day of March, 1998. TANOX BIOSYSTEMS, INC. By:_________________ John Blickenstaff, Vice President and Secretary 7 <PAGE> ATTACHMENT 1 -TO BE EXECUTED WITH VOTING AGREEMENT TANOX BIOSYSTEMS, INC. Irrevocable Proxy Effective as of the date of that certain Voting Agreement to which this irrevocable proxy is attached, the undersigned hereby irrevocably appoints Nancy T. Chang and any substitute or substitutes which she may designate, to be the attorney-in-fact and proxy of the undersigned at all meetings of the shareholders of Tanox Biosystems, Inc. or any adjournment thereof. Nancy T. Chang and any substitute or substitutes which she may designate, are hereby empowered to vote at such meetings all shares of common stock of Tanox Biosystems, Inc. held by the undersigned, or any transferee thereof, which are subject at the time of such vote to the Voting Agreement, for the election of Designated Directors as determined under the Voting Agreement. This proxy will not be voted on any other matters to come before the meetings of the shareholders. This proxy is coupled with the interests of the above-named proxy in the shares owned by the undersigned that are covered by the Voting Agreement and is irrevocable so long as the shares for which such proxy is given are subject to the Voting Agreement. This proxy shall terminate upon termination of the Voting Agreement. (Name of Stock Recipient) PanResources International Ltd. __________________________ By:____________________________ M. de Boer, Ph.D. Name:__________________________ __________________________ J.W. Larrick, M.D., Ph.D. Title:_________________________ __________________________ Andries de Nooij B.V. J.S. Price, Ph.D. By:____________________________ __________________________ R.F. Balint, Ph.D. Name:__________________________ __________________________ Title:_________________________ M.T. den Hartog, Ph.D. __________________________ L. Boon, Ph.D. <PAGE> EXHIBIT B Form of Notarial Deed of Transfer <PAGE> DEED OF TRANSFER OF SHARES PANGENETICS B.V. Today, the tenth of March nineteen hundred and ninety-eight, appear before me, Jan Bouwen de Snaijer, civil law notary, practising in Amsterdam: 1. Martijn Adriaan Cysouw, candidate civil law notary, residing in 1076 BK Amsterdam, Stadionkade 83, born in Sas van Gent on the sixth of November nineteen hundred and sixty-three, unmarried, identified on the basis of passport Kingdom of the Netherlands, number N248667l7, acting in this matter as proxy of: a. PANRESOURCES INTERNATIONAL N.V., a company established under the laws of the Curacao with registered office at Curacao, new Haven Office Center, Emancipatie Boulevard 31, and as such representing this company, hereinafter referred to as: "PanResources"; b. JAMES WILLIAM LARRICK, scientist, residing in CA 94062 Woodside, United States of America, Star Route Box 48, born in Denver (Colorado) on the fourth of January nineteen hundred and fifty; married, hereinafter referred to as: "Larrick"; c. the closed company with limited liability: ANDRIES DE NOOIJ B.V., with statutory seat in Amsterdam and offices in 1017 ED Amsterdam, Keizersgracht 810 B, and as such representing this company, hereinafter referred to as: "De Nooij"; d. JEFFREY STUART PRICE, scientist, residing in 859 Balra frive, El l Cerrito, CA 94530, United States of America, born in Michigan on <PAGE> 2 the second of October nineteen hundred and forty-two, unmarried, hereinafter referred to as: "Price"; e. LOUIS BOON, project manager, residing in 1069 NJ Amsterdam, Sandinostraat 9, born in Amsterdam on the fifteenth of April nineteen hundred and sixty-three, married, hereinafter referred to as: "Boon"; f. MARCEL THEODORUS DEN HARTOG, scientist, residing in 1411 WN Monnickendam, Jan Persijn 134, born in Amsterdam on the twenty-third of February nineteen hundred and sixty-five, unmarried, hereinafter referred to as: "Den Hartog"; g. ROBERT FREDERICK BALINT, scientist, residing in 4003 Scripps Avenue, Palo Alto, CA 94306, United States of America, born in New Jersey on the twenty-seventh of July nineteen hundred and forty-seven, married, hereinafter referred to as: "Balint"; h. the Foundation: STICHTING ADMINISTRATIEKANTOOR PANGENETICS, with statutory seat in Amsterdam and offices in 1105 BE Amsterdam-Zuidoost, Paasheuvelweg 15, and as such representing this company, hereinafter referred to as: "StAk"; i. TANOX BIOSYSTEMS, INC., a company established under the laws of the State Texas, United States of America, with registered office in Houston, Texas, United States of America, TX77025, 10301 Stella Link, and as such representing this company, hereinafter referred to as: "Transferee"; 2. MARK DE BOER, managing director, residing in 1261 BT Blaricum, Naarderweg 20, born in Ajax (Canada) on the twenty-eighth of January nineteen hundred and sixty, married, identified on the basis of passport European Union, Kingdom of the Netherlands number N30538225, acting in this matter: a. in private, hereinafter referred to as: "De Boer"; b. as managing director of the closed company with limited liability: <PAGE> 3 PANGENETICS B.V., with statutory seat in Heemskerk and offices in 1105 BE Amsterdam-Zuidoost, Paasheuvelweg 15., and as such, after having been designated therefor by the general meeting of shareholders, representing this