0001047469-03-037476.txt : 20031114 0001047469-03-037476.hdr.sgml : 20031114 20031114151604 ACCESSION NUMBER: 0001047469-03-037476 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABGENIX INC CENTRAL INDEX KEY: 0001052837 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 943248826 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24207 FILM NUMBER: 031003864 BUSINESS ADDRESS: STREET 1: 6701 KAISER DRIVE CITY: FREMONT STATE: CA ZIP: 94555 BUSINESS PHONE: 5106086500 MAIL ADDRESS: STREET 1: 6701 KAISER DRIVE CITY: FREMONT STATE: CA ZIP: 94555 10-Q 1 a2121719z10-q.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-24207

ABGENIX, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		94-3248826 (IRS employer Identification number)
6701 Kaiser Drive, Fremont, CA (Address of principal executive office)		94555 (Zip Code)

(510) 284-6500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding in 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes ý No o

As of October 31, 2003 there were 88,211,050 shares of the Registrant's Common Stock outstanding.

TABLE OF CONTENTS

			Page No.
PART I. Financial Information
	ITEM 1. Financial Statements
		Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002	3
		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002	4
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002	5
		Notes to Condensed Consolidated Financial Statements	6
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		13
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		50
	ITEM 4. Controls and Procedures		51
PART II. Other Information
	ITEM 1. Legal Proceedings		52
	ITEM 2. Changes in Securities and Use of Proceeds		52
	ITEM 3. Defaults upon Senior Securities		52
	ITEM 4. Submission of Matters to a Vote of Security Holders		52
	ITEM 5. Other Information		52
	ITEM 6. Exhibits and Reports on Form 8-K		52
SIGNATURES			54
CERTIFICATIONS

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ABGENIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)

			September 30, 2003			December 31, 2002
ASSETS
Current assets:
	Cash and cash equivalents		$	19,831		$	207,974
	Marketable securities			247,533			188,575
	Interest receivable			2,136			2,004
	Accounts receivable, net			1,141			2,640
	Prepaid expenses and other current assets			22,392			16,538

		Total current assets		293,033			417,731
Property and equipment, net				251,526			244,419
Long-term investments				22,871			20,939
Goodwill				34,780			34,780
Identified intangible assets, net				85,508			92,349
Deposits and other assets				29,525			31,779

			$	717,243		$	841,997

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	6,390		$	21,557
	Deferred revenue			7,243			3,416
	Accrued liabilities			16,739			8,907
	Contract cancellation obligation			21,191			—
	Accrued interest payable			296			2,061

		Total current liabilities		51,859			35,941
Deferred rent				5,714			4,417
Convertible subordinated notes				200,000			200,000
Commitments
Stockholders' equity:
	Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued or outstanding			—			—
	Common stock, $0.0001 par value; 220,000,000 shares authorized; 88,017,227 and 87,655,342 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively			9			9
	Additional paid-in capital			967,549			965,821
	Accumulated other comprehensive income			3,853			4,156
	Accumulated deficit			(511,741	)		(368,347	)

		Total stockholders' equity		459,670			601,639

			$	717,243		$	841,997

See accompanying notes.

ABGENIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

			Three Months Ended September 30,						Nine Months Ended September 30,
			2003			2002			2003			2002
Revenues:
	Contract revenue		$	1,957		$	2,635		$	10,463		$	16,135
	Interest and other income			2,036			5,068			8,010			15,460

		Total revenues		3,993			7,703			18,473			31,595

Costs and expenses:
	Research and development			26,008			29,570			67,943			97,489
	Manufacturing start-up costs			10,282			—			63,127			—
	Amortization of identified intangible assets, related to research and development			1,792			1,815			5,398			5,437
	General and administrative			7,828			8,945			21,182			22,872
	Impairment of investments			—			—			—			72,151
	Interest expense			1,652			1,228			4,133			3,661

		Total costs and expenses		47,562			41,558			161,783			201,610

Loss before income tax expense				(43,569	)		(33,855	)		(143,310	)		(170,015	)
Foreign income tax expense				—			—			84			—

Net loss			$	(43,569	)	$	(33,855	)	$	(143,394	)	$	(170,015	)

Basic and diluted net loss per share			$	(0.50	)	$	(0.39	)	$	(1.63	)	$	(1.95	)

Shares used in computing basic and diluted net loss per share				87,962			87,395			87,865			87,122

See accompanying notes.

ABGENIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

			Nine Months Ended September 30,
			2003			2002
Operating activities
Net loss			$	(143,394	)	$	(170,015	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation			20,489			8,023
	Amortization of identified intangible assets			5,398			5,437
	Impairment of identified intangible asset			1,443			—
	Amortization of debt issuance cost			896			662
	Impairment of investments			—			72,151
	Loss on sale of equipment			29			—
	Changes for certain assets and liabilities:
		Interest receivable		(132	)		319
		Accounts receivable		1,499			858
		Prepaid expenses and other current assets		(5,854	)		(6,103	)
		Deposits and other assets		1,358			(1,433	)
		Accounts payable		(15,167	)		(1,553	)
		Deferred revenue		3,827			(8,608	)
		Accrued liabilities		7,832			(373	)
		Contract cancellation obligation		21,191			—
		Accrued interest payable		(1,765	)		311
		Deferred rent		1,297			1,785

Net cash used in operating activities				(101,053	)		(98,539	)

Investing activities
Purchases of marketable securities				(255,087	)		(113,939	)
Maturities of marketable securities				40,533			134,414
Sales of marketable securities				153,361			99,022
Purchases of property and equipment				(27,636	)		(124,790	)
Investment in note receivable				—			(2,750	)
Sales of equipment				11			—
Payments for acquisition liabilities				—			(215	)

Net cash used in investing activities				(88,818	)		(8,258	)

Financing activities
Net proceeds from issuance of convertible subordinated notes				—			194,000
Net proceeds from issuances of common stock				1,728			1,802

Net cash provided by financing activities				1,728			195,802

Net increase (decrease) in cash and cash equivalents				(188,143	)		89,005
Cash and cash equivalents at beginning of period				207,974			99,663

Cash and cash equivalents at end of period			$	19,831		$	188,668

See accompanying notes.

ABGENIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation—The unaudited condensed consolidated financial statements of Abgenix, Inc. (the "Company" or "Abgenix") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information or footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2002, and accompanying notes included in the Company's Annual Report as filed on Form 10-K with the Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, 2003, are not necessarily indicative of the results to be expected for the full year or for any other future period.

Revenue Recognition—The Company receives payments from customers for license, option, service and milestone fees. These payments are generally non-refundable but are reported as deferred revenue until they are recognizable as revenue. The Company has followed the following principles in recognizing revenue:

•: Research license fees: Fees to license the use of the Company's proprietary technologies in research performed by the customer are generally recognized only after both the license period has commenced and the technology has been delivered. However, in multiple-element revenue arrangements, if the delivered technology does not have stand alone value or if the Company does not have objective and reliable evidence of the fair value of the undelivered products or services, the amount of revenue allocable to the delivered technology is deferred until the remaining products or services are provided to the customer.
•: Product license fees: Fees to license the production, use and sale of an antibody generated by the Company's proprietary technologies are generally recognized only after both the license period has commenced and the technology has been delivered. However, in multiple-element revenue arrangements, if the delivered technology does not have stand alone value or if the Company does not have objective and reliable evidence of the fair value of the undelivered products or services, the amount of revenue allocable to the delivered technology is deferred until the remaining products or services are provided to the customer.
•: Option fees: Fees for granting options to obtain product licenses to develop a product are recognized as revenue when the option is exercised or when the option period expires, whichever occurs first. However, in multiple-element revenue arrangements, if the option does not have stand alone value or if the Company does not have objective and reliable evidence of the fair value of the undelivered products or services, the amount of revenue allocable to option fees is deferred until the remaining products or services are provided to the customer.
•: Research services: Fees for research services performed by Abgenix are recognized ratably over the entire period the services are performed. In the case of co-development arrangements, fees received for research services provided are recorded as contract revenues in the period the services are rendered.

•: Milestones: Incentive milestone payments are recognized as revenue when the milestone is achieved. Incentive milestone payments are triggered either by the results of the Company's research efforts or by events external to Abgenix, such as regulatory approval to market a product. Incentive milestone payments are substantially at risk at the inception of the contract, and the values assigned thereto are commensurate with the type of milestone achieved. The Company has no future performance obligations related to an incentive milestone that has been achieved.

Stock-Based Compensation—The Company accounts for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company does not recognize compensation expense for employee stock options granted at fair market value. For purposes of disclosures pursuant to Statement of Financial Accounting Standards (SFAS 123), as amended by SFAS 148, the estimated fair value of options is amortized to expense over the options' vesting period. The following table illustrates what net loss would have been had the Company accounted for its stock- based awards under the provisions of SFAS 123. Pro forma amounts may not be representative of future periods.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
	(in thousands, except per share amounts)
Net loss as reported	$	(43,569	)	$	(33,855	)	$	(143,394	)	$	(170,015	)
Stock-based employee compensation costs that would have been included in the determination of net loss if the fair value based method had been applied to all awards		(15,058	)		(20,772	)		(46,950	)		(62,036	)

Pro forma net loss as if the fair value based method had been applied to all awards	$	(58,627	)	$	(54,627	)	$	(190,344	)	$	(232,051	)

Basic and diluted net loss per share as reported	$	(0.50	)	$	(0.39	)	$	(1.63	)	$	(1.95	)

Pro forma basic and diluted loss per share	$	(0.67	)	$	(0.63	)	$	(2.17	)	$	(2.66	)

The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for the three and nine months ended September 30, 2003 and 2002:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2003		2002		2003		2002
Risk-free interest rate	3.13	%	3.07	%	2.98	%	3.07	%
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Volatility factors of the expected market price of our Common Stock	0.96		1.05		1.01		1.05
Weighted-average expected life of option (years)	5.55		5.54		5.53		5.54

These same assumptions were applied in the determination of the option values related to stock options granted to non-employees, except the option life, for which the term of the consulting contracts, 1 to 5 years, was used. The value of stock options granted to non-employees has been recorded in the financial statements.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option

valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the Black-Scholes model and other existing models do not necessarily provide a reliable measure of the fair value of its employee stock options.

The weighted-average fair values of options granted during the three and nine months ended September 30, 2003 were $9.68 and $7.49 per share, respectively, and were $15.34 per share for both the three-month and nine-month periods ended September 30, 2002. All options granted were at exercise prices at the current fair market value of the stock on the date of grant.

Net Loss Per Share—Basic net loss per share is calculated based on the weighted average number of shares outstanding during the period. The impact of common stock options and warrants was excluded from the computation of diluted net loss per share, as their effect is antidilutive for all periods presented.

Reclassifications—Certain prior period balances have been reclassified to conform to the current period presentation.

2. Comprehensive Income (Loss)

Other comprehensive income (loss) consists of unrealized gains or losses on available-for-sale securities. The components of comprehensive loss were as follows (in thousands):

		Three Months Ended September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Net loss		$	(43,569	)	$	(33,855	)	$	(143,394	)	$	(170,015	)

Other comprehensive income:
	Unrealized holding losses arising during period		(1,231	)		(1,547	)		(303	)		(51,550	)
Less: reclassification adjustment for losses recognized in net loss			—			—			—			65,043

Net unrealized gains (losses) on securities			(1,231	)		(1,547	)		(303	)		13,493

Comprehensive loss		$	(44,800	)	$	(35,402	)	$	(143,697	)	$	(156,522	)

3. Goodwill and Identified Intangible Assets

During the quarter ended March 31, 2003, the Company decided to discontinue the development of therapeutic antibodies to the complement protein properdin. Accordingly, the Company recorded an impairment charge of approximately $1.4 million related to the license to develop and commercialize antibodies to properdin. The impairment charge was included in research and development expenses on the Company's statement of operations.

Identified intangible assets consisted of the following (in thousands):

	Gross Assets		Accumulated Amortization			Net
As of September 30, 2003:
Acquisition-related developed technology	$	106,183	$	(21,920	)	$	84,263
Other intangible assets		1,442		(197	)		1,245

Identified intangible assets	$	107,625	$	(22,117	)	$	85,508

As of December 31, 2002:
Acquisition-related developed technology	$	106,183	$	(16,612	)	$	89,571
Other intangible assets		3,016		(238	)		2,778

Identified intangible assets	$	109,199	$	(16,850	)	$	92,349

Amortization of acquisition-related intangibles was approximately $1.8 million and $5.3 million, respectively, for each of the three and nine month periods ended September 30, 2003 and 2002. Amortization of other intangible assets was $22,000 and $90,000, respectively, for the three and nine months ended September 30, 2003 and $46,000 and $139,000, respectively, for the three and nine months ended September 30, 2002. All of the Company's acquired identified intangibles other than goodwill are subject to amortization.

Expected amortization expense related to identified intangible assets for the three-month period from October 1, 2003, to December 31, 2003, and each of the fiscal years thereafter is as follows (in thousands):

	Periods Ending December 31,
	2003		2004		2005		2006		2007		Thereafter		Total
Acquisition-related intangibles	$	1,769	$	7,076	$	7,077	$	7,077	$	7,076	$	54,188	$	84,263
Other intangible assets	$	23	$	90	$	90	$	90	$	90	$	862	$	1,245

4. Segment Information

The operations of the Company and its wholly owned subsidiaries constitute one business segment.

Information about customers who provided 10% or more of contract revenues for the period is as follows:

Period		Number of Customers and Percentage of Contract Revenues for each of the Customers
Three months ended September 30, 2003		2 customers, 71% and 13%, respectively
Nine months ended September 30, 2003		3 customers, 29%, 26%, and 12%, respectively
Three months ended September 30, 2002		4 customers, 35%, 31%, 16% and 14%, respectively
Nine months ended September 30, 2002		3 customers, 53%, 13% and 11%, respectively

5. Restructuring Charges

In October 2002, the Company announced a restructuring plan, which consisted primarily of a 15% reduction in employees. A restructuring charge of $1.8 million was recorded in 2002 to account for severance, medical and other benefits associated with this restructuring. As of December 31, 2002, approximately $1.1 million of severance benefits were accrued. During the three and nine months ended September 30, 2003, the Company made cash payments for severance benefits of approximately

$80,000 and $1.1 million, respectively. As of September 30, 2003, approximately $22,000 of severance benefits was accrued and is expected to be paid to terminated employees over the next quarter.

6. Contract Cancellation Obligation

Effective June 30, 2003, the Company canceled its November 2000 agreement with Lonza Biologics plc ("Lonza") for the exclusive use of a cell culture production suite, because the Company determined that with the opening of its own manufacturing plant, it no longer needed access to the Lonza facility. Upon canceling the agreement, the Company became obligated to pay Lonza four equal installments of 4,250,000 British pounds on October 1, 2003, February 1, 2004, May 1, 2004 and August 1, 2004, which eliminated the Company's commitment to pay approximately $46.0 million in total monthly fees through August 2006. The value of this obligation on the effective date of June 30, 2003 was approximately $28.0 million and was recorded as a component of manufacturing start-up costs in the Company's statements of operations in the second quarter of 2003. In September 2003, the Company made the first of four installment payments to Lonza. The balance of the obligation as of September 30, 2003 was approximately $21.2 million.

7. Customer Indemnification

The Company has certain agreements with customers and collaborators that contain indemnification provisions. In such provisions, the Company typically agrees to indemnify the customer or collaborator against certain types of third-party claims. The Company would accrue for known indemnification issues if a loss were probable and could be reasonably estimated. The Company would also accrue for estimated incurred but unidentified issues based on historical activity. There was no accrual for or expense related to indemnification issues as of September 30, 2003 and 2002 and, in each case, for the three and nine months then ended.

8. Recent Accounting Pronouncements

In November 2002, the FASB issued Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into after June 30, 2003. The Company adopted EITF Issue No 00-21 on July 1, 2003. The adoption of EITF Issue No. 00-21 did not result in a material change to the Company's existing revenue recognition policy for existing and prospective revenue arrangements. The adoption of EITF Issue No. 00-21 did not have a material impact on the Company's consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46 (the "Interpretation"), Consolidation of Variable Interest Entities. The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has controlling financial interest through ownership of a majority voting interest in the entity. The Company will implement the Interpretation in the quarter ending December 31, 2003. The Company has performed a preliminary analysis of the Interpretation and does not believe that the adoption will result in a material impact on the Company's results of operations or financial position. During the quarter ending December 31, 2003, the Company will complete its evaluation of the implications of the Interpretation with respect to all variable interest entities with which it has involvement.

9. Subsequent Events

Agreements with AstraZeneca

In October 2003, Abgenix entered into a collaboration and license agreement with AstraZeneca UK Limited ("AstraZeneca") to provide for the joint discovery and development of therapeutic antibodies against up to 36 oncology targets to be commercialized exclusively worldwide by AstraZeneca. The agreement provides that Abgenix will conduct early stage preclinical research on behalf of AstraZeneca with respect to these targets. Under the agreement, Abgenix also may conduct clinical, process development and manufacturing activities for which AstraZeneca is to compensate Abgenix at competitive market rates. Abgenix may also receive milestone payments at various stages of development and royalties on commercial sales. The collaboration agreement also includes a co-development component under which Abgenix will be able to generate additional antibody product candidates against up to 18 targets that AstraZeneca will have the option to co-develop with Abgenix. The companies will share development costs and responsibilities for any co-development candidates selected by AstraZeneca. During the three-year period of selection of targets for development the Company will work exclusively with AstraZeneca to generate and develop antibodies for therapeutic use in oncology subject to various exceptions, including among others for generation and development of antigens in accordance with existing collaborations, for antigens that the Company and AstraZeneca decide not to pursue in the collaboration, and for certain process development and manufacturing services.

In October 2003, in connection with the collaboration agreement, the Company entered into a securities purchase agreement with AstraZeneca. Pursuant to the agreement, the Company issued to AstraZeneca $50.0 million of Series A-1 convertible preferred stock with a seven-year maturity and $50.0 million of Series A-2 convertible preferred stock with a 10-year maturity. The Series A-2 preferred stock, after the 60-day anniversary of the closing date, is redeemable at the option of Abgenix or exchangeable at the option of AstraZeneca for a $50.0 million convertible subordinated note. Subject to various terms and conditions, if a certain milestone event is reached, the Company will have the option to issue to AstraZeneca up to $30.0 million of Series A-3 preferred stock and if a further milestone event is reached, the Company will have the option to issue to AstraZeneca up to $30.0 million of Series A-4 preferred stock. Each of the Series A-3 preferred stock and the Series A-4 preferred stock will have a maturity date that is five years from issuance. Due to the redeemable feature, the Company expects the preferred stock to be classified as a liability on its consolidated balance sheet.

Subject to certain conditions, the Company can force conversion of each series of preferred stock into shares of common stock at a conversion price equal to the lower of (A) the average market price for the 10 days prior to the trading day immediately preceding the conversion date (provided that the average market price shall in no event be higher than 101% of the market price on the trading day immediately preceding the conversion date) or (B) $30.00 per share. At any time prior to the earlier of (A) the redemption or repurchase of the preferred stock or (B) the relevant maturity date, AstraZeneca may convert each series of preferred stock into shares of common stock at a conversion price of $30.00 per share. When and if issued by the Company, the convertible note will have the same conversion terms as the preferred stock.

Upon the occurrence of a "Type I Redemption Event," consisting of a change in control of Abgenix after the completion of a defined research period, AstraZeneca has the right to require Abgenix to redeem all outstanding shares of the preferred stock at their liquidation preference. At its option, and subject to certain conditions, Abgenix may deliver shares of its common stock in lieu of cash upon a Type I Redemption Event.

Upon the occurrence of a "Type II Redemption Event," consisting of either (i) a material breach by Abgenix of a material obligation under the Collaboration Agreement or (ii) an acquisition of

Abgenix by a competitor of AstraZeneca, in each case that occurs during a defined research period and results in AstraZeneca's termination of all research programs and its ability to designate additional antigens, AstraZeneca has the right to require Abgenix to redeem a specified portion of the outstanding shares of Preferred Stock. The amount that AstraZeneca may require Abgenix to redeem will be based upon the extent of completion of the programs for the 36 oncology targets that are the subject of the collaboration. At its option, and subject to certain conditions, Abgenix may deliver shares of its common stock in lieu of cash upon a Type II Redemption Event.

Each series of preferred stock has a liquidation preference equal to the purchase price paid for the relevant series. The preferred stock will receive dividends or distributions if and when declared on the common stock on an as-converted basis, but shall have no other rights to dividends, except upon an event of default that is a payment default. Upon an event of default that is a payment default, the preferred stock shall receive a quarterly, cumulative cash dividend at a rate equal to the 10-year U.S. treasury rate plus 3% compounded annually.

At any time prior to maturity, the Company can, upon at least 15 days' notice to the holder, redeem each series of preferred stock for cash in an amount equal to its liquidation preference. Holders of preferred stock will have the right to vote with the common stock on an as-converted basis. In addition, the preferred stock has a class vote on certain matters. The convertible note, when and if issued, will not have any voting rights until it is converted into common stock and will not bear any interest until the occurrence of a default that is a payment default. Upon an event of default that is a payment default, the convertible note will bear interest at a rate equal to the 10-year U.S. treasury rate plus 3% compounded annually.

The preferred stock will be subordinate and junior to all indebtedness and senior to the Company's common stock. The convertible note, when and if issued, will be senior to the preferred and the common stock and junior to all senior indebtedness and to the Company's 3.5% convertible subordinated notes due in 2007.

Amendment of Joint Development and Commercialization Agreement with Immunex

In October 2003, the Company entered into an amendment of its joint development and commercialization agreement with Immunex Corporation, a wholly owned subsidiary of Amgen, Inc., for the development and commercialization of Abgenix's proprietary antibody therapeutic product candidate, ABX-EGF. Under the amendment, Immunex has decision-making authority for development and commercialization activities. As under the original agreement, the Company is obligated to pay 50% of the development and commercialization costs and is entitled to receive 50% of any profits from sales of ABX-EGF. However, Immunex will make available up to $60.0 million in advances that the Company may use to fund its share of development and commercialization costs after it has contributed $20.0 million toward development costs in 2004. The amount of any such advances, plus interest, may be repaid out of profits resulting from future product sales. However, the Company is not obligated to repay any portion of the loan if ABX-EGF is not commercialized. Under a separate agreement with Immunex, the Company has responsibility for manufacturing clinical supplies for the collaboration, and, for the first five years after, commercial launch, for manufacturing commercial supplies.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements based upon current expectations that involve risks and uncertainties. In this Quarterly Report on Form 10-Q, the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and similar expressions as they relate to Abgenix are included to identify forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below and under the heading "Additional Factors that Might Affect Future Results". In this Quarterly Report on Form 10-Q, references to "Abgenix," "we," "us," and "our" are to Abgenix, Inc. and its subsidiaries.

Overview

We are a biopharmaceutical company that is focused on the discovery, development and manufacture of antibody therapeutic products for the treatment of a variety of disease conditions, including cancer, inflammation, metabolic disease, transplant-related diseases, cardiovascular disease and infectious diseases.

We have proprietary technologies that facilitate rapid generation of highly specific, antibody therapeutic product candidates that contain fully human protein sequences and that bind to disease targets appropriate for antibody therapy. In this Quarterly Report on Form 10-Q we refer to these candidates as fully human antibody therapeutic product candidates. We developed our XenoMouse® technology, a technology using genetically modified mice to generate fully human antibodies. We also own a technology that enables the rapid identification of antibodies with desired function and characteristics, referred to as SLAM™ technology. In our XenoMax™ technology, we use SLAM technology to select and isolate antibodies with particular function and characteristics from antibody-producing cells generated by XenoMouse animals. We believe XenoMax technology enhances our capabilities in product development and flexibility in manufacturing. We have entered into a variety of contractual arrangements with multiple pharmaceutical, biotechnology and genomics companies involving our XenoMouse and XenoMax technologies. Two of our customers, Pfizer, Inc. and Amgen, Inc., have initiated clinical trials with fully human antibodies generated from XenoMouse animals. In addition, under a joint development and commercialization agreement we are co-developing ABX-EGF, our leading proprietary antibody product candidate, with Immunex Corporation, a wholly-owned subsidiary of Amgen. We intend to build a large and diversified product portfolio by using our XenoMouse and XenoMax technologies to generate antibodies to antigen targets that we source, entering into additional joint development and commercialization agreements with pharmaceutical and biotechnology companies and, in some cases, self funding clinical activities to determine preliminary safety and efficacy and carrying out additional internal product development. We also plan to enter into additional agreements to use our XenoMax technology to assist our licensees and collaborators in isolating antibodies with desired function and characteristics and agreements to provide our licensees and collaborators, as well as other third parties, process sciences and manufacturing services. We expect that substantially all of our revenues for the foreseeable future will result from payments under these and other contracts. The terms of our current contractual arrangements vary, but can generally be categorized as follows:

•: Oncology Alliance—We have entered into a collaboration and license agreement with AstraZeneca UK Limited in October 2003 for the discovery, development and commercialization of fully human monoclonal antibodies to treat cancer. The alliance involves the joint discovery and development of therapeutic antibodies for up to 36 cancer targets to be commercialized exclusively worldwide by AstraZeneca. We will conduct early stage pre-clinical research on behalf of AstraZeneca with respect to these targets. For the resulting products, we may receive milestone payments at various stages of development and royalties on future product sales. Under the agreement, we also may conduct early clinical trials, process development and clinical

manufacturing, as well as commercial manufacturing during the first five years of commercial sales, for which AstraZeneca would compensate us at competitive market rates. The collaboration also involves the selection and development by us of an additional pool of antibodies against up to 18 targets, which the companies may elect to further develop on an equal cost and profit sharing basis. During the three-year period of selection of targets for development we will work exclusively with AstraZeneca to generate and develop antibodies for therapeutic use directed against antigens in the field of oncology subject to various exceptions, including among others for antigens that are or become subject to existing collaborations, anitgens that we and AstraZeneca decide not to pursue in the collaboration, and certain process development and manufacturing services. In connection with this collaboration, AstraZeneca made a $100.0 million investment in Abgenix convertible preferred stock. Upon the achievement of certain milestones, we may also require AstraZeneca to invest up to an additional $60.0 million.

•: Antigen Target Sourcing Contracts—We have entered into several target sourcing contracts with genomics and biopharmaceutical companies that may enable us to generate a pipeline of proprietary fully human antibody product candidates. Typically, pursuant to these contracts we generate fully human antibodies to the antigen targets provided or identified by our collaborators. The contracts typically contain provisions that allow either Abgenix or our collaborator to evaluate and select particular antibodies from the pool of generated antibodies for further development and commercialization. The party selecting an antibody for further development or commercialization will generally pay to the other party license fees, milestone payments and royalty payments on any eventual product sales, in exchange for rights to develop and commercialize the product. In connection with these arrangements, we may also agree to make equity investments in collaborators for strategic reasons. For example, we have made equity investments in CuraGen Corporation and MDS Proteomics Inc. in connection with our collaborations with these parties.
•: Proprietary Product Development—In 2000, we entered into a joint development and commercialization agreement with Immunex for the co-development of ABX-EGF, a fully human antibody we created. We amended this agreement in October 2003. Under the amended agreement, Immunex will have decision-making authority for development and commercialization activities. As under the original agreement, we are obligated to pay 50% of the development and commercialization costs and are entitled to receive 50% of any profits from sales of ABX-EGF; however, Immunex will make available up to $60.0 million in advances that we may use to fund our share of development and commercialization costs for ABX-EGF after we have contributed $20.0 million toward development costs in 2004. The amount of any such advances, plus interest, may be repaid out of profits resulting from future product sales; however, we are not obligated to repay any portion of the loan if ABX-EGF does not reach commercialization. Under a separate agreement, we will manufacture clinical supplies for the collaboration, and, for the first five years after commercial launch, commercial supplies. In 2002, we entered into a joint development and commercialization agreement with SangStat Medical Corporation for ABX-CBL, an in-licensed mouse antibody we developed. In February 2003, we and SangStat announced that because the Phase 2/3 clinical trial for ABX-CBL did not meet its primary endpoint, further development of ABX-CBL would not continue. Under that agreement, SangStat paid us certain license fees and milestone payments, and we and SangStat have shared equally in all development costs.
•: Production Services—As of September 30, 2003, we had entered into contracts with two customers to provide process sciences and manufacturing services. One of these contracts is related to an antibody product candidate that we developed with the customer pursuant to an existing antigen sourcing contract. Under these production services contracts we will deliver a

variety of process development, cell banking and manufacturing services for selected antibody product candidates. The agreements provide for the customer to pay us certain fees and we will be entitled to royalties on the sale of products subject to these contracts. We also have the right of first offer with regard to production services for additional antibodies developed by one of these customers. We intend to enter into agreements to provide process sciences and manufacturing services to other existing and new customers.

•: Technology Out-Licensing—We have licensed our XenoMouse and XenoMax technologies to third parties for the purpose of generating antibody product candidates to one or more specific antigen targets provided by the customer. As of September 30, 2003, we had entered into contracts covering numerous antigen targets with over thirty customers to use our XenoMouse and XenoMax technologies to generate and/or develop the resulting fully human antibodies. Pursuant to these contracts, we and our customers intend to generate antibody product candidates for the treatment of cancer, inflammation, autoimmune diseases, transplant rejection, cardiovascular disease, growth factor modulation, neurological diseases and infectious diseases. In some cases in which we license XenoMouse technology, we provide our mice to the customer, which then carries out immunizations with its specific antigen targets. In other cases, we immunize the mice with the customer's antigen targets for additional compensation. The customer generally has an option for a period of time to acquire a product license for any antibody identified using XenoMouse technology that the customer wishes to develop and commercialize. The financial terms of these agreements may include license fees, option fees and milestone payments paid to us by the customer. Based on our agreements, these payments and fees would average from approximately $7.0 million to $10.0 million per antigen target if our customer takes the antibody into development and ultimately to commercialization. Additionally, our license agreements entitle us to receive royalties on any future product sales by the customer. We also have the right of first offer with regard to production services for antibodies developed pursuant to certain agreements. We may agree to make equity investments in some of our customers, or they may agree to make equity investments in us, in connection with these licensing arrangements. As of September 30, 2003, we had entered into one agreement in which we licensed our SLAM technology to one party on a non-exclusive basis for the purpose of generating and using antibodies other than antibodies derived from XenoMouse technology or other technology that involves the use of non-human animals, and on a co-exclusive basis for the purpose of antigen discovery. We currently do not intend to license our SLAM technology for use by any other parties. In addition, as of September 30, 2003, we had also entered into an agreement in which we exclusively licensed to one party rights under patent applications and patents held by us to develop and commercialize therapeutic antibodies to parathyroid hormone-related protein, or PTHrp.
•: Technology In-Licensing—We also license technology from other parties that we use in conjunction with our proprietary technology to develop, manufacture and commercialize therapeutic antibody candidates. The other party may also agree to produce antibody therapeutic candidates for us using its own technology. For example, we have entered into license and options agreements with ImmunoGen, Inc. pursuant to which we may develop and commercialize products based upon certain proprietary immunotoxins. These agreements often also obligate us to pay license fees, milestone payments and royalty fees to the counterparty upon the occurrence of specified conditions, including upon our sale of products derived from use of the licensed technology. We may also agree to make an equity investment in the other party for strategic reasons in connection with these arrangements. For example, we purchased shares of common stock of ImmunoGen in connection with our agreement with that company.

As of September 30, 2003, two of our antibody therapeutic product candidates were in ongoing clinical trials.

•

ABX-EGF—Generated using XenoMouse technology for development as a treatment for a variety of cancers, ABX-EGF is our leading fully human antibody therapeutic product candidate. We are co-developing this candidate with Immunex under an amended development and commercialization agreement. The status of clinical trials for ABX-EGF is as follows:

•: Various cancers—We initiated a Phase 1 clinical trial for ABX-EGF in cancer in July 1999.
•: Renal cell cancer—We initiated a Phase 2 clinical trial evaluating the effect of ABX-EGF as monotherapy in patients with renal cell cancer in April 2001.
•: Non-small cell lung cancer—Immunex initiated a Phase 2 clinical trial for ABX-EGF in non-small cell lung cancer in combination with standard chemotherapy, compared to standard chemotherapy alone, in July 2001.
•: Colorectal cancer—Immunex initiated a Phase 2 clinical trial evaluating the effect of ABX-EGF as monotherapy in patients with metastatic colorectal cancer who have previously failed chemotherapy in December 2001. Immunex initiated a separate Phase 2 clinical trial evaluating the effect of ABX-EGF in combination with standard chemotherapy, as first-line treatment in patients with metastatic colorectal cancer in January 2002.
•: Prostate cancer—We initiated a Phase 2 clinical trial evaluating the effect of ABX-EGF in patients with hormone resistant prostate cancer in January 2002.

•

ABX-MA1—Generated using XenoMouse technology, ABX-MA1 is a fully human antibody therapeutic product candidate for the treatment of a variety of cancers. We filed an Investigational New Drug Application, or IND, in December 2001 and initiated a Phase 1 clinical trial for ABX-MA1 in metastatic melanoma in February 2002.

We developed ABX-CBL, an in-licensed mouse antibody, for the treatment of a transplant-related disease known as graft versus host disease. In February 2003, we and our co-developer, SangStat, announced that the Phase 2/3 clinical trial for ABX-CBL did not meet its primary endpoint and that we would discontinue further development. Also, in May 2002, after analyzing Phase 2b clinical trial results of ABX-IL8, a fully human antibody therapeutic product candidate generated using XenoMouse technology, we decided to discontinue the clinical development of ABX-IL8 and wind down ongoing clinical trials, consistent with patient safety and follow-up.

We agreed to jointly develop and commercialize ABX-EGF. We may enter into joint development agreements for other product candidates, and such agreements may occur earlier in the product development lifecycle than when we entered into previous joint development agreements. We will expend significant capital to conduct clinical trials or share in the costs of conducting clinical trials, for our proprietary product candidates. We expect that this will substantially increase our operating expenses over the next few years in comparison to prior periods.

In addition to our proprietary antibody therapeutic product candidates in clinical trials, there are three customer-developed antibodies generated with XenoMouse technology in clinical trials or the subject of an IND as follows:

•: Pfizer—We generated a XenoMouse-derived fully human antibody therapeutic product candidate for treating cancer that Pfizer has advanced into clinical trials. In addition, Pfizer has filed an IND to initiate clinical testing of a second XenoMouse-derived fully human antibody therapeutic product candidate in July 2003.
•: Amgen—We generated a XenoMouse-derived fully human antibody therapeutic product candidate that binds to an undisclosed antigen target that Amgen has advanced into clinical trials.

