DALLAS -- Texas A&M University has ordered an independent review of whether a nonprofit corporation can and should use its name for a $40 million taxable issue to buy the assets of a biotechnology company headed by the university's former chairman.

University regents said they were surprised to learn last month that the Texas A&M University System Research Technologies Corp. had been created May 3 and could issue bonds without the oversight of the regents, the state's Bond Review Board, or the Texas attorney general.

Now the regents have engaged the Dallas law firm of Locke, Purnell, Rain, Harrell to answer legal questions, while university officials and First Southwest Co. of Dallas, the financial adviser to the system, study the deal's economic feasibility. Officials did not return phone calls, but sources said their reports were expected as early as this week.

Houston lawyer Ross Margraves, chairman of the board of regents, said the proposed issue could be misconstrued as a Texas A&M bond issue, and -- if the deal were to default -- could hurt investor confidence in the university's double-A rated bonds.

"My concerns is that they [investors] might buy this thinking this is an A&M deal," Mr. Margraves said. "I don't want Ma Friggit out here buying $100,000 in these bonds and thinking A&M let her down."

He added, "It's intended that we have no liability for the performance of this debt."

Further, some observers privately question if the $40 million, nonrated taxable deal could be sold by Prudential Securities Inc. without the Texas A&M name. "I don't think it can be done," one regent said.

Asked if a sale without the university's name is possible, Peter W. Bruton, a director in the public finance department at Prudential in New York, answered, "I don't know."

The Research Technologies Corp. was incorporated in May by David Eller, chairman of the board of regents until his six-year term expired in January 1989. It was formed as an affiliate of the Texas A&M Research Corp., a nonprofit created by the university on Jan. 25 that is chaired by Mr. Eller.

While he does not sit on the board of the second nonprofit, the Research Technology Corp., that agency plans to use $33 million of the bond proceeds to buy certain assets of Houston-based Granada BioSciences Inc., a publicly traded biotechnology company of which Mr. Eller is chairman.

Under an agreement, the company would continue to manage the assets for the benefit of the university. But some have questioned whether the proposed bond deal should be completed.

"Because of Mr. Eller's former association with the A&M system, everyone needs to understand the ramifications of this if we are going to go forward," Mr. Margraves said. He later added, "You want something like this to be able to pass the smell test."

Others question the economics of the transaction. "They seem to be in a big rush about it," said Mary Nan West, a South Texas rancher and a regent since January. "If it [Granada] is all so great and good, why hasn't somebody else come along and bought it?"

The company last reported a profit in 1985, and public filings show that from 1986 to 1990, the long-term debt of Granada BioSciences tripled to just over $16 million. At the same time, shareholders equity fell 65% to $27.1 million.

And the company, its affiliates, and principals, including Mr. Eller, are the subject of class action lawsuits brought by investors since 1987 alleging fraud Texas securities law violations, and other breaches. The company is fighting the claims, many of which stem from losses incurred by investors in cattle partnerships sold by Granada.

In an interview Friday, Mr. Eller said the lawsuits and a lack of profits are not indicators that the company, of which he claims no direct ownership, is in financial trouble.

"I'm not giving you can excuse," said Mr. Eller, who cited examples of other technology companies with similar histories. "I'm saying that by analogy, it's not unique."

Later, he added, "If the deal doesn't work, it's not going to kill anybody."

The bond counsel for the transaction said Granada BioSciences' situation has given the nonprofit the opportunity to acquire for considerably less assets that have been valued at up to $100 million.

"These assets would not be available at anything like this price if Granada were financially strong," said Tom Leonard, partner with Leonard Marsh Hurt Terry & Blinn in Austin, the bond counsel. "The real beneficiary of the transaction is going to be the Texas A&M University system."

He added, "The reason there is going to be a transaction at all is that for whatever reasons, Granada has chosen to sell these assets."

He said the proposal has been found fair and the proposed price reasonable by a feasibility consultant, a university official, an independent expert, and Kemper Securities Co., all of which reviewed the transaction.

In fact, Mr. Leonard said the agreement would mean no liability for Texas A&M for the debt service or operations costs, but could give the university as much as $10 million from a management agreement and access to intellectual property developed by Granada.

Others agree. "It could mean as much as $10 million to $20 million of research funds for us with no liability to Texas A&M," said Billy Clayton, a former speaker of the state House of Representatives who is both a regent and a nonvoting member of the nonprofit. "This is a good deal for us."

Under the proposal, the nonprofit would acquire approximately 8,000 head of genetically superior beef and dairy cattle for $29.3 million; 2,600 cattle embryo for $1.8 million; and technologies meant to improve the production capabilities of food animals for $1.9 million.

Also, $5 million of the issue would be used to establish a reserve fund. The remainder of the issue would pay costs of issuance.

When the university decided in January to create the first nonprofit, Texas A&M Research Corp., the idea was to benefit by commercializing technology. The concept has been tried elsewhere, but is new to the university, which Mr. Eller says has discussed the idea for years.

"If it does work, it's going to end up being a vehicle through which it will set a model and a precedent for Texas A&M," he said.

Mr. Margraves, the board's chairman, said the regents support the public-private ventures, particularly in a time when state budgets are becoming tighter.

He and other regents agreed that if the plan works, it could lessen the need for taxpayers' dollars to fund research as the university is able to profit from licensing the technology it develops.

But many regents say they were surprised to learn that a second nonprofit had been created in May bearing the Texas A&M name. In interviews, they said they were also surprised that the new agency did not require oversight from their board or the state, or approval by the state's attorney general.

Assistant Attorney General Jim Thomassen, chief of the state's public finance division, said he reviewed the agency and found that oversight was not required because it is like a private corporation doing business with Texas A&M.

"This entity is not controlled by A&M in any way nor does it act on behalf of A&M," he said, "It's like any other XYZ corporation that can go over to A&M and get a contract to do business."

The fact that the nonprofit did not require oversight caused the first bond counsel, Hutchison, Boyle, Brooks & Fisher of Dallas, to back away from the deal.

"Our position was that any financing that employs, directly or indirectly, the name should go to the Bond Review Board and the attorney general," said senior partner Ray Hutchison.

Further, some regents were upset that they were not informed about the issue until it was almost ready to be sold. No date has been set for the deal yet.

"A lot of the project had been put together before we were aware of it," said James Bond, deputy chancellor for legal and external affairs at Texas A&M. "I don't believe anybody was intending to go forward with the issue prior to getting the regents' approval."

While regents may not have been aware of the issue, officials connected to the project said they have had regular communication with the university. "It wasn't done without their knowledge," said Prudential's Mr. Bruton. "It would be the last thing we wanted to do."

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