company., hereinafter referred to as: "the Company" PanResources, Larrick, De Nooij, Price, Boon, Den Hartog, Balint en De Boer together hereinafter referred to as: "Transferors"; THE APPEARERS, acting in their aforementioned capacities, CONSIDER THAT: i. PanResources is holder of the shares, mentioned in article 1.1, these shares hereinafter referred to as: "the PanResources Shares"; ii. Larrick is holder of the shares, mentioned in article 1.2, these shares hereinafter referred to as: "the Larrick Shares"; iii. De Boer is holder of the shares, mentioned in article 1.3, these shares hereinafter referred to as: "the De Boer Shares"; iv. De Nooij is holder of the shares, mentioned in article 1.4, these shares hereinafter referred to as: "the De Nooij Shares"; v. Price is holder of the shares, mentioned in article 1.5, these shares hereinafter referred to as: "the Price Shares"; vi. Boon is holder of the shares, mentioned in article 1.6, these shares hereinafter referred to as: "the Boon Shares"; vii. Den Hartog is holder of the shares, mentioned in article 1.7, these shares hereinafter referred to as: "the Den Hartog Shares"; viii. Balint is holder of the shares, mentioned in article 1.8, these shares hereinafter referred to as: "the Balint Shares"; ix. the PanResources Shares, the Larrick Shares, the De Boer Shares, the De Nooij Shares, the Price Shares, the Boon Shares, the Den Hartog Shares and the Balint Shares together, hereinafter referred to as: "the Shares"; x. according to a purchase and sale agreement dated the tenth of March nineteen hundred and ninety-eight Transferors sold the Shares to Transferee, who purchased the Shares from Transferors, this agreement hereinafter <PAGE> 4 referred to as: "the Agreement"; xi. pursuant to the Agreement, Transferors are obliged to transfer the Shares to Transferee, and subsequently DECLARE the following: TRANSFER OF THE SHARES ARTICLE 1. 1.1 Pursuant to the Agreement PanResources transfers to Transferee, who accepts from PanResources, two hundred thousand (200,000) shares in the share capital of the Company, numbered 180,001 up to and including 380,000, each having a nominal value often Netherlands cents (NLG 0.10), which shares are registered in name of PanResources 1.2 Pursuant to the Agreement Larrick transfers to Transferee, who accepts from Larrick, twenty thousand (20,000) shares in the share capital of the Company, numbered 380,001 up to and including 400,000, each having a nominal value of ten Netherlands cents (NLG 0.10), which shares are registered in name of Larrick 1.3 Pursuant to the Agreement De Boer transfers to Transferee, who accepts from De Boer one hundred ninety thousand (190,000) shares in the share capital of the Company, numbered 1 up to and including 180,000 and 421,165 up to and including 431,164, each having a nominal value of ten Netherlands cents (NLG 0.10), which shares are registered in name of De Boer 1.4 Pursuant to the Agreement De Nooij transfers to Transferee, who accepts from De Nooij twenty-one thousand one hundred sixty-four (21,164) shares in the share capital of the Company, numbered 400,001 up to and including 421,164, each having a nominal value often Netherlands cents (NLG 0.10), which shares are registered in name of De Nooij 1.5 Pursuant to the Agreement Price transfers to Transferee, who accepts from Price ten thousand ( 10,000) shares in the share capital of the Company, numbered 456,165 up to and including 466,164, which shares are registered <PAGE> 5 in name of Price 1.6 Pursuant to the Agreement Boon transfers to Transferee, who accepts from Boon seven thousand five hundred (7,500) shares in the share capital of the Company, numbered 431,165 up to and including 438,664, which shares are registered in name of Boon 1.7 Pursuant to the Agreement Den Hartog transfers to Transferee, who accepts from Den Hartog seven thousand five hundred (7,500) shares in the share capital of the Company, numbered 438,665 up to and including 446,164, which shares are registered in name of Den Hartog 1.8 Pursuant to the Agreement Balint transfers to Transferee, who accepts from Balint ten thousand (10,000) shares in the share capital of the Company, numbered 446,165 up to and including 456,164, which shares are registered in name of Balint ACQUISITION OF SHARES BY TRANSFERORS ARTICLE 2. 2.1 PanResources - at that time named PanResources International Limited, of which company the seat was transferred to Cura9ao under the name PanResources International N.V., approved tl1rough resolution of the Ministry of Justice dated the ninth of March nineteen hundred and ninety- eight -acquired the PanResources Shares as a result of purchase, sale and transfer by notarial deed executed on the eighth of January nineteen hundred and ninety-seven by J.B. de Snaijer, civil law notary, practising in Amsterdam, in which deed (i) full discharge for the payment of the purchase price is granted and (ii) the right to dissolve the agreement according to the provisions of article 6:265 of the Netherlands Civil Code is waived 2.2 Larrick acquired the Larrick Shares as a result of issue of the Larrick Shares by the Company and subscription thereto by Larrick at the incorporation of the Company by deed executed on the nineteenth of May nineteen hundred and ninety-five by