Results of Operations

Three Months and Nine Months Ended September 30, 2003 and 2002

Contract Revenues.

Contract revenues totaled $2.0 million and $10.5 million, respectively, in the three and nine months ended September 30, 2003, compared to $2.6 million and $16.1 million, respectively, in the comparable 2002 periods. Because contract revenues depend to a large extent on the success or failure of research and development efforts undertaken by our collaborators and licensees, our period-to-period contract revenues can fluctuate significantly and are inherently difficult to predict. With our new manufacturing facility and our existing pilot plant, we now offer integrated process sciences and manufacturing services, which we refer to as production services. In future periods we expect to generate revenue from production services and for those revenues to increase over the next few years.

The primary components of contract revenues for both periods were as follows:

•: Technology Licensing

We recognized a total of $2.0 million and $9.7 million, respectively, in the three and nine months ended September 30, 2003, compared to $2.2 million and $13.2 million, respectively, in the comparable 2002 periods, from licensing our proprietary technologies. Revenues consisted primarily of the following:

•: Chugai Pharmaceutical Co. Ltd.—In the three months ended March 31, 2003, we recognized $3.0 million under an agreement with Chugai in which we exclusively licensed to Chugai rights under patent applications and patents held by us to develop and commercialize anti-PTHrp therapeutic antibodies.
•: Celltech R&D Ltd.—In the three months ended March 31, 2002, we recognized $8.4 million under an agreement with Celltech in which we granted a license of our SLAM technology. We received payments totaling $16.8 million in the fourth quarter of 2001 representing a research license fee and service fees for the transfer of technology, net of $0.2 million in shared closing costs. We recognized these fees over the six-month period ended March 31, 2002, during which we fulfilled our obligations to provide Celltech with the applicable protocols, technical information and training to enable Celltech to effectively utilize the SLAM technology.
•: Additionally, in the three and nine months ended September 30, 2003 and 2002, we recognized various fees, such as research license and service fees, research milestone payments, option fees and product license fees, under agreements related to the licensing of our XenoMouse and XenoMax technology. We recognized fees primarily from Pfizer and Amgen in the three and nine month periods ended September 30, 2003, and primarily from Pfizer, Amgen and CuraGen in the three and nine month periods ended September 30, 2002. Also included in revenue for the three and nine months ended September 30, 2003 was a product development milestone fee from Pfizer triggered by its filing of an IND related to a XenoMouse-derived fully human antibody therapeutic product candidate.

•: Proprietary Product Development

We recognized approximately $38,000 and $723,000, respectively in the three and nine months ended September 30, 2003, compared to $414,000 and $2.9 million, respectively, in the comparable 2002 periods, pursuant to our joint development and commercialization agreements. In the three and nine months ended September 30, 2003, revenues from the reimbursement of development costs decreased as our collaborator's cost exceeded our cost for the development of ABX-EGF. In addition, we discontinued the ABX-CBL program which resulted in a decrease of revenue from the reimbursement of development costs.

Interest and Other Income.

Interest and other income consist primarily of interest from cash, cash equivalents and marketable securities. Interest and other income decreased to $2.0 million and $8.0 million in the three and nine months ended September 30, 2003, compared to $5.1 million and $15.5 million, respectively, in the comparable 2002 periods. The decrease was due to lower interest rates and lower average cash, marketable securities and cash equivalent balances.

Research and Development Expenses.

Research and development expenses were $26.0 million and $67.9 million, respectively, in the three and nine months ended September 30, 2003, compared to $29.6 million and $97.5 million, respectively, in the comparable 2002 periods. We expect these costs to increase significantly in 2004 due to an increase in the activities for the development of ABX-EGF. Management separates research and development expenditures into amounts related to research and amounts related to product development as follows:

•: Research Costs

Research costs include costs associated with research and testing of our product candidates prior to reaching the development stage and costs associated with cell line development. Such costs primarily include the costs of Abgenix personnel, facilities, including depreciation, lab supplies and technology in-licensing. In 2002, a large component also included outside contractors. Research costs were $12.4 million and $41.3 million, respectively, in the three and nine months ended September 30, 2003, as compared to $13.8 million and $49.5 million, respectively, in the comparable 2002 periods. Major components of the changes in research costs in the three and nine months ended September 30, 2003 as compared to the same periods in 2002 were as follows:

•: Costs of Abgenix Personnel—Costs of Abgenix personnel to support research activities decreased 26% and 21% in the three and nine months ended September 30, 2003, respectively, from the comparable 2002 periods. The decrease was a result of our restructuring plan implemented in October 2002, which resulted in an approximately 15% reduction in total employees overall. Personnel costs primarily include salary, fringe benefits, recruiting and relocation costs.
•: Outside Contractors—Costs for outside contractors to support research activities decreased 92% and 87% in the three and nine months ended September 30, 2003, respectively, from the comparable 2002 periods. The decrease was a result of the reduction of activities performed by outside contractors related to the development of cell lines for our product candidates.
•: Technology In-Licensing—In the first quarter of 2003, we decided to discontinue the development of therapeutic antibodies to the complement protein properdin. Accordingly, we recorded an impairment charge of $1.4 million of previously capitalized costs and

$600,000 of other related costs related to the license to develop and commercialize properdin. We also paid $478,000 for research funding to Gliatech in the first quarter of 2003. In the nine months ended September 30, 2002, we paid a total of $1.6 million to Gliatech for research funding.

•: Cost of Facilities—Cost of facilities, including depreciation, increased in the three and nine months ended September 30, 2003, as compared to the same periods in 2002, primarily due to the increase in depreciation expenses related to newly acquired lab equipment and our enterprise resource planning system that was implemented in the third quarter of 2002.

•: Product Development Costs

Product development costs include costs of preclinical development and conducting clinical trials. Such costs include costs of Abgenix personnel, drug supply costs, research fees charged by outside contractors, co-development costs, and facility expenses including depreciation. Product development costs were $13.6 million and $26.6 million, respectively, in the three and nine months ended September 30, 2003 as compared to $15.8 million and $48.0 million, respectively, in the comparable 2002 periods. The decrease in the three and nine months ended September 30, 2003 was primarily related to the decrease in clinical trials being conducted for ABX-IL8. Major components of the changes in product development costs in the three and nine months ended September 30, 2003 as compared to the same periods in 2002 were as follows:

•: Clinical Research Fees and Drug Supply Costs—Clinical research fees, including clinical investigator site fees, monitoring costs, and data management costs, and drug supply costs increased 71% in the three months ended September 30, 2003 and decreased 56% in the nine months ended September 30, 2003, as compared to the comparable 2002 periods. The increase in the three months ended September 30, 2003 as compared to the same period in 2002 was primarily due to the increased clinical trial activities for ABX-EGF. The decrease in the nine months ended September 30, 2003 was primarily due to the decrease in clinical trials being conducted for ABX-IL8 partially offset by the increased clinical trial activities for ABX-EGF in 2003 as compared to the same period in 2002.
•: Co-Development Costs—Co-development costs, which consist of reimbursements to Immunex for our share of ABX-EGF development costs, increased 277% and 290% in the three and nine months ended September 30, 2003, as compared to the comparable 2002 periods. The increase was primarily due to the increased development and clinical trial activities for ABX-EGF performed by Immunex. We expect co-development costs to increase significantly in 2004 due to an increase in activities related to the development of ABX-EGF.
•: Costs of Abgenix Personnel—Costs of Abgenix personnel to support clinical activities decreased 59% and 55%, respectively, in the three and nine months ended September 30, 2003, as compared to the comparable 2002 periods. The decrease was a result of our restructuring plan implemented in October 2002, which resulted in an approximate 15% reduction in total employees overall, and the decrease in clinical trials being conducted for ABX-IL8. Personnel costs primarily include salary, fringe benefits, recruiting and relocation costs.

Manufacturing Start-Up Costs.

Manufacturing start-up costs were $10.3 million and $63.1 million, respectively, in the three and nine months ended September 30, 2003. Manufacturing start-up costs include costs associated with our new manufacturing facility, including quality assurance and quality control activities and the costs of outside contractors. The primary component of this cost in the nine months ended September 30, 2003

was a cancellation fee of approximately $28.0 million expensed in June 2003 for the negotiated cancellation of an agreement with an outside contractor, Lonza Biologics plc ("Lonza"). Effective June 30, 2003, we canceled our November 2000 agreement with Lonza for the exclusive use of a cell culture production suite because we determined that with the opening of our own manufacturing facility we no longer needed access to the Lonza facility. Excluding the cancellation fee, manufacturing start-up costs primarily include facility expenses that include depreciation, outside contractor costs, and personnel costs. We began manufacturing antibody therapeutic candidates in portions of the facility in the second quarter of 2003, at which time we began to depreciate the portions of the facility that were placed into service. We expect the facility to be under-utilized for the remainder of the year and 2004 and therefore manufacturing start-up costs will continue for at least the remainder of 2003 and 2004. These costs may decrease as a result of utilization of the facility for the manufacture of ABX-EGF and potentially other product candidates under production services agreements; however, this decrease may be offset by an increase in depreciation.

Amortization of Identified Intangible Assets.

Our identified intangible assets consist primarily of existing technology (including patents and certain royalty rights) that we acquired through our acquisition of Hesed Biomed Inc. in 2001, Abgenix Biopharma Inc. and IntraImmune Therapies, Inc. in 2000, and Japan Tobacco's interest in Xenotech in 1999. Amortization of intangible assets totaled $1.8 million and $5.4 million, respectively, in each of the three and nine month periods ended September 30, 2003 and 2002.

General and Administrative Expenses.

General and administrative expenses include compensation, professional services, consulting, facilities, including depreciation, and other expenses related to legal, finance and information systems. General and administrative expenses totaled $7.8 million and $21.2 million, respectively, in the three and nine months ended September 30, 2003, as compared to $8.9 million and $22.9 million, respectively, in the comparable 2002 periods. The decrease in 2003 as compared to 2002 was primarily due to a decrease in consulting related to the implementation of our new information systems in 2002 and in legal costs due to the timing of activities related to securities filings, licensing, financing activities and other contractual matters, partially offset by a charge of $2.1 million due to the sublease of one of our facilities at rates below the original rental rates. Excluding the charge for our sublease, we expect general and administrative costs to approximate the same levels in the fourth quarter of 2003 as they were in each of the first three quarters of 2003.

Impairment of Investments.

We purchased an aggregate amount of $80.0 million of common stock of CuraGen and ImmunoGen as strategic investments at various times in 1999 and 2000.

In 2002, during the first, second and fourth quarters, declines in the fair value of the CuraGen and ImmunoGen common stock were deemed to be other than temporary. Accordingly, we recorded impairment charges of $34.7 million, $30.4 million and $2.2 million, in the first, second and fourth quarters of 2002, respectively. The total impairment charge for the year ended December 31, 2002 was $67.3 million. As of September 30, 2003, these investments were recorded at fair value in long-term investments on the balance sheet, and the net unrealized holding gains/losses are reported as a component of stockholders' equity. If we deem these investments further impaired at the end of any future period, we may incur an additional impairment charge on these investments.

In addition, in 2001, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with our collaboration with that company. As of June 30, 2002, we estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had occurred.

Accordingly, we recorded an impairment charge of $7.1 million in the second quarter of 2002. The amount of the charge was based on the difference between the estimated value as determined by our management and our original cost basis. The investment is recorded in long-term investments on the balance sheet. If we deem the investment in MDS Proteomics further impaired at the end of any future period, we may incur an additional impairment charge on this investment.

Interest Expense.

Interest expense was primarily related to interest and amortization of issuance costs on our convertible debt. In the three months ended September 30, 2003, interest expense increased to $1.7 million, as compared to $1.2 million in the same period in 2002, as a result of a decrease in capitalized interest. Capitalized interest decreased in the third quarter of 2003 compared to the same period in 2002 because we began to depreciate portions of our manufacturing facility in the second quarter of 2003 when we began manufacturing antibody therapeutic candidates in these portions of the facility. In the nine months ended September 30, 2003, interest expense increased to $4.1 million, as compared to $3.7 million in the same period in 2002, because our convertible debt was outstanding for only a portion of the relevant period in 2002. This increase was partially offset by an increase in capitalized interest. The convertible debt was issued in March 2002, accrues interest at an annual rate of 3.5%, and is payable semi-annually. Interest expense related to the convertible debt was capitalized in the amount of $0.4 million and $2.1 million, respectively, in the three and nine months ended September 30, 2003, as compared to $0.8 million and $1.1 million in the same periods in 2002. For each future quarterly period, we expect to accrue approximately $1.8 million of interest expense related to our convertible debt until the debt matures, until we redeem or repurchase the debt or until all or part of the debt is converted into shares of our common stock.

Foreign Income Tax Expense.

Foreign income tax expense was recorded reflecting an income tax provision on foreign contract research projects of zero and approximately $84,000, respectively, in the three and nine months ended September 30, 2003.

Liquidity and Capital Resources

At September 30, 2003, we had cash, cash equivalents and marketable securities of approximately $267.4 million. We invest our cash equivalents and marketable securities primarily in highly liquid, interest bearing, investment grade and government securities in order to preserve principal. We have also invested in certain marketable equity securities of ImmunoGen and CuraGen for strategic reasons. These securities had a fair value of $15.0 million at September 30, 2003.

Cash Used in Operating Activities. Net cash used in operating activities was $101.1 million and $98.5 million in the nine months ended September 30, 2003 and 2002, respectively. The major components of the change in cash used in operating activities in the nine months ended September 30, 2003, compared to the same period in 2002, were primarily the following:

•: A decrease of $36.3 million in research and development costs, net of depreciation and an impairment charge related to an identified intangible asset, related to the development of new products.
•: An increase of $28.3 million in manufacturing costs, net of the Lonza contract cancellation fee of $28.0 million and depreciation, related to the start-up of our new antibody production facility.
•: A payment of approximately $7.0 million on the Lonza contract cancellation obligation in September 2003.

•: An increase of $7.4 million in customer payments due primarily to the timing of payments received under our contracts offset by a decrease of $7.8 million in cash from interest income due to lower interest rates and lower average cash balances.
•: An increase of $13.6 million in vendor payments, which reduced accounts payable.

Cash Used in Investing Activities. Net cash used in investing activities was $88.8 million and $8.3 million in the nine months ended September 30, 2003 and 2002, respectively. Cash was provided by and used in investing activities as follows:

•: Capital expenditures of $27.6 million and $124.8 million in the nine months ended September 30, 2003 and 2002, respectively. The investments in 2003 and 2002 reflect primarily investment in construction in progress and equipment for our new manufacturing facility. The investments in 2002 also reflect investment in leasehold improvements in our new office facility and process science laboratory and investments in computer hardware and software, including the acquisition of a new enterprise resource planning system.
•: Purchases, net of maturities and sales, of marketable securities of $61.2 million during the nine months ended September 30, 2003 and maturities and sales, net of purchases, of marketable securities of $119.5 million during the nine months ended September 30, 2002.
•: A payment of $2.8 million to our landlord in the third quarter of 2002, as the final disbursement under a loan agreement entered into in August 2001.

Cash Provided by Financing Activities. During the nine months ended September 30, 2003, net cash provided by financing activities was $1.7 million, consisting of proceeds from the exercise of stock options and the issuance of stock under our employee stock purchase plan. During the nine months ended September 30, 2002, net cash provided by financing activities was $195.8 million, consisting of $194.0 million net proceeds from our issuance of convertible subordinated notes, as described below, and $1.8 million proceeds from the exercise of stock options and the issuance of stock under our employee stock purchase plan.

In March 2000 and February 2001, we obtained stand-by letters of credit for $2.0 million and $3.0 million, respectively, from a commercial bank as security for our obligations under two facility leases. These were increased in January 2002 to $2.5 and $3.2 million, respectively, in connection with amendments to our facility leases. In September 2001, we obtained a stand-by letter of credit for 1.0 million Canadian dollars from a commercial bank as security for our obligations under a facility lease in Canada while the facility was under construction. The standby letter of credit for 1.0 million Canadian dollars was terminated in January 2003. The outstanding stand-by letters of credit are secured by an investment account, in which we must maintain a balance of approximately $6.0 million.

Financing Uncertainties Related to Our Business Plan. We plan to continue to make significant expenditures to establish and staff our own manufacturing facility and support our research and development activities, including pre-clinical product development and clinical trials. We also intend to look for opportunities to acquire new technology through in-licensing, collaborations or acquisitions.

Over the next three months, we estimate that we will spend approximately $3.1 million on leasehold improvements and equipment for our new manufacturing and our research and development facilities.

We currently intend to use our available cash on hand to finance these projects and business developments, but we might also pursue other financing alternatives, such as a bank line of credit, sale-lease back financing, funding by one or more collaborators, equity or equity-related financing or a mortgage financing, that may become available to us. Whether we use cash on hand or choose to obtain financing will depend on, among other things, the future success of our business, the prevailing interest rate environment and the condition of financial markets generally.

The amounts of the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties that may adversely affect our liquidity and capital resources to a significant extent. As of September 30, 2003, two of our proprietary product candidates, ABX-EGF and ABX-MA1, were in various stages of clinical trials. The clinical trials of ABX-EGF and ABX-MA1 are expected to require significant expenditures in the foreseeable future. We have discontinued development of two proprietary product candidates, ABX-IL8 and ABX-CBL. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate. We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

Clinical Phase		Estimated Completion Period
Phase 1		1-2 Years
Phase 2		1-2 Years
Phase 3		2-4 Years

However, the duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trials, including, among others, the following:

•: the number of patients that ultimately participate in the trial;
•: the duration of patient follow-up that seems appropriate in view of the results;
•: the number of clinical sites included in the trials; and
•: the length of time required to enroll suitable patient subjects.

We test our potential product candidates in numerous pre-clinical studies to identify disease indications for which they may be product candidates. We may conduct multiple clinical trials on our own or with our collaborators to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for one or more indications for a given product candidate in order to focus our resources on more promising product candidates or indications. For example, in January 2002 and May 2002, we announced that clinical trials of our proprietary product candidate ABX-IL8 as a treatment for rheumatoid arthritis and psoriasis, respectively, did not support further clinical studies of that product candidate. Additionally in February 2003, we announced that the clinical trial of our proprietary product candidate ABX-CBL as a treatment for graft versus host disease, did not support further clinical studies of that product candidate. The failure of clinical trials can also result in additional research and development expenses and other costs. For example, we recorded a charge of $6.7 million for the three months ended June 30, 2002, related to our decision in the second quarter of 2002 to wind down our clinical trials of ABX-IL8.

An important element of our business strategy is to pursue the research and development of a diverse range of product candidates for a variety of disease indications. We may enter co-development agreements, similar to our agreement with Immunex for ABX-EGF and may enter into additional joint development agreements earlier in the development lifecycle of product candidates than we did in our

existing co-development agreements. We have begun to implement our collaboration strategy through co-development arrangements with companies such as Chugai Pharmaceutical, U3 Pharma AG and Corvas International, Inc. Our strategy is designed to diversify the risks associated with our research and development spending. The decisions to terminate or wind down our clinical programs for developing ABX-IL8 and ABX-CBL have reduced the diversity of our product portfolio. We believe that this effect is temporary, in view of the number of potential product candidates we have in preclinical development. To the extent, however, that we are unable to maintain a diverse and broad range of product candidates, our dependence on the success of one or a few product candidates would increase.

Our proprietary product candidates also have not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our clinical data establish safety and efficacy. The number, size and type of clinical trials we conduct for a particular product candidate are also affected by the policies of the FDA and European regulatory agencies regarding the availability of possible expedited approval procedures, which we may seek to utilize. These policies may change from time to time. As we conduct clinical trials for a given product candidate, we may decide or the FDA may require us to make changes in our plans and protocols. Such changes may relate to, for example, changes in the standard of care for a particular disease indication, comparability of efficacy and toxicity of materials where a change in materials is proposed, or competitive developments foreclosing the availability of expedited approval procedures. We may be required to support proposed changes with additional pre-clinical or clinical testing, which could delay the expected time line for concluding clinical trials. In addition, the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.

Furthermore, our business strategy includes the option of entering into arrangements with third parties to collaborate in the development and commercialization of our products. In the event that third parties take over the clinical trial process for one of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, or the extent to which third parties may control clinical trials pursuant to such arrangements, and how such arrangements would affect our capital requirements.

As a result of the uncertainties discussed above, among others, the duration and completion costs of our research and development projects are difficult to estimate and are subject to considerable variation. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

We also may be required to make further substantial expenditures if unforeseen difficulties arise in other parts of our business. In particular, our future liquidity and capital requirements also will depend on many factors other than our research and development activities, including:

•: the scope and results of preclinical development and clinical trials;
•: the retention of existing and establishment of further co-development, licensing, manufacturing and other agreements, if any;

•: continued scientific progress in our research and development programs;
•: the size and complexity of these programs;
•: the cost of establishing our manufacturing capabilities and complying with good manufacturing practice regulations;
•: the cost of conducting commercialization activities and arrangements;
•: the time and expense involved in seeking regulatory approvals;
•: competing technological and market developments;
•: the time and expense of filing and prosecuting patent applications, and enforcing and defending against patent claims;
•: our investment in, or acquisition of, other companies;
•: the amount of product or technology in-licensing in which we engage; and
•: other factors not within our control.

We believe that our current cash balances, cash equivalents, marketable securities, and the cash generated from our licensing and other agreements will be sufficient to meet our operating and capital requirements for at least one year. However, because of the uncertainties in our business discussed above, among others, we cannot assure you that this will be the case. In addition, we may choose to, or prevailing business conditions may require us to, obtain additional financing from time to time. We may choose to raise additional funds through public or private financing, licensing and other agreements or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional equity or equity-related financing may be dilutive to our stockholders, and debt financing, if available, may subject us to restrictive covenants. We may also choose to obtain funding through collaborations, licensing and other contractual arrangements. Such agreements may require us to relinquish our rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed would harm our business, financial condition and results of operations.

History of Net Losses. We have incurred net losses in each of the last five years of operation, including net losses of $16.8 million in 1998, $20.5 million in 1999, $8.8 million in 2000, $60.9 million in 2001, $208.9 million in 2002 and $143.4 million in the nine months ended September 30, 2003. As of September 30, 2003, our accumulated deficit was $511.7 million. Our losses to date have resulted principally from:

•: research and development costs relating to the development of our XenoMouse and XenoMax technologies and antibody therapeutic product candidates;
•: general and administrative costs relating to our operations;
•: impairment charges related to our strategic investments in CuraGen, ImmunoGen and MDS Proteomics; and
•: manufacturing start-up costs, primarily those related to the cancellation of our agreement with Lonza for the exclusive use of a cell culture production suite.

We expect to incur additional losses for the foreseeable future as a result of our research and development costs, including costs associated with conducting preclinical development and clinical trials, charges related to purchases of technology or other assets, and costs associated with establishing and operating our manufacturing facilities. We intend to invest significantly in our products prior to entering into licensing agreements. This will increase our need for capital and will result in losses for at least the next several years. We expect that the amount of operating losses will fluctuate significantly

from quarter to quarter as a result of increases or decreases in our research and development efforts, the execution or termination of licensing and other agreements, and the initiation, and success or failure, of clinical trials.

Net Operating Loss Carryforwards. As of December 31, 2002, we had net operating loss carryforwards for federal income tax purposes of approximately $314.0 million. Our net operating loss carryforwards exclude losses incurred prior to our formation in July 1996. Further, we have capitalized the amounts associated with the 1997 settlement and cross-license that have been expensed for financial statement accounting purposes and we are amortizing those amounts over a period of approximately 15 years for tax purposes. The net operating loss and credit carryforwards will expire in the years 2006 through 2022, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

Critical Accounting Policies

The application of several accounting policies that require us to make subjective and complex judgments impacts the financial results that we report. We are required to estimate the effect of matters that are inherently uncertain. Changes in our estimates or judgments could materially impact our results of operations, financial condition and cash flows in future years. We believe our most critical accounting policies include revenue recognition, accounting for our equity investments, accounting for goodwill, and accounting for clinical trial supplies.

Revenue Recognition.

We derive our contract revenue from license, option, service and milestone fees received from customers. As described below, within the framework of generally accepted accounting principles, significant management judgments and estimates must be made and applied in connection with the revenue recognized in any accounting period. If our management made different judgments or utilized different estimates, material differences could result in the amount and timing of our revenue in any period.

•: Research and product license fees are generally recognized only after both the license period has commenced and the technology has been delivered. However, in multiple-element revenue arrangements, if the delivered technology does not have stand alone value or if we do not have objective and reliable evidence of the fair value of the undelivered products or services, the amount of revenue allocable to the delivered technology is deferred until the remaining products or services are provided to the customer. Under some of our research and product license arrangements, the period over which we may provide the product or service to the customer may not be contractually defined with an end date. In these circumstances, we must exercise judgment in estimating the period of time over which certain deliverables, such as customer training, will be provided to enable the customer to practice the license.
•: Option fees for granting options to obtain product licenses to develop a product are recognized when the option is exercised or when the option period expires, whichever occurs first. However, in multiple-element revenue arrangements, if the option does not have stand alone value or if we do not have objective and reliable evidence of the fair value of the undelivered products or services, the amount of revenue allocable to option fees is deferred until the remaining products or services are provided to the customer.
•: Fees we receive for research services we perform are generally recognized ratably over the entire period we perform these services. However, in the case of co-development arrangements, fees

we receive for research services we provide are recorded as revenue in the period they are rendered.

•: Incentive milestone payments are recognized as revenue when the specified milestone is achieved. Incentive milestone payments are triggered either by the results of our research efforts or by events external to Abgenix, such as regulatory approval to market a product. Incentive milestone payments are substantially at risk at the inception of the contract, and the values assigned thereto are commensurate with the type of milestone achieved. We have no future performance obligations related to an incentive milestone that has been achieved.

Accounting for Equity Investments.

We record gains and losses on equity investments in accordance with SFAS No. 115. Gains and losses that are deemed other than temporary are charged to earnings, and any net unrealized holding gains and losses, to the extent not recognized as an impairment charge, are reported as a component of stockholders' equity.

In 2002, during the first, second and fourth quarters, declines in the fair value of our investment in CuraGen and ImmunoGen common stock were deemed to be other than temporary, primarily because the stock of each company traded below our respective cost basis for more than six months. Accordingly, we recorded impairment charges of $34.7 million, $30.4 million and $2.2 million, in the first, second and fourth quarters of 2002, respectively. The total impairment charge for the year ended December 31, 2002 was $67.3 million.

In addition, in 2001, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with our collaboration with that company. Because MDS Proteomics is a private company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an investment in a publicly traded company. As of June 30, 2002, we estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had occurred. Accordingly, we recorded an impairment charge of $7.1 million on our investment in the second quarter of 2002. The amount of the charge was based on the difference between the estimated value as determined by our management and our original cost basis. This investment is recorded in long-term investments on the balance sheet. If we deem the investment in MDS Proteomics further impaired at the end of any future period, we may incur an additional impairment charge on this investment.

Accounting for Goodwill.

On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. As a result, we no longer amortize goodwill but instead review goodwill for impairment on annual basis, or sooner if indications of impairment exist. Under our accounting policy, we have adopted the beginning of the fourth quarter as an annual goodwill impairment test date. Following this approach, we compare the carrying values available as of September 30 with the estimated fair value of the reporting unit to assess if there has been a potential impairment, and, if impairment is indicated, complete the measurement of impairment under the procedures established by SFAS 142. Because we have determined that we have one reporting unit under SFAS No. 142, our market capitalization is considered to be a reasonable proxy for the fair value of the reporting unit. We also consider whether current business and general market conditions suggest that the fair value of the reporting unit has likely declined below its carrying value.

For a brief period during the first quarter of 2003, our common stock had traded at a price that represented a market capitalization less than our book value. However this condition did not persist for a significant portion of the first quarter of 2003 and as of March 31, 2003 and September 30, 2003, our

common stock was trading at a price that represented a market capitalization higher than our book value. As of September 30, 2003, we determined that the fair value of the reporting unit was higher than its carrying value and an impairment charge was not recognized.

If we were to determine in a future period that an impairment of goodwill existed, the impairment measurement procedures could result in a charge for the impairment of goodwill. Furthermore, a change in our determination of reporting units could result in a charge for the impairment of goodwill in future periods. A change in the determination of reporting units could occur should we reorganize into reporting units such that each unit constitutes a business for which discrete financial information is available that is regularly reviewed by management to evaluate the performance of that unit. As of September 30, 2003, the carrying value of our goodwill was approximately $34.8 million.

Accounting for Clinical Trial Supplies.

The costs associated with the manufacture of our antibody therapeutic product candidates for use in clinical trials are capitalized as prepaid expense if management determines that such clinical trial supplies have alternative future uses in clinical trials for multiple indications of a product candidate and are expensed upon the use of the materials, primarily as they are used in clinical trials. We immediately expense previously capitalized costs if the asset is not expected to have an alternative future use, such as use in a clinical trial. As of September 30, 2003, the balance of prepaid clinical trial supplies was $10.1 million and consisted of ABX-EGF. We may incur expenses related to clinical supply writedowns depending on the outcome of ongoing clinical trials.

Contractual Obligations and Commercial Commitments

As of September 30, 2003, future minimum payments for certain contractual obligations for years subsequent to December 31, 2002 were as follows:

			Total		2003		2004- 2005*		2006- 2007*		2008 and Thereafter*
			(in thousands)
Contractual Obligations
	Operating leases		$	145,709	$	3,202	$	26,875	$	28,765	$	86,867
	Convertible debt			200,000		—		—		200,000		—

		Total	$	345,709	$	3,202	$	26,875	$	228,765	$	86,867

*: Amounts represent total of minimum payments for the entire period.

In March 2002, we issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of our common stock at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5%. We are obligated to pay interest on March 15 and September 15 of each year, beginning on September 15, 2002. We expect to make interest payments on the notes of $7.0 million per year, for years 2003 through 2006, and $1.2 million in 2007, assuming all the notes remain outstanding until their maturity date. The notes will mature on March 15, 2007 and are redeemable at our option on or after March 20, 2005, or earlier if the price of our common stock exceeds specified levels. In addition, the holders of the notes may require us to repurchase the notes if we undergo a change in control. Therefore, in March 2007, or earlier if we undergo a change in control, we may use a significant portion of our cash, cash equivalents and marketable securities to repay the $200.0 million principal amount of our convertible debt. If our balance of cash, cash equivalents and marketable securities at any time is insufficient to meet our obligations under the notes, we would have to seek additional financing, if available, to support our obligations under the notes.

Other significant commercial commitments include the following:

•: Purchase commitments totaling $2.5 million to contractors related to the purchase of equipment and design and construction of our new manufacturing facility;
•: Effective June 30, 2003, we canceled our agreement with Lonza for the exclusive use of a cell culture production suite. Upon canceling the agreement, we became obligated to pay Lonza four equal installments of 4,250,000 British pounds on October 1, 2003, February 1, 2004, May 1, 2004 and August 1, 2004, which eliminated our commitment to pay approximately $46.0 million in total monthly fees through August 2006. The value of this obligation on the effective date of June 30, 2003 was approximately $28.0 million. In September 2003, we made the first of four installment payments to Lonza. The balance of the obligation as of September 30, 2003 was approximately $21.2 million;
•: An annual maintenance fee of $50,000 for our exclusive worldwide rights to commercialize ABX-CBL. In addition, we commit at least $1.0 million annually to the development of ABX-CBL until ABX-CBL receives regulatory approval as a commercial product in any country and to pay royalties on potential product sales. If we fail to fulfill this commitment, we would lose the CBL license and not be able to continue the development of ABX-CBL. Our obligations under the CBL license agreement are subject to our discretionary right to terminate the agreement. We and our co-developer, SangStat, announced in February 2003 our decision to discontinue further development of ABX-CBL; and
•: A commitment to share equally all development and commercialization costs for ABX-EGF pursuant to our development and commercialization agreement with Immunex. As amended in October 2003, that agreement provides that Immunex will have decision-making authority for development and commercialization activities and will make available to us $60.0 million in advances that we may use to fund our share of development and commercialization costs for ABX-EGF after we have contributed $20.0 million toward development costs in 2004. The amount of any such advances, plus interest, may be repaid out of profits resulting from future product sales and we are not obligated to repay any portion of the loan if ABX-EGF does not reach commercialization.

Recent Accounting Pronouncements

In November 2002, the FASB issued Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into after June 30, 2003. We adopted EITF Issue No. 00-21 in the third quarter of 2003. The adoption of EITF Issue No. 00-21 did not result in a material change to our existing revenue recognition policy for existing and prospective revenue arrangements. The adoption of EITF Issue No. 00-21 did not have a material impact on our consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46 (the "Interpretation"), Consolidation of Variable Interest Entities. The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has controlling financial interest through ownership of a majority voting interest in the entity. We will implement the Interpretation in the quarter ending December 31, 2003. We have performed a preliminary analysis of the Interpretation and do not believe that the adoption will result in a material impact on our results of operations or

financial position. During the quarter ending December 31, 2003, we will complete the evaluation of the implications of the Interpretation with respect to all variable interest entities with which we have involvement.

Subsequent Events

Agreements with AstraZeneca

In October 2003, we entered into a collaboration and license agreement with AstraZeneca to provide for the joint discovery and development of therapeutic antibodies against up to 36 oncology targets to be commercialized exclusively worldwide by AstraZeneca. The agreement provides that we will conduct early stage preclinical research on behalf of AstraZeneca with respect to these targets. Under the agreement, we also may conduct clinical, process development and manufacturing activities for which AstraZeneca is to compensate us at competitive market rates. We may also receive milestone payments at various stages of development and royalties on commercial sales. The collaboration agreement also includes a co-development component under which we will be able to generate additional antibody product candidates against up to 18 targets that AstraZeneca will have the option to co-develop with us. We and AstraZeneca will share development costs and responsibilities for any co-development candidates selected by AstraZeneca. During the three-year period of selection of targets for development we will work exclusively with AstraZeneca to generate and develop antibodies for therapeutic use in oncology subject to various exceptions, including among others for generation and development of antigens in accordance with existing collaborations, for antigens that we and AstraZeneca decide not to pursue in the collaboration, and for certain process development and manufacturing services.