J. Karstens, civil law notary, practising in Leiden 2.3 De Boer acquired the De Boer Shares as follows: <PAGE> 6 a. one hundred eighty thousand ( 180,000) shares, numbered 1 up to and including 180,000 as a result of issue of these shares by the Company and subscription thereto by De Boer at the incorporation of the Company by deed executed on the nineteenth of May nineteen hundred and ninety-five by J. Karstens, aforementioned; b. ten thousand (10,000) shares, numbered 421,165 up to and including 421,164 as a result of transfer by way of decertification by notarial deed executed on the tenth of March nineteen hundred and ninety- eight by J.B. de Snaijer, civil law notary, practising in Amsterdam, in which deed (i) full discharge for custody of these shares is granted and (ii) the right to dissolve the agreement according to the provisions of article 6:265 of the Netherlands Civil Code is waived. 2.4 De Nooij acquired the De Nooij Shares as a result of issue of the De Nooij Shares by the Company and subscription thereto by De Nooij on the twenty- seventh of August nineteen hundred and ninety-six pursuant to a resolution of the general meeting of shareholders of the Company , evidenced by deed of issue executed on the twenty-seventh of August nineteen hundred and ninety-six by J.B. de Snaijer, aforementioned 2.5 Price acquired the Price Shares as a result of transfer by way of decertification ("levering ten titel van beeindiging beheer") by notarial deed executed on the tenth of March nineteen hundred and ninety-eight by J.B. de Snaijer, civil law notary, practising in Amsterdam, in which deed (i) full discharge for custody of the Price Shares is granted and (ii) the right to dissolve the agreement according to the provisions of article 6:265 of the Netherlands Civil Code is waived 2.6 Boon acquired the Boon Shares as a result of transfer by way of decertification ("levering ten titel van beeindiging beheer") by notarial deed executed on the tenth of March nineteen hundred and ninety-eight by J.B. de Snaijer, civil law notary , practising in Amsterdam, in which deed (i) full discharge for custody of the Boon Shares is granted and (ii) the right to <PAGE> 7 dissolve the agreement according to the provisions of article 6:265 of the Netherlands Civil Code is waived 2.7 Den Hartog acquired the Den Hartog Shares as a result of transfer by way of decertification ("levering ten titel van beeindiging beheer") by notarial deed executed on the tenth of March nineteen hundred and ninety-eight by J.B. de Snaijer, civil law notary, practising in Amsterdam, in which deed (i) full discharge for custody of the Den Hartog Shares is granted and (ii) the right to dissolve the agreement according to the provisions of article 6:265 of the Netherlands Civil Code is waived 2.8 Balint acquired the Balint Shares as a result of- transfer by way of decertification ("levering ten titel van beeindiging beheer") by notarial deed executed on the tenth of March nineteen hundred and ninety-eight by J.B. de Snaijer, civil law notary, practising in Amsterdam, in which deed (i) full discharge for custody of the Balint Shares is granted and (ii) the right to dissolve the agreement according to the provisions of article 6:265 of the Netherlands Civil Code is waived PURCHASE PRICE. ARTICLE 3. 3.1 The purchase price of the Shares as well as the manner of payment thereof have been inserted in the Agreement" 3.2 A part of the purchase price being an amount of two hundred sixty-six thousand six hundred sixty-seven United States dollars (US$ 266,667) was paid to Transferors. Transferors grant full discharge to Transferee for payment of the amount mentioned in the preceding sentence. REPRESENTATION TRANSFERORS ARTICLE 4. Without prejudice to the representations mentioned in the Agreement, each of Transferors represents to Transferee to which he transferred the shares that: a. he is fully authorised to sell and transfer the shares; b. no option rights or other rights of third parties to demand transfer of the <PAGE> 8 shares exist; c. none of the shares is subject to a right of pledge or any other right; no one may demand that such right shall be vested; d. none of the shares is subject to seizure (in Dutch: "beslag"); e. all shares have been paid up in full. RESTRICTIONS ON THE TRANSFER OF SHARES ARTICLE 5 Pursuant to the provisions of article 12 paragrapll16 of the articles of association of the Company Transferors herewith declare that the restrictions on the transfer of shares as laid down in the articles of association of the Company do not apply to the present transfers of the Shares. ACKNOWLEDGEMENT ARTICLE 6. The Company acknowledges the transfers of the Shares according to this deed COSTS. ARTICLE 7. The costs of this deed shall be borne by the Company. ARTICLE 2:204C NETHERLANDS CIVIL CODE. ARTICLE 8 The provisions of article 2:204c of the Netherlands Civil Code do not apply to the Agreement, as Transferee is not a Netherlands company GOVERNING LAW. ARTICLE 9. This agreement shall be governed by the laws of the Netherlands To this deed has been attached a copy of the Agreement. The proxies to the appearers sub 1a, 1b, 1c and 1i are evidenced by four non notarial instruments, which are attached to this deed, The proxies to the appearer sub 1d, 1e, 1f, 1g and 1h are