In October 2003, in connection with the collaboration agreement, we entered into a securities purchase agreement with AstraZeneca. Pursuant to the agreement, we issued to AstraZeneca $50.0 million of Series A-1 convertible preferred stock with a seven-year maturity and $50.0 million of Series A-2 convertible preferred stock with a 10-year maturity. The Series A-2 preferred stock, after the 60-day anniversary of the closing date, is redeemable at our option or exchangeable at the option of AstraZeneca for a $50.0 million convertible subordinated note. Subject to various terms and conditions, if a certain milestone event is reached, we have the option to issue to AstraZeneca up to $30.0 million of Series A-3 preferred stock and if a further milestone event is reached, we will have the option to issue to AstraZeneca up to $30.0 million of Series A-4 preferred stock. Each of the Series A-3 preferred stock and the Series A-4 preferred stock will have a maturity date that is five years from issuance. Due to the redeemable feature, we expect the preferred stock to be classified as a liability on our consolidated balance sheet.

Subject to certain conditions, we can force conversion of each series of preferred stock into shares of common stock at a conversion price equal to the lower of (A) the average market price for the 10 days prior to the trading day immediately preceding the conversion date (provided that the average market price shall in no event be higher than 101% of the market price on the trading day immediately preceding the conversion date) or (B) $30.00 per share. At any time prior to the earlier of (A) the redemption or repurchase of the preferred stock or (B) the relevant maturity date, AstraZeneca may convert each series of preferred stock into shares of common stock at a conversion price of $30.00 per share. When and if issued by us, the convertible note will have the same conversion terms as the preferred stock.

Upon the occurrence of a "Type II Redemption Event," consisting of either (i) a material breach by Abgenix of a material obligation under the Collaboration Agreement or (ii) an acquisition of Abgenix by a competitor of AstraZeneca, in each case that occurs during a defined research period and results in AstraZeneca's termination of all research programs and its ability to designate additional antigens, AstraZeneca has the right to require Abgenix to redeem a specified portion of the outstanding shares of Preferred Stock. The amount that AstraZeneca may require Abgenix to redeem will be based upon the extent of completion of the programs for the 36 oncology targets that are the subject of the collaboration. At its option, and subject to certain conditions, Abgenix may deliver shares of its common stock in lieu of cash upon a Type II Redemption Event.

At any time prior to maturity, we can, upon at least 15 days' notice to the holder, redeem each series of preferred stock for cash in an amount equal to its liquidation preference. Holders of preferred stock will have the right to vote with the common stock on an as-converted basis. In addition, the preferred stock has a class vote on certain matters. The convertible note, when and if issued, will not have any voting rights until it is converted into common stock and will not bear any interest until the occurrence of a default that is a payment default. Upon an event of default that is a payment default, the convertible note will bear interest at a rate equal to the 10-year U.S. treasury rate plus 3% compounded annually.

The preferred stock will be subordinated and junior to all indebtedness and senior to our common stock. The convertible note, when and if issued, will be senior to the preferred and the common stock and junior to all senior indebtedness and to our 3.5% convertible subordinated notes due in 2007.

Amendment of Joint Development and Commercialization Agreement with Immunex

In October 2003, we entered into an amendment of our joint development and commercialization agreement with Immunex, for the development and commercialization of our proprietary antibody therapeutic product candidate, ABX-EGF. Under the amendment, Immunex has decision-making authority for development and commercialization activities. As under the original agreement, we are obligated to pay 50% of the development and commercialization costs and are entitled to receive 50% of any profits from sales of ABX-EGF. However, Immunex will make available up to $60.0 million in advances that we may use to fund our share of development and commercialization costs for ABX-EGF after we have contributed $20.0 million toward development costs in 2004. The amount of any such advances, plus interest, may be repaid out of profits resulting from future product sales. However, we are not obligated to repay any portion of the loan if ABX-EGF is not commercialized. Under a separate agreement with Immunex, we have responsibility for manufacturing clinical supplies for the collaboration, and, for the first five years after commercial launch, for manufacturing commercial supplies.

Additional Factors That Might Affect Future Results

Risks Related to our Finances

We are an early stage company without commercial therapeutic products, and we cannot assure you that we will develop sufficient revenues in the future to sustain our business.

You must evaluate us in light of the uncertainties and complexities present in an early stage biopharmaceutical company. Our product candidates are in early stages of development. We will need to make significant additional investments in research and development, preclinical testing and clinical trials, and in regulatory and sales and marketing activities, to commercialize current and future product candidates. Our product candidates, if successfully developed, may not generate sufficient or sustainable revenues to enable us to be profitable.

We have a history of losses and we expect to continue to incur losses for the foreseeable future.

We have incurred net losses in each of the last five years of operation, including net losses of $16.8 million in 1998, $20.5 million in 1999, $8.8 million in 2000, $60.9 million in 2001, $208.9 million in 2002 and $143.4 million in the nine months ended September 30, 2003. As of September 30, 2003, our accumulated deficit was $511.7 million. Our losses to date have resulted principally from:

•: research and development costs relating to the development of our XenoMouse technology and antibody product candidates;
•: general and administrative costs relating to our operations;
•: impairment charges related to our strategic investments in CuraGen, ImmunoGen, and MDS Proteomics; and
•: manufacturing start-up costs, primarily those related to the cancellation of our agreement with Lonza for the exclusive use of a cell culture production suite.

We expect to incur additional losses for the foreseeable future as a result of our research and development costs and manufacturing start-up costs, including costs associated with conducting preclinical development and clinical trials, and charges related to purchases of technology or other assets. We intend to invest significantly in our products prior to entering into licensing agreements. This will increase our need for capital and will result in losses for at least the next several years. We expect that the amount of operating losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the execution or termination of licensing, manufacturing and other contractual arrangements, and the initiation, success or failure of clinical trials.

We are currently unprofitable and may never be profitable, and our future revenues could fluctuate significantly.

Prior to June 1996, Cell Genesys, Inc. owned our business and operated it as a separate business unit. Since that time, we have funded our research and development activities primarily from private placements and public offerings of our securities and from revenues generated by our licensing and other contractual arrangements.

We expect that substantially all of our revenues for the foreseeable future will result from payments under licensing and other contractual arrangements and from interest income. To date, payments under licensing and other agreements have been in the form of option fees, reimbursement for research and development expenses, license fees and milestone payments. Payments under our existing and any future customer agreements will be subject to significant fluctuation in both timing and amount. Our revenues may not be indicative of our future performance or of our ability to continue to

achieve contractual milestones. Our revenues and results of operations for any period may also not be comparable to the revenues or results of operations for any other period. We may not be able to:

•: enter into further co-development, licensing, manufacturing or other agreements;
•: successfully complete preclinical development or clinical trials;
•: obtain required regulatory approvals;
•: successfully manufacture or market product candidates; or
•: generate additional revenues or profitability.

Our failure to achieve any of the above goals would materially harm our business, financial condition and results of operations.

We may require additional financing, and an inability to raise the necessary capital or to do so on acceptable terms would threaten the continued success of our business.

We will continue to expend substantial resources to support research and development and establish and operate our manufacturing facility, including costs associated with preclinical development and clinical trials. In the years ended December 31, 2002, 2001, and 2000, we incurred expenses of $128.5 million, $96.2 million and $50.1 million, respectively, on research and development. For the nine months ended September 30, 2003, we spent $67.9 million on research and development. Regulatory and business factors will require us to expend substantial funds in the course of completing required additional development, preclinical testing and clinical trials of, and attaining regulatory approvals for, product candidates. The amounts of the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties that may adversely affect our liquidity and capital resources. Our future liquidity and capital requirements will depend on many factors, including:

•: the scope and results of preclinical development and clinical trials;
•: the retention of existing and establishment of further co-development, licensing, manufacturing and other agreements, if any;
•: continued scientific progress in our research and development programs;
•: the size and complexity of these programs;
•: the cost of establishing our manufacturing capabilities and complying with good manufacturing practice regulations;
•: the cost of conducting commercialization activities and arrangements;
•: the time and expense involved in seeking regulatory approvals;
•: competing technological and market developments;
•: the time and expense of filing and prosecuting patent applications, and enforcing and defending against patent claims;
•: our investment in, or acquisition of, other companies;
•: the amount of product or technology in-licensing in which we engage; and
•: other factors not within our control.

We believe that our current cash balances, cash equivalents, marketable securities, and the cash generated from our licensing and other contractual arrangements, will be sufficient to meet our operating and capital requirements for at least one year. However, because of the uncertainties in our business, including the uncertainties listed above, we cannot assure you that this will be the case. In

addition, we may choose to obtain additional financing from time to time. We may choose to raise additional funds through public or private financing, licensing and other agreements or arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional equity or equity-related financing may be dilutive to our stockholders, and debt financing, if available, may subject us to restrictive covenants. We may also choose to obtain funding through licensing and other contractual arrangements. Such agreements may require us to relinquish our rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed would harm our business, financial condition and results of operations.

Our indebtedness may harm our financial condition and results of operations.

We have a significant amount of convertible debt and debt service obligations and, if one of our series of preferred stock is redeemed for convertible debt, we will incur an additional $50.0 million of indebtedness. Our level of indebtedness will have several important effects on our future operations, including, without limitation:

•: we will have additional cash requirements to support the payment of any interest or amortization required with respect to outstanding indebtedness;
•: increases in our outstanding indebtedness and leverage will increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure; and
•: depending on the levels of our outstanding debt, our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes may be limited.

Our ability to make payment of principal and interest on our indebtedness depends upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required, among other things:

•: to seek additional financing in the debt or equity markets;
•: to refinance or restructure all or a portion of our indebtedness, including our convertible subordinated notes;
•: to sell selected assets; or
•: to reduce or delay planned capital expenditures.

Such measures might not be sufficient to enable us to service our debt. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms.

Our strategic investments expose us to equity price risk and our investments in those companies may be deemed impaired, which would affect our results of operations.

We are exposed to equity price risk on our strategic investments in CuraGen, ImmunoGen and MDS Proteomics and we may elect to make additional similar investments in the future. In 1999 and 2000, we purchased an aggregate amount of $80.0 million of the common stock of CuraGen and ImmunoGen as strategic investments. In 2002, during the first, second and fourth quarters, declines in the fair value of the CuraGen and ImmunoGen common stock were deemed to be other than temporary, primarily because the stock of each company traded below our cost basis for more than six months. Accordingly, we recorded impairment charges of $34.7 million, $30.4 million and $2.2 million, in the first, second and fourth quarters of 2002, respectively. The total impairment charge for the year ended December 31, 2002 was $67.3 million. The public trading prices of the shares of both companies

have fluctuated significantly since we purchased them and could continue to do so. If these shares continue to trade below their new cost bases in future periods, we may incur additional impairment charges relating to these investments. As of September 30, 2003, these investments were recorded at fair value in long-term investments on the balance sheet, and any net unrealized holding gains and losses are reported as a component of stockholders' equity.

In addition, in 2001, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with our collaboration with that company. Because MDS Proteomics is a private company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an investment in a publicly traded company. As of June 30, 2002, we estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had occurred. Accordingly, we recorded an impairment charge of $7.1 million on our investment in the second quarter of 2002. The amount of the charge was based on the difference between the estimated value as determined by our management and our original cost basis. The investment is recorded in long-term investments on the balance sheet. If we deem the investment in MDS Proteomics further impaired at the end of any future period, we may incur an additional impairment charge on this investment.

Risks Related to the Development and Commercialization of our Products

Our XenoMouse and XenoMax technologies may not produce safe, efficacious or commercially viable products, which will be critical to our ability to generate revenues from our products.

Our XenoMouse and XenoMax technologies are new approaches to developing antibodies as products for the treatment of diseases and medical disorders. We have not commercialized any antibody therapeutic products based on our technologies. Moreover, we are not aware of any commercialized, fully human antibody therapeutic products that have been generated from any technologies similar to ours. Our antibody therapeutic product candidates are still in early stages of development. We have initiated clinical trials with respect to three proprietary fully human antibody therapeutic product candidates, and our collaborators have initiated clinical trials with respect to three other fully human antibody therapeutic product candidates generated by XenoMouse technology. We cannot be certain that either XenoMouse technology or XenoMax technology will generate antibodies against every antigen to which they are exposed in an efficient and timely manner, if at all. Furthermore, XenoMouse technology and XenoMax technology may not result in any meaningful benefits to our current or potential customers or in product candidates that are safe and efficacious for patients. Our failure to generate antibody therapeutic product candidates that lead to the successful commercialization of products would materially harm our business, financial condition and results of operations.

If we do not successfully develop our products, or if they do not achieve commercial success, our business will be materially harmed.

Our development of current and future product candidates, either alone or in conjunction with collaborators, is subject to the risks of failure inherent in the development of new pharmaceutical products and products based on new technologies. These risks include:

•: delays in product development, clinical testing or manufacturing;
•: unplanned expenditures in product development, clinical testing or manufacturing;
•: failure in clinical trials or failure to receive regulatory approvals;
•: emergence of superior or equivalent product development technologies or products;

•: inability to manufacture on our own, or through others, product candidates on a clinical or commercial scale;
•: inability to market products due to third-party proprietary rights;
•: election by our customers not to pursue product development;
•: failure by our customers to develop products successfully; and
•: failure to achieve market acceptance.

Because of these risks, our research and development efforts and those of our customers and collaborators may not result in any commercially viable products. Our failure to successfully complete a significant portion of these development efforts, to obtain required regulatory approvals or to achieve commercial success with any approved products would materially harm our business, financial condition and results of operations.

In addition, our decisions to terminate or wind down our clinical programs for developing ABX-IL8 and ABX-CBL have reduced the diversity of our product portfolio. We hope to be able to make up for this loss of diversity through the number and variety of potential new product candidates we have in preclinical development. However, to the extent that we are unable to maintain a broad and diverse range of product candidates, our success would depend more heavily on one or a few product candidates.

Before we commercialize and sell any of our product candidates, we must conduct clinical trials, which are expensive and have uncertain outcomes.

Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any products, we must demonstrate through preclinical testing and clinical trials that our product candidates are safe and effective for use in humans. We have incurred and will continue to incur substantial expense for, and we have devoted and expect to continue to devote a significant amount of time to, preclinical testing and clinical trials.

Historically, the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from preclinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we may encounter regulatory delays or rejections as a result of many factors, including changes in regulatory policy during the period of product development.

Completion of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. However, we estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

Clinical Phase		Estimated Completion Period
Phase 1		1-2 Years
Phase 2		1-2 Years
Phase 3		2-4 Years

Many factors may delay our commencement and rate of completion of clinical trials, including:

•: the number of patients that ultimately participate in the trial;
•: the duration of patient follow-up that seems appropriate in view of the results;

•: the number of clinical sites included in the trials;
•: the length of time required to enroll suitable patient subjects; and
•: the availability of adequate supplies of the product candidate being tested.

We have limited experience in conducting and managing clinical trials. We rely on third parties, including our collaborators, to assist us in managing and monitoring clinical trials. Our reliance on these third parties may result in delays in completing, or in failure to complete, these trials if the third parties fail to perform under our agreements with them.

In addition, we have ongoing research projects that may lead to product candidates, but we have not submitted INDs nor begun clinical trials for these projects. Our preclinical or clinical development efforts may not be successfully completed, we may not file further INDs and clinical trials may not commence as planned.

Two of our proprietary product candidates, ABX-EGF and ABX-MA1, are in various stages of clinical trials. We have discontinued development of two proprietary product candidates, ABX-CBL and ABX-IL8. To date, data obtained from these clinical trials have been insufficient to demonstrate safety and efficacy under applicable Food and Drug Administration, or FDA, guidelines. As a result, these data will not support an application for regulatory approval without further clinical trials. Clinical trials that we conduct or that third parties conduct on our behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for any of our product candidates. We expect to commence new clinical trials from time to time in the course of our business as our product development work continues. However, regulatory authorities may not permit us to undertake any additional clinical trials for our product candidates.

Our product candidates may fail to demonstrate safety or efficacy in clinical trials. For example, we completed analysis of the Phase 2b clinical trials of ABX-IL8 in psoriasis and concluded that the results did not warrant continued development in psoriasis and decided not to proceed with studies in other disease indications. Similarly we completed a preliminary analysis of the results from the Phase 2/3 clinical trial of ABX-CBL and concluded that the study did not meet its primary endpoint. Therefore, we and SangStat do not plan any further development of ABX-CBL. Failures of clinical trials of any product candidate could delay the development of other product candidates or hinder our ability to obtain additional financing. In addition, failures in our clinical trials can lead to additional research and development charges. Any delays in, or termination of, our clinical trials could materially harm our business, financial condition and results of operations.

We may rely on third-party manufacturers, and we may have difficulty conducting clinical trials of our product candidates if a manufacturer does not perform in accordance with our expectations.

To date we have relied on a single contract manufacturer, Lonza, to produce ABX-CBL, ABX-IL8 and ABX-EGF under good manufacturing practice regulations, for use in our clinical trials. In June 2003, we canceled our manufacturing supply agreement with Lonza, pursuant to which we had exclusive access to a cell culture production suite, because we determined that with the opening of our own manufacturing plant, we no longer needed access to the Lonza facility. We have also relied on other contract manufacturers form time to time to produce our product candidates for use in our clinical trials. For example, Fred Hutchinson Cancer Research Center has produced ABX-MA1 for use in our clinical trials. While portions of our Fremont manufacturing facility are now operational, creating additional capacity, which we control, we cannot assure you that we will be able to qualify this facility for regulatory compliance as expected and we may use Lonza or another third-party manufacturer if necessary in the future.

Third-party manufacturers may encounter difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified personnel, compliance

with FDA and other applicable regulations, production costs, and development of advanced manufacturing techniques and process controls. If we continue to use third-party manufacturers, they may not perform as agreed or may not remain in the contract manufacturing business for the time required by us to successfully produce and market our product candidates. Any failure of third-party manufacturers to deliver the required quantities of our product candidates for clinical use on a timely basis and at commercially reasonable prices, and our failure to find replacement manufacturers or successfully implement our own manufacturing capabilities, would materially harm our business, financial condition and results of operations.

Our own ability to manufacture is uncertain, which may make it more difficult for us to develop and sell our products.

We are establishing our own manufacturing facility for the manufacture of product candidates for clinical trials and to support the potential early commercial launch of a limited number of products, in each case, in compliance with FDA and European good manufacturing practices. In May 2000, we signed a long-term lease for the building that contains this manufacturing facility. Construction has been completed and portions of the facility are operational. We are also conducting validation of the facility and completed a significant stage of validation in the second and third quarter of 2003. We expect to complete additional significant stages of validation in the fourth quarter of 2003. In October 2003, following an inspection by the State Department of Health Services, we received a Drug Manufacturing License from the State of California. The license permits us to manufacture and ship clinical material from our manufacturing facility. The total cost of the facility, including design fees, permits, validation, construction, leasehold improvements and equipment, will be approximately $148.0 million. Validation of this facility may take longer than expected, and the planned and actual construction costs of building and qualifying the facility for regulatory compliance may be higher than expected. In addition, if the commercial launch of one or more of our product candidates proves successful, we will likely need to use one or more third-party facilities to produce these products in sufficient quantities.

The process of manufacturing antibody therapeutic products is complex. While the managers of the facility have gained extensive manufacturing experience in prior positions with other companies, we have no experience in the clinical or commercial scale manufacturing of our existing product candidates, or any other antibody therapeutic products. Also, we will need to manufacture such antibody therapeutic products in a facility and by a process that comply with FDA, European and other regulations. Although we are currently manufacturing an antibody product candidate in this facility in compliance with those regulations, we may not be able to maintain compliance with those regulations. Our manufacturing operations will be subject to ongoing, periodic unannounced inspection by the FDA and state agencies to ensure compliance with good manufacturing practices. Our inability to complete and maintain a manufacturing facility within our planned time and cost parameters could materially harm the development and sales of our products and our financial performance.

We also may encounter problems with the following:

•: production yields;
•: quality control and assurance;
•: availability of qualified personnel;
•: on-going compliance with FDA regulations;
•: production costs; and
•: development of advanced manufacturing techniques and process controls.

We continually evaluate our options for commercial production of our antibody therapeutic products, which include use of third-party manufacturers, use of our own commercial scale manufacturing facility or entering into a manufacturing joint venture relationship with a collaborator or other third party. We are aware of only a limited number of companies on a worldwide basis that operate manufacturing facilities in which our product candidates can be manufactured under good manufacturing practice regulations, a requirement for all pharmaceutical products. It may take a substantial period of time for a contract manufacturing facility that has not been producing antibodies to begin producing antibodies under good manufacturing practice regulations. We may not be able to contract with any of these companies on acceptable terms, if at all.

In addition, the FDA and other regulatory authorities will require us to register any manufacturing facilities in which our antibody therapeutic products are manufactured. The FDA and other regulatory authorities will then subject the facilities to inspections confirming compliance with FDA good manufacturing practice or other regulations. Our failure or the failure of our third-party manufacturers to maintain regulatory compliance would materially harm our business, financial condition and results of operations.

The successful growth of revenues from our manufacturing services depends to a large extent on our ability to find third parties who agree to use our services and our ability to provide those services successfully.

Our strategy for enhancing contract revenues depends, to a significant extent on entering into agreements to provide antibody production services to third parties. Potential third parties include our existing collaborators, as well as other pharmaceutical and biotechnology companies, technology companies, academic institutions and other entities. We must enter into these agreements to successfully develop this aspect of our business. To date, we have entered into two production services agreements and we cannot assure you that we will be able to enter into additional agreements.

We may not be able to secure manufacturing agreements on favorable terms. If we do obtain such agreements, we may encounter difficulties in performing as agreed. We may encounter difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified personnel, compliance with FDA and other applicable regulations, production costs, and development of advanced manufacturing techniques and process controls. The failure to deliver the required quantities of product on a timely basis and at commercially reasonable prices could materially harm our business, financial condition and results of operations.

The successful growth of our business depends to a large extent on our ability to find third-party collaborators to develop and commercialize many of our product candidates.

Our strategy for the development and commercialization of antibody therapeutic products depends, in large part, upon the formation of collaboration agreements with third parties. Potential third parties include pharmaceutical and biotechnology companies, technology companies, academic institutions and other entities. We must enter into these agreements to successfully develop and commercialize product candidates. These agreements are necessary in order for us to:

•: access proprietary antigens for which we can generate fully human antibody products;
•: fund research, preclinical development, clinical trials and manufacturing;
•: seek and obtain regulatory approvals; and
•: successfully commercialize existing and future product candidates.

Our ability to continue our current collaborations and to enter into additional third party collaborations is dependent in large part on our ability to successfully demonstrate that our XenoMouse technology is an attractive method of developing antibody therapeutic products. We have

generated only a limited number of fully human antibody therapeutic product candidates pursuant to our collaboration agreements and only six fully human antibody therapeutic product candidates generated with XenoMouse technology have entered clinical testing. We have announced that one of these product candidates has not met our expectations. Our failure to maintain our existing collaboration agreements or to enter into additional agreements could materially harm our business, financial condition and results of operations.

Our dependence on licensing, collaboration, manufacturing and other agreements with third parties subjects us to a number of risks. These agreements may not be on terms that prove favorable to us, and we typically afford our collaborators significant discretion in electing whether to pursue any of the planned activities. Licensing and other contractual arrangements may require us to relinquish our rights to certain of our technologies, products or marketing territories. To the extent we agree to work exclusively with one collaborator in a given therapeutic area, our opportunities to collaborate with other entities could be curtailed. We cannot control the amount or timing of resources our collaborators may devote to the product candidates, and collaborators may not perform their obligations as expected. Additionally, business combinations or significant changes in a collaborator's business strategy may adversely affect a collaborator's willingness or ability to complete its obligations under the arrangement. Even if we fulfill our obligations under an agreement, typically our collaborators can terminate the agreement at any time following proper written notice. The termination or breach of agreements by our collaborators, or the failure of our collaborators to complete their obligations in a timely manner, could materially harm our business, financial condition and results of operations. If we are not able to establish further collaboration agreements or any or all of our existing agreements are terminated, we may be required to seek new collaborators or to undertake product development and commercialization at our own expense. Such an undertaking may:

•: limit the number of product candidates that we will be able to develop and commercialize;
•: reduce the likelihood of successful product introduction;
•: significantly increase our capital requirements; and
•: place additional strain on our management's time.

Existing or potential collaborators may pursue alternative technologies, including those of our competitors, or enter into other transactions that could make a collaboration with us less attractive to them. For example, if an existing collaborator purchases a company that is one of our competitors, that company could be less willing to continue its collaboration with us. In addition, a company that has a strategy of purchasing companies with attractive technologies might have less incentive to enter into a collaboration agreement with us. Moreover, disputes may arise with respect to the ownership of rights to any technology or products developed with any current or future collaborator. Lengthy negotiations with potential new collaborators or disagreements between us and our collaborators may lead to delays in or termination of the research, development or commercialization of product candidates or result in time-consuming and expensive litigation or arbitration. The decision by our collaborators to pursue alternative technologies or the failure of our collaborators to develop or commercialize successfully any product candidate to which they have obtained rights from us could materially harm our business, financial condition and results of operations.

We are subject to extensive government regulation, which will require us to spend significant amounts of money, and we may not be able to obtain regulatory approvals, which are required for us to conduct clinical testing and commercialize our products.

Our product candidates under development are subject to extensive and rigorous domestic government regulation. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution

of biopharmaceutical products. If we market our products abroad, they will also be subject to extensive regulation by foreign governments. Neither the FDA nor any other regulatory agency has approved any of our product candidates for sale in the United States or any foreign market. The regulatory review and approval process, which includes preclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain. Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish the product candidate's safety and efficacy. The approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance, and may involve requirements for post-marketing studies. As we conduct clinical trials for a given product candidate, we may decide or the FDA may require us to make changes in our plans and protocols. Such changes may relate to, for example, changes in the standard of care for a particular disease indication, comparability of efficacy and toxicity of materials where a change in materials is proposed, or competitive developments foreclosing the availability of expedited approval procedures. We may be required to support proposed changes with additional pre-clinical or clinical testing, which could delay the expected time line for concluding clinical trials. Regulatory requirements are subject to frequent change. Delays in obtaining regulatory approvals may:

•: adversely affect the successful commercialization of any drugs that we or our customers develop;
•: impose costly procedures on us or our customers;
•: diminish any competitive advantages that we or our customers may attain; and
•: adversely affect our receipt of revenues or royalties.

Our product candidates may not be approved or may be approved with limitations or for indications that differ from those we initially target. If approved, certain material changes affecting a product such as manufacturing changes or additional labeling claims are subject to further FDA review and approval. The FDA may withdraw any required approvals after we obtain them. We may not maintain compliance with other regulatory requirements. Further, if we fail to comply with applicable FDA and other regulatory requirements at any stage during the regulatory process, we or our third-party manufacturers may be subject to sanctions, including:

•: delays;
•: warning letters;
•: fines;
•: clinical holds;
•: product recalls or seizures;
•: injunctions;
•: refusal of the FDA to review pending market approval applications or supplements to approval applications;
•: total or partial suspension of production;
•: civil penalties;
•: withdrawals of previously approved marketing applications; and
•: criminal prosecutions.

In many instances we expect to rely on our customers and co-developers to file INDs and generally direct the regulatory approval process for products derived from our technologies. These customers and co-developers may not be able to or may choose not to conduct clinical testing or obtain necessary

approvals from the FDA or other regulatory authorities for any product candidates. If they fail to obtain required governmental approvals, we will experience delays in or be precluded from marketing or realizing the commercial benefits from the marketing of products derived from our technologies. In addition, our failure to obtain the required approvals would preclude the commercial use of our products. Any such delays and limitations may materially harm our business, financial condition and results of operations.

We and our third-party manufacturers also are required to comply with the applicable FDA current good manufacturing practice regulations and other regulatory requirements. Good manufacturing practice regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA and the facilities must pass an inspection by the FDA before we can use them in commercial manufacturing of any product. Manufacturing facilities in California, including our facility, are also subject to the licensing requirements of and inspection by the State of California Department of Health Services. In October 2003, following an inspection, we received a Drug Manufacturing License from the State of California. The license, which must be renewed annually, permits us to manufacture and ship clinical material. We or our third-party manufacturers may not be able to comply with the applicable good manufacturing practice requirements and other regulatory requirements. The failure of us or our third-party manufacturers to comply with these requirements would materially harm our business, financial condition and results of operations.

If our products do not gain market acceptance among the medical community, our revenues would greatly decline.

Our product candidates may not gain market acceptance among physicians, patients, third-party payors and the medical community. We may not achieve market acceptance even if clinical trials demonstrate safety and efficacy, and the necessary regulatory and reimbursement approvals are obtained. The degree of market acceptance of any product candidates that we develop will depend on a number of factors, including:

•: establishment and demonstration of clinical efficacy and safety;
•: cost-effectiveness of our product candidates;
•: their potential advantage over alternative treatment methods;
•: reimbursement policies of government and third-party payors; and
•: marketing and distribution support for our product candidates, including the efforts of our collaborators where they have marketing and distribution responsibilities.

Physicians will not recommend therapies using our products until such time as clinical data or other factors demonstrate the safety and efficacy of such procedures as compared to conventional drug and other treatments. Even if we establish the clinical safety and efficacy of therapies using our antibody product candidates, physicians may elect not to recommend the therapies for any number of other reasons, including whether the mode of administration of our antibody products is effective for certain indications. Antibody products, including our product candidates as they would be used for certain disease indications, are typically administered by infusion or injection, which requires substantial cost and inconvenience to patients. Our product candidates, if successfully developed, will compete with a number of drugs and therapies manufactured and marketed by major pharmaceutical and other biotechnology companies. Our products may also compete with new products currently under development by others. Physicians, patients, third-party payors and the medical community may not accept or utilize any product candidates that we or our customers develop. The failure of our products

to achieve significant market acceptance would materially harm our business, financial condition and results of operations.

We do not have marketing and sales experience, which may require us to rely on others to market and sell our products and may make it more challenging for us to commercialize our product candidates.

Although we have been marketing our XenoMouse technology to potential customers and collaborators for several years, we do not have marketing, sales or distribution experience or capability with respect to our therapeutic product candidates. We intend to enter into arrangements with third parties to market and sell most of our therapeutic product candidates when we commercialize them, which may be as early as 2005. We may not be able to enter into these marketing and sales arrangements with others on acceptable terms, if at all. To the extent that we enter into marketing and sales arrangements with other companies, our revenues, if any, will depend on the efforts of others. These efforts may not be successful. If we are unable to enter into third-party arrangements, we will need to develop a marketing and sales force, which may need to be substantial in size, in order to achieve commercial success for any product candidate approved by the FDA. We may not successfully develop marketing and sales capabilities or have sufficient resources to do so. If we do develop such capabilities, we will compete with other companies that have experienced and well-funded marketing and sales operations. Our failure to enter into successful marketing arrangements with third parties and our inability to conduct such activities ourselves would materially harm our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

Our ability to protect our intellectual property rights will be critically important to the success of our business, and we may not be able to protect these rights in the United States or abroad.

Our success depends in part on our ability to:

•: obtain patents;
•: protect trade secrets;
•: operate without infringing the proprietary rights of others; and
•: prevent others from infringing our proprietary rights.

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We attempt to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. However, the patent position of biopharmaceutical companies involves complex legal and factual questions, and, therefore, we cannot predict with certainty whether our patent applications will be approved or any resulting patents will be enforced. In addition, third parties may challenge, seek to invalidate or circumvent any of our patents, once they are issued. 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 adequate proprietary protection or competitive advantages against competitors with similar technologies. 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.

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 for our technology or adequate remedies in the event of unauthorized use or disclosure of confidential and proprietary information, and, in addition, the parties may breach such agreements. Also, our trade secrets may otherwise become known to, or be independently developed by, our competitors. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed.

We may face challenges from third parties regarding the validity of our patents and proprietary rights, or from third parties asserting that we are infringing their patents or proprietary rights, which could result in litigation that would be costly to defend and could deprive us of valuable rights.

Parties have conducted research for many years in the antibody and transgenic animal fields. The term "transgenic", when applied to an animal, such as a mouse, refers to an animal that has chromosomes into which human genes have been incorporated. This research has resulted in a substantial number of issued patents and an even larger number of pending patent applications. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Our technologies may unintentionally infringe the patents or violate other proprietary rights of third parties. Such infringement or violation may prevent us and our customers from pursuing product development or commercialization. Such a result could materially harm our business, financial condition and results of operations.

In March 1997, we entered into a cross-license and settlement agreement with GenPharm to avoid protracted litigation. Under the cross-license, we licensed on a non-exclusive basis certain patents, patent applications, third-party licenses and inventions pertaining to the development and use of certain transgenic rodents, including mice, that produce fully human antibodies that are integral to our products and business. Our business, financial condition and results of operations could be materially harmed if any of the parties breaches the cross-license agreement.

GlaxoSmithKline, plc, or Glaxo has a family of patents relating to certain methods for generating monoclonal antibodies that Glaxo is asserting against Genentech, Inc. in litigation that was commenced in 1999. On May 4, 2001, Genentech announced that a jury had determined that Genentech had not infringed Glaxo's patents and that all of the patent claims asserted against Genentech are invalid. We understand that Glaxo has filed a notice of appeal with the Court of Appeals for the Federal Circuit. If any of the claims of these patents are finally determined in the litigation to be valid, and if we were to use manufacturing processes covered by the patents to make our products, we may then need to obtain a license should one be available. Should a license be denied or unavailable on commercially reasonable terms, we may have difficulty commercializing one or more of our products in any territories in which these claims were in force.

Genentech, Johnson & Johnson, Glaxo, Transkaryotic Therapies, Inc. and the Trustees of the Columbia University in the City of New York each owns or controls a U.S. patent that relates to recombinant cell lines or methods of generating recombinant cell lines for the production of antibodies. If we were to use a production system covered by any of these patents, we may then need to obtain a license should one be available. Under these circumstances, our failure to obtain a license at all or on commercially reasonable terms could impede commercialization of one or more of our products in any territories in which these patent claims were in force.

Genentech owns a U.S. patent that issued in June 1998 relating to inhibiting the growth of tumor cells that involves an antibody that binds to an epidermal growth factor receptor, or an anti-EGF receptor antibody, in combination with a cytotoxic factor, which is a substance having a toxic effect on

cells. ImClone Systems, Inc. owns or is licensed under a U.S. patent that issued in April 2001, relating to inhibiting the growth of tumor cells that involves an anti-EGF receptor antibody in combination with an anti-neoplastic, or anti-tumor, agent. We believe that currently all of our activities relating to anti-EGF receptor monoclonal antibodies are within the exemption provided by the U.S. patent laws for uses reasonably related to obtaining FDA approval of a drug. We do not expect the scope of our product development plans to change in the future prior to filing an application for a biologic license with the FDA. We do not believe based on our review that either the Genentech or ImClone patent would be successfully asserted against any planned commercial sales of ABX-EGF. If a court determines that the claims of either the Genentech patent or the ImClone patent cover our activities with ABX-EGF and are valid, such a decision may require us to obtain a license to Genentech's or ImClone's patent, as the case may be, to label and sell ABX-EGF for certain combination therapies. Our failure to obtain a license, or to obtain a license on commercially reasonable terms, could impede our commercialization of ABX-EGF in the United States.

In 2000, the Japanese Patent Office granted a patent to Kirin Beer Kabushiki Kaisha, one of our competitors, relating to non-human transgenic mammals. Kirin has filed corresponding patent applications in Europe and Australia. Kirin may also have filed a corresponding patent application in the United States. Our licensee, Japan Tobacco, has filed opposition proceedings against the Kirin patent. We cannot predict the outcome of those opposition proceedings, which may take years to be resolved.

Extensive litigation regarding patents and other intellectual property rights has been common in the biotechnology and pharmaceutical industries. The defense and prosecution of intellectual property suits, United States Patent and Trademark Office interference proceedings, and related legal and administrative proceedings in the United States and internationally involve complex legal and factual questions. As a result, such proceedings are costly and time-consuming to pursue and their outcome is uncertain. Litigation may be necessary to:

•: enforce patents that we own or license;
•: protect trade secrets or know-how that we own or license; or
•: determine the enforceability, scope and validity of the proprietary rights of others.

Our involvement in any litigation, interference or other administrative proceedings could cause us to incur substantial expense and could significantly divert the efforts of our technical and management personnel. An adverse determination may subject us to loss of our proprietary position or to significant liabilities, or require us to seek licenses that may not be available from third parties. An adverse determination in a judicial or administrative proceeding, or a failure to obtain necessary licenses, may restrict or prevent us from manufacturing and selling our products, if any. Costs associated with these arrangements may be substantial and may include ongoing royalties. Furthermore, we may not be able to obtain the necessary licenses on satisfactory terms, if at all. These outcomes could materially harm our business, financial condition and results of operations.

Risks Related to Our Industry

We face intense competition and rapid technological change, and if we fail to develop products that keep pace with new technologies and that gain market acceptance, our product candidates or technologies could become obsolete.

The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of several pharmaceutical and biotechnology companies that are actively engaged in research and development in areas related to antibody therapy. These companies have commenced clinical trials of antibody therapeutic product candidates or have successfully commercialized antibody therapeutic products. Many of these companies are addressing the

same diseases and disease indications as we or our customers are. Also, we compete with companies that offer antibody generation services to companies that have antigens. These competitors have specific expertise or technology related to antibody development and introduce new or modified technologies from time to time. These companies include GenPharm, a wholly owned subsidiary of Medarex, Inc., Medarex's collaborator, Kirin Brewing Co. Ltd.; GenMab A/S; Cambridge Antibody Technology Group plc; Protein Design Labs, Inc.; MorphoSys AG; Xenerex Biosciences Inc., a subsidiary of Avanir Pharmaceuticals; XLT Biopharmaceuticals Ltd.; and Alexion Pharmaceuticals, Inc. Finally, we compete with companies that currently offer antibody production services, and may compete with companies that currently only manufacture their own antibodies but could offer antibody production services to third parties.

Some of our competitors have received regulatory approval of or are developing or testing product candidates that may compete directly with our product candidates. ImClone, in collaborations with Bristol-Meyers Squib Company and Merck KgAa; AstraZeneca, plc; Glaxo; and a collaboration of OSI Pharmaceuticals, Inc., Genentech and Roche have potential antibody and small molecule product candidates in clinical development that may compete with ABX-EGF, which is also in clinical trials. AstraZeneca has received approval for Iressa, a small molecule product candidate that may compete with ABX-EGF, in the United States, Japan and Australia for the treatment of advanced non-small cell lung cancer. ImClone and Bristol-Myers Squibb recently announced that the FDA has accepted ImClone's application for approval to market Erbitux, ImClone's antibody product candidate, for the treatment of metastatic colorectal cancer. Furthermore, we are also aware that Merck KgAa has submitted applications for the authorization to market Erbitux for the treatment of metastatic colorectal cancer in the European Union and Switzerland.

Many of these companies and institutions, either alone or together with their customers or collaborators, have substantially greater financial resources and larger research and development staffs than we do. In addition, many of these competitors, either alone or together with their customers or collaborators, have significantly greater experience than we do in:

•: developing products;
•: undertaking preclinical testing and human clinical trials;
•: obtaining FDA and other regulatory approvals of products; and
•: manufacturing and marketing products.

Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing products before we do. If we commence commercial product sales, we will be competing against companies with greater marketing and manufacturing capabilities, areas in which we have limited or no experience.

We also face, and will continue to face, competition from academic institutions, government agencies and research institutions. There are numerous competitors working on products to treat each of the diseases for which we are seeking to develop therapeutic products. In addition, any product candidate that we successfully develop may compete with existing therapies that have long histories of safe and effective use. Competition may also arise from:

•: other drug development technologies and methods of preventing or reducing the incidence of disease;
•: new small molecules; or
•: other classes of therapeutic agents.

Developments by competitors may render our product candidates or technologies obsolete or non-competitive. We face and will continue to face intense competition from other companies for

agreements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions, and for licenses to proprietary technology. These competitors, either alone or with their customers, may succeed in developing technologies or products that are more effective than ours.

We face uncertainty over reimbursement and healthcare reform, which, if determined adversely to us, could seriously hinder the market acceptance of our products.

In both domestic and foreign markets, sales of our product candidates will depend in part upon the availability of reimbursement from third-party payors, such as government health administration authorities, managed care providers and private health insurers. Third-party payors are increasingly challenging the price and examining the cost effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. In addition, domestic and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare, which could further limit reimbursement for pharmaceuticals. The failure of the government and third-party payors to provide adequate coverage and reimbursement rates for our product candidates could adversely affect the market acceptance of our products. The failure of our products to receive market acceptance would materially harm our business, financial condition and results of operations.

Other Risks Related to Our Company

Our restructuring plan may not achieve the results we intend and may harm our business.

In October 2002, we announced a restructuring plan, which included a reduction in headcount of approximately 15%. The restructuring may negatively affect our employee turnover, recruiting and retention, and may not enable us to reduce our costs to the extent expected.

The future growth and success of our business will depend on our ability to continue to attract and retain our employees and consultants.

For us to pursue product development, marketing and commercialization plans, we may need to hire additional qualified scientific personnel. We may also need to hire personnel with expertise in clinical testing, government regulation, manufacturing, marketing, law and finance. Attracting and retaining qualified personnel will be critical to our success. We may not be able to attract and retain personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions.

We grant stock options as a method of attracting and retaining employees, to motivate performance and to align the interests of management with those of our stockholders. Due to the decline in the trading price of our common stock during 2001 and 2002, a substantial portion of the stock options held by our employees have an exercise price that is higher than the current trading price of our common stock. We may elect to reprice or otherwise adjust the terms of these stock options, grant additional stock options at the current lower market price, pay higher cash compensation, or provide some combination of these alternatives to retain and attract qualified employees, but we cannot be sure that any of these actions would be successful. If we issue additional stock options, this would dilute existing stockholders.

As a result of these factors, we may have difficulty attracting and retaining qualified personnel, which could materially harm our business, financial condition and results of operations.

We may experience difficulty in the integration of any future acquisition with the operations of our business.

We may from time to time seek to expand our business through corporate acquisitions. Our acquisition of companies and businesses and expansion of operations, involve risks such as the following:

•: the potential inability to identify target companies best suited to our business plan;
•: the potential inability to successfully integrate acquired operations and businesses and to realize anticipated synergies, economies of scale or other expected value;
•: incurrence of expenses attendant to transactions that may or may not be consummated; and
•: difficulties in managing and coordinating operations at multiple venues, which, among other things, could divert our management's attention from other important business matters.

In addition, our acquisition of companies and businesses and expansion of operations may result in dilutive issuances of equity securities, the incurrence of additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in amortization expense or other charges to expense.

We have implemented a stockholder rights plan and are subject to other anti-takeover provisions, which could deter a party from effecting a takeover of us at a premium to our then-current stock price.

In June 1999, our board of directors adopted a stockholder rights plan, which we amended and restated in November 1999 and May 2002, and amended in October 2003. The stockholder rights plan and certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. This could limit the price that certain investors might be willing to pay in the future for our common stock. Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws allow us to:

•: issue preferred stock without any vote or further action by the stockholders;
•: eliminate the right of stockholders to act by written consent without a meeting;
•: specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings; and
•: eliminate cumulative voting in the election of directors.

We are subject to certain provisions of Delaware law which could also delay or make more difficult a merger, tender offer or proxy contest involving us. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless the transaction meets certain conditions. The stockholder rights plan, the possible issuance of preferred stock, the procedures required for director nominations and stockholder proposals and Delaware law could have the effect of delaying, deferring or preventing a change in control of us, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock.

We face product liability risks and may not be able to obtain adequate insurance, and if we are held liable for an uninsured claim or a claim in excess of our insurance limits, our business, financial condition and results of operations may be harmed.

The use of any of our product candidates, or of any products manufactured in our facility, in clinical trials, and the sale of any approved products, may expose us to liability claims resulting from such use or sale. Consumers, healthcare providers, pharmaceutical companies or others selling such products might make claims of this kind. We may experience financial losses in the future due to product liability claims. We have obtained limited product liability insurance coverage for our clinical trials, under which the coverage limits are $10.0 million per occurrence and $10.0 million in the aggregate. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for product candidates in development. We also intend to expand our insurance coverage to include production services activities. We may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If third parties bring a successful product liability claim or series of claims against us for uninsured liabilities or in excess of insured liabilities, our business, financial condition and results of operations may be materially harmed.

Our operations involve hazardous materials, and we could be held responsible for any damages caused by such materials.

Our research and manufacturing activities involve the controlled use of hazardous materials. In addition, although we maintain insurance for harm to employees and to our facilities caused by hazardous materials, we do not insure against any other harm (including harm to the environment) caused by the use of hazardous materials on our premises. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, we may be held liable for any resulting damages, which may exceed our financial resources and may materially harm our business, financial condition and results of operations.

We do not intend to pay cash dividends on our common stock.

We intend to retain any future earnings to finance the growth and development of our business and we do not plan to pay cash dividends on our common stock in the foreseeable future.

Our stock price is highly volatile, and you may not be able to sell your shares of our common stock at a price greater than or equal to the price you paid for them.

The market price and trading volume of our common stock are volatile, and we expect such volatility to continue for the foreseeable future. For example, during the period between September 30, 2002 and September 30, 2003, our common stock closed as high as $16.58 per share and as low as $4.58 per share. This may impact your decision to buy or sell our common stock. Factors affecting our stock price include:

•: our financial results;
•: fluctuations in our operating results;
•: announcements of technological innovations or new commercial therapeutic products by us or our competitors;
•: published reports by securities analysts;
•: developments in our clinical trials and in clinical trials for potentially competitive product candidates;
•: government regulation;

•: changes in reimbursement policies;
•: developments in patent or other proprietary rights;
•: announcements of that we have entered into new collaboration, licensing or similar arrangements with new collaborators, or amendments of the terms of our existing collaborations;
•: developments in our relationship with customers;
•: public concern as to the safety and efficacy of our products; and
•: general market conditions.

If we were deemed to be an investment company, we would become subject to provisions of the Investment Company Act that likely would have a material adverse impact on our business.

A company is required to register as an investment company under the Investment Company Act of 1940, or the 1940 Act, if, among other things, and subject to various exceptions:

•: it is or holds itself out to be engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or
•: it is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 percent of the value of such company's total assets (exclusive of Government securities and cash items) on an unconsolidated basis.

A major portion of our assets has been invested in investment grade interest-bearing securities. Such investments could in some circumstances require us to register as an investment company under the 1940 Act. Registration under the 1940 Act, or a determination that we failed to register when required to do so, could have a material adverse impact on us. We believe that we are and will remain exempt from the registration requirements, but absent interpretation by the courts or the SEC of the relevant exemption as applied to companies engaged in research and development, this result cannot be assured. In addition, a change in our allocation of assets on account of 1940 Act concerns could reduce the rate of return on our liquid assets.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk. We are exposed to interest rate sensitivity on our investments in debt securities and our outstanding fixed rate debt. The objective of our investment activities is to preserve principal, while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid, investment grade and government debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in short-term securities and our goal is to maintain an average maturity of approximately one year. In addition, as of September 30, 2003, we had $200.0 million of outstanding 3.5% convertible subordinated notes due in 2007. The fair value of these convertible subordinated notes may fluctuate with changes in market interest rates, as well as changes in the market price of our common stock. A hypothetical 1.0% per annum decrease in interest rates would result in an adverse net change in the fair value of our interest rate sensitive assets and liabilities of approximately $4.3 million and $6.3 million at September 30, 2003 and December 31, 2002, respectively.

Equity Price Risk. We are exposed to equity price risk on strategic investments, such as those we have made in CuraGen, ImmunoGen and MDS Proteomics. We typically do not attempt to reduce or eliminate our market exposure on these securities. With respect to CuraGen and ImmunoGen, each of whose common stock is publicly traded, the aggregate market value of our investments in these securities was approximately $15.0 million and $13.0 million as of September 30, 2003 and

December 31, 2002, respectively. Due to decreases in the market prices of the shares of CuraGen and ImmunoGen, we recorded impairment charges of $67.3 million in 2002 related to these investments. The trading prices of shares of CuraGen and ImmunoGen have fluctuated significantly since we purchased these securities. Each additional 10% decrease in market value of these securities would result in a decrease in value of approximately $1.5 million and $1.3 million from the fair value of those investments at September 30, 2003 and December 31, 2002, respectively. Additional price declines could cause us to record additional impairment charges in future periods.

An adverse movement of equity market prices generally would also have an impact on the valuation of our strategic investment in MDS Proteomics, a privately held company. Such a movement and the related underlying economic conditions would negatively impact the prospects of any company we invest in, its ability to raise capital and the likelihood of our being able to realize our investment through liquidity events such as a public offering, merger or private sale. In 2002, we incurred a $7.1 million charge related to a write-down of our investment in MDS Proteomics, and we may incur future write-downs of these securities. At September 30, 2003, our strategic investment in MDS Proteomics had a carrying amount of $7.9 million.

Foreign Currency Risk. A substantial majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily the British pound. As of September 30, 2003, we had a contract cancellation obligation to Lonza of approximately $21.2 million, which is payable in British pounds. A hypothetical 10% adverse change in exchange rates would result in an increase in the U.S. dollar value of this obligation of approximately $2.1 million at September 30, 2003.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on their evaluation of our disclosure controls and procedures, as that term is defined by Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as of the end of the period covered by this report, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be included in this quarterly report on Form 10-Q has been made known to them in a timely fashion.

Changes in Internal Controls Over Financial Reporting

There has been no change in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Not applicable.

ITEM 2. Changes in Securities and Use of Proceeds

Not applicable.

ITEM 3. Defaults upon Senior Securities

Not applicable.

ITEM 4. Submission of Matters to Vote of Security Holders

Not applicable.

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits and Reports on Form 8-K

(a): Exhibits

Number		Description
3.1	(1)	Amended and Restated Certificate of Incorporation of Abgenix, as currently in effect.
3.2	(2)	Amended and Restated Bylaws of Abgenix, as currently in effect.
4.7		Certificate of Designations, Preferences and Rights of Series A-1 Convertible Preferred Stock of Abgenix, Inc.
4.8		Certificate of Designations, Preferences and Rights of Series A-2 Convertible Preferred Stock of Abgenix, Inc.
4.9	(3)	Amendment No. 1 to Amended and Restated Preferred Shares Rights Agreements, between Abgenix, Inc. and Mellon Investor Services LLC, dated October 29, 2003.
10.85		Sublease, dated as of July 31, 2003, by and between Protein Design Labs, Inc. and Abgenix, Inc.
31.1		Certification of Raymond M. Withy, Ph.D. Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Kurt Leutzinger Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Raymond M. Withy, Ph.D. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Kurt Leutzinger Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to the same exhibit filed with Abgenix's Annual Report on Form 10-K for the year ended December 31, 2002.

(2)

Incorporated by reference to the same exhibit filed with Abgenix's Annual Report on Form 10-K for the year ended December 31, 2001.

(3)

Incorporated by reference to the same exhibit filed with Abgenix's Amendment No. 3 to its Registration Statement on Form 8-A (File No. 000-24207).

(b): Reports on Form 8-K

We filed a Form 8-K on July 22, 2003, furnishing under "Item 12. Disclosure of Results of Operations and Financial Condition" a press release we issued on that date to report our financial results for the quarter ended June 30, 2003.

We filed a Form 8-K on October 16, 2003, furnishing under "Item 5. Other Events" a press release we issued on that date to announce that we had entered into a Collaboration and License Agreement and a Securities Purchase Agreement with AstraZeneca UK Limited.

We filed a Form 8-K on October 21, 2003, furnishing under "Item 12. Disclosure of Results of Operations and Financial Condition" a press release we issued on that date to report our financial results for the quarter ended September 30, 2003.

We filed a Form 8-K on October 29, 2003, furnishing under "Item 5. Other Events" a press release we issued on that date to announce the consummation of the Collaboration and License Agreement with AstraZeneca and the issuance of convertible preferred stock pursuant to the Securities Purchase Agreement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 14, 2003

		ABGENIX, INC. (Registrant)
		/s/ RAYMOND M. WITHY Raymond M. Withy, Ph.D. President and Chief Executive Officer (Principal Executive Officer)
		/s/ KURT LEUTZINGER Kurt Leutzinger Chief Financial Officer (Principal Financial and Accounting Officer)

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ABGENIX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (unaudited)
ABGENIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
ABGENIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
ABGENIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (unaudited)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

ITEM 2. Changes in Securities and Use of Proceeds

ITEM 3. Defaults upon Senior Securities

ITEM 4. Submission of Matters to Vote of Security Holders

ITEM 5. Other Information

ITEM 6. Exhibits and Reports on Form 8-K

SIGNATURES
EX-4.7 3 a2121719zex-4_7.htm EX-4.7

Exhibit 4.7

CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A-1
CONVERTIBLE PREFERRED STOCK OF ABGENIX, INC.

Pursuant to Section 151 of the
General Corporation Law of the State of Delaware

The undersigned, pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, does hereby certify that, pursuant to the authority expressly vested in the Board of Directors of Abgenix, Inc., a Delaware corporation (the “CORPORATION”), by the Corporation’s Certificate of Incorporation, the Board of Directors of the Corporation (the “BOARD OF DIRECTORS”) has duly provided for the issuance of and created a series of Preferred Stock (the “PREFERRED STOCK”) of the Corporation, par value $0.0001 per share, and in order to fix the designation and amount and the voting powers, designations, preferences and other rights, and the qualifications, limitations and restrictions, of a series of Preferred Stock, has duly adopted this Certificate of Designations, Preferences and Rights of Preferred Stock (the “CERTIFICATE”).

Each share of such series of Preferred Stock shall rank equally in all respects and shall be subject to the following provisions:

1. NUMBER OF SHARES AND DESIGNATION. 50,000 shares of Preferred Stock of the Corporation shall constitute a series of Preferred Stock designated as Series A-1 Convertible Preferred Stock (the “SERIES A-1 PREFERRED STOCK”). Subject to Section 8(c), the number of shares of Series A-1 Preferred Stock may be increased (to the extent of the Corporation’s authorized and unissued Preferred Stock) or decreased (but not below the number of shares of Series A-1 Preferred Stock then outstanding) by further resolution duly adopted by the Board of Directors and the filing of a certificate of increase or decrease, as the case may be, with the Secretary of State of the State of Delaware.

2. RANK. The Series A-1 Preferred Stock shall, with respect to rights upon liquidation, dissolution or winding up of the affairs of the Corporation, or otherwise (a) rank senior and prior to the Common Stock, and each other class or series of equity securities of the Corporation, whether currently issued or issued in the future, that by its terms ranks junior to the Series A-1 Preferred Stock (all of such equity securities, including the Common Stock, are collectively referred to herein as the “JUNIOR SECURITIES”), (b) rank on a parity with each other class or series of equity securities of the Corporation, whether currently issued or issued in the future, that does not by its terms expressly provide that it ranks senior to or junior to the Series A-1 Preferred Stock (all of such equity securities are collectively referred to herein as the “PARITY SECURITIES”), and (c) rank junior to each other class or series of equity securities of the Corporation, whether currently issued or issued in the future, that by its terms ranks senior to the Series A-1 Preferred Stock (all of such equity securities are collectively referred to herein as the “SENIOR SECURITIES”). The respective definitions of Junior Securities, Parity Securities and Senior Securities shall also include any rights or options exercisable or exchangeable for or convertible into any of the Junior Securities, Parity Securities or Senior Securities, as the case may be.

3. DIVIDENDS.

(a) Ratably with Common Stock. The holders of shares of Series A-1 Preferred Stock shall be entitled to participate equally and ratably with the holders of shares of Common Stock in all dividends and distributions paid (whether in the form of cash, stock or otherwise) on the shares of Common Stock as if immediately prior to each record date for the Common Stock, shares of Series A-1 Preferred Stock then outstanding were converted into shares of Common Stock (in the manner, and at the Conversion Price, described in Section 6(a)(i)).

(b) Dividend Trigger Date. Subject to the rights of the holders of any Senior Securities, in addition to the dividends specified in Section 3(a), upon the occurrence and during the continuation of any Event of Default described in Section 10(a)(i) (the date of each such occurrence, a “DIVIDEND TRIGGER DATE”), thereafter and continuing until the earlier of the redemption or conversion of the relevant shares of Series A-1 Preferred Stock and the date on which such Event of Default is cured and ceases to exist, the holders of such shares shall be entitled to receive, out of funds legally available for that purpose, cash dividends at the Dividend Rate. Such dividends shall be cumulative from the Dividend Trigger Date and shall be payable in arrears on each Dividend Payment Date, provided that if any such payment date is not a Business Day then such dividend shall be payable on the next Business Day. The dividends per share of the Series A-1 Preferred Stock for any full quarterly period shall be computed by multiplying the Dividend Rate for such Dividend Period by the Redemption Price per share and dividing the result by four. Dividends payable for any period less than a full quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed for such period less than one month.

(c) Ratable Distribution. If the full cash dividends required to be paid by the Corporation to the holder of Series A-1 Preferred Stock pursuant to Section 3(b) are not paid or made available to the holders of all outstanding shares of Series A-1 Preferred Stock, and funds available shall be insufficient to permit payment in full in cash to all such holders and the holders of any Parity Securities of the preferential amounts to which they are then entitled, the entire amount available for payment of cash dividends shall be distributed among the holders of the Series A-1 Preferred Stock and such holders of Parity Securities ratably and in proportion to the full amount to which they would otherwise be respectively entitled, and any remainder not paid in cash to such holders shall cumulate.

(d) Junior Securities. So long as any shares of Series A-1 Preferred Stock shall be outstanding after the Dividend Trigger Date or any dividends accrued but unpaid in respect of shares of Series A-1 Preferred Stock redeemed pursuant to Section 5 or converted pursuant to Section 6 remain unpaid, the Corporation shall not (i) declare or pay any dividend or make any distribution on any Junior Securities, whether in cash, property or otherwise (other than dividends payable on shares of the class or series upon which such dividends are declared or paid, or payable in shares of Common Stock with respect to Junior Securities other than Common Stock), or (ii) purchase or redeem any Junior Securities, or pay or make available any monies for a sinking fund for the purchase or redemption of any Junior Securities, unless all dividends to which the holders of Series A-1 Preferred Stock shall have been entitled for all previous Dividend Periods shall have been paid or declared and a sum of money sufficient for the payment thereof set apart.

4. LIQUIDATION PREFERENCE.

(a) Amount. The liquidation preference for the shares of Series A-1 Preferred Stock shall be One Thousand United States Dollars (U.S. $1,000.00) per share (the “BASE LIQUIDATION VALUE”), plus the amount of any accrued but unpaid dividends (the “LIQUIDATION VALUE”).

(b) Entitlement of Series A-1 Preferred Stockholders. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A-1 Preferred Stock shall be entitled to receive the greater of (i) the Liquidation Value of such shares in effect on the date of such liquidation, dissolution or winding up or (ii) the payment such holders would have received had such holders, immediately prior to such liquidation, dissolution or winding up, converted their shares of Series A-1 Preferred Stock into shares of Common Stock (pursuant to, and at the Conversion Price described in, Section 6(a)(i)).

(c) Seniority. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A-1 Preferred Stock (i) shall not be entitled to receive the Liquidation Value of such shares until payment in full or provision has been made for the payment in full of all claims of creditors of the Corporation and the liquidation preferences for all Senior Securities, and (ii) shall be entitled to receive the Liquidation Value of such shares before any payment or distribution of any assets of the Corporation shall be made or set apart for holders of any Junior Securities. Subject to clause (i) above, if the assets of the Corporation are not sufficient to pay in full the Liquidation Value payable to the holders of shares of Series A-1 Preferred Stock and the liquidation preference payable to the holders of any Parity Securities, then such assets, or the proceeds thereof, shall be distributed among the holders of shares of Series A-1 Preferred Stock and any such other Parity Securities ratably in accordance with the Liquidation Value for the Series A-1 Preferred Stock and the liquidation preference for the Parity Securities, respectively.

(d) Events Constituting Liquidation. Neither a consolidation or merger of the Corporation with or into any other entity, nor a merger of any other entity with or into the Corporation, nor a sale or transfer of all or any part of the Corporation’s assets for cash, securities or other property shall be considered a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 4.

5. REDEMPTION; PROCEDURES FOR REDEMPTION.

(a) Redemption Upon Final Maturity. On the seventh (7th) anniversary of the Initial Closing Date (as such term is defined in the Purchase Agreement), the Corporation shall redeem all outstanding shares of Series A-1 Preferred Stock, if any, at a cash redemption price per share equal to the Liquidation Value (such amount being referred to herein as the “REDEMPTION PRICE”).

(b) Redemption at Option of the Corporation. At any time prior to the seventh (7th) anniversary of the Initial Closing Date (as such term is defined in the Purchase Agreement), at its sole option, the Corporation may redeem any or all shares of Series A-1 Preferred Stock at

a cash redemption price per share equal to the Redemption Price if (i) a shelf registration statement covering resales of the Common Stock issuable upon conversion of Series A-1 Preferred Stock is effective and available for use in accordance with Section 8.1 of the Purchase Agreement and is expected to remain effective and available for use for the thirty (30) days following the date of the notice provided by the Corporation pursuant to Section 5(c), unless registration is no longer required pursuant to the terms and conditions of the Purchase Agreement and (ii) the Common Stock issuable upon conversion of the Series A-1 Preferred Stock is listed or admitted for trading on an Approved Market and is expected to remain so listed or admitted for trading for the thirty (30) days following the date of the notice provided by the Corporation pursuant to Section 5(c). Except as set forth in this Section 5(b), the Corporation shall not have the option to redeem any shares of Series A-1 Preferred Stock. If fewer than all of the outstanding shares of Series A-1 Preferred Stock are to be redeemed pursuant to this Section 5(b), the shares of each holder of Series A-1 Preferred Stock shall be redeemed on a pro rata basis (according to the number of shares of Series A-1 Preferred Stock held by each holder, with any fractional shares rounded to the nearest whole share or in such other manner as the Board of Directors may determine, as may be prescribed by resolution of the Board of Directors).

(c) Notice of Redemption. In the event of a redemption of shares of Series A-1 Preferred Stock pursuant to Section 5(a) or 5(b), notice of such redemption shall be given by the Corporation, by first class mail, postage prepaid, mailed not less than fifteen (15) days nor more than forty-five (45) days prior to the Redemption Date, to each holder of Series A-1 Preferred Stock at the address appearing in the Corporation’s records. Such notice shall state:

(i) the date on which the holder is to surrender to the Corporation the certificates for any shares to be redeemed (such date, the “REDEMPTION DATE”);

(ii) the number of shares of Series A-1 Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of shares to be redeemed from such holder (such notice being referred to as the “REDEMPTION NOTICE”);

(iii) the then-current Conversion Price;

(iv) that if the holder wishes to convert any or all shares of Series A-1 Preferred Stock that are the subject of the Redemption Notice, the holder must give notice of such conversion no later than the close of business on the Business Day immediately preceding the Redemption Date; and

(v) that, unless the Corporation defaults in paying the Redemption Price with respect to such shares of Series A-1 Preferred Stock, the only remaining right of the holder in respect of such shares shall be to receive the payment of the Redemption Price.

Once a Redemption Notice is given by the Corporation to a holder, the shares of Series A-1 Preferred Stock that are the subject of such Redemption Notice shall not thereafter be convertible pursuant to Section 6(a)(ii) and the Redemption Price shall become due and payable on the Redemption Date, except to the extent that all or any portion of the shares of Series A-1

Preferred Stock held by such holder are converted in accordance with the provisions of Section 6(a)(i).

(d) Redemption Events.

(i) Notwithstanding anything contained in Section 5(a), (b) or (c) to the contrary, if at any time there shall occur a

(A) Type I Redemption Event, then on the date that is thirty (30) Business Days after the date of such Redemption Event (or, if such day is not a Business Day, then the next Business Day thereafter) (the “TYPE I REDEMPTION EVENT DATE”), the Corporation shall either, as it may elect,

(1) redeem from each holder of Series A-1 Preferred Stock, at a cash redemption price equal to the Redemption Price, as many of the Maximum Number of Type I Redemption Event Shares as the holder may specify in a Redemption Event Notice (for each holder, such number of shares, the “DESIGNATED NUMBER OF TYPE I REDEMPTION EVENT SHARES”), or

(2) exercise its rights pursuant to, and subject to all of the terms and provisions of, Section 6(a)(ii) to require the holder of the Series A-1 Preferred Stock to convert the Designated Number of Type I Redemption Event Shares; provided, however, that if and to the extent, as of the Type I Redemption Event Date, the Corporation is prevented by the terms of Section 6(a)(ii)(B) from requiring the holder to convert shares of Series A-1 Preferred Stock pursuant to Section 6(a)(ii)(A), then the Corporation shall, notwithstanding any election that it may otherwise have made pursuant to this Section 5(d)(i)(A), redeem from each holder on the Type I Redemption Event Date in accordance with clause (1) above such of the Designated Number of Type I Redemption Event Shares as the Corporation is prevented by the terms of Section 6(a)(ii)(B) from requiring the holder to convert as of such date.

(B) Type II Redemption Event, then on the Type II Redemption Event Date, the Corporation shall either, as it may elect,

(1) redeem from each such holder a number of shares of Series A-1 Preferred Stock then held by such holder up to a maximum number equal to such holder’s pro rata portion (according to the number of shares of Series A-1 Preferred Stock held by each holder, with any fractional shares rounded to the nearest whole share or in such other manner as the Board of Directors may determine, as may be prescribed by resolution of the Board of Directors) of the Maximum Number of Type II Redemption Event Shares, at a cash redemption price per share equal to the Redemption Price, as the holder may specify in the Redemption Event Notice (for each holder, such number of shares, the “DESIGNATED NUMBER OF TYPE II REDEMPTION EVENT SHARES”), or

(2) exercise its rights pursuant to, and subject to all of the terms and provisions of, Section 6(a)(ii) (without giving effect to clause (4) of Section 6(a)(ii)(B)) to require the holder of the Series A-1 Preferred Stock to convert any one or all of the Designated Number of Type II Redemption Event Shares; provided, however, that in the event that the Corporation elects to convert less than all of such Designated Number of Type II Redemption Event Shares, the Corporation shall redeem from such holder on the Type II Redemption Event Date in accordance with clause (1) above such of the Designated Number of Type II Redemption Event Shares as the Corporation has elected not to convert; provided, further, that if and to the extent, as of the Type II Redemption Event Date, the Corporation is prevented by the terms of Section 6(a)(ii)(B) (without giving effect to clause (4) of Section 6(a)(ii)(B)) from requiring the holder to convert shares of Series A-1 Preferred Stock pursuant to Section 6(a)(ii)(A), then the Corporation shall, notwithstanding any election that it may otherwise have made pursuant to this Section 5(d)(i)(B), redeem from each holder on the Type II Redemption Event Date in accordance with clause (1) above such of the Designated Number of Type II Redemption Event Shares as the Corporation is prevented by the terms of Section 6(a)(ii)(B) (without giving effect to clause (4) of Section 6(a)(ii)(B)) from requiring the holder to convert as of such date.

(ii) Within ten (10) Business Days after the occurrence of a Redemption Event, the Corporation shall provide each holder of Series A-1 Preferred Stock with notice of the Redemption Event. The notice shall state:

(A) the date of such Redemption Event, whether it is a Type I Redemption Event or a Type II Redemption Event, and, briefly, the events causing such Redemption Event;

(B) the date by which the Redemption Event Notice pursuant to this Section 5(d) must be given;

(C) the Redemption Event Date;

(D) the Maximum Number of Redemption Event Shares and, if the Redemption Event is a Type II Redemption Event, the holder’s pro rata portion of the Maximum Number of Type II Redemption Event Shares;

(E) the holder’s right to require the Corporation, (1) in the case of a Type I Redemption Event, to redeem or convert (at the Corporation’s election) such number of shares of Series A-1 Preferred Stock as would equal the Maximum Number of Redemption Event Shares or, (2) in the case of a Type II Redemption Event, to redeem or convert the holder’s pro rata portion of the Maximum Number of Type II Redemption Event Shares;

(F) in the case of (1) a Type I Redemption Event, whether the Corporation is electing to redeem or exercise its rights to convert such Designated Number of

Type I Redemption Event Shares as may thereafter be specified by the holder, and (2) a Type II Redemption Event, whether the Corporation is electing to redeem or exercise its rights to convert such Designated Number of Type II Redemption Event Shares as may thereafter be specified by the holder (and, in either case, in the event that the Corporation is electing to exercise its rights to convert any such shares, the number of such shares that the Corporation is electing to convert, and the place or places where certificates for such shares are to be surrendered for issuance of certificates representing shares of Common Stock);

(G) the then-current Conversion Price and the then-current Corporation Conversion Price;

(H) that the Series A-1 Preferred Stock that is the subject of redemption pursuant to a Redemption Event Notice may be converted into Common Stock pursuant to Section 6(a)(i) only to the extent that the Redemption Event Notice has been withdrawn in accordance with the terms of this Certificate;

(I) the procedures that the holder must follow to exercise rights under this Section 5(d); and

(J) the procedures for withdrawing a Redemption Event Notice.