evidenced by five non notarial instruments, which are attached to four deeds of issue of (certified depositary receipts for) shares, executed today, before me, notary. The existence of the proxies is sufficiently evidenced to <PAGE> 9 me, notary This deed is executed in Amsterdam on the date shown at the head hereof. After the substance of this deed has been stated to the appearers, they unanimously declared to have noted its contents and not to insist on it being read out in full Immediately after those parts of the deed that the law requires to be read out have been read out, this deed is signed by the appearers, who are known to me, notary, and by me, notary <PAGE> EXHIBIT C Articles of Association <PAGE> ** B.V. -------------------- C O N T E N T S --------------- Article 1 Name. Corporate Seat. Article 2 Objects. Article 3 Share capital and shares. Article 4 Issue of shares. Article 5 Payment for shares. Article 6 Repurchase and disposal of shares. Article 7 Shareholders register. Article 8 Notices of meetings and notifications. Article 9 Transfer of shares. Article 10 Restrictions on the transfer of shares. Article 11 Management. Article 12 Resolutions of the managing board. Article 13 Representation. Authorised signatories. Article 14 General meetings. Article l5 Voting rights of shareholders. Article 16 Financial year. Annual accounts. Article 17 Auditor. Article 18 Profit and loss. Article 19 Distribution of profits. Article 20 Liquidation. Article 21 Transitional provision. <PAGE> version dated 3-3II/10-3-1998 emj/sh/wdh F:\ONDWERK\EN\EN98\51445743.Z on this day, the ** day of ** nineteen hundred and ninety-eight appears before me, Francois Diederik Rosendaal, notaris (civil law notary) in Rotterdam: ** The person appearing declares that on ** nineteen hundred and ninety-eight the general meeting of shareholders of Pan Genetics B.V., a private company with limited liability, which corporate seat in Heemskerk, The Netherlands, and address at: 1105 BE Amsterdam Zuidoost, The Netherlands, Paasheuvelweg 15, resolved to amend the articles of association of this company and to authorise the person appearing to execute this deed. Pursuant to those resolutions the person appearing declares that she amends the company's articles of association such that these shall read in full as follows ARTICLES OF ASSOCIATION: NAME. CORPORATE SEAT. ARTICLE 1: The name of the company is: ** B.V. Its corporate seat is in Heemskerk (The Netherlands). OBJECTS. ARTICLE 2. The objects of the company are: a. to develop and manufacture medicines and patents on medicines and other pharmaceutical products, as well as to buy and sell, and to import and export of these <PAGE> 2 products; b. to co-operate, to take an interest in, to take over and/or to conduct the management of and to finance other enterprises, to lend, to provide security included mortgages and guarantees; and b. to perform all activities which are incidental to or which i may be conductive to any of the foregoing. SHARE CAPITAL AND SHARES. ARTICLE 3. 3.1. The authorised share capital of the company amounts to two hundred thousand Dutch guilders (NLG 200,000). It is divided into two million shares of ten cents {NLG 0.10) each. 3.2. The shares shall be in registered form and shall consecutively be numbered from 1 onwards. 3.3. No share certificates shall be issued. 3.4. The company may make loans in respect of a subscription for or acquisition of shares in its share capital up to an amount not exceeding the amount of its distributable reserves. A resolution by the managing board to make a loan as referred to in the preceding sentence shall be subject to the approval of the general meeting of shareholders, hereinafter also to be referred to as: the general meeting. The company shall maintain a non-distributable reserve for an amount equal to the outstanding amount of the loans as referred to in this paragraph. ISSUE OF SHARES. ARTICLE 4. 4.1. Shares shall be issued pursuant to a resolution of the general meeting; the general meeting shall determine the price and further terms and conditions of the issue. 4.2. Shares shall never be issued at a price below par. <PAGE> 3 4.3. Shares shall be issued by notarial deed, in accordance with the provisions set out in section 2:196 of the civil Code. 4.4. Shareholders have no pre-emption rights upon issue of shares or upon a grant of rights to subscribe for shares. 4.5. The company is not authorised to cooperate in the issue of depositary receipts for shares. PAYMENT FOR SHARES. ARTICLE 5. 5.1. Shares shall only be issued against payment in full. 5.2. Payment must be made in cash, providing no alternative contribution has been agreed. 5.3. Payment in cash may be made in a foreign currency, subject to the company's consent. REPURCHASE AND DISPOSAL OF SHARES. ARTICLE 6. 6.1. Subject to authorisation by the general meeting, the managing board may cause the company to acquire such number of fully paid up shares in its own share capital for a consideration that the aggregate par value of the shares in its share capital to be acquired and already held by the company and its subsidiary companies does not exceed half the issued share capital and without prejudice to the other provisions of the law in respect thereof. 