(iii) The holder may exercise its rights specified in this Section 5(d) by delivery to the Corporation of a written notice (a “REDEMPTION EVENT NOTICE”) at any time prior to the close of business on the Business Day next preceding the Redemption Event Date specifying the Designated Number of Redemption Event Shares. The holder may specify a Designated Number of Redemption Event Shares that is less than the Maximum Number of Redemption Event Shares only if the amount so designated is not less than one whole share. Notwithstanding anything herein to the contrary, the holder shall have the right to withdraw any Redemption Event Notice in whole or in a portion thereof so long as the remaining Designated Number of Redemption Event Shares, if any, is not less than one whole share at any time prior to the close of business on the Business Day next preceding the Redemption Event Date by written notice of withdrawal given to the Corporation.

(e) Rights of Holder. Upon receipt by the Corporation of the Redemption Event Notice specified in Section 5(d)(iii), the holder shall (unless such Redemption Event Notice is withdrawn as specified in Section 5(d)(iii)) thereafter be entitled to receive on the Redemption Event Date, either the Redemption Price or the certificates and payment amount (if any) to which it is entitled upon conversion as provided in Section 6(b)(ii), as applicable, in each case with respect to each share of Series A-1 Preferred Stock held by such holder that is included in the Designated Number of Redemption Event Shares. Any Series A-1 Preferred Stock in respect of which a Redemption Event Notice has been given by the holder thereof may not be converted into shares of Common Stock pursuant to Section 6(a) on or after the date of the delivery of such Redemption Event Notice unless such Redemption Event Notice has first been validly withdrawn.

(f) Redemption Terms. In the event that any Designated Number of Redemption Event Shares are to be redeemed pursuant to this Section 5, the following terms and conditions shall apply.

(i) Surrender of Certificates. On or prior to the Redemption Date or the Redemption Event Date, as the case may be, each holder of Series A-1 Preferred Stock to be redeemed shall surrender its certificate or certificates representing shares of Series A-1 Preferred Stock to be redeemed to the Corporation at the Corporation’s principal executive offices or such other location as the Corporation may by notice direct, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after the Redemption Date or the Redemption Event Date, as the case may be, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of the Series A-1 Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to the Series A-1 Preferred Stock subject to redemption, and such shares shall not thereafter be transferred on the books of the Corporation or deemed to be outstanding for any purpose whatsoever.

(ii) Consequences of Nonpayment. In the event that the Corporation does not pay the Redemption Price on the Redemption Date or the Redemption Event Date, as the case may be, the Redemption Price shall be calculated as if the Redemption Date or the Redemption Event Date, as the case may be, were the later of such date and the date on which such payment is made. If the Corporation is unable at the Redemption Date or the Redemption Event Date, as the case may be, to redeem any or all shares of Series A-1 Preferred Stock then to be redeemed because such redemption would violate the applicable laws of the State of Delaware, then the Corporation shall redeem such shares as soon thereafter as redemption would not violate such laws. In the event of any redemption of only a part of the then outstanding Series A-1 Preferred Stock subject to redemption, the Corporation shall effect such redemption pro rata among the holders thereof (based on the number of shares of Series A-1 Preferred Stock held on the date of notice of redemption).

(g) Conversion Terms. In the event that the Corporation elects, pursuant to clause (2) of Section 5(d)(i)(A) or clause (2) of Section 5(d)(i)(B), to exercise its rights to require the holder to convert any shares of Series A-1 Preferred Stock pursuant to Section 6(a)(ii) with respect to the Designated Number of Redemption Event Shares specified by each holder, the terms of Section 6 shall govern the conversion of such shares, except that the notice provisions of Section 5(d)(ii) shall apply in lieu of the notice requirements of Section 6(b)(i)(B) such that, upon the Corporation’s giving of the notice required pursuant to Section 5(d)(ii), the Corporation shall be deemed to have exercised its conversion rights pursuant to Section 6(a)(ii) with respect to such Designated Number of Redemption Event Shares and the Corporation shall not be required to provide any additional notice under Section 6(b)(i)(B) in order to exercise such rights with respect to such shares.

6. CONVERSION.

(a) Right to Convert; Right of Corporation to Require Conversion.

(i) Voluntary Conversion at the Option of the Holder. Subject to the provisions of Section 5, this Section 6 and Section 9, each holder of shares of Series A-1 Preferred Stock shall have the right, at any time and from time to time, at such holder’s option, to convert any or all of such holder’s shares of Series A-1 Preferred Stock, in whole or in part, into fully paid and non-assessable shares of Common Stock at the conversion price equal to the Initial Conversion Price per share of Common Stock, subject to adjustment as described in Section 6(c) (as adjusted, the “CONVERSION PRICE”). The number of shares of Common Stock into which a share of the Series A-1 Preferred Stock shall be convertible pursuant to this Section 6(a)(i) (calculated as to each conversion to the nearest 1/100th of a share) shall be determined by dividing the Base Liquidation Value by the Conversion Price in effect at the time of conversion. The “INITIAL CONVERSION PRICE” shall be Thirty United States Dollars (U.S. $30.00) per share. Notwithstanding the foregoing provisions of this Section 6(a)(i), if some or all of the shares of Series A-1 Preferred Stock held by the holder are to be redeemed pursuant to Section 5, the conversion right specified in this Section 6(a)(i) shall terminate as to such shares at the close of business on the Business Day immediately preceding the Redemption Date or the Redemption Event Date, as the case may be (unless the Corporation shall default in paying the Redemption Price per share, when due, in which case the conversion right shall terminate at the close of business on the date such default is cured).

(ii) Mandatory Conversion at the Option of the Corporation.

(A) Subject to the provisions of Section 5, this Section 6 and Section 9, the Corporation shall have the right to require the holder of shares of Series A-1 Preferred Stock, at the Corporation’s option, to convert any or all of such holder’s shares of Series A-1 Preferred Stock, in whole or in part, into fully paid and non-assessable shares of Common Stock at a conversion price equal to the lower of (1) the Average Market Price for Corporation’s Conversion Option or (2) the Conversion Price described in Section 6(a)(i) above (such lower price, the “CORPORATION CONVERSION PRICE”). The number of shares of Common Stock into which a share of the Series A-1 Preferred Stock shall be convertible pursuant to this Section 6(a)(ii) (calculated as to each conversion to the nearest 1/100th of a share) shall be determined by dividing the Base Liquidation Value by the Corporation Conversion Price.

(B) Notwithstanding anything contained herein to the contrary, in no event shall the Corporation have the right to require the holder of shares of Series A-1 Preferred Stock to convert any or all of such shares into shares of Common Stock pursuant to Section 6(a)(ii)(A): (1) at any time during the period commencing on the date of the Initial Closing (as such term is defined in the Purchase Agreement) and ending on the third anniversary thereof (the “RESTRICTED CONVERSION

PERIOD”), except to the extent permitted by the terms and conditions of Section 6(a)(ii)(C); (2) unless (y) a shelf registration statement covering resales of the Common Stock issuable upon conversion of the Series A-1 Preferred Stock is effective and available for use in accordance with Section 8.1 of the Purchase Agreement and is expected to remain effective and available for use for the thirty (30) days following the Conversion Date unless registration is no longer required pursuant to the terms and conditions of the Purchase Agreement and (z) the Common Stock issuable upon conversion of the Series A-1 Preferred Stock is listed or admitted for trading on an Approved Market and is expected to remain so listed or admitted for trading for the thirty (30) days following the Conversion Date; (3) if there exists and is continuing an Event of Default; or (4) during any period when any member of the Corporation’s senior management is, to the knowledge of the Corporation, at the time of the giving of the Corporation’s Election Notice (or, in the event of a conversion by the Corporation pursuant to an election under clause (2) of Section 5(d)(i)(A), at the time of the Corporation’s giving of the notice required pursuant to Section 5(d)(ii)), prohibited or restricted from trading in shares of Common Stock under the Corporation’s internal rules and procedures relating to insider trading in the Corporation’s securities.

(C) During the Restricted Conversion Period, the Corporation shall have no right to require the holders of shares of Series A-1 Preferred Stock to convert in any three month period shares of Series A-1 Preferred Stock that yield shares of Common Stock exceeding the greater of (1) one percent of the shares of Common Stock outstanding as of the beginning of such three month period and (2) the average weekly trading volume on the NNM for shares of Common Stock during the four weeks ending on the first day of such three month period, in each case as such amounts are determined pursuant to Rule 144 of the Securities Act.

(b) Mechanics of Conversion.

(i) Procedures to Exercise Conversion Rights. A holder of shares of Series A-1 Preferred Stock or the Corporation, as the case may be, that elects to exercise its conversion rights pursuant to Section 6(a) shall provide notice to the other party as follows:

(A) Holder’s Notice and Surrender. To exercise its conversion right pursuant to Section 6(a)(i), the holder of shares of Series A-1 Preferred Stock to be converted shall surrender the certificate or certificates representing such shares at the office of the Corporation (or any transfer agent of the Corporation previously designated by the Corporation to the holders of Series A-1 Preferred Stock for this purpose) with a written notice of election to convert, completed and signed, specifying the number of shares to be converted.

(B) Corporation’s Notice. Subject to Section 5(g), to exercise its conversion right pursuant to Section 6(a)(ii), the Corporation shall deliver written notice to such holder (the “CORPORATION’S ELECTION NOTICE”), at least

twenty (20) days and no more than forty-five (45) days prior to the Conversion Date, specifying: (1) the number of shares of Series A-1 Preferred Stock to be converted and, if fewer than all the shares held by such holder are to be converted, the number of shares to be held by such holder; (2) the Conversion Date; and (3) the place or places where certificates for such shares are to be surrendered for issuance of certificates representing shares of Common Stock.

(ii) Surrender and Delivery of Certificates. Unless the shares issuable upon conversion are to be issued in the same name as the name in which such shares of Series A-1 Preferred Stock are registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form reasonably satisfactory to the Corporation, duly executed by the holder or the holder’s duly authorized attorney and an amount sufficient to pay any transfer or similar tax in accordance with Section 6(b)(vi). As promptly as practicable after the surrender by the holder of the certificates for shares of Series A-1 Preferred Stock as aforesaid, the Corporation shall issue and shall deliver to such holder, or on the holder’s written order to the holder’s transferee, a certificate or certificates for the whole number of shares of Common Stock issuable upon the conversion of such shares, a check payable in an amount corresponding to any fractional interest in a share of Common Stock as provided in Section 6(b)(vii), and, in the case of a conversion pursuant to Section 6(a)(ii), a certificate of an executive officer of the Corporation setting forth the Corporation Conversion Price and, in reasonable detail, the determination thereof and the number of shares of Common Stock issued in respect of each converted share of Series A-1 Preferred Stock.

(iii) Effective Date of Conversion. Each conversion shall be deemed to have been effected immediately prior to the close of business on (A) in the case of conversion pursuant to Section 6(a)(i), the first Business Day on which the certificates for shares of Series A-1 Preferred Stock shall have been surrendered and such notice received by the Corporation as aforesaid or (B) in the case of conversion pursuant to Section 6(a)(ii), the date specified as the Conversion Date in the Corporation’s notice of conversion delivered to each holder pursuant to Section 6(b)(i)(B) (in each case, the “CONVERSION DATE”); provided, however, that in the event of a conversion by the Corporation under Section 6(a)(ii) pursuant to an election made by the Corporation under clause (2) of Section 5(d)(i)(A) or clause (2) of Section 5(d)(i)(B), the “CONVERSION DATE” shall be the Redemption Event Date. At such time on the Conversion Date: (A) the person in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder of record of the shares of Common Stock represented thereby at such time; and (B) such shares of Series A-1 Preferred Stock so converted shall no longer be deemed to be outstanding, and all rights of a holder with respect to such shares, in the event of conversion pursuant to Section 6(a)(i), surrendered for conversion and, in the event of conversion pursuant to Section 6(a)(ii), covered by the Corporation’s notice of conversion, shall immediately terminate except the right to receive (x) the Common Stock, (y) other amounts payable pursuant to this Section 6, and (z) any dividends then accrued but unpaid in respect of the converted Series A-1 Preferred Stock.

(iv) Duly Issued Shares. All shares of Common Stock delivered upon conversion of the Series A-1 Preferred Stock shall, upon delivery, be duly and validly authorized and issued, fully paid and nonassessable, free from all preemptive rights and free from all taxes, liens, security interests and charges (other than liens or charges created by or imposed upon the holder or taxes in respect of any transfer occurring contemporaneously therewith).

(v) Reservation and Listing of Shares. The Corporation shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, solely for the purpose of effecting conversions of the Series A-1 Preferred Stock, the aggregate number of shares of Common Stock issuable upon conversion of the Series A-1 Preferred Stock pursuant to Section 6(a)(i). Prior to any conversion by the Corporation pursuant to Section 6(a)(ii), the Corporation shall ensure that it then has a sufficient number of authorized but unissued shares of Common Stock in order to effect such conversion. The Corporation shall, promptly following the issuance of the shares of Series A-1 Preferred Stock, take such action to cause the shares of Common Stock initially issuable upon conversion of the shares of Series A-1 Preferred Stock to be listed on the NNM as promptly as possible but no later than the effective date of the Registration Statement providing for the resale by the holder of shares of Common Stock issuable upon conversion of shares of the Series A-1 Preferred Stock as contemplated by Section 8 of the Purchase Agreement. The Corporation further agrees that if it applies to have its Common Stock or other securities traded on any other stock exchange or market it will include in such application all shares of Common Stock to be issued upon the shares of Series A-1 Preferred Stock and will take all such other actions as may be necessary to cause such shares of Common Stock to be so listed. During the period beginning on the date hereof and ending on the Final Date (as defined in the Purchase Agreement), the Corporation shall take all actions necessary to continue the listing and trading of its Common Stock on an Approved Market and will comply in all material respects with the Corporation’s reporting, filing and other obligations under the bylaws and rules of each such exchange or market on which shares of the Common Stock may from time to time be listed to the extent necessary to ensure the continued eligibility for trading of shares of Common Stock. The Corporation shall take all commercially reasonable action as may be necessary to ensure that the shares of Common Stock may be issued without violation of any applicable law or regulation or of any requirement of any securities exchange or inter-dealer quotation system on which the shares of Common Stock are listed or traded.

(vi) Fees and Taxes. Issuances of certificates for shares of Common Stock upon conversion of the Series A-1 Preferred Stock shall be made without charge to the holder of shares of Series A-1 Preferred Stock for any issue or transfer tax (other than taxes in respect of any transfer occurring contemporaneously therewith or as a result of the holder being a non-U.S. person) or other incidental expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Corporation; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance or delivery of shares of Common Stock in a name other than that of the holder of the Series A-1 Preferred Stock,

and no such issuance or delivery shall be made unless and until the person requesting such issuance or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

(vii) Fractions of Shares. In connection with the conversion of any shares of Series A-1 Preferred Stock, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Market Price per share of Common Stock on the Conversion Date.

(viii) Conversion on Pro Rata Basis. If fewer than all of the outstanding shares of Series A-1 Preferred Stock are to be converted pursuant to Section 6(a)(ii), the shares of each holder of Series A-1 Preferred Stock shall be converted on a pro rata basis (according to the number of shares of Series A-1 Preferred Stock held by each holder, with any fractional shares rounded to the nearest whole share or in such other manner as the Board of Directors may determine, as may be prescribed by resolution of the Board of Directors).

(c) Adjustments to Conversion Price.

(i) Stock Splits, Etc. In case the Corporation shall (A) pay a dividend on its Common Stock in shares of Common Stock, (B) make a distribution on its Common Stock in shares of Common Stock, (C) subdivide its Outstanding Common Stock into a greater number of shares, or (D) combine its Outstanding Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior thereto shall be adjusted so that the holder shall upon conversion of the shares of Series A-1 Preferred Stock held by it be entitled to receive that number of shares of Common Stock which it would have owned had such shares of Series A-1 Preferred Stock been converted immediately prior to the happening of such event. An adjustment made pursuant to this Section 6(c)(i) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of subdivision or combination.

(ii) Rights to Purchase Common Stock. In case the Corporation shall issue rights or warrants to all or substantially all holders of its Common Stock entitling them (for a period commencing no earlier than the record date described below and expiring not more than sixty (60) days after such record date) to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price per share (or having a conversion price per share) less than the Current Average Market Price per share of Common Stock on the record date for the determination of stockholders entitled to receive such rights or warrants, the Conversion Price in effect immediately prior thereto shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to such record date by a fraction of which the numerator shall be the number of shares of Common Stock Outstanding on such record date plus the number of shares which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the

convertible securities so offered, which shall be determined by multiplying the number of shares of Common Stock issuable upon conversion of such convertible securities by the conversion price per share of Common Stock pursuant to the terms of such convertible securities) would purchase at the Current Average Market Price per share of Common Stock on such record date, and of which the denominator shall be the number of shares of Common Stock Outstanding on such record date plus the number of additional shares of Common Stock offered (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever any such rights or warrants are issued, and shall become effective immediately after such record date. If at the end of the period during which such rights or warrants are exercisable not all rights or warrants shall have been exercised, the adjusted Conversion Price shall be immediately readjusted to what it would have been based upon the number of additional shares of Common Stock actually issued (or the number of shares of Common Stock issuable upon conversion of convertible securities actually issued).

(iii) Distributions to Holders of Common Stock.

(A) In case the Corporation shall distribute to all or substantially all holders of its Common Stock any shares of Capital Stock of the Corporation (other than Common Stock), evidences of indebtedness or other non-cash assets (including securities of any person other than the Corporation but excluding (1) dividends or distributions paid exclusively in cash or (2) dividends or distributions referred to in Section 6(c)(i)), or shall distribute to all or substantially all holders of its Common Stock rights or warrants to subscribe for or purchase any of its securities (excluding those rights and warrants referred to in Section 6(c)(ii) and also excluding the distribution of rights to all holders of Common Stock pursuant to the adoption of a stockholders rights plan or the detachment of such rights under the terms of such stockholder rights plan), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the current Conversion Price by a fraction of which the numerator shall be the Current Average Market Price per share of the Common Stock on the record date mentioned below less the fair market value on such record date (as reasonably determined by the Board of Directors, whose determination shall be conclusive evidence of such fair market value and which shall be evidenced by an Officers’ Certificate delivered to the holder) of the portion of the Capital Stock, evidences of indebtedness or other non-cash assets so distributed or of such rights or warrants applicable to one share of Common Stock (determined on the basis of the number of shares of Common Stock Outstanding on the record date), and of which the denominator shall be the Current Average Market Price per share of the Common Stock on such record date. Such adjustment shall be made successively whenever any such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution.

(B) In the event the then fair market value (as so determined) of the portion of the Capital Stock, evidences of indebtedness or other non-cash assets so distributed or of such rights or warrants applicable to one share of Common Stock is

equal to or greater than the Current Average Market Price per share of the Common Stock on such record date, in lieu of the foregoing adjustment, adequate provision shall be made so that the holder has the right to receive upon conversion the amount of Capital Stock, evidences of indebtedness or other non-cash assets so distributed or of such rights or warrants the holder would have received had the holder converted the shares of Series A-1 Preferred Stock then held by it on such record date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 6(c)(iii)(B) by reference to the actual or when issued trading market for any securities, it must in doing so consider the prices in such market over the same period used in computing the Current Average Market Price of the Common Stock.

(C) In the event that the Corporation has implemented or implements a preferred shares rights plan (“RIGHTS PLAN”), upon conversion by each holder of the shares of Series A-1 Preferred Stock held by it into Common Stock, to the extent that the Rights Plan has been implemented and is still in effect upon such conversion, the holder shall receive, in addition to the Common Stock, the rights described therein (whether or not the rights have separated from the Common Stock at the time of conversion), subject to the limitations set forth in the Rights Plan. Any distribution of rights or warrants pursuant to a Rights Plan complying with the requirements set forth in the immediately preceding sentence of this paragraph shall not constitute a distribution of rights or warrants pursuant to this Section 6(c)(iii)(C).

(D) Rights or warrants distributed by the Corporation to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Corporation’s Capital Stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events (“TRIGGER EVENT”): (1) are deemed to be transferred with such shares of Common Stock; (2) are not exercisable; and (3) are also issued in respect of future issuances of Common Stock, shall be deemed not to have been distributed for purposes of this Section 6(c)(iii)(D) (and no adjustment to the Conversion Price under this Section 6(c)(iii)(D) will be required) until the occurrence of the earliest Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Price shall be made under this Section 6(c)(iii)(D). If any such right or warrant, including any such existing rights or warrants distributed prior to the date of the Initial Closing Date (as defined in the Purchase Agreement), are subject to events upon the occurrence of which such rights or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and record date with respect to new rights or warrants with such rights (and a termination or expiration of the existing rights or warrants without exercise by any of the holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Trigger Event or other event (of the type described in the preceding

sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this Section 6(c)(iii)(D) was made, (y) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (z) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued.

(E) In case the Corporation shall, by dividend or otherwise, at any time distribute (a “TRIGGERING DISTRIBUTION”) to all or substantially all holders of its Common Stock cash in an aggregate amount that, together with the aggregate amount of (1) any cash and the fair market value (as reasonably determined by the Board of Directors, whose determination shall be conclusive evidence thereof and which shall be evidenced by an Officers’ Certificate delivered to the holder) of any other consideration payable in respect of any tender offer by the Corporation or a Subsidiary of the Corporation for Common Stock consummated within the twelve (12) months preceding the date of payment of the Triggering Distribution and in respect of which no Conversion Price adjustment pursuant to this Section 6(c)(iii)(E) has been made and (2) all other cash distributions to all or substantially all holders of its Common Stock made within the twelve (12) months preceding the date of payment of the Triggering Distribution and in respect of which no Conversion Price adjustment pursuant to this Section 6(c)(iii)(E) has been made (and in which the holder did not otherwise participate), exceeds an amount equal to ten percent (10%) of the product of the Current Average Market Price per share of Common Stock on the Business Day (the “DETERMINATION DATE”) immediately preceding the day on which such Triggering Distribution is declared by the Corporation multiplied by the number of shares of Common Stock Outstanding on the Determination Date (excluding shares held in the treasury of the Corporation), the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying such Conversion Price in effect immediately prior to the Determination Date by a fraction of which the numerator shall be the Current Average Market Price per share of the Common Stock on the Determination Date less the sum of the aggregate amount of cash and the aggregate fair market value (determined as aforesaid in this Section 6(c)(iii)(E)) of any such other consideration so distributed, paid or payable within such twelve (12) months (including the Triggering Distribution) applicable to one share of Common Stock (determined on the basis of the number of shares of Common Stock Outstanding on the Determination Date) and the denominator shall be such Current Average Market Price per share of the Common Stock on the Determination Date, such reduction to become effective immediately prior to the opening of business on the day following the date on which the Triggering Distribution is paid.

(F) In case any tender offer made by the Corporation or any of its Subsidiaries for Common Stock shall expire and such tender offer (as amended upon the expiration thereof) shall involve the payment of aggregate consideration in an amount (determined as the sum of the aggregate amount of cash consideration and the aggregate fair market value (as reasonably determined by the Board of Directors, whose determination shall be conclusive evidence thereof and which shall be evidenced by an Officers’ Certificate delivered to the holder) of any other consideration) that, together with the aggregate amount of (1) any cash and the fair market value (as reasonably determined by the Board of Directors, whose determination shall be conclusive evidence thereof and which shall be evidenced by an Officers’ Certificate delivered to the holder) of any other consideration payable in respect of any other tender offers by the Corporation or any Subsidiary of the Corporation for Common Stock consummated within the twelve (12) months preceding the date of the Expiration Date and in respect of which no Conversion Price adjustment pursuant to this Section 6(c)(iii)(F) has been made and (2) all cash distributions to all or substantially all holders of its Common Stock made within the twelve (12) months preceding the Expiration Date and in respect of which no Conversion Price adjustment pursuant to this Section 6(c)(iii)(F) has been made (and in which the holder did not otherwise participate), exceeds an amount equal to ten percent (10%) of the product of the Current Average Market Price per share of Common Stock as of the last date (the “EXPIRATION DATE”) tenders could have been made pursuant to such tender offer (as it may be amended) (the last time at which such tenders could have been made on the Expiration Date is hereinafter sometimes called the “EXPIRATION TIME”) multiplied by the number of shares of Common Stock Outstanding (including tendered shares but excluding any shares held in the treasury of the Corporation) at the Expiration Time, then, immediately prior to the opening of business on the day after the Expiration Date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Expiration Date by a fraction of which the numerator shall be the product of the number of shares of Common Stock Outstanding (including tendered shares but excluding any shares held in the treasury of the Corporation) at the Expiration Time multiplied by the Current Average Market Price per share of the Common Stock on the Trading Day next succeeding the Expiration Date and the denominator shall be the sum of (y) the aggregate consideration (determined as aforesaid) payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the “PURCHASED SHARES”) and (z) the product of the number of shares of Common Stock Outstanding (less any Purchased Shares and excluding any shares held in the treasury of the Corporation) at the Expiration Time and the Current Average Market Price per share of Common Stock on the Trading Day next succeeding the Expiration Date, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Date. In the event that the Corporation is obligated to purchase shares pursuant to any such tender offer, but

the Corporation is permanently prevented by applicable law from effecting any or all such purchases or any or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect based upon the number of shares actually purchased. If the application of this Section 6(c)(iii)(F) to any tender offer would result in an increase in the Conversion Price, no adjustment shall be made for such tender offer under this Section 6(c)(iii)(F).

(G) For purposes of this Section 6(c), the term “tender offer” shall mean and include both tender offers and exchange offers, all references to “purchases” of shares in tender offers (and all similar references) shall mean and include both the purchase of shares in tender offers and the acquisition of shares pursuant to exchange offers, and all references to “tendered shares” (and all similar references) shall mean and include shares tendered in both tender offers and exchange offers.

(iv) Deferral. In any case in which this Section 6(c) shall require that an adjustment be made following a record date or a Determination Date or Expiration Date, as the case may be, established for purposes of this Section 6(c), the Corporation may elect to defer (but only until five (5) Business Days following the giving by the Corporation to the holder the certificate described in Section 6(c)(vii)) issuing to the holder of any Series A-1 Preferred Stock converted after such record date or Determination Date or Expiration Date the shares of Common Stock and other Capital Stock of the Corporation issuable upon such conversion over and above the shares of Common Stock and other Capital Stock of the Corporation issuable upon such conversion only on the basis of the Conversion Price prior to adjustment; and, in lieu of the shares the issuance of which is so deferred, the Corporation shall issue or cause its transfer agents to issue due bills or other appropriate evidence prepared by the Corporation of the right to receive such shares. If any distribution in respect of which an adjustment to the Conversion Price is required to be made as of the record date or Determination Date or Expiration Date therefor is not thereafter made or paid by the Corporation for any reason, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect if such record date had not been fixed or such effective date or Determination Date or Expiration Date had not occurred.

(v) No Adjustment. No adjustment in the Conversion Price shall be required unless the adjustment would require an increase or decrease of at least one half of one percent (.5%) in the Conversion Price as last adjusted; provided, however, that any adjustments which by reason of this Section 6(c)(v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 6(c)(v) shall be made to the nearest cent or to the nearest one-hundredth (1/100th) of a share, as the case may be. No adjustment need be made for issuances of Common Stock pursuant to a Corporation plan for reinvestment of dividends or interest or for a change in the par value or a change to no par value of the Common Stock. To the extent that the Series A-1 Preferred Stock held by a holder becomes redeemable for, or convertible into the right to receive cash, no adjustment need be made thereafter as to the cash.

(vi) Adjustment for Tax Purposes. The Corporation shall be entitled to make such reductions in the Conversion Price, in addition to those required by the preceding sections of this Section 6(c), as it in its discretion shall determine to be advisable in order that any stock dividends, subdivisions of shares, distributions of rights to purchase stock or securities or distributions of securities convertible into or exchangeable for stock hereafter made by the Corporation to its stockholders shall not be taxable.

(vii) Notice of Adjustment. Whenever the Conversion Price or conversion privilege is adjusted, the Corporation shall promptly notify the holder of the adjustment and provide the holder with an Officers’ Certificate briefly stating the facts requiring the adjustment and the manner of computing it.

(viii) Notice of Certain Transactions. In the event that:

(A) the Corporation takes any action which would require an adjustment in the Conversion Price;

(B) the Corporation consolidates or merges with, or transfers all or substantially all of its property and assets to, another corporation and shareholders of the Corporation must approve the transaction; or

(C) there is a dissolution or liquidation of the Corporation;

then the Corporation shall notify the holder of the proposed transaction and the related record or effective date, as the case may be. The Corporation shall give the notice at least ten (10) days before such date. Failure to give such notice or any defect therein shall not affect the validity of any transaction referred to in clause (A), (B) or (C) of this Section 6(c)(viii).

(d) Effect of Reclassification, Consolidation, Merger or Sale on Conversion Privilege. If any of the following shall occur, namely:

(i) any reclassification or change of shares of Common Stock issuable upon conversion of the Series A-1 Preferred Stock (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 any other change for which an adjustment is provided in Section 6(c));

(ii) any consolidation or merger or combination to which the Corporation is a party other than a merger in which the Corporation is the continuing corporation and which does not result in any reclassification of, or change (other than 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) in, Outstanding shares of Common Stock; or

(iii) any sale or conveyance as an entirety or substantially as an entirety of the property and assets of the Corporation, directly or indirectly, to any person,

then the Corporation, or such successor, purchasing or transferee corporation, as the case may be, shall, as a condition precedent to such reclassification, change, combination, consolidation, merger, sale or conveyance, execute and deliver to the holder a supplemental instrument providing that (A) the holder shall have the right to convert its shares of Series A-1 Preferred Stock into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, combination, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock deliverable upon conversion of such Series A-1 Preferred Stock, at a conversion price equal to the Conversion Price determined pursuant to Section 6(a)(i), immediately prior to such reclassification, change, combination, consolidation, merger, sale or conveyance, and (B) in the event of any exercise by the Corporation of its right to convert any shares of Series A-1 Preferred Stock held by such holder pursuant to Section 6(a)(ii), such shares of Series A-1 Preferred Stock shall be convertible into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, combination, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock deliverable upon conversion of such Series A-1 Preferred Stock, at a conversion price equal to the Corporation Conversion Price determined pursuant to Section 6(a)(ii)(A), immediately prior to such reclassification, change, combination, consolidation, merger, sale or conveyance. Any such supplemental instrument shall provide for adjustments of the Conversion Price which shall be as nearly equivalent as may be practicable to the adjustments of the Conversion Price provided for in Section 6(c). If, in the case of any such consolidation, merger, combination, sale or conveyance, the stock or other securities and property (including cash) receivable thereupon by a holder of Common Stock include shares of stock or other securities and property of a person other than the successor, purchasing or transferee corporation, as the case may be, in such consolidation, merger, combination, sale or conveyance, then such supplemental instrument shall also be executed by such other person and shall contain such additional provisions to protect the interests of the holder as the Board of Directors shall reasonably consider necessary by reason of the foregoing. The provisions of this Section 6(d) shall similarly apply to successive reclassifications, changes, combinations, consolidations, mergers, sales or conveyances. In the event the Corporation shall execute a supplemental instrument pursuant to this Section 6(d), the Corporation shall promptly file with the holder (x) an Officers’ Certificate briefly stating the reasons therefor, the kind or amount of shares of stock or other securities or property (including cash) receivable by the holder upon the conversion of its shares of Series A-1 Preferred Stock after any such reclassification, change, combination, consolidation, merger, sale or conveyance, any adjustment to be made with respect thereto and that all conditions precedent have been complied with and (y) an Opinion of Counsel that all conditions precedent have been complied with.

(e) Voluntary Reduction. The Corporation from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least twenty (20) days and if the reduction is irrevocable during the period if the Board of Directors determines that such reduction would be in the best interest of the Corporation or to avoid or diminish income tax to holders of shares of the Common Stock in connection with a dividend or distribution of stock or similar event, and the Corporation provides fifteen (15) days’ prior notice of any reduction in the Conversion Price; provided, however, that in no event may the Corporation reduce the Conversion Price to be less than the par value of a share of Common Stock.

(f) Miscellaneous.

(i) Except as otherwise explicitly contemplated by this Section 6, no adjustment in respect of any dividends or other payments or distributions made to holders of Series A-1 Preferred Stock or securities issuable upon the conversion of the Series A-1 Preferred Stock will be made during the term of the Series A-1 Preferred Stock or upon the conversion of the Series A-1 Preferred Stock. The provisions of this Section 6(f) are without prejudice to the right of holders of Series A-1 Preferred Stock to receive any dividends to which they may be entitled under Section 3.

(ii) If any event occurs of the type contemplated by the provisions of Section 6(c), (d), or (e) but not expressly provided for by such provisions (including the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Board of Directors shall make any appropriate adjustment in the Conversion Price necessary to protect the rights of the holder as and to the extent contemplated by Sections 6(c), (d), or (e); provided, that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 6 or decrease the number of shares of Common Stock issuable upon any conversion of shares of Series A-1 Preferred Stock.

(iii) If the Corporation shall enter into any transaction for the purpose of avoiding the application of the provisions of Sections 6(c), (d) or (e) or this Section 6(f), the benefits of such provisions shall nevertheless apply and be preserved.

(iv) Any dividend or distribution that was paid or distributed to, or otherwise made available to or set aside for, to the holders of Series A-1 Preferred Stock (pursuant to Section 3(a) or otherwise) shall not also result in an adjustment to the Conversion Price pursuant to Section 6.

7. STATUS OF SHARES. All shares of Series A-1 Preferred Stock that are at any time redeemed pursuant to Section 5 or converted pursuant to Section 6 and all shares of Series A-1 Preferred Stock that are otherwise reacquired by the Corporation shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized but unissued shares of Preferred Stock, without designation as to series, subject to reissuance by the Board of Directors as shares of any one or more other series.

8. VOTING RIGHTS.

(a) Limited Voting Rights. The holders of record of shares of Series A-1 Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this Section 8 or as otherwise provided by law.