6.2. Article 4, paragraph 1, shall equally apply to the disposal 0(pound) shares acquired in its share capital by the company. A resolution to dispose of such shares shall be deemed to include the approval as referred to in section 2=195, subsection 3 of the Civil Code. SHAREHOLDERS REGISTER. ARTICLE 7. <PAGE> 4 7.1. The managing board shall maintain a shareholders register in accordance with the requirements set for that purpose by law. 7.2. The managing board shall make the register available at the office of the company for inspection by the shareholders NOTICES OF MEETINGS AND NOTIFICATIONS. ARTICLE 8. 8.1. Notices of meetings and notifications to shareholders shall be sent by registered or regular letter to the addresses stated in the shareholders register. 8.2. Notifications to the managing board 5hall be sent by registered or regular letter to the office of the company or to the addresses of all managing directors. TRANSFER OF SHARES. ARTICLE 9. Any transfer of shares shall be effected by notarial deed, in accordance with the provisions set out in section 2:196 of the civil Code. RESTRICTIONS ON THE TRANSFER OF SHARES. ARTICLE 10. 10.1. A transfer of shares in the company -not including a transfer by the company of shares which it has acquired in its own share capital may only be effected with due observance of paragraphs 2 to 7 inclusive of this article. 10.2. A shareholder who wishes to transfer one or more shares shall require the approval of the general meeting. 10.3. The transfer must be effected within three months after the approval has been granted or is deemed to have been granted. 10.4. The approval shall be deemed to have been granted if the general meeting, simultaneously with the <PAGE> 5 refusal to grant its approval, does not provide the requesting shareholder with the names of one or more prospective purchasers who are prepared to purchase all the shares referred to in the request for approval. against payment in cash, at the purchase price determined in accordance with paragraph 5; the company itself may only be designated as prospective purchaser with the approval of the requesting shareholder. The approval shall likewise be deemed granted if the general meeting has not made a decision in respect of the request for approval within six weeks of its receipt. 10.5. The requesting shareholder and the prospective purchasers accepted by him shall determine the purchase price referred to in paragraph 4 by mutual agreement. Failing agreement, the purchase price shall be determined by an independent expert, to be designated by mutual agreement between the managing board and the requesting shareholder. 10.6. Should the managing board and the requesting shareholder fail to reach agreement on the designation of the independent expert, such designation shall be made by the President of the Chamber of Commerce and Industry. within the district in which the company has its corporate seat. 10.7. Once the purchase price of the shares has been determined by the independent expert. the requesting shareholder shall be free, for a period of One month after such determination of the purchase price, to decide whether he will transfer his shares to the designated prospective purchasers. MANAGEMENT: <PAGE> 6 ARTICLE II. II.1 The company shall be managed by a managing board, consisting of one or more managing directors. The general meeting shall determine the number of managing directors. A legal entity may be appointed as a managing director. II.2. Managing directors shall be appointed by the general meeting. The general meeting may at any time suspend and dismiss managing directors. II.3. The general meeting shall determine the terms and conditions of employment of the managing directors II.4. In the event that one.-or more managing directors is prevented from acting or is failing, the remaining managing directors or the only remaining managing director shall temporarily be in charge of the management. In the event that all managing directors are or the only managing director is prevented from acting or are / is failing, the person designated or to be designated for that purpose by the general meeting shall temporarily be in charge of the management. Failing one or more managing directors the person referred to in the preceding sentence shall take the necessary measures as soon as possible in order to have a definitive arrangement made. RESOLUTIONS BY THE MANAGING BOARD. ARTICLE 12. 12.1. With due observance of these articles of association, the managing board may adopt rules governing its internal proceedings. Furthermore, the managing directors may divide their duties among themselves, whether or not by rule. 12.2. The managing board shall meet whenever a managing director so requires. The managing board shall adopt its resolutions by an absolute majority of <PAGE> 7 votes cast. In a tie vote, the general meeting shall decide. 12.3. The managing board may also adopt resolutions without holding a meeting, provided such resolutions are adopted in writing, by cable. by telex or by telefax and all managing directors have expressed themselves in favour of the proposal concerned. 12.4. The managing board shall adhere to the instructions of the general meeting in respect of the general financial, social, economic and personnel policies to be pursued by the company. 