(b) Right to Vote with Common Stock. The holders of the shares of Series A-1 Preferred Stock (i) shall be entitled to vote with the holders of the Common Stock on all matters submitted for a vote of holders of Common Stock (voting together with the holders of Common Stock as one class) and (ii) shall be entitled to a number of votes equal to the number of votes to which shares of Common Stock issuable upon conversion by the holder of such shares of Series

A-1 Preferred Stock pursuant to Section 6(a)(i) would have been entitled if such shares of Common Stock had been Outstanding at the time of the applicable record date.

(c) Right to Vote as a Separate Class. In addition to the rights provided in Section 8(b) and any other rights provided by law, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority by voting power of the then outstanding shares of Series A-1 Preferred Stock voting together as a single class:

(i) change the rights, preferences, privileges or restrictions of the shares of Series A-1 Preferred Stock;

(ii) increase or decrease the aggregate number of authorized shares of Series A-1 Preferred;

(iii) create, authorize, designate or issue Senior Securities; or

(iv) merge or consolidate into or with any other corporation or entity if the effect of any such transaction would be to change or adversely affect in any manner whatsoever the rights, privileges, seniority or preferences of the Series A-1 Preferred Stock.

9. AGGREGATE OWNERSHIP LIMITATION. If upon any proposed conversion of Series A-1 Preferred Stock pursuant to Section 6(a), any holder of Series A-1 Preferred would be entitled to receive Common Stock that, taken together with all other shares of Common Stock Beneficially Owned by such holder and its Affiliates, would result in such holder and its Affiliates acquiring Beneficial Ownership of more than 19.9% of the Corporation’s Common Stock then Outstanding immediately following such conversion (the “OWNERSHIP THRESHOLD”), then:

(a) Such holder shall instead receive upon conversion a number of shares of Common Stock up to the Ownership Threshold; and

(b) To the extent such holder would have otherwise received shares of Common Stock in excess of the Ownership Threshold, the Corporation shall redeem such number of shares of Series A-1 Preferred Stock as would result in such holder exceeding the Ownership Threshold at a cash redemption price equal to the product of (i) such number of shares of Common Stock in excess of the Ownership Threshold times (ii) the Current Average Market Price on the relevant Conversion Date (the “OWNERSHIP THRESHOLD REDEMPTION AMOUNT”). Except in the case of a proposed conversion by the Corporation of Series A-1 Preferred Stock pursuant to Section 6(a) as a result of an election by the Corporation pursuant to clause (2) of Section 5(d)(i)(A) or clause (2) of Section 5(d)(i)(B), in the event that the Corporation provides written notice to such holder at least ten (10) days prior to the date on which the Corporation shall redeem such shares and pay to such holder the Ownership Threshold Redemption Amount (such date, the “OWNERSHIP THRESHOLD REDEMPTION DATE”), the Corporation shall have the right to obtain from such holder a loan in the principal amount designated by the Corporation in such notice, which amount shall not exceed the Ownership

Threshold Redemption Amount, and in exchange for such loan the holder shall receive from the Corporation a five-year, interest free Subordinated Promissory Note, with a face amount equal to the principal amount of the loan, in the form attached to this Certificate as Exhibit A (a “SUBORDINATED PROMISSORY NOTE”), and, in the event that multiple Subordinated Promissory Notes shall be made pursuant hereto, mutatis mutandis as necessary to provide for any prepayment due in respect of a Type II Prepayment Event among the successive Subordinated Promissory Notes sequentially in the order in which such Subordinated Promissory Notes were made. The holder shall provide such loan to the Corporation in exchange for such Subordinated Promissory Note on the Ownership Threshold Redemption Date, immediately following the receipt by the holder of the Ownership Threshold Redemption Amount in immediately available funds. The Corporation and the holder shall reasonably cooperate with each other to coordinate the timing of such transactions on the Ownership Threshold Redemption Date.

10. CERTAIN DEFAULTS AND REMEDIES.

(a) Events of Default. Subject to Section 10(b), an “EVENT OF DEFAULT” shall occur if:

(i) the Corporation (A) defaults in the payment of any principal of (including any premium, if any, on) (1) any Convertible Note when the same becomes due and payable (whether at maturity, on a Prepayment Date, on a Prepayment Event Date, or otherwise) or (2) any Promissory Note (as defined in the Purchase Agreement) held by AstraZeneca UK Limited or any of its Affiliates; or (B) fails to redeem, and to pay to any holder the Redemption Price for, each share of Preferred Stock that the Corporation is required to redeem on the date specified for such redemption herein;

(ii) the Corporation fails to comply with any of its obligations under (A) the Convertible Note, if any, or any Promissory Note (as defined in the Purchase Agreement) held by AstraZeneca UK Limited or any of its Affiliates or (B) Section 5.6(a) or Section 5.8 of the Purchase Agreement, in each case other than any obligation specified in Section 10(a)(i), and the default continues for the period and after the notice specified in Section 10(b);

(iii) the Corporation fails to provide notice of a Redemption Event to the holder when required by Section 5(d)(ii) for a period of thirty (30) days after notice of failure to do so;

(iv) the Corporation shall default in respect of any of its obligations under the Preferred Stock other than any obligation specified in Section 10(a)(i) and the default continues for the period and after the notice specified in Section 10(b);

(v) the Purchase Agreement, or any other agreement or instrument contemplated by the Purchase Agreement, shall be asserted by the Corporation not to be a legal, valid and binding obligation of the Corporation, enforceable against the Corporation in accordance with its terms;

(vi) the Corporation or any Significant Subsidiary, pursuant to or within the meaning of any Bankruptcy Law:

(A) commences a voluntary case or proceeding;

(B) consents to the entry of an order for relief against it in an involuntary case or proceeding;

(C) consents to the appointment of a Custodian of it or for all or substantially all of its property; or

(D) makes a general assignment for the benefit of its creditors; or

(vii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:

(A) is for relief against the Corporation or any Significant Subsidiary in an involuntary case or proceeding;

(B) appoints a Custodian of the Corporation or any Significant Subsidiary or for all or substantially all of the property of the Corporation or any Significant Subsidiary; or

(C) orders the liquidation of the Corporation or any Significant Subsidiary;

and in each case the order or decree remains unstayed and in effect for sixty (60) consecutive days.

The term “Bankruptcy Law” means Title 11 of the United States Code (or any successor thereto) or any similar federal or state law for the relief of debtors. The term “Custodian” means any receiver, holder, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law.

(b) Notice and Cure.

(i) A default under Section 10(a)(ii) or (a)(iv) is not an Event of Default until the holder notifies the Corporation in writing of the default and the Corporation does not cure the default within sixty (60) days after receipt of such notice. The notice given pursuant to this Section 10(b) must specify the Event of Default, demand that it be remedied and state that the notice is a “NOTICE OF DEFAULT.”

(ii) When any Event of Default under Section 10(a) is cured, it ceases.

(iii) The Corporation shall immediately notify each holder of Series A-1 Preferred Stock upon becoming aware of the existence of any condition or event which constitutes a default or an Event of Default hereunder by written notice which specifies the nature and period of existence of such default or Event of Default and what action the

Corporation is taking or proposes to take with respect thereto. No holder shall be charged with knowledge of any Event of Default unless written notice thereof shall have been given to the holder or any agent of the holder.

(c) Redemption.

(i) If an Event of Default (other than an Event of Default specified in Section 10(a)(vi) or (vii)) occurs and is continuing, the holders of a majority of the shares of Series A-1 Preferred Stock then outstanding may, by notice to the Corporation, demand in a notice to the Corporation that the Corporation redeem, on a Business Day specified in such notice, which day shall be not less than ten (10) days following the date of such notice (such specified date the “DEFAULT REDEMPTION DATE”), all of the shares of Series A-1 Preferred Stock then outstanding, and the Corporation shall redeem all such shares at a cash redemption price per share equal to the Redemption Price. If an Event of Default specified in Section 10(a)(vi) or (vii) occurs, all Series A-1 Preferred Stock then outstanding shall ipso facto become and be immediately redeemable by the Corporation at a cash redemption price per share equal to the Redemption Price without any declaration or other act on the part of the holders. Each holder may at any time, by notice to the Corporation, rescind a redemption notice and its consequences. No such rescission shall affect any subsequent default of impair any right consequent thereto.

(ii) On or prior to the Default Redemption Date, the holders of the Series A-1 Preferred Stock shall surrender their certificates representing such shares to the Corporation at the Corporation’s principal executive offices or such other location as the Corporation may by notice direct, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on each such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. From and after the Default Redemption Date, unless there shall have been a default in payment of Redemption Price, all rights of the holders of the Series A-1 Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or deemed to be outstanding for any purpose whatsoever.

(iii) In the event that the Corporation does not pay the Redemption Price on the Default Redemption Date, the Redemption Price shall be calculated as if the Default Redemption Date were the later of such date and the date on which such payment is made. If the Corporation is unable at the Default Redemption Date to redeem any or all shares of Series A-1 Preferred Stock then to be redeemed because such redemption would violate the applicable laws of the State of Delaware, then the Corporation shall redeem such shares as soon thereafter as redemption would not violate such laws. In the event of any redemption of only a part of the then outstanding Series A-1 Preferred Stock, the Corporation shall effect such redemption pro rata among the holders thereof (based on the number of shares of Series A-1 Preferred Stock held on the date of notice of redemption).

(d) Other Remedies. A delay or omission by any holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law.

11. DEFINITIONS.

(a) General. Unless otherwise specified, references in this Certificate to any section are references to such section of this Certificate and, unless otherwise specified, references in any section or definition to any clause are references to such clause of such section or definition. Terms for which meanings are defined in this Certificate shall apply equally to the singular and plural forms of the terms defined. Whenever the context may permit or require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The term “including” means including, without limiting the generality of any description preceding such term. Each reference herein to any person shall include a reference to such person’s successors and permitted assigns. Unless otherwise specified, references to any agreement, instrument or other document in this Certificate refer to such agreement, instrument or other document as originally executed or, if subsequently varied, replaced or supplemented from time to time, as so varied, replaced or supplemented and in effect at the relevant time of reference thereto.

(b) Defined Terms. Unless the context otherwise requires, when used herein the following terms shall have the meaning indicated:

“Adjusted Outstanding Amount” means fifty percent (50%) of the sum of (a) the amount that equals the product of the total number of shares of Series A-1 Preferred Stock outstanding as of the Type II Redemption Event Date multiplied by the Liquidation Value per share of such Series A-1 Preferred Stock, plus (b) the amount that equals the product of the total number of shares of Series A-2 Preferred Stock (as defined in the Series A-2 Certificate of Designation) outstanding as of the Type II Redemption Event Date multiplied by the Liquidation Value (as defined in the Series A-2 Certificate of Designation) per share of such Series A-2 Preferred Stock, plus (c) the principal amount of the Convertible Note outstanding as of the Type II Redemption Event Date, plus (d) the principal amount of each Promissory Note (as such term is defined in the Purchase Agreement) outstanding as of the Type II Redemption Event Date.

“Affiliate” means with respect to any Person, any other Person directly, or indirectly through one or more intermediaries, controlling, controlled by or under common control with such Person. For purposes of this definition, the term “control” (and correlative terms “controlling,” “controlled by” and “under common control with”) means possession of the power, whether by contract, equity ownership or otherwise, to direct the policies or management of a Person.

“Approved Market” means the NNM, the New York Stock Exchange, or the American Stock Exchange.

“Average Market Price for Corporation’s Conversion Option” means, with respect to shares of Common Stock, the arithmetic mean of the daily Market Prices of shares of

Common Stock for the ten (10) consecutive Trading Days commencing on the eleventh (11th) Trading Day preceding the Conversion Date and ending on the Trading Day next preceding the Conversion Date; provided, however, that in no event shall the “Average Market Price for Corporation’s Conversion Option” be more than one hundred one percent (101%) of the Market Price of shares of Common Stock for the last Trading Day preceding the Conversion Date.

“Bankruptcy Law” has the meaning set forth in Section 10(a).

“Base Liquidation Value” has the meaning set forth in Section 4(a).

“Beneficially Own” or “Beneficial Ownership” are used herein with the same meanings given to such terms in Rules 13d-3 and 13d-5 of the Exchange Act.

“Board of Directors” has the meaning set forth in the first paragraph hereof.

“Business Day” means any day that, in the State of New York and the State of California, is not a day on which banking institutions are authorized by law or regulation to close.

“Capital Stock” of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, but excluding any debt securities convertible into such equity.

“Certificate” has the meaning set forth in the first paragraph hereof.

“Collaboration Agreement” means the Collaboration Agreement, dated as of October 15, 2003, between the Corporation and AstraZeneca UK Limited.

“Common Stock” means the Common Stock of the Corporation, par value $0.0001 per share.

“Conversion Date” has the meaning set forth in Section 6(b)(iii).

“Conversion Price” has the meaning set forth in Section 6(a)(i).

“Convertible Note” has the meaning set forth in the Purchase Agreement.

“Corporation” has the meaning set forth in the first paragraph hereof.

“Corporation Conversion Price” has the meaning set forth in Section 6(a)(ii).

“Corporation’s Election Notice” has the meaning set forth in Section 6(b)(i)(B).

distributions or tender offers under Section 6(c)(iii) or (b) the record date with respect to distributions, issuances or other events requiring such computation under Section 6(c)(ii) and (iii), calculated in any case by taking the sum of the Market Prices for shares of the Common Stock for each of the thirty (30) days in the specified period and dividing the foregoing sum by thirty (30).

“Custodian” has the meaning set forth in Section 10(a).

“Default Redemption Date” has the meaning set forth in Section 10(c).

“Designated Number of Redemption Event Shares” means, for each holder, the Designated Number of Type I Redemption Event Shares or the Designated Number of Type II Redemption Event Shares, as the case may be.

“Designated Number of Type I Redemption Event Shares” has the meaning set forth in Section 5(d).

“Designated Number of Type II Redemption Event Shares” has the meaning set forth in Section 5(d).

“Determination Date” has the meaning set forth in Section 6(c)(iii)(E).

“Discovery Period” means the period commencing on the effective date of the Collaboration Agreement and ending on the later to occur of (a) the date of expiration or termination of the Antigen Designation Term (as such term is defined in the Collaboration Agreement) and (b) the date of expiration or termination of the Research Program Term (as such term is defined in the Collaboration Agreement) with respect to the Research Program (as such term is defined in the Collaboration Agreement) that is the last such program to terminate or expire pursuant to the Collaboration Agreement.

“Dividend Payment Date” means March 31, June 30, September 30 and December 31 of each year.

“Dividend Period” means (a) the period beginning on the Dividend Trigger Date and ending on the first Dividend Payment Date and (b) each quarterly period between Dividend Payment Dates.

“Dividend Rate” means (a) during the period commencing on the Initial Closing Date (as such term is defined in the Purchase Agreement) and ending on the fifth anniversary of such date, a rate equal to the 10-Year United States Treasury Bond yield rate as reported in The Wall Street Journal Western edition on the Initial Closing Date, plus an additional three percent (3%) compounded annually, and (b) during the period commencing on the date following the fifth anniversary of the Initial Closing Date and continuing until the last date on which all shares of Preferred Stock have been converted or redeemed, a rate equal to the 10-Year United States Treasury Bond yield rate as reported in The Wall Street Journal Western edition on the first day of such period, plus an additional three percent (3%) compounded annually; provided, however, that if The Wall Street Journal ceases to be published, then the 10-Year United States Treasury

Bond yield rate to be used shall be that reported in such other business publication of national circulation in the United States as the Corporation and the holder reasonably agree.

“Dividend Trigger Date” has the meaning set forth in Section 3(b).

“Event of Default” has the meaning set forth in Section 10(a).

“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder.

“Expiration Date” has the meaning set forth in Section 6(c)(iii)(F).

“Expiration Time” has the meaning set forth in Section 6(c)(iii)(F).

“Initial Conversion Price” has the meaning set forth in Section 6(a)(i).

“Junior Securities” has the meaning set for in Section 2.

“Liquidation Value” has the meaning set forth in Section 4(a).

“Market Price” means, with respect to a particular security, on any given day, the last reported sales price or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices in either case on the NNM or, if the security is not listed or admitted to trading on the NNM, on the principal national securities exchange on which the security is listed or admitted to trading or, if not listed or admitted to trading on the NNM or any national securities exchange, the last reported sales price of the security as quoted on Nasdaq or, in case no reported sales takes place, the average of the closing bid and asked prices as quoted on Nasdaq or any comparable system or, if the security is not quoted on Nasdaq or any comparable system, the closing sales price or, in case no reported sale takes place, the average of the closing bid and asked prices, as furnished by any two members of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose. If the Common Stock is not listed and traded in a manner that the quotations referred to above are available for the period required hereunder, the Market Price per share of Common Stock shall be deemed to be the fair value per share of such security as determined in good faith by the Board of Directors.

“Maximum Number of Redemption Event Shares” means the Maximum Number of Type I Redemption Event Shares or the Maximum Number of Type II Redemption Event Shares, as the case may be.

“Maximum Number of Type I Redemption Event Shares” means the total number of shares of Series A-1 Preferred Stock held by a holder as of a Type I Redemption Event Date.

“Maximum Number of Type II Redemption Event Shares” means the total number of shares of Series A-1 Preferred Stock (and any fraction of any such share) that, if redeemed by the Corporation on the Type II Redemption Event Date at the Redemption Price per share, would yield the Series A-1 Type II Redemption Event Amount.

“Maximum Redemption Amount” means Fifty Million Dollars (U.S. $50,000,000.00).

“NNM” means the Nasdaq National Market.

“Notice of Default” has the meaning set forth in Section 10(b).

“Officer” means the chairman or any co-chairman of the board, any vice chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the controller, the secretary or any assistant controller or assistant secretary of the Corporation.

“Officers’ Certificate” means a certificate signed by two Officers.

“Opinion of Counsel” means a written opinion from legal counsel. The counsel may be an employee of or counsel to the Corporation.

“Outstanding” means, at any time, the number of shares of Common Stock then outstanding calculated on a fully diluted basis, assuming the exercise, exchange or conversion into Common Stock of all outstanding securities exercisable, exchangeable or convertible into shares of Common Stock (whether or not then exercisable, exchangeable or convertible).

“Ownership Threshold” has the meaning set forth in Section 9.

“Ownership Threshold Redemption Amount” has the meaning set forth in Section 9(b).

“Ownership Threshold Redemption Date” has the meaning set forth in Section 9(b).

“Parity Securities” has the meaning set forth in Section 2.

“Person” means an individual, corporation, partnership, other entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act).

“Preferred Stock” has the meaning set forth in the first paragraph hereof.

“Program” has the meaning given to the term “Research Program” in the Collaboration Agreement.

“Program Completion Factor” means a fraction, the numerator of which equals 36 less the number of Programs that have achieved a Program Milestone as of the Type II Redemption Event Date and the denominator of which is 36.

“Program Milestone” means, with respect to a particular Program, the occurrence of the selection of the first Research Antibody (as such term is defined in the Collaboration Agreement); provided, that notwithstanding anything to the contrary in the Collaboration

Agreement, for the purpose of calculating the Program Completion Factor hereunder, any dispute as to whether or not an Antibody(ies) (as such term is defined in the Collaboration Agreement) has met the binding criteria as contemplated by clause (a) of Section 2.3.2 of the Collaboration Agreement shall be resolved in accordance with the provisions of Section 3.6 of the Collaboration Agreement, as if the selection or non-selection of such Research Antibody were a matter giving either party a right to refer such dispute to an Expert (as such term is defined in the Collaboration Agreement) for expedited arbitration as set forth in Section 3.6.1 of the Collaboration Agreement.

“Purchase Agreement” means the Securities Purchase Agreement, dated as of October 15, 2003, between the Corporation and AstraZeneca UK Limited.

“Purchased Shares” has the meaning set forth in Section 6(c)(iii)(F).

“Redemption Date” has the meaning set forth in Section 5(c).

“Redemption Event” means a Type I Redemption Event or a Type II Redemption Event, as the case may be.

“Redemption Event Date” means the Type I Redemption Event Date or the Type II Redemption Event Date, as the case may be.

“Redemption Event Notice” has the meaning set forth in Section 5(d)(iii).

“Redemption Notice” has the meaning set forth in Section 5(c).

“Redemption Price” has the meaning set forth in Section 5(a).

“Restricted Conversion Period” has the meaning set forth in Section 6(a)(ii).

“Rights Plan” has the meaning set forth in Section 6(c)(iii)(C).

“Securities Act” means the United States Securities Act of 1933, as amended.

“Senior Securities” has the meaning set forth in Section 2.

“Series A-1 Allocated Redemption Amount” means the amount that equals the lesser of (a) the product of (i) the Program Completion Factor multiplied by (ii) the Maximum Redemption Amount and (b) the Adjusted Outstanding Amount.

“Series A-1 Preferred Stock” has the meaning set forth in the first paragraph hereof.

“Series A-1 Remaining Redemption Amount” means the amount that equals the product of (a) the number of shares of Series A-1 Preferred Stock outstanding as of the Type II Redemption Event Date multiplied by (b) the Liquidation Value per share of such Series A-1 Preferred Stock.

“Series A-1 Type II Redemption Event Amount” means the amount that equals the lesser of the Series A-1 Allocated Redemption Amount and the Series A-1 Remaining Redemption Amount.

“Series A-2 Certificate of Designation” has the meaning given to such term in the Purchase Agreement.

“Significant Subsidiary” means, in respect of any Person, a Subsidiary of such Person that would constitute a “significant subsidiary” as such term is defined under Rule 1-02 of Regulation S-X under the Securities Act and the Exchange Act.

“Subordinated Promissory Note” has the meaning set forth in Section 9.

“Subsidiary” means, in respect of any Person, any corporation, association, partnership, or other business entity of which more than fifty percent (50%) of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, general partners or holders thereof is at the time owned or controlled, directly or indirectly, by (a) such Person; (b) such Person and one or more Subsidiaries of such Person; or (c) one or more Subsidiaries of such Person.

“Trading Day” means, with respect to any security, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are generally not traded on the principal exchange or market in which such security is traded.

“Trigger Event” has the meaning set forth in Section 6(c)(iii)(D).

“Triggering Distribution” has the meaning set forth in Section 6(c)(iii)(E).

“Type I Redemption Event” means a Change in Control (as defined in the Collaboration Agreement) that occurs at any time after the last day of the Discovery Period.

“Type I Redemption Event Date” has the meaning set forth in Section 5(d).

“Type II Redemption Event” means the termination by AstraZeneca UK Limited (or any of its Affiliates) of all outstanding Research Programs and, in the event that the Antigen Designation Term has not expired, the Antigen Designation Term, pursuant to Section 16.2 or Section 16.3.1 of the Collaboration Agreement, which termination occurs at any time prior to or on the last day of the Discovery Period.

“Type II Redemption Event Date” means the date that is thirty (30) Business Days after the date of the applicable Type II Redemption Event (or if such day is not a Business Day, then the next Business Day thereafter).

12. NO OTHER RIGHTS.

The shares of Series A-1 Preferred Stock shall not have any relative, optional or other special rights and powers except as set forth herein or as may be required by law.

[The remainder of this page was left blank intentionally.]

IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly executed and acknowledged by its undersigned duly authorized officer this 27th day of October, 2003.

ABGENIX, INC.


By:	/s/ Raymond M. Withy, Ph.D.
	Name:	Raymond M. Withy, Ph.D.
	Title:	President and
		Chief Executive Officer

Exhibit A

FORM OF SUBORDINATED PROMISSORY NOTE ISSUABLE TO PURCHASER ON

ACCOUNT OF THE OWNERSHIP THRESHOLD

EXHIBIT A

THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH LAWS AND, IF REQUESTED BY THE MAKER, UPON DELIVERY OF AN OPINION OF COUNSEL SATISFACTORY TO THE MAKER THAT THE PROPOSED TRANSFER IS EXEMPT FROM THE ACT OR SUCH LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO CERTAIN TRANSFER RESTRICTIONS CONTAINED IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT, DATED AS OF OCTOBER 15, 2003, BETWEEN THE MAKER AND THE HOLDER.

SUBORDINATED PROMISSORY NOTE

U.S. $[________] ___________, 20__
New York, New York

FOR VALUE RECEIVED, Abgenix, Inc., a Delaware corporation (the “Maker”), hereby unconditionally promises to pay to the order of [__________________] (the “Holder”), or its permitted assigns, the original aggregate principal sum of [_________] United States Dollars (U.S. $[________]) on the Maturity Date, subject to prior prepayment in accordance with the provisions hereof.

Upon the occurrence and during the continuation uncured of any Event of Default described in Section 6.1(a), such principal amount of this Note as from time to time remains unpaid shall bear interest at the Default Rate. Such interest shall be payable in arrears on the last day of each March, June, September and December and at the time of the final payment of the principal amount hereof. Interest shall be calculated on the basis of a three hundred sixty-five (365)-day year for the number of days elapsed.

For purposes of determining the person entitled to payment of the principal of and interest on this Note, the Maker is entitled to pay the person in whose name this Note is registered at the close of business on the fifteenth day (whether or not a Business Day) next preceding the date for such payment. All payments of principal and interest on this Note shall be payable at the principal executive office of such registered holder or at such other place as such registered holder may from time to time in writing appoint at least fifteen (15) days before the date such payment is due. All payments required to be made by the Maker under this Note shall be made in cash in immediately available funds.

Subject to the Holder’s compliance with Section 7 of the Purchase Agreement and with applicable law, this Note is transferable on the note register of the Maker upon surrender of this Note for transfer at the principal executive offices of the Maker duly endorsed by or accompanied by a written instrument of transfer in form satisfactory to the Maker and duly executed by the registered holder and thereupon a new note in the outstanding principal amount of the Note so surrendered will be issued to the designated transferee or transferees. No service charge will be made for any such transfer or exchange, but the Maker may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. This Note is issuable only in registered form.

1. Definitions.

1.1 General. Terms used herein and not otherwise defined are used herein with the same meanings given to them in the Purchase Agreement. Unless otherwise specified, references in this Note to any section are references to such section of this Note and, unless otherwise specified, references in any section or definition to any clause are references to such clause of such section or definition. Terms for which meanings are defined in this Note shall apply equally to the singular and plural forms of the terms defined. Whenever the context may permit or require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The term “including” means including, without limiting the generality of any description preceding such term. Each reference herein to any Person shall include a reference to such Person’s successors and permitted assigns. Unless otherwise specified, references to any agreement, instrument or other document in this Note refer to such agreement, instrument or other document as originally executed or, if subsequently varied, replaced or supplemented from time to time, as so varied, replaced or supplemented and in effect at the relevant time of reference thereto.

1.2 Defined Terms. Unless the context otherwise requires, when used herein the following terms shall have the meaning indicated:

“Bankruptcy Law” has the meaning set forth in Section 6.1.

“Certificate(s) of Designation” means the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation, and the Series A-3/A-4 Certificate of Designation.

“Collaboration Agreement” means the Collaboration Agreement, dated as of October 15, 2003, between the Maker and AstraZeneca UK Limited.

“Common Stock” means the common stock, par value $0.0001 per share, of Maker.

“Convertible Note” has the meaning set forth in the Purchase Agreement.

“Custodian” has the meaning set forth in Section 6.1.

“Default Rate” means (i) during the period commencing on the date hereof and ending on the fifth anniversary of such date, an interest rate equal to the 10-Year United States Treasury Bond yield rate as reported in The Wall Street Journal Western edition on the date hereof, plus an additional three percent (3%) compounded annually, and (ii) during the period commencing on the date following the fifth anniversary of the date hereof and continuing until the last date on which the entire principal amount of this Note has been converted or repaid and any interest owing hereon has been paid, an interest rate equal to the 10-Year United States Treasury Bond yield rate as reported in The Wall Street Journal Western edition on the first day of such period, plus an additional three percent (3%) compounded annually; provided, however, that if The Wall Street Journal ceases to be published, then the 10-Year United States Treasury Bond yield rate to be used shall be that reported in such other business publication of national circulation in the United States as the Maker and the Holder reasonably agree.

“Designated Prepayment Event Amount” means the Designated Type I Prepayment Event Amount or the Designated Type II Prepayment Event Amount, as the case may be.

“Designated Senior Indebtedness” means any particular Senior Indebtedness of the Maker in which the instrument creating or evidencing the same or the assumption or guarantee thereof (or any related agreements or documents to which the Maker is a party) expressly provides that such Senior Indebtedness shall be “Designated Senior Indebtedness” for purposes of this Note (provided that such instrument, agreement or other document creating or evidencing the Indebtedness may place limitations and conditions on the right of such Senior Indebtedness to exercise the rights of Designated Senior Indebtedness). If any payment made to any holder of any Designated Senior Indebtedness or its Representative with respect to such Designated Senior Indebtedness is rescinded or must otherwise be returned by such holder or Representative upon the insolvency, bankruptcy or reorganization of the Maker or otherwise, the reinstated Indebtedness of the Maker arising as a result of such rescission or return shall constitute Designated Senior Indebtedness effective as of the date of such rescission or return.

“Designated Type I Prepayment Event Amount” has the meaning set forth in Section 3.2(a)(i).

“Designated Type II Prepayment Event Amount” has the meaning set forth in Section 3.2(a)(ii).

term is defined in the Collaboration Agreement) that is the last such program to terminate or expire pursuant to the Collaboration Agreement.

“Event of Default” has the meaning set forth in Section 6.1.

“Exchange Act” means the United States Securities Exchange Act of 1934, as amended.

“GAAP” means generally accepted accounting principles in the United States of America as in effect as of the date of this Note, including those set forth in (i) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) the statements and pronouncements of the Financial Accounting Standards Board, (iii) such other statements by such other entity as approved by a significant segment of the accounting profession and (iv) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in registration statements filed under the Securities Act and periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC.

“Holder” has the meaning set forth in the first paragraph hereof.

“Indebtedness” means, with respect to any Person, without duplication, (i) all indebtedness, obligations and other liabilities (contingent or otherwise) of such Person (A) for borrowed money (including obligations of such Person in respect of overdrafts, foreign exchange contracts, currency exchange agreements, interest rate protection agreements, and any loans or advances from banks, whether or not evidenced by notes or similar instruments) or (B) evidenced by credit or loan agreements, bonds, debentures, notes or similar instruments (whether or not the recourse of the lender is to the whole of the assets of such Person or to only a portion thereof) (other than any accounts payable or other accrued current liability or obligation incurred in the ordinary course of business in connection with the obtaining of materials or services), (ii) all reimbursement obligations and other liabilities (contingent or otherwise) of such Person with respect to letters of credit, bank guarantees or bankers’ acceptances, (iii) all obligations and liabilities (contingent or otherwise) of such Person (A) in respect of (1) leases of such Person required, in conformity with GAAP, to be accounted for as capitalized lease obligations on the balance sheet of such Person (as determined by the Maker), and (2) ground leases the Maker may enter into in the future with respect to the Maker’s facilities in Fremont, California, or (B) under any lease or related document (including a purchase agreement, conditional sale or other title retention agreement) in connection with the lease of real property or improvement thereon (or any personal property included as part of any such lease) which provides that such Person is contractually obligated to purchase or cause a third party to purchase the leased property or pay an agreed upon residual value of the leased property to the lessor (whether or not such lease transaction is characterized as an operating lease or a capitalized lease in accordance with GAAP), (iv) all obligations (contingent or otherwise) of such Person with respect to any interest rate or other swap, cap, floor or collar agreement, hedge agreement, forward contract, or other similar instrument or agreement or foreign currency hedge, exchange, purchase or similar instrument or agreement; (v) all direct or indirect guarantees, agreements to be jointly liable or similar agreements by such Person in respect of, and obligations or liabilities of such Person to

purchase or otherwise acquire or otherwise assure a creditor against loss in respect of, indebtedness, obligations or liabilities of another Person of the kind described in clauses (i) through (iv), and (vi) any and all deferrals, renewals, extensions, refinancings and refundings of, or amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind described in clauses (i) through (v).

“Instrument” has the meaning set forth in Section 6.1.

“Maker” has the meaning set forth in the first paragraph hereof.

“Maturity Date” means the fifth (5th) anniversary of the date of issuance of this Note.

“Maximum Prepayment Event Amount” means the Maximum Type I Prepayment Event Amount or the Maximum Type II Prepayment Event Amount, as the case may be.

“Maximum Type I Prepayment Event Amount” means the total principal amount of this Note outstanding as of a Type I Prepayment Event Date.

“Maximum Type II Prepayment Event Amount” means the amount that equals the lesser of the Type II Allocated Prepayment Amount and the Type II Remaining Prepayment Amount.

“Note” has the meaning set forth in Section 2.

“Officers’ Certificate” means a certificate signed by two Officers.

“Opinion of Counsel” means a written opinion from legal counsel, which counsel may be an employee of or counsel to the Maker.

“Payment Blockage Notice” has the meaning set forth in Section 4.2.

“Person” means an individual, corporation, partnership, other entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act).

“Prepayment Event” means a Type I Prepayment Event or a Type II Prepayment event, as the case may be.

“Prepayment Event Date” means the Type I Prepayment Event Date or the Type II Prepayment Event Date, as the case may be.

“Prepayment Event Notice” has the meaning set forth in Section 3.2.

“Purchase Agreement” means the Securities Purchase Agreement, dated as of October 15, 2003, between the Maker and AstraZeneca UK Limited.

“Representative” means the (i) trustee under any indenture to which Maker is a party or other holder, agent or representative for any Senior Indebtedness or (ii) with respect to any Senior Indebtedness that does not have any such trustee, holder, agent or other representative, (a) in the case of such Senior Indebtedness issued pursuant to an agreement providing for voting arrangements as amount the holders or owner of such Senior Indebtedness, any holder or owner of such Senior Indebtedness acting with the consent of the required persons necessary to bind such holders or owners of such Senior Indebtedness and (b) in the case of all other such Senior Indebtedness, the holder or owner of such Senior Indebtedness.

“SEC” means the United States Securities and Exchange Commission.

“Securities Act” means the United States Securities Act of 1933, as amended.