12.5 The general meeting may adopt resolutions pursuant to which clearly specified resolutions of the managing board require its approval. REPRESENTATION. AUTHORISED SIQNATORIES. ARTICLE 13. 13.1 The managing board is authorised to represent the company. In the event that more than one managing director is in office, the company may also be represented by two managing directors acting jointly. 13.2. If a managing director, acting in his personal capacity, enters into an agreement with the company or conducts any litigation against the company. the company may, with due observance of the provisions of the first paragraph, be represented in that matter either by the managing board or the other managing directors, unless the general meeting designates a person for that purpose or the law provides for the designation in a different manner. Such person may also be the managing director in respect of whom there is a conflict of interest. If a managing director has a conflict of interest with the company other than as referred to in the penultimate sentence, he shall, as in the case of <PAGE> 8 the managing board or the other managing directors. have the power to represent the company, with due observance of the provisions of the first paragraph. 13.3. The managing board may grant to one or more persons, whether or not employed by the company, the power to represent the company ("procuratie") or grant in a different manner the power to represent the company on a continuing basis. The managing board may also grant such titles as it may determine to persons, as referred to in the preceding sentence, as well as to other persons, but only if such persons are employed by the company. GENERAL MEETINGS. ARTICLE 14. 14.1. The annual general meeting shall be held within six months after the end of the financial year. 14.2. The agenda for this meeting shall in any case include the adoption of the annual accounts and the allocation of profits, unless the period for preparation of the annual accounts has been extended. At such general meeting the person referred to in article 11, paragraph 4, shall be designated and, furthermore, all items which have been put on the agenda in accordance with paragraphs 5 and 6 of this article shall be discussed. 14.3. A general meeting shall be convened whenever the managing board or a shareholder considers appropriate. 14.4. General meetings shall be held in the municipality where the company has its corporate seat. Resolutions adopted at a general meeting held elsewhere shall be valid only if the entire issued share capital is represented. <PAGE> 9 14.5. Shareholders shall be given notice of the general meeting by the managing board, by a managing director or by a shareholder. The notice shall specify the items to be discussed. 14.6. Notice shall be given not later than on the fifteenth day prior to the date of the meeting. If the notice period was shorter or if no notice was sent, no valid resolutions may be adopted unless the resolution is adopted by unanimous vote at a meeting at which the entire issued share capital is represented. The provision of the preceding sentence shall equally apply to matters which have not been mentioned in the notice of meeting or in a supplementary notice sent with due observance of the notice period. 14.7. The general meeting shall appoint its chairman. The chairman shall designate the secretary. 14.8. Minutes shall be kept of the business transacted at a meeting. VOTING RIGHTS OF SHAREHOLDERS. ARTICLE 15. 15.1. Each share confers the right to-cast one vote. The voting rights attached to shares may not be conferred on holders of a right of usufruct and holders of a right of pledge on such shares. 15.2. Shareholders may be represented at a meeting by a proxy authorised in writing. 15.3. Resolutions shall be adopted by an absolute majority of votes cast. 15.4. Shareholders may adopt any resolutions which they could adopt at a meeting, without holding a meeting, provided that the managing directors have been able to advice regarding such resolution. Such a resolution shall only be valid if all shareholders entitled to vote have cast their votes <PAGE> 10 in writing, by cable, by telex or by telefax in favour of the proposal concerned. Those who have adopted a resolution without holding a meeting shall forthwith notify the managing board of the resolution so adopted. FINANCIAL YEAR. ANNUAL ACCOUNTS. ARTICLE 16. 16.1. The financial year shall coincide with the calendar year. 16.2. Annually, within five months after 'the end of each financial year subject to an extension of such period not exceeding six months by the general meeting on the basis of special circumstances - the managing board shall prepare annual accounts and .shall make these available at the office of the company for inspection by the shareholders. The annual accounts shall be accompanied by the auditors certificate, referred to in article 17, if the assignment referred to in that article has been given, by the annual report, unless section 2:403 of the Civil Code is applicable to the company, and by the additional information referred to in section 2:392. subsection 1 of the Civil Code. insofar as the provisions of that subsection apply to the company. The annual accounts shall be signed by all managing directors. If the signature of one or more of them is lacking, this shall be disclosed, stating the reasons thereof. 16.3. Adoption of the annual accounts by the general meeting shall constitute a discharge of the managing board for its management during the financial year concerned, unless a proviso is made by the general meeting and without prejudice to the provisions of the law. AUDITOR. <PAGE> 11 ARTICLE 17. The company may give an assignment to an auditor, as referred to in section 2:393 of the Civil Code, to audit the annual accounts prepared by the managing board in accordance with subsection 3 of such section provided that the company shall give such assignment if the law so requires. If the law does not require that the assignment mentioned in the preceding sentence be given the company may also give the assignment to audit the annual accounts prepared by the managing board to another expert i such expert shall hereinafter also be referred to as: auditor. The general meeting shall be authorised to give the assignment referred to above. If the general meeting fails to do so, then the managing board shall be so authorised. The assignment given to the auditor may be revoked at any time by the general meeting and by the managing board if it has given such assignment. The auditor shall report on his audit to the managing board and shall issue a certificate containing its results. PROFIT AND LOSS. ARTICLE 18. 18.1. Distribution of profits pursuant to this article shall be made following the adoption of the annual accounts which show that such distribution is allowed. 18.2. The profits shall be at the free disposal of the general meeting. 18.3. The company may only make distributions to shareholders and other persons entitled to distributable profits to the extent that its equity exceeds the total amount of its issued share capital and the reserves to be maintained pursuant to the law. 18.4. A loss may only be applied against reserves maintained pursuant to the law to the extent <PAGE> 12 permitted by law. 18.5. When determining the division of the amount to be distributed among shareholders, shares which are held by the company shall not be counted. DISTRIBUTION OF PROFITS. ARTICLE 19. 19.1. Dividends shall be due and payable four weeks after they have been declared, unless the general meeting determines another date on the proposal of the managing board . 19.2. The general meeting may resolve that dividends shall be distributed in whole or in part in a form other than cash. 19.3. Without prejudice to article 19, paragraph 3, the general meeting may resolve to distribute all or any part of the reserves. 19.4. Without prejudice to article l8, paragraph 3, an interim dividend shall be distributed out of the profits made in the current financial year, if the general meeting so determines on the proposal of the managing board. LIQUIDATION. ARTICLE 20. 20.1. If the company is dissolved pursuant to a resolution of the general meeting, it shall be liquidated by the managing board, if and to the extent that the general meeting shall not resolve otherwise. 20.2. After the legal entity has ceased to exist, the books and records of the company shall remain in the custody of the person designated for that purpose by the liquidators for a period of ten years. Finally the person appearing declares that at the time of execution of this deed the issued share capital of the company amounts to forty thousand Dutch guilders <PAGE> 13 (NLG 40,000). The required ministerial declaration of no-objection was granted on ** nineteen hundred and ninety-eight, number B.V. 522.7.23. The certificate of which section 2:203a of the Civil Code, prescribes that it shall be attached to this deed and the ministerial declaration of no-objec:tion. are attached to this deed. In witness whereof the original of this deed, which shall be retained by me, is executed in Rotterdam, on the date first given in the head of this deed. Having conveyed the substance of this deed to the person appearing she has declared that she has taken cognizance of the contents of the deed and does not require it to be read out to her in full. Immediately after the reading of those parts of the deed which the law prescribes to be read out, this deed is signed by the person appearing, who is known to me, notaris, and by myself, notaris. <PAGE> EXHIBIT D Letter of Intent <PAGE> LETTER OF INTENT PanGenetics B. V. ("PanGenetics"), a company organized and existing under the laws of The Netherlands and having its principal place of business at Paasheuvelweg 15, 1105 BE, Amsterdam, The Netherlands, Upither B.V. ("Upither") a company organized and existing under the laws of The Netherlands and having its principal place of business at Yalelaan 1, Utrecht, The Netherlands and the Faculty of Veterinary Medicine of the Utrecht University ("DGK-UU"), having its principal offices at Yalelaan 1, Utrecht, The Netherlands, intend to negotiate a Collaboration, Option and License Agreement that includes the terms and conditions outlined in this letter. WHEREAS, PanGenetics holds one-third (1/3) of the outstanding shares of Upither; WHEREAS, DGK-UU holds two-thirds (2/3) of the outstanding shares of Upither; WHEREAS, Upither has proprietary technology, patent applications and research programs in