“Senior Indebtedness” means the principal of, premium, if any, interest (including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowed as a claim in any such proceeding) and rent, if any, payable on or in connection with, and all fees, costs, expenses and other amounts accrued or due on or in connection with, the Maker’s 3.5% Convertible Subordinated Notes due March 15, 2007, or any other Indebtedness of the Maker, whether outstanding on the date of this Note or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Maker (including all deferrals, renewals, extensions or refundings of, or amendments, modifications or supplements to, the foregoing), unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to this Note or expressly provides that such Indebtedness is “pari passu” or “junior” to this Note. Notwithstanding the foregoing, the term Senior Indebtedness shall not include (i) any Indebtedness of the Maker to any Subsidiary of the Maker (other than Indebtedness of the Maker to such Subsidiary arising by reason of guarantees by the Maker of Indebtedness of such Subsidiary to a Person that is not a Subsidiary of the Maker); (ii) this Note; or (iii) Indebtedness of or amounts owed by the Maker for compensation to employees, or for goods or materials purchased in the ordinary course of business, or for services. If any payment made to any holder of any Senior Indebtedness or its Representative with respect to such Senior Indebtedness is rescinded or must otherwise be returned by such holder or Representative upon the insolvency, bankruptcy or reorganization of the Maker or otherwise, the reinstated Indebtedness of the Maker arising as a result of such rescission or return shall constitute Senior Indebtedness effective as of the date of such rescission or return.

“Series A-1 Certificate of Designation” has the meaning set forth in Purchase Agreement.

“Series A-2 Certificate of Designation” has the meaning set forth in Purchase Agreement.

“Series A-3/A-4 Certificate of Designation” has the meaning set forth in the Purchase Agreement.

“Subsidiary” means, in respect of any Person, any corporation, association, partnership, or other business entity of which more than fifty percent (50%) of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, general partners or holders thereof is at the time owned or controlled, directly or indirectly, by (i) such Person; (ii) such Person and one or more Subsidiaries of such Person; or (iii) one or more Subsidiaries of such Person.

“Type I Prepayment Event” means a Change in Control (as such term is defined in the Collaboration Agreement) that occurs at any time after the last day of the Discovery Period.

“Type I Prepayment Event Date” has the meaning set forth in Section 3.2(a)(i).

“Type II Allocated Prepayment Amount” means the greater of (i) the amount, if positive, that is derived when the Series A-2 Remaining Redemption Amount (as such term is defined in the Series A-2 Certificate of Designation) is subtracted from the Series A-2 Allocated Redemption Amount (as such term is defined in the Series A-2 Certificate of Designation), which amount shall be zero (0) in the event that such amount is zero (0) or negative, or (ii) the amount, if positive, that is derived when the Type II Remaining Prepayment Amount (as such term is defined in the Convertible Note) is subtracted from the Type II Allocated Prepayment Amount (as such term is defined in the Convertible Note), which amount shall be zero (0) in the event that such amount is zero (0) or negative; provided, that, in the event that the amount in each of clause (i) and clause (ii) is zero (0), the “Type II Allocated Prepayment Amount” means zero (0).

“Type II Prepayment Event” means the termination by AstraZeneca UK Limited (or any of its Affiliates) of all outstanding Research Programs and, in the event that the Antigen Designation Term has not expired, the Antigen Designation Term, pursuant to Section 16.2 or Section 16.3.1 of the Collaboration Agreement, which termination occurs at any time prior to or on the last day of the Discovery Period.

“Type II Prepayment Event Date” has the meaning set forth in Section 3.2(a)(ii).

“Type II Remaining Prepayment Amount” means the principal amount of this Note outstanding as of the Type II Redemption Event Date.

2. Securities Purchase Agreement. This Subordinated Promissory Note (this “Note”) is one of the Promissory Notes of the Maker referred to in the Purchase Agreement.

3. Payments.

3.1 Maker’s Right to Prepay. The principal amount of this Note may be prepaid (without premium or penalty) at any time and from time to time at the election of the Maker, as a whole or in part.

3.2 Prepayment upon Prepayment Event.

(a) Prepayments at Option of Holder.

(i) If at any time that any portion of the principal amount this Note remains unpaid there shall occur a Type I Prepayment Event, then on the date that is thirty (30) Business Days after the date of such Prepayment Event (or, if such day is not a Business Day, then the next Business Day thereafter) (the “Type I Prepayment Event Date”), the Maker shall prepay in full so much of the Maximum Type I Prepayment Event Amount as the Holder may specify in a Prepayment Event Notice (the “Designated Type I Prepayment Event Amount”).

(ii) If at any time that any portion of the principal amount this Note remains unpaid there shall occur a Type II Prepayment Event, then on the date that is thirty (30) Business Days after the date of such Prepayment Event (or, if such day is not a Business Day, then the next Business Day thereafter) (the “Type II Prepayment Event Date”), the Maker shall prepay in full so much of the principal amount of this Note then remaining unpaid, not to exceed an amount equal to the Maximum Type II Prepayment Event Amount, as the Holder may specify in a Prepayment Event Notice (the “Designated Type II Prepayment Event Amount”).

(b) Notice to Holder. Within ten (10) Business Days after the occurrence of a Prepayment Event, the Maker shall provide Holder with notice of the Prepayment Event. The notice shall state:

(i) the date of such Prepayment Event, whether the Prepayment Event is a Type I Prepayment Event or a Type II Prepayment Event, and, briefly, the events causing such Prepayment Event;

(ii) the date by which the Prepayment Event Notice pursuant to Section 3.2(c) must be given;

(iii) the Prepayment Event Date;

(iv) the Maximum Prepayment Event Amount;

(v) the Holder’s right to require the Maker to prepay an amount up to the Maximum Prepayment Event Amount;

(vi) the procedures that the Holder must follow to exercise rights under this Section 3.2; and

(vii) the procedures for withdrawing a Prepayment Event Notice.

(c) Exercise by Holder of Right to Receive Prepayment. The Holder may exercise its rights specified in this Section 3.2 by delivery of a written notice (a “Prepayment Event Notice”) to the Maker at any time prior to the close of business on the Business Day next preceding the Prepayment Event Date specifying the Designated Prepayment Event Amount. The Holder may specify a Designated Prepayment Event Amount that is less than the Maximum Prepayment Event Amount. Provisions of this Note that apply to the prepayment of the Maximum Prepayment Event Amount also apply to the prepayment of a Designated Prepayment Event Amount that is less than the Maximum Prepayment Event Amount. Notwithstanding anything herein to the contrary, the Holder shall have the right to withdraw any Prepayment Event Notice in whole or in a portion thereof, at any time prior to the close of business on the Business Day next preceding the Prepayment Event Date by written notice of withdrawal given to the Maker.

(d) Effect of Prepayment Event Notice. Upon receipt by the Maker of the Prepayment Event Notice specified in Section 3.2(c), the Holder shall (unless such Prepayment Event Notice is withdrawn as specified in Section 3.2(c)) thereafter be entitled to receive on the Prepayment Event Date the Designated Type I Prepayment Event Amount or the Designated Type II Prepayment Event Amount with respect to this Note, as the case may be.

4. Subordination.

4.1 Agreement of Subordination.

(a) Note Subject to Section 4. The Maker covenants and agrees, and the Holder by its acceptance of this Note likewise covenants and agrees, that this Note shall be issued subject to the provisions of this Article 4; and each transferee of this Note accepts and agrees to be bound by such provisions.

(b) Subordination. The payment of the principal of, premium, if any, and interest on this Note (including any amount prepayable pursuant to Section 3) shall, to the extent and in the manner hereinafter set forth, be subordinated and subject in right of payment to the prior payment in full in cash or payment satisfactory to the holders of Senior Indebtedness of all Senior Indebtedness, whether outstanding at the date of this Note or thereafter incurred.

(c) No Effect on Default. No provision of this Article 4 shall prevent the occurrence of any default or Event of Default hereunder.

4.2 Payments to Holder.

(a) Payment Blockage. No payment shall be made with respect to the principal of, or premium, if any, or interest on this Note (including any amount prepayable pursuant to Section 3), if:

(i) a default in the payment of principal, premium, interest, rent or other obligations due on any Designated Senior Indebtedness occurs and is continuing (or, in the case of Designated Senior Indebtedness for which there is a

period of grace, in the event of such a default that continues beyond the period of grace, if any, specified in the instrument or lease evidencing such Designated Senior Indebtedness), unless and until such default shall have been cured or waived or shall have ceased to exist; or

(ii) a default, other than a payment default, on Designated Senior Indebtedness occurs and is continuing that then permits holders of such Designated Senior Indebtedness to accelerate its maturity and the Holder receives a notice of the default (a “Payment Blockage Notice”) from a Representative or holder of Designated Senior Indebtedness or the Maker.

(b) Limit on Payment Blockage. If the Holder receives any Payment Blockage Notice pursuant to clause (a)(ii) above, no subsequent Payment Blockage Notice shall be effective for purposes of this Section unless and until (i) at least three hundred sixty-five (365) days shall have elapsed since the initial effectiveness of the immediately prior Payment Blockage Notice; and (ii) all scheduled payments on this Note that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Holder (unless such default was waived, cured or otherwise ceased to exist and thereafter subsequently reoccurred) shall be, or be made, the basis for a subsequent Payment Blockage Notice.

(c) Resumption of Payments. The Maker may and shall resume payments on and distributions in respect of this Note upon the earlier of:

(i) in the case of a default referred to in clause (a)(i) of Section 4.2 above, the date upon which the default is cured or waived or ceases to exist, or

(ii) in the case of a default referred to in clause (a)(ii) of Section 4.2 above, the earlier of the date on which such default is cured or waived or ceases to exist or one hundred seventy-nine (179) days pass after the date on which the applicable Payment Blockage Notice is received, if the maturity of such Designated Senior Indebtedness has not been accelerated, unless this Section 4 otherwise prohibits the payment or distribution at the time of such payment or distribution.

(d) Payments Upon Dissolution. Upon any payment by the Maker, or distribution of assets of the Maker of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Maker (whether voluntary or involuntary) or in bankruptcy, insolvency, receivership or similar proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash, or other payments satisfactory to the holders of Senior Indebtedness before any payment is made on account of the principal of, premium, if any, or interest on this Note; and upon any such dissolution or winding-up or liquidation or reorganization of the Maker or bankruptcy, insolvency, receivership or other proceeding, any payment by the Maker, or distribution of assets of the Maker of any kind or character, whether in cash, property or securities, to which the Holder would be entitled, except for the provisions of this Section 4, shall (except as aforesaid) be paid by the Maker or by any receiver, trustee in bankruptcy,

liquidating trustee, agent or other Person making such payment or distribution, or by the Holder if received by it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, or as otherwise required by law or a court order) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash, or other payment satisfactory to the holders of Senior Indebtedness, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution is made to the Holder in respect of this Note.

(e) Certain Distributions Excluded. For purposes of this Section 4, the words, “cash, property or securities” shall not be deemed to include shares of stock of the Maker as reorganized or readjusted, or securities of the Maker or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Section 4 with respect to this Note to the payment of all Senior Indebtedness which may at the time be outstanding; provided that (i) the Senior Indebtedness is assumed by the new corporation, if any, resulting from any reorganization or readjustment, and (ii) the rights of the holders of Senior Indebtedness (other than leases which are not assumed by the Maker or the new corporation, as the case may be) are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Maker with, or the merger of the Maker into, another corporation or the liquidation or dissolution of the Maker following the conveyance, transfer or lease of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Section 5 shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 4.2 if such other corporation shall, as a part of such consolidation, merger, conveyance, transfer or lease, comply with the conditions stated in Section 5.

(f) Acceleration. In the event of the acceleration of this Note because of an Event of Default, no payment or distribution shall be made to the Holder in respect of the principal of, premium, if any, or interest on this Note by the Maker (including any amount prepayable pursuant to Section 3) until all Senior Indebtedness has been paid in full in cash or other payment satisfactory to the holders of Senior Indebtedness or such acceleration is rescinded in accordance with the terms of this Note. If payment of this Note is accelerated because of an Event of Default, the Maker shall promptly notify holders of Senior Indebtedness of such acceleration. In the event that, notwithstanding the foregoing provisions, any payment or distribution of assets of the Maker of any kind or character, whether in cash, property or securities (including by way of setoff or otherwise), prohibited by the foregoing, shall be received by the Holder before all Senior Indebtedness is paid in full, in cash or other payment satisfactory to the holders of Senior Indebtedness, or provision is made for such payment thereof in accordance with its terms in cash or other payment satisfactory to the holders of Senior Indebtedness, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Maker, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full, in cash or other payment satisfactory to the holders of Senior Indebtedness,

after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness.

4.3 Subrogation. Subject to the payment in full, in cash or other payment satisfactory to the holders of Senior Indebtedness, of all Senior Indebtedness, the rights of the Holder under this Note shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this Section 4 (equally and ratably with the holders of all indebtedness of the Maker which by its express terms is subordinated to other indebtedness of the Maker to substantially the same extent as this Note is subordinated and is entitled to like rights of subrogation) to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Maker applicable to the Senior Indebtedness until the principal, premium, if any, and interest on this Note shall be paid in full in cash or other payment satisfactory to the holders of Senior Indebtedness; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Holder would be entitled except for the provisions of this Section 4, and no payment over pursuant to the provisions of this Section 4, to or for the benefit of the holders of Senior Indebtedness by the Holder, shall, as between the Maker, its creditors other than holders of Senior Indebtedness, and the Holder, be deemed to be a payment by the Maker to or on account of the Senior Indebtedness; and no payments or distributions of cash, property or securities to or for the benefit of the Holder pursuant to the subrogation provisions of this Section 4, which would otherwise have been paid to the holders of Senior Indebtedness shall be deemed to be a payment by the Maker to or for the account of this Note. It is understood that the provisions of this Section 4 are and are intended solely for the purposes of defining the relative rights of the Holder, on the one hand, and the holders of the Senior Indebtedness, on the other hand.

4.4 No Impairment of Obligations. Nothing contained in this Section 4 or elsewhere in this Note is intended to or shall impair, as among the Maker, its creditors other than the holders of Senior Indebtedness, and the Holder, the obligation of the Maker, which is absolute and unconditional, to pay to the Holder the principal of (and premium, if any) and interest on this Note as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holder and creditors of the Maker other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Holder from exercising all remedies otherwise permitted by applicable law upon default under this Note, subject to the rights, if any, under this Section 4 of the holders of Senior Indebtedness in respect of cash, property or securities of the Maker received upon the exercise of any such remedy.

4.5 Reliance on Order of Court. Upon any payment or distribution of assets of the Maker referred to in this Section 4, the Holder shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such bankruptcy, dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, delivered to the Holder, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Maker, the amount thereof or payable thereon and all other facts pertinent thereto or to this Section 4.

4.6 No Impairment of Subordination. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Maker or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Maker with the terms, provisions and covenants of this Note, regardless of any knowledge thereof which any such holder may have or otherwise be charged with.

4.7 Senior Indebtedness Entitled to Rely. The holders of Senior Indebtedness (including Designated Senior Indebtedness) shall have the right to rely upon this Section 4, and no amendment or modification of the provisions contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto.

4.8 Holder’s Agreement to Effectuate Subordination of Note. The Holder by its acceptance of this Note agrees to take such actions as may be necessary or appropriate to effectuate, as between the holders of Senior Indebtedness and the Holder, the subordination provided in this Section 4.

5. Consolidation, Merger, Conveyance, Transfer or Lease.

5.1 Maker May Consolidate, Etc., Only On Certain Terms. The Maker shall not consolidate with or merge into any other Person (in a transaction in which the Maker is not the surviving corporation) or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless:

(a) in case the Maker shall consolidate with or merge into another Person (in a transaction in which the Maker is not the surviving corporation) or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Maker is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Maker substantially as an entirety shall be a corporation organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and shall expressly assume, by an instrument supplemental hereto, executed and delivered to the Holder, in form reasonably satisfactory to the Holder, the due and punctual payment of the principal of and any premium and interest on this Note and the performance or observance of every covenant of this Note on the part of the Maker to be performed or observed, by supplemental instrument satisfactory in form to the Holder, executed and delivered to the Holder by the Person (if other than the Maker) formed by such consolidation or into which the Maker shall have been merged or by the Person which shall have acquired the Maker’s assets;

(b) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and

(c) the Maker has delivered to the Holder an Officers’ Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplement instrument is required in connection with such transaction, such supplemental

instrument comply with this Section 5 and that all conditions precedent herein provided for relating to such transaction have been complied with.

5.2 Successor Substituted. Upon any consolidation of the Maker with, or merger of the Maker into, any Person or any conveyance, transfer or lease of the properties and assets of the Maker substantially as an entirety in accordance with Section 5.1, the successor Person formed by such consolidation or into which the Maker is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Maker under this Note with the same effect as if such successor Person had been named as the Maker herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Note.

6. Default and Remedies.

6.1 Events of Default. Subject to Section 6.2, an “Event of Default” shall occur if:

(a) the Maker (i) defaults in the payment of any principal of (including any premium, if any, on) (A) this Note when the same becomes due and payable (whether at maturity, on a mandatory prepayment date, or otherwise), whether or not such payment shall be prohibited by the provisions of Section 4, or (B) any Promissory Note (as such term is defined in the Purchase Agreement) held by the Holder or any of its Affiliates; or (C) the Convertible Note (as such term is defined in the Purchase Agreement); or (ii) fails to redeem, and to pay to any holder of Preferred Stock the Redemption Price (as such term is defined in the applicable Certificate of Designation) for, each share of Preferred Stock that the Maker is required to redeem from such holder on the date specified for such redemption under the terms of the applicable Certificate of Designation;

(b) the Maker fails to comply with any of its obligations under (i) this Note, (ii) any Promissory Note held by the Holder or any of its Affiliates, (iii) the Convertible Note or (iv) Section 5.6(a) or Section 5.8 of the Purchase Agreement, in each case other than any obligation specified in Section 6.1(a);

(c) the Maker fails to provide notice of a Prepayment Event to the Holder when required by Section 3.2(b) for a period of thirty (30) days after notice of failure to do so;

(d) any indebtedness under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Maker or any Significant Subsidiary (all or substantially all of the outstanding voting securities of which are owned, directly or indirectly, by the Maker) or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Maker or any Significant Subsidiary (all or substantially all of the outstanding voting securities of which are owned, directly or indirectly, by the Maker) (excluding, however, this Note, any Promissory Note and the Convertible Note) (an “Instrument”) with an aggregate outstanding principal amount then outstanding in excess of Twenty-Five Million United States Dollars (U.S. $25,000,000), whether such indebtedness now exists or shall hereafter be created, is not paid at final maturity of the Instrument (either at its stated maturity or upon acceleration thereof), and

such indebtedness is not discharged, or such acceleration is not rescinded or annulled, within a period of thirty (30) days after there shall have been given to the Maker by the Holder a written notice specifying such default and requiring the Maker to cause such indebtedness to be discharged or cause such default to be cured or waived or such acceleration to be rescinded or annulled and stating that such notice is a “Notice of Default” hereunder;

(e) the Maker shall default in respect of any of its obligations under the Preferred Stock other than any obligation specified in Section 6.1(a) and the default continues for the period and after the notice specified in Section 6.2;

(f) this Note, the Purchase Agreement, or any other agreement or instrument contemplated by the Purchase Agreement shall be asserted by the Maker not to be a legal, valid and binding obligation of the Maker, enforceable against the Maker in accordance with its terms;

(g) the Maker or any Significant Subsidiary, pursuant to or within the meaning of any Bankruptcy Law:

(i) commences a voluntary case or proceeding;

(ii) consents to the entry of an order for relief against it in an involuntary case or proceeding;

(iii) consents to the appointment of a Custodian of it or for all or substantially all of its property; or

(iv) makes a general assignment for the benefit of its creditors; or

(h) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:

(i) is for relief against the Maker or any Significant Subsidiary in an involuntary case or proceeding;

(ii) appoints a Custodian of the Maker or any Significant Subsidiary or for all or substantially all of the property of the Maker or any Significant Subsidiary; or

(iii) orders the liquidation of the Maker or any Significant Subsidiary;

and in each case the order or decree remains unstayed and in effect for sixty (60) consecutive days.

The term “Bankruptcy Law” means Title 11 of the United States Code (or any successor thereto) or any similar federal or state law for the relief of debtors. The term “Custodian” means any receiver, holder, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law.

6.2 Notice and Cure.

(a) A default under Section 6.1(b) or (e) above is not an Event of Default until the Holder notifies the Maker in writing of the default and the Maker does not cure the default within sixty (60) days after receipt of such notice. The notice given pursuant to this Section 6.2 must specify the default, demand that it be remedied and state that the notice is a “Notice Of Default.”

(b) When any Event of Default under Section 6.1 is cured, it ceases.

(c) The Maker shall immediately notify Holder upon becoming aware of the existence of any condition or event which constitutes a default or an Event of Default hereunder by written notice which specifies the nature and period of existence of such default or Event of Default and what action the Maker is taking or proposes to take with respect thereto. The Holder shall not be charged with knowledge of any Event of Default unless written notice thereof shall have been given to the Holder or any agent of the Holder.

6.3 Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.1(g) or (h)) occurs and is continuing, the Holder may, by notice to the Maker, declare all unpaid principal on this Note then outstanding (if not then due and payable), together with unpaid interest, if any, to the date of acceleration, to be due and payable upon any such declaration, and the same shall become and be immediately due and payable. If an Event of Default specified in Section 6.1(g) or (h) occurs, all unpaid principal of this Note then outstanding, together with unpaid interest, shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Holder. The Holder may at any time, by notice to the Maker, rescind an acceleration and its consequences. No such rescission shall affect any subsequent default or impair any right consequent thereto.

6.4 Other Remedies.

(a) Available Remedies. If an Event of Default occurs and is continuing, the Holder may, but shall not be obligated to, pursue any available remedy by proceeding at law or in equity to collect the payment of the principal of or interest on this Note or to enforce the performance of any provision of the Purchase Agreement or this Note.

(b) Remedies Not Exclusive. The Holder may maintain a proceeding even if it does not possess this Note or does not produce it in the proceeding. A delay or omission by the Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law.

6.5 Collection Suit By Holder. If an Event of Default in the payment of principal specified in Section 6.1(a) occurs and is continuing or if any interest due and payable hereunder is not paid when due and thereafter remains unpaid, the Holder may recover judgment against the Maker for the whole amount of principal and accrued interest remaining unpaid, together with, to the extent that payment of such interest is lawful, interest on overdue principal and on overdue installments of interest, in each case at the Default Rate and such further amount

as shall be sufficient to cover the costs and expenses of collection, including reasonable attorneys’ fees and disbursements.

7. Voting Rights. The Holder of this Note shall have no voting rights with respect to Maker.

8. Waiver. No delay or omission on the part of the Holder in exercising any right under this Note shall operate as a waiver of such right or of any other right of the Holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The Maker hereby forever waives presentment, demand, presentment for payment, protest, notice of protest, notice of dishonor of this Note and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note.

9. Miscellaneous.

9.1 Amendment. None of the terms or provisions of this Note may be excluded, modified or amended except by a written instrument duly executed by the Holder and the Maker expressly referring to this Note and setting forth the provision so excluded, modified or amended.

9.2 Costs. If action is successfully instituted to collect on this Note, the Maker promises to pay all costs and expenses, including reasonable attorneys’ fees, incurred in connection with such action.

9.3 Headings. The headings of the sections of this Note have been inserted for convenience of reference only, are not intended to be considered part hereof, and shall in no way modify or restrict any of the terms or provisions hereof.

9.4 Governing Law. This Note shall be governed by, and construed in accordance with, the laws of the State of New York.

9.5 Service of Process; Consent to Jurisdiction; Venue.

(a) The Maker agrees that service of any process, summons, notice or document by registered mail to its address set forth in Section 11.4 of the Purchase Agreement, or any other lawful means, shall be effective service of process for any action, suit or proceeding brought against it with respect to this Note in any court identified in clause (b) below.

(b) The Maker hereby irrevocably and unconditionally consents to the exclusive jurisdiction of the courts of the State of New York and the United States District Court for the Southern District of New York for any action, suit or proceeding (other than appeals therefrom) arising out of or relating to this Agreement, and agrees not to commence any action, suit or proceeding (other than appeals therefrom) related thereto except in such courts. The Maker further hereby irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding (other than appeals therefrom) arising out of or relating to this Note in the courts of the State of New York or the United States District Court for the Southern District of New York, and hereby further irrevocably and unconditionally waives and agrees not

to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.

9.6 Notices. All notices hereunder shall be given by a party in writing and shall be deemed received by the other party hereto, in each case in accordance with the terms of Section 11.4 of the Purchase Agreement as if any such notice were a notice thereunder.

9.7 Transferability. This Note may not be transferred or assigned by the Holder except as permitted by Section 7 of the Purchase Agreement. For the avoidance of doubt, the parties acknowledge and agree that, in the event that the Holder merges into or consolidates with any other Person, or that any other Person acquires securities of the Holder, such merger, consolidation or acquisition (as the case may be) shall not be deemed for purposes of this Section 9.7 to be, or to trigger, a transfer or assignment of the Holder’s rights and obligations hereunder.

9.8 Maximum Rate. Any provisions contained in this Note to the contrary notwithstanding, Holder shall not be entitled to receive, collect or apply, as interest on the obligations evidenced hereunder, any amount in excess of the maximum rate of interest permitted to be charged by applicable law, and, in the event any amount is ever received, collected, or applied as interest in excess of this maximum allowable rate by Holder, any such amount which would be excessive interest shall be applied to the reduction of the principal amount owed by the Maker. If such principal amount is paid in full, any such excess shall be promptly paid over to the Maker. In determining whether or not the interest paid or payable under any specific circumstances exceeds the maximum rate allowed by law, Holder may, to the maximum extent allowed by law, characterize any nonprincipal payment as an expense, fee or premium rather than interest; exclude voluntary prepayments and the effects of them; and apportion the total amount of interest throughout the entire contemplated term of the this Note so that the interest rate is uniform throughout.

9.9 Binding Effect. This Note shall be binding upon the successors or assigns of the Maker and shall inure to the benefit of the successors and assigns of the Holder.

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IN WITNESS WHEREOF, the Maker has caused this Note to be executed by its duly authorized officer as of the date first set forth above.

		ABGENIX, INC.


		By:
		Name:
		Title:

EX-4.8 4 a2121719zex-4_8.htm EX-4.8

Exhibit 4.8

CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A-2
CONVERTIBLE PREFERRED STOCK OF ABGENIX, INC.

Pursuant to Section 151 of the
General Corporation Law of the State of Delaware

Each share of such series of Preferred Stock shall rank equally in all respects and shall be subject to the following provisions:

1. NUMBER OF SHARES AND DESIGNATION. 50,000 shares of Preferred Stock of the Corporation shall constitute a series of Preferred Stock designated as Series A-2 Convertible Preferred Stock (the “SERIES A-2 PREFERRED STOCK”). Subject to Section 9(c), the number of shares of Series A-2 Preferred Stock may be increased (to the extent of the Corporation’s authorized and unissued Preferred Stock) or decreased (but not below the number of shares of Series A-2 Preferred Stock then outstanding) by further resolution duly adopted by the Board of Directors and the filing of a certificate of increase or decrease, as the case may be, with the Secretary of State of the State of Delaware.

2. RANK. The Series A-2 Preferred Stock shall, with respect to rights upon liquidation, dissolution or winding up of the affairs of the Corporation, or otherwise (a) rank senior and prior to the Common Stock, and each other class or series of equity securities of the Corporation, whether currently issued or issued in the future, that by its terms ranks junior to the Series A-2 Preferred Stock (all of such equity securities, including the Common Stock, are collectively referred to herein as the “JUNIOR SECURITIES”), (b) rank on a parity with each other class or series of equity securities of the Corporation, whether currently issued or issued in the future, that does not by its terms expressly provide that it ranks senior to or junior to the Series A-2 Preferred Stock (all of such equity securities are collectively referred to herein as the “PARITY SECURITIES”), and (c) rank junior to each other class or series of equity securities of the Corporation, whether currently issued or issued in the future, that by its terms ranks senior to the Series A-2 Preferred Stock (all of such equity securities are collectively referred to herein as the “SENIOR SECURITIES”). The respective definitions of Junior Securities, Parity Securities and Senior Securities shall also include any rights or options exercisable or exchangeable for or convertible into any of the Junior Securities, Parity Securities or Senior Securities, as the case may be.

3. DIVIDENDS.

(a) Ratably with Common Stock. The holders of shares of Series A-2 Preferred Stock shall be entitled to participate equally and ratably with the holders of shares of Common Stock in all dividends and distributions paid (whether in the form of cash, stock or otherwise) on the shares of Common Stock as if immediately prior to each record date for the Common Stock, shares of Series A-2 Preferred Stock then outstanding were converted into shares of Common Stock (in the manner, and at the Conversion Price, described in Section 6(a)(i)).

(b) Dividend Trigger Date. Subject to the rights of the holders of any Senior Securities, in addition to the dividends specified in Section 3(a), upon the occurrence and during the continuation of any Event of Default described in Section 11(a)(i) (the date of each such occurrence, a “DIVIDEND TRIGGER DATE”), thereafter and continuing until the earlier of the redemption or conversion of the relevant shares of Series A-2 Preferred Stock and the date on which such Event of Default is cured and ceases to exist, the holders of such shares shall be entitled to receive, out of funds legally available for that purpose, cash dividends at the Dividend Rate. Such dividends shall be cumulative from the Dividend Trigger Date and shall be payable in arrears on each Dividend Payment Date, provided that if any such payment date is not a Business Day then such dividend shall be payable on the next Business Day. The dividends per share of the Series A-2 Preferred Stock for any full quarterly period shall be computed by multiplying the Dividend Rate for such Dividend Period by the Redemption Price per share and dividing the result by four. Dividends payable for any period less than a full quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed for such period less than one month.

(c) Ratable Distribution. If the full cash dividends required to be paid by the Corporation to the holder of Series A-2 Preferred Stock pursuant to Section 3(b) are not paid or made available to the holders of all outstanding shares of Series A-2 Preferred Stock, and funds available shall be insufficient to permit payment in full in cash to all such holders and the holders of any Parity Securities of the preferential amounts to which they are then entitled, the entire amount available for payment of cash dividends shall be distributed among the holders of the Series A-2 Preferred Stock and such holders of Parity Securities ratably and in proportion to the full amount to which they would otherwise be respectively entitled, and any remainder not paid in cash to such holders shall cumulate.

(d) Junior Securities. So long as any shares of Series A-2 Preferred Stock shall be outstanding after the Dividend Trigger Date or any dividends accrued but unpaid in respect of shares of Series A-2 Preferred Stock redeemed pursuant to Section 5 or Section 7 or converted pursuant to Section 6 remain unpaid, the Corporation shall not (i) declare or pay any dividend or make any distribution on any Junior Securities, whether in cash, property or otherwise (other than dividends payable on shares of the class or series upon which such dividends are declared or paid, or payable in shares of Common Stock with respect to Junior Securities other than Common Stock), or (ii) purchase or redeem any Junior Securities, or pay or make available any monies for a sinking fund for the purchase or redemption of any Junior Securities, unless all dividends to which the holders of Series A-2 Preferred Stock shall have been entitled for all previous Dividend Periods shall have been paid or declared and a sum of money sufficient for the payment thereof set apart.

4. LIQUIDATION PREFERENCE.

(a) Amount. The liquidation preference for the shares of Series A-2 Preferred Stock shall be One Thousand United States Dollars (U.S. $1,000.00) per share (the “BASE LIQUIDATION VALUE”), plus the amount of any accrued but unpaid dividends (the “LIQUIDATION VALUE”).

(b) Entitlement of Series A-2 Preferred Stockholders. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A-2 Preferred Stock shall be entitled to receive the greater of (i) the Liquidation Value of such shares in effect on the date of such liquidation, dissolution or winding up or (ii) the payment such holders would have received had such holders, immediately prior to such liquidation, dissolution or winding up, converted their shares of Series A-2 Preferred Stock into shares of Common Stock (pursuant to, and at the Conversion Price described in, Section 6(a)(i)).

(c) Seniority. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A-2 Preferred Stock (i) shall not be entitled to receive the Liquidation Value of such shares until payment in full or provision has been made for the payment in full of all claims of creditors of the Corporation and the liquidation preferences for all Senior Securities, and (ii) shall be entitled to receive the Liquidation Value of such shares before any payment or distribution of any assets of the Corporation shall be made or set apart for holders of any Junior Securities. Subject to clause (i) above, if the assets of the Corporation are not sufficient to pay in full the Liquidation Value payable to the holders of shares of Series A-2 Preferred Stock and the liquidation preference payable to the holders of any Parity Securities, then such assets, or the proceeds thereof, shall be distributed among the holders of shares of Series A-2 Preferred Stock and any such other Parity Securities ratably in accordance with the Liquidation Value for the Series A-2 Preferred Stock and the liquidation preference for the Parity Securities, respectively.

(d) Events Constituting Liquidation. Neither a consolidation or merger of the Corporation with or into any other entity, nor a merger of any other entity with or into the Corporation, nor a sale or transfer of all or any part of the Corporation’s assets for cash, securities or other property shall be considered a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 4.

5. REDEMPTION; PROCEDURES FOR REDEMPTION.

(a) Redemption Upon Final Maturity. On the tenth (10th) anniversary of the Initial Closing Date (as such term is defined in the Purchase Agreement), the Corporation shall redeem all outstanding shares of Series A-2 Preferred Stock, if any, at a cash redemption price per share equal to the Liquidation Value (such amount being referred to herein as the “REDEMPTION PRICE”).

(b) Redemption at Option of the Corporation. At any time prior to the tenth (10th) anniversary of the Initial Closing Date (as such term is defined in the Purchase Agreement), at its sole option, the Corporation may redeem any or all shares of Series A-2 Preferred Stock at a cash redemption price per share equal to the Redemption Price if (i) a shelf

registration statement covering resales of the Common Stock issuable upon conversion of Series A-2 Preferred Stock is effective and available for use in accordance with Section 8.1 of the Purchase Agreement and is expected to remain effective and available for use for the thirty (30) days following the date of the notice provided by the Corporation pursuant to Section 5(c), unless registration is no longer required pursuant to the terms and conditions of the Purchase Agreement and (ii) the Common Stock issuable upon conversion of the Series A-2 Preferred Stock is listed or admitted for trading on an Approved Market and is expected to remain so listed or admitted for trading for the thirty (30) days following the date of the notice provided by the Corporation pursuant to Section 5(c). Except as set forth in this Section 5(b), the Corporation shall not have the option to redeem any shares of Series A-2 Preferred Stock. If fewer than all of the outstanding shares of Series A-2 Preferred Stock are to be redeemed pursuant to this Section 5(b), the shares of each holder of Series A-2 Preferred Stock shall be redeemed on a pro rata basis (according to the number of shares of Series A-2 Preferred Stock held by each holder, with any fractional shares rounded to the nearest whole share or in such other manner as the Board of Directors may determine, as may be prescribed by resolution of the Board of Directors).