the field of immunotherapy of autoimmune diseases; WHEREAS, PanGenetics has preclinical development programs and expertise in the organization of clinical trials in the field of immunotherapy of auto immune diseases; WHEREAS, PanGenetics, Upither and DGK-UU ("the Parties") wish to provide for a collaboration for the preclinical and clinical development for some of Upither's proprietary technology in the field of immunotherapy of autoimmune diseases ("the Field"); NOW, THEREFORE, the Parties intend to negotiate a Collaboration, Option and License Agreement that will give PanGenetics the responsibility for the preclinical and clinical development for some of Upither's proprietary technology in the Field and therefore agree as outlined below: 1. During a period of six (6) months starting May 15, 1997, the Parties will define and negotiate a binding Collaboration, Option and License Agreement including detailed terminology and the terms outlined in this letter of intent. 2. PanGenetics and DGK-UU will grant to Upither a world-wide, royalty free license with the right to sublicense to make, use and sell products based on or developed with the proprietary technology listed in Exhibit 1 attached hereto. Under these License Agreements Upither will be responsible for all costs associated with the filing and prosecution of all patents and patents applications covering the licensed proprietary technology. 1 page 1 <PAGE> 3. PanGenetics will obtain from Upither an exclusive Option to world-wide, licenses with the right to sublicense to make, us and sell products based on or developed with the Upither Proprietary Rights listed in Exhibit 1 attached hereto. In return for the exclusive Option, PanGenetics will compensate Upither in the following way: PanGenetics will pay to Upither DFL 500,000 per year for an initial period of four (4) years. Upither will use this funding to pay for a Research Program at the department of prof. dr. w. van Eden at DG -VU. The aim of this Research Program will be to study the molecular and cellular mechanisms underlying the pathophysiology of autoimmune diseases. Of the research funding, twenty-five percent (25%) may be spent on general supportive measurements s h as equipment and technical support for routine laboratory activities in the laboratory of prof dr. W. van Eden. Any intellectual property resulting from the Research Program, whether patentable or not, will be owned by Upither. Upither shall provide PanGenetics the rig t of first refusal to all right and title to such inventions. At the end of the third year of the initial period of four (4) years, the Parties may negotiate the terms and conditions under which the Research Program can be extended for an additional period. 4. In the event that PanGenetics exercises its Option granted under this Agreement, the Parties will negotiate the terms of a binding License Agreement for the Upither Proprietary Rights subject of the Option exercise. 5. Upither and PanGenetics agree t execute a binding Agreement under which PanGenetics will obtain an exclusive world-wide license with the right to sublicense to make, use and sell products based on or developed with the Upither Proprietary Rights as defined in patent application PCT/EP95100l08 listed in Exhibit 1 attached hereto. For, and in consideration of the License to the Upither Proprietary Rights as defined in patent application PCT/EP95100l08 granted to PanGenetics, PanGenetics will pay a royalty of 3% of net sales to Upither for Product(s) sold by PanGenetics or its sublicensees to unrelated third parties. In addition, PanGenetics will pay the following milestone payments to Upither: DFL 250,000 upon initiation of phase I or phase I/II clinical testing; DFL 500,000 upon initiation of phase II clinical testing; DFL 750,000 upon initiation of phase III clinical testing and; DFL 1,000,000 upon first product sales. 6. PanGenetics grants to Upither the right of first refusal to provide R&D activities related to the Licensed Products of the present agreement to PanGenetics when clinical testing of such products has commenced. 7. PanGenetics will to the extent practical collaborate with Upither, the laboratory of prof dr. w. van Eden and their associated clinical research groups on the preclinical and clinical testing of lead products under the present a agreement. In the event that PanGenetics determines that it is in the best interest of the project(s) to collaborate with other research or clinical groups, consultation will be made first with Upither. 8. In the event that PanGenetics can not fulfill its financial commitments under this agreement, all rights granted hereunder will revert to Upither. page 2 <PAGE> 9. Upither and the group of prof. dr. w. van Eden at DGK-UU may publish or present the findings of the research involving the Research Program, provided that at least thirty (30) days before submission for publication or presentation to any third party a copy of the publication or presentation is delivered to PanGenetics. At PanGenetics' request Upither and the group of prof. dr. w. van Eden at DGK-UU shall delay revealing any patentable subject matter in the disclosure in order to permit the filing of patent applications. 10. Agreed and accepted: UPITHER B.V. PANGENETICS B. V. Signed by:/s/ IR. DR