(c) Notice of Redemption. In the event of a redemption of shares of Series A-2 Preferred Stock pursuant to Section 5(a) or 5(b), notice of such redemption shall be given by the Corporation, by first class mail, postage prepaid, mailed not less than fifteen (15) days nor more than forty-five (45) days prior to the Redemption Date, to each holder of Series A-2 Preferred Stock at the address appearing in the Corporation’s records. Such notice shall state:

(i) the date on which the holder is to surrender to the Corporation the certificates for any shares to be redeemed (such date, the “REDEMPTION DATE”);

(ii) the number of shares of Series A-2 Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of shares to be redeemed from such holder (such notice being referred to as the “REDEMPTION NOTICE”);

(iii) the then-current Conversion Price;

(iv) that if the holder wishes to convert any or all shares of Series A-2 Preferred Stock that are the subject of the Redemption Notice, the holder must give notice of such conversion no later than the close of business on the Business Day immediately preceding the Redemption Date; and

(v) that, unless the Corporation defaults in paying the Redemption Price with respect to such shares of Series A-2 Preferred Stock, the only remaining right of the holder in respect of such shares shall be to receive the payment of the Redemption Price.

Once a Redemption Notice is given by the Corporation to a holder, the shares of Series A-2 Preferred Stock that are the subject of such Redemption Notice shall not thereafter be convertible pursuant to Section 6(a)(ii) and the Redemption Price shall become due and payable on the Redemption Date, except to the extent that all or any portion of the shares of Series A-2 Preferred Stock held by such holder are converted in accordance with the provisions of Section 6(a)(i).

(d) Redemption Events.

(i) Notwithstanding anything contained in Section 5(a), (b) or (c) to the contrary, if at any time there shall occur a

(A) Type I Redemption Event, then on the date that is thirty (30) Business Days after the date of such Redemption Event (or, if such day is not a Business Day, then the next Business Day thereafter) (the “TYPE I REDEMPTION EVENT DATE”), the Corporation shall either, as it may elect,

(1) redeem from each holder of Series A-2 Preferred Stock, at a cash redemption price equal to the Redemption Price, as many of the Maximum Number of Type I Redemption Event Shares as the holder may specify in a Redemption Event Notice (for each holder, such number of shares, the “DESIGNATED NUMBER OF TYPE I REDEMPTION EVENT SHARES”), or

(2) exercise its rights pursuant to, and subject to all of the terms and provisions of, Section 6(a)(ii) to require the holder of the Series A-2 Preferred Stock to convert the Designated Number of Type I Redemption Event Shares; provided, however, that if and to the extent, as of the Type I Redemption Event Date, the Corporation is prevented by the terms of Section 6(a)(ii)(B) from requiring the holder to convert shares of Series A-2 Preferred Stock pursuant to Section 6(a)(ii)(A), then the Corporation shall, notwithstanding any election that it may otherwise have made pursuant to this Section 5(d)(i)(A), redeem from each holder on the Type I Redemption Event Date in accordance with clause (1) above such of the Designated Number of Type I Redemption Event Shares as the Corporation is prevented by the terms of Section 6(a)(ii)(B) from requiring the holder to convert as of such date.

(B) Type II Redemption Event, then on the Type II Redemption Event Date, the Corporation shall either, as it may elect,

(1) redeem from each such holder a number of shares of Series A-2 Preferred Stock then held by such holder up to a maximum number equal to such holder’s pro rata portion (according to the number of shares of Series A-2 Preferred Stock held by each holder, with any fractional shares rounded to the nearest whole share or in such other manner as the Board of Directors may determine, as may be prescribed by resolution of the Board of Directors) of the Maximum Number of Type II Redemption Event Shares, at a cash redemption price per share equal to the Redemption Price, as the holder may specify in the Redemption Event Notice (for each holder, such number of shares, the “DESIGNATED NUMBER OF TYPE II REDEMPTION EVENT SHARES”), or

(2) exercise its rights pursuant to, and subject to all of the terms and provisions of, Section 6(a)(ii) (without giving effect to clause (4) of Section

6(a)(ii)(B)) to require the holder of the Series A-2 Preferred Stock to convert any one or all of the Designated Number of Type II Redemption Event Shares; provided, however, that in the event that the Corporation elects to convert less than all of such Designated Number of Type II Redemption Event Shares, the Corporation shall redeem from such holder on the Type II Redemption Event Date in accordance with clause (1) above such of the Designated Number of Type II Redemption Event Shares as the Corporation has elected not to convert; provided, further, that if and to the extent, as of the Type II Redemption Event Date, the Corporation is prevented by the terms of Section 6(a)(ii)(B) (without giving effect to clause (4) of Section 6(a)(ii)(B)) from requiring the holder to convert shares of Series A-2 Preferred Stock pursuant to Section 6(a)(ii)(A), then the Corporation shall, notwithstanding any election that it may otherwise have made pursuant to this Section 5(d)(i)(B), redeem from each holder on the Type II Redemption Event Date in accordance with clause (1) above such of the Designated Number of Type II Redemption Event Shares as the Corporation is prevented by the terms of Section 6(a)(ii)(B) (without giving effect to clause (4) of Section 6(a)(ii)(B)) from requiring the holder to convert as of such date.

(ii) Within ten (10) Business Days after the occurrence of a Redemption Event, the Corporation shall provide each holder of Series A-2 Preferred Stock with notice of the Redemption Event. The notice shall state:

(A) the date of such Redemption Event, whether it is a Type I Redemption Event or a Type II Redemption Event, and, briefly, the events causing such Redemption Event;

(B) the date by which the Redemption Event Notice pursuant to this Section 5(d) must be given;

(C) the Redemption Event Date;

(D) the Maximum Number of Redemption Event Shares and, if the Redemption Event is a Type II Redemption Event, the holder’s pro rata portion of the Maximum Number of Type II Redemption Event Shares;

(E) the holder’s right to require the Corporation, (1) in the case of a Type I Redemption Event, to redeem or convert (at the Corporation’s election) such number of shares of Series A-2 Preferred Stock as would equal the Maximum Number of Redemption Event Shares or, (2) in the case of a Type II Redemption Event, to redeem or convert the holder’s pro rata portion of the Maximum Number of Type II Redemption Event Shares;

(F) in the case of (1) a Type I Redemption Event, whether the Corporation is electing to redeem or exercise its rights to convert such Designated Number of Type I Redemption Event Shares as may thereafter be specified by the holder, and (2) a Type II Redemption Event, whether the Corporation is electing to redeem or exercise its rights to convert such Designated Number of Type II Redemption Event

Shares as may thereafter be specified by the holder (and, in either case, in the event that the Corporation is electing to exercise its rights to convert any such shares, the number of such shares that the Corporation is electing to convert, and the place or places where certificates for such shares are to be surrendered for issuance of certificates representing shares of Common Stock);

(G) the then-current Conversion Price and the then-current Corporation Conversion Price;

(H) that the Series A-2 Preferred Stock that is the subject of redemption pursuant to a Redemption Event Notice may be converted into Common Stock pursuant to Section 6(a)(i) only to the extent that the Redemption Event Notice has been withdrawn in accordance with the terms of this Certificate;

(I) the procedures that the holder must follow to exercise rights under this Section 5(d); and

(J) the procedures for withdrawing a Redemption Event Notice.

(iii) The holder may exercise its rights specified in this Section 5(d) by delivery to the Corporation of a written notice (a “REDEMPTION EVENT NOTICE”) at any time prior to the close of business on the Business Day next preceding the Redemption Event Date specifying the Designated Number of Redemption Event Shares. The holder may specify a Designated Number of Redemption Event Shares that is less than the Maximum Number of Redemption Event Shares only if the amount so designated is not less than one whole share. Notwithstanding anything herein to the contrary, the holder shall have the right to withdraw any Redemption Event Notice in whole or in a portion thereof so long as the remaining Designated Number of Redemption Event Shares, if any, is not less than one whole share at any time prior to the close of business on the Business Day next preceding the Redemption Event Date by written notice of withdrawal given to the Corporation.

(e) Rights of Holder. Upon receipt by the Corporation of the Redemption Event Notice specified in Section 5(d)(iii), the holder shall (unless such Redemption Event Notice is withdrawn as specified in Section 5(d)(iii)) thereafter be entitled to receive on the Redemption Event Date, either the Redemption Price or the certificates and payment amount (if any) to which it is entitled upon conversion as provided in Section 6(b)(ii), as applicable, in each case with respect to each share of Series A-2 Preferred Stock held by such holder that is included in the Designated Number of Redemption Event Shares. Any Series A-2 Preferred Stock in respect of which a Redemption Event Notice has been given by the holder thereof may not be converted into shares of Common Stock pursuant to Section 6(a) on or after the date of the delivery of such Redemption Event Notice unless such Redemption Event Notice has first been validly withdrawn.

(f) Redemption Terms. In the event that any Designated Number of Redemption Event Shares are to be redeemed pursuant to this Section 5, the following terms and conditions shall apply.

(i) Surrender of Certificates. On or prior to the Redemption Date or the Redemption Event Date, as the case may be, each holder of Series A-2 Preferred Stock to be redeemed shall surrender its certificate or certificates representing shares of Series A-2 Preferred Stock to be redeemed to the Corporation at the Corporation’s principal executive offices or such other location as the Corporation may by notice direct, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after the Redemption Date or the Redemption Event Date, as the case may be, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of the Series A-2 Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to the Series A-2 Preferred Stock subject to redemption, and such shares shall not thereafter be transferred on the books of the Corporation or deemed to be outstanding for any purpose whatsoever.

(ii) Consequences of Nonpayment. In the event that the Corporation does not pay the Redemption Price on the Redemption Date or the Redemption Event Date, as the case may be, the Redemption Price shall be calculated as if the Redemption Date or the Redemption Event Date, as the case may be, were the later of such date and the date on which such payment is made. If the Corporation is unable at the Redemption Date or the Redemption Event Date, as the case may be, to redeem any or all shares of Series A-2 Preferred Stock then to be redeemed because such redemption would violate the applicable laws of the State of Delaware, then the Corporation shall redeem such shares as soon thereafter as redemption would not violate such laws. In the event of any redemption of only a part of the then outstanding Series A-2 Preferred Stock subject to redemption, the Corporation shall effect such redemption pro rata among the holders thereof (based on the number of shares of Series A-2 Preferred Stock held on the date of notice of redemption).

(g) Conversion Terms. In the event that the Corporation elects, pursuant to clause (2) of Section 5(d)(i)(A) or clause (2) of Section 5(d)(i)(B), to exercise its rights to require the holder to convert any shares of Series A-2 Preferred Stock pursuant to Section 6(a)(ii) with respect to the Designated Number of Redemption Event Shares specified by each holder, the terms of Section 6 shall govern the conversion of such shares, except that the notice provisions of Section 5(d)(ii) shall apply in lieu of the notice requirements of Section 6(b)(i)(B) such that, upon the Corporation’s giving of the notice required pursuant to Section 5(d)(ii), the Corporation shall be deemed to have exercised its conversion rights pursuant to Section 6(a)(ii) with respect to such Designated Number of Redemption Event Shares and the Corporation shall not be required to provide any additional notice under Section 6(b)(i)(B) in order to exercise such rights with respect to such shares.

6. CONVERSION.

(a) Right to Convert; Right of Corporation to Require Conversion.

(i) Voluntary Conversion at the Option of the Holder. Subject to the provisions of Section 5, this Section 6, Section 7 and Section 10, each holder of shares of Series A-2 Preferred Stock shall have the right, at any time and from time to time, at such holder’s option, to convert any or all of such holder’s shares of Series A-2 Preferred Stock, in whole or in part, into fully paid and non-assessable shares of Common Stock at the conversion price equal to the Initial Conversion Price per share of Common Stock, subject to adjustment as described in Section 6(c) (as adjusted, the “CONVERSION PRICE”). The number of shares of Common Stock into which a share of the Series A-2 Preferred Stock shall be convertible pursuant to this Section 6(a)(i) (calculated as to each conversion to the nearest 1/100th of a share) shall be determined by dividing the Base Liquidation Value by the Conversion Price in effect at the time of conversion. The “INITIAL CONVERSION PRICE” shall be Thirty United States Dollars (U.S. $30.00) per share. Notwithstanding the foregoing provisions of this Section 6(a)(i), if some or all of the shares of Series A-2 Preferred Stock held by the holder are to be redeemed pursuant to Section 5 or Section 7, the conversion right specified in this Section 6(a)(i) shall terminate as to such shares at the close of business on the Business Day immediately preceding the Redemption Date, Redemption Event Date, or Exchange Date, as the case may be (unless the Corporation shall default in paying the Redemption Price per share, when due, in which case the conversion right shall terminate at the close of business on the date such default is cured).

(ii) Mandatory Conversion at the Option of the Corporation.

(A) Subject to the provisions of Section 5, this Section 6, Section 7 and Section 10, the Corporation shall have the right to require the holder of shares of Series A-2 Preferred Stock, at the Corporation’s option, to convert any or all of such holder’s shares of Series A-2 Preferred Stock, in whole or in part, into fully paid and non-assessable shares of Common Stock at a conversion price equal to the lower of (1) the Average Market Price for Corporation’s Conversion Option or (2) the Conversion Price described in Section 6(a)(i) above (such lower price, the “CORPORATION CONVERSION PRICE”). The number of shares of Common Stock into which a share of the Series A-2 Preferred Stock shall be convertible pursuant to this Section 6(a)(ii) (calculated as to each conversion to the nearest 1/100th of a share) shall be determined by dividing the Base Liquidation Value by the Corporation Conversion Price.

(B) Notwithstanding anything contained herein to the contrary, in no event shall the Corporation have the right to require the holder of shares of Series A-2 Preferred Stock to convert any or all of such shares into shares of Common Stock pursuant to Section 6(a)(ii)(A): (1) at any time during the period commencing on the date of the Initial Closing (as such term is defined in the Purchase Agreement) and ending on the third anniversary thereof (the “RESTRICTED CONVERSION PERIOD”), except to the extent permitted by the terms and conditions of Section

6(a)(ii)(C); (2) unless (y) a shelf registration statement covering resales of the Common Stock issuable upon conversion of the Series A-2 Preferred Stock is effective and available for use in accordance with Section 8.1 of the Purchase Agreement and is expected to remain effective and available for use for the thirty (30) days following the Conversion Date unless registration is no longer required pursuant to the terms and conditions of the Purchase Agreement and (z) the Common Stock issuable upon conversion of the Series A-2 Preferred Stock is listed or admitted for trading on an Approved Market and is expected to remain so listed or admitted for trading for the thirty (30) days following the Conversion Date; (3) if there exists and is continuing an Event of Default; or (4) during any period when any member of the Corporation’s senior management is, to the knowledge of the Corporation, at the time of the giving of the Corporation’s Election Notice (or, in the event of a conversion by the Corporation pursuant to an election under clause (2) of Section 5(d)(i)(A), at the time of the Corporation’s giving of the notice required pursuant to Section 5(d)(ii)), prohibited or restricted from trading in shares of Common Stock under the Corporation’s internal rules and procedures relating to insider trading in the Corporation’s securities.

(C) During the Restricted Conversion Period, the Corporation shall have no right to require the holders of shares of Series A-2 Preferred Stock to convert in any three month period shares of Series A-2 Preferred Stock that yield shares of Common Stock exceeding the greater of (1) one percent of the shares of Common Stock outstanding as of the beginning of such three month period and (2) the average weekly trading volume on the NNM for shares of Common Stock during the four weeks ending on the first day of such three month period, in each case as such amounts are determined pursuant to Rule 144 of the Securities Act.

(b) Mechanics of Conversion.

(i) Procedures to Exercise Conversion Rights. A holder of shares of Series A-2 Preferred Stock or the Corporation, as the case may be, that elects to exercise its conversion rights pursuant to Section 6(a) shall provide notice to the other party as follows:

(A) Holder’s Notice and Surrender. To exercise its conversion right pursuant to Section 6(a)(i), the holder of shares of Series A-2 Preferred Stock to be converted shall surrender the certificate or certificates representing such shares at the office of the Corporation (or any transfer agent of the Corporation previously designated by the Corporation to the holders of Series A-2 Preferred Stock for this purpose) with a written notice of election to convert, completed and signed, specifying the number of shares to be converted.

(B) Corporation’s Notice. Subject to Section 5(g), to exercise its conversion right pursuant to Section 6(a)(ii), the Corporation shall deliver written notice to such holder (the “CORPORATION’S ELECTION NOTICE”), at least twenty (20) days and no more than forty-five (45) days prior to the Conversion Date, specifying: (1) the number of shares of Series A-2 Preferred Stock to be converted

and, if fewer than all the shares held by such holder are to be converted, the number of shares to be held by such holder; (2) the Conversion Date; and (3) the place or places where certificates for such shares are to be surrendered for issuance of certificates representing shares of Common Stock.

(ii) Surrender and Delivery of Certificates. Unless the shares issuable upon conversion are to be issued in the same name as the name in which such shares of Series A-2 Preferred Stock are registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form reasonably satisfactory to the Corporation, duly executed by the holder or the holder’s duly authorized attorney and an amount sufficient to pay any transfer or similar tax in accordance with Section 6(b)(vi). As promptly as practicable after the surrender by the holder of the certificates for shares of Series A-2 Preferred Stock as aforesaid, the Corporation shall issue and shall deliver to such holder, or on the holder’s written order to the holder’s transferee, a certificate or certificates for the whole number of shares of Common Stock issuable upon the conversion of such shares, a check payable in an amount corresponding to any fractional interest in a share of Common Stock as provided in Section 6(b)(vii), and, in the case of a conversion pursuant to Section 6(a)(ii), a certificate of an executive officer of the Corporation setting forth the Corporation Conversion Price and, in reasonable detail, the determination thereof and the number of shares of Common Stock issued in respect of each converted share of Series A-2 Preferred Stock.

(iii) Effective Date of Conversion. Each conversion shall be deemed to have been effected immediately prior to the close of business on (A) in the case of conversion pursuant to Section 6(a)(i), the first Business Day on which the certificates for shares of Series A-2 Preferred Stock shall have been surrendered and such notice received by the Corporation as aforesaid or (B) in the case of conversion pursuant to Section 6(a)(ii), the date specified as the Conversion Date in the Corporation’s notice of conversion delivered to each holder pursuant to Section 6(b)(i)(B) (in each case, the “CONVERSION DATE”); provided, however, that in the event of a conversion by the Corporation under Section 6(a)(ii) pursuant to an election made by the Corporation under clause (2) of Section 5(d)(i)(A) or clause (2) of Section 5(d)(i)(B), the “CONVERSION DATE” shall be the Redemption Event Date. At such time on the Conversion Date: (A) the person in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder of record of the shares of Common Stock represented thereby at such time; and (B) such shares of Series A-2 Preferred Stock so converted shall no longer be deemed to be outstanding, and all rights of a holder with respect to such shares, in the event of conversion pursuant to Section 6(a)(i), surrendered for conversion and, in the event of conversion pursuant to Section 6(a)(ii), covered by the Corporation’s notice of conversion, shall immediately terminate except the right to receive (x) the Common Stock, (y) other amounts payable pursuant to this Section 6, and (z) any dividends then accrued but unpaid in respect of the converted Series A-2 Preferred Stock.

(iv) Duly Issued Shares. All shares of Common Stock delivered upon conversion of the Series A-2 Preferred Stock shall, upon delivery, be duly and validly

authorized and issued, fully paid and nonassessable, free from all preemptive rights and free from all taxes, liens, security interests and charges (other than liens or charges created by or imposed upon the holder or taxes in respect of any transfer occurring contemporaneously therewith).

(v) Reservation and Listing of Shares. The Corporation shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, solely for the purpose of effecting conversions of the Series A-2 Preferred Stock, the aggregate number of shares of Common Stock issuable upon conversion of the Series A-2 Preferred Stock pursuant to Section 6(a)(i). Prior to any conversion by the Corporation pursuant to Section 6(a)(ii), the Corporation shall ensure that it then has a sufficient number of authorized but unissued shares of Common Stock in order to effect such conversion. The Corporation shall, promptly following the issuance of the shares of Series A-2 Preferred Stock, take such action to cause the shares of Common Stock initially issuable upon conversion of the shares of Series A-2 Preferred Stock to be listed on the NNM as promptly as possible but no later than the effective date of the Registration Statement providing for the resale by the holder of shares of Common Stock issuable upon conversion of shares of the Series A-2 Preferred Stock as contemplated by Section 8 of the Purchase Agreement. The Corporation further agrees that if it applies to have its Common Stock or other securities traded on any other stock exchange or market it will include in such application all shares of Common Stock to be issued upon the shares of Series A-2 Preferred Stock and will take all such other actions as may be necessary to cause such shares of Common Stock to be so listed. During the period beginning on the date hereof and ending on the Final Date (as such term is defined in the Purchase Agreement), the Corporation shall take all actions necessary to continue the listing and trading of its Common Stock on an Approved Market and will comply in all material respects with the Corporation’s reporting, filing and other obligations under the bylaws and rules of each such exchange or market on which shares of the Common Stock may from time to time be listed to the extent necessary to ensure the continued eligibility for trading of shares of Common Stock. The Corporation shall take all commercially reasonable action as may be necessary to ensure that the shares of Common Stock may be issued without violation of any applicable law or regulation or of any requirement of any securities exchange or inter-dealer quotation system on which the shares of Common Stock are listed or traded.

(vi) Fees and Taxes. Issuances of certificates for shares of Common Stock upon conversion of the Series A-2 Preferred Stock shall be made without charge to the holder of shares of Series A-2 Preferred Stock for any issue or transfer tax (other than taxes in respect of any transfer occurring contemporaneously therewith or as a result of the holder being a non-U.S. person) or other incidental expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Corporation; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance or delivery of shares of Common Stock in a name other than that of the holder of the Series A-2 Preferred Stock, and no such issuance or delivery shall be made unless and until the person requesting

such issuance or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

(vii) Fractions of Shares. In connection with the conversion of any shares of Series A-2 Preferred Stock, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Market Price per share of Common Stock on the Conversion Date.

(viii) Conversion on Pro Rata Basis. If fewer than all of the outstanding shares of Series A-2 Preferred Stock are to be converted pursuant to Section 6(a)(ii), the shares of each holder of Series A-2 Preferred Stock shall be converted on a pro rata basis (according to the number of shares of Series A-2 Preferred Stock held by each holder, with any fractional shares rounded to the nearest whole share or in such other manner as the Board of Directors may determine, as may be prescribed by resolution of the Board of Directors).

(c) Adjustments to Conversion Price.

(i) Stock Splits, Etc. In case the Corporation shall (A) pay a dividend on its Common Stock in shares of Common Stock, (B) make a distribution on its Common Stock in shares of Common Stock, (C) subdivide its Outstanding Common Stock into a greater number of shares, or (D) combine its Outstanding Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior thereto shall be adjusted so that the holder shall upon conversion of the shares of Series A-2 Preferred Stock held by it be entitled to receive that number of shares of Common Stock which it would have owned had such shares of Series A-2 Preferred Stock been converted immediately prior to the happening of such event. An adjustment made pursuant to this Section 6(c)(i) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of subdivision or combination.

(ii) Rights to Purchase Common Stock. In case the Corporation shall issue rights or warrants to all or substantially all holders of its Common Stock entitling them (for a period commencing no earlier than the record date described below and expiring not more than sixty (60) days after such record date) to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price per share (or having a conversion price per share) less than the Current Average Market Price per share of Common Stock on the record date for the determination of stockholders entitled to receive such rights or warrants, the Conversion Price in effect immediately prior thereto shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to such record date by a fraction of which the numerator shall be the number of shares of Common Stock Outstanding on such record date plus the number of shares which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered, which shall be determined by multiplying the number of shares of Common Stock issuable upon conversion of such convertible securities by the

conversion price per share of Common Stock pursuant to the terms of such convertible securities) would purchase at the Current Average Market Price per share of Common Stock on such record date, and of which the denominator shall be the number of shares of Common Stock Outstanding on such record date plus the number of additional shares of Common Stock offered (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever any such rights or warrants are issued, and shall become effective immediately after such record date. If at the end of the period during which such rights or warrants are exercisable not all rights or warrants shall have been exercised, the adjusted Conversion Price shall be immediately readjusted to what it would have been based upon the number of additional shares of Common Stock actually issued (or the number of shares of Common Stock issuable upon conversion of convertible securities actually issued).

(iii) Distributions to Holders of Common Stock.

(A) In case the Corporation shall distribute to all or substantially all holders of its Common Stock any shares of Capital Stock of the Corporation (other than Common Stock), evidences of indebtedness or other non-cash assets (including securities of any person other than the Corporation but excluding (1) dividends or distributions paid exclusively in cash or (2) dividends or distributions referred to in Section 6(c)(i)), or shall distribute to all or substantially all holders of its Common Stock rights or warrants to subscribe for or purchase any of its securities (excluding those rights and warrants referred to in Section 6(c)(ii) and also excluding the distribution of rights to all holders of Common Stock pursuant to the adoption of a stockholders rights plan or the detachment of such rights under the terms of such stockholder rights plan), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the current Conversion Price by a fraction of which the numerator shall be the Current Average Market Price per share of the Common Stock on the record date mentioned below less the fair market value on such record date (as reasonably determined by the Board of Directors, whose determination shall be conclusive evidence of such fair market value and which shall be evidenced by an Officers’ Certificate delivered to the holder) of the portion of the Capital Stock, evidences of indebtedness or other non-cash assets so distributed or of such rights or warrants applicable to one share of Common Stock (determined on the basis of the number of shares of Common Stock Outstanding on the record date), and of which the denominator shall be the Current Average Market Price per share of the Common Stock on such record date. Such adjustment shall be made successively whenever any such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution.

(B) In the event the then fair market value (as so determined) of the portion of the Capital Stock, evidences of indebtedness or other non-cash assets so distributed or of such rights or warrants applicable to one share of Common Stock is equal to or greater than the Current Average Market Price per share of the Common Stock on such record date, in lieu of the foregoing adjustment, adequate provision

shall be made so that the holder has the right to receive upon conversion the amount of Capital Stock, evidences of indebtedness or other non-cash assets so distributed or of such rights or warrants the holder would have received had the holder converted the shares of Series A-2 Preferred Stock then held by it on such record date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 6(c)(iii)(B) by reference to the actual or when issued trading market for any securities, it must in doing so consider the prices in such market over the same period used in computing the Current Average Market Price of the Common Stock.

(C) In the event that the Corporation has implemented or implements a preferred shares rights plan (“RIGHTS PLAN”), upon conversion by each holder of the shares of Series A-2 Preferred Stock held by it into Common Stock, to the extent that the Rights Plan has been implemented and is still in effect upon such conversion, the holder shall receive, in addition to the Common Stock, the rights described therein (whether or not the rights have separated from the Common Stock at the time of conversion), subject to the limitations set forth in the Rights Plan. Any distribution of rights or warrants pursuant to a Rights Plan complying with the requirements set forth in the immediately preceding sentence of this paragraph shall not constitute a distribution of rights or warrants pursuant to this Section 6(c)(iii)(C).

(D) Rights or warrants distributed by the Corporation to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Corporation’s Capital Stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events (“TRIGGER EVENT”): (1) are deemed to be transferred with such shares of Common Stock; (2) are not exercisable; and (3) are also issued in respect of future issuances of Common Stock, shall be deemed not to have been distributed for purposes of this Section 6(c)(iii)(D) (and no adjustment to the Conversion Price under this Section 6(c)(iii)(D) will be required) until the occurrence of the earliest Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Price shall be made under this Section 6(c)(iii)(D). If any such right or warrant, including any such existing rights or warrants distributed prior to the date of the Initial Closing Date (as such term is defined in the Purchase Agreement), are subject to events upon the occurrence of which such rights or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and record date with respect to new rights or warrants with such rights (and a termination or expiration of the existing rights or warrants without exercise by any of the holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this

Section 6(c)(iii)(D) was made, (y) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (z) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued.

(E) In case the Corporation shall, by dividend or otherwise, at any time distribute (a “TRIGGERING DISTRIBUTION”) to all or substantially all holders of its Common Stock cash in an aggregate amount that, together with the aggregate amount of (1) any cash and the fair market value (as reasonably determined by the Board of Directors, whose determination shall be conclusive evidence thereof and which shall be evidenced by an Officers’ Certificate delivered to the holder) of any other consideration payable in respect of any tender offer by the Corporation or a Subsidiary of the Corporation for Common Stock consummated within the twelve (12) months preceding the date of payment of the Triggering Distribution and in respect of which no Conversion Price adjustment pursuant to this Section 6(c)(iii)(E) has been made and (2) all other cash distributions to all or substantially all holders of its Common Stock made within the twelve (12) months preceding the date of payment of the Triggering Distribution and in respect of which no Conversion Price adjustment pursuant to this Section 6(c)(iii)(E) has been made (and in which the holder did not otherwise participate), exceeds an amount equal to ten percent (10%) of the product of the Current Average Market Price per share of Common Stock on the Business Day (the “DETERMINATION DATE”) immediately preceding the day on which such Triggering Distribution is declared by the Corporation multiplied by the number of shares of Common Stock Outstanding on the Determination Date (excluding shares held in the treasury of the Corporation), the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying such Conversion Price in effect immediately prior to the Determination Date by a fraction of which the numerator shall be the Current Average Market Price per share of the Common Stock on the Determination Date less the sum of the aggregate amount of cash and the aggregate fair market value (determined as aforesaid in this Section 6(c)(iii)(E)) of any such other consideration so distributed, paid or payable within such twelve (12) months (including the Triggering Distribution) applicable to one share of Common Stock (determined on the basis of the number of shares of Common Stock Outstanding on the Determination Date) and the denominator shall be such Current Average Market Price per share of the Common Stock on the Determination Date, such reduction to become effective immediately prior to the opening of business on the day following the date on which the Triggering Distribution is paid.

(F) In case any tender offer made by the Corporation or any of its Subsidiaries for Common Stock shall expire and such tender offer (as amended upon the expiration thereof) shall involve the payment of aggregate consideration in an amount (determined as the sum of the aggregate amount of cash consideration and the aggregate fair market value (as reasonably determined by the Board of Directors, whose determination shall be conclusive evidence thereof and which shall be evidenced by an Officers’ Certificate delivered to the holder) of any other consideration) that, together with the aggregate amount of (1) any cash and the fair market value (as reasonably determined by the Board of Directors, whose determination shall be conclusive evidence thereof and which shall be evidenced by an Officers’ Certificate delivered to the holder) of any other consideration payable in respect of any other tender offers by the Corporation or any Subsidiary of the Corporation for Common Stock consummated within the twelve (12) months preceding the date of the Expiration Date and in respect of which no Conversion Price adjustment pursuant to this Section 6(c)(iii)(F) has been made and (2) all cash distributions to all or substantially all holders of its Common Stock made within the twelve (12) months preceding the Expiration Date and in respect of which no Conversion Price adjustment pursuant to this Section 6(c)(iii)(F) has been made (and in which the holder did not otherwise participate), exceeds an amount equal to ten percent (10%) of the product of the Current Average Market Price per share of Common Stock as of the last date (the “EXPIRATION DATE”) tenders could have been made pursuant to such tender offer (as it may be amended) (the last time at which such tenders could have been made on the Expiration Date is hereinafter sometimes called the “EXPIRATION TIME”) multiplied by the number of shares of Common Stock Outstanding (including tendered shares but excluding any shares held in the treasury of the Corporation) at the Expiration Time, then, immediately prior to the opening of business on the day after the Expiration Date, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Expiration Date by a fraction of which the numerator shall be the product of the number of shares of Common Stock Outstanding (including tendered shares but excluding any shares held in the treasury of the Corporation) at the Expiration Time multiplied by the Current Average Market Price per share of the Common Stock on the Trading Day next succeeding the Expiration Date and the denominator shall be the sum of (y) the aggregate consideration (determined as aforesaid) payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the “PURCHASED SHARES”) and (z) the product of the number of shares of Common Stock Outstanding (less any Purchased Shares and excluding any shares held in the treasury of the Corporation) at the Expiration Time and the Current Average Market Price per share of Common Stock on the Trading Day next succeeding the Expiration Date, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Date. In the event that the Corporation is obligated to purchase shares pursuant to any such tender offer, but the Corporation is permanently prevented by applicable law from effecting any or all

such purchases or any or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would have been in effect based upon the number of shares actually purchased. If the application of this Section 6(c)(iii)(F) to any tender offer would result in an increase in the Conversion Price, no adjustment shall be made for such tender offer under this Section 6(c)(iii)(F).

(G) For purposes of this Section 6(c), the term “tender offer” shall mean and include both tender offers and exchange offers, all references to “purchases” of shares in tender offers (and all similar references) shall mean and include both the purchase of shares in tender offers and the acquisition of shares pursuant to exchange offers, and all references to “tendered shares” (and all similar references) shall mean and include shares tendered in both tender offers and exchange offers.

(iv) Deferral. In any case in which this Section 6(c) shall require that an adjustment be made following a record date or a Determination Date or Expiration Date, as the case may be, established for purposes of this Section 6(c), the Corporation may elect to defer (but only until five (5) Business Days following the giving by the Corporation to the holder the certificate described in Section 6(c)(vii)) issuing to the holder of any Series A-2 Preferred Stock converted after such record date or Determination Date or Expiration Date the shares of Common Stock and other Capital Stock of the Corporation issuable upon such conversion over and above the shares of Common Stock and other Capital Stock of the Corporation issuable upon such conversion only on the basis of the Conversion Price prior to adjustment; and, in lieu of the shares the issuance of which is so deferred, the Corporation shall issue or cause its transfer agents to issue due bills or other appropriate evidence prepared by the Corporation of the right to receive such shares. If any distribution in respect of which an adjustment to the Conversion Price is required to be made as of the record date or Determination Date or Expiration Date therefor is not thereafter made or paid by the Corporation for any reason, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect if such record date had not been fixed or such effective date or Determination Date or Expiration Date had not occurred.

(v) No Adjustment. No adjustment in the Conversion Price shall be required unless the adjustment would require an increase or decrease of at least one half of one percent (.5%) in the Conversion Price as last adjusted; provided, however, that any adjustments which by reason of this Section 6(c)(v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 6(c)(v) shall be made to the nearest cent or to the nearest one-hundredth (1/100th) of a share, as the case may be. No adjustment need be made for issuances of Common Stock pursuant to a Corporation plan for reinvestment of dividends or interest or for a change in the par value or a change to no par value of the Common Stock. To the extent that the Series A-2 Preferred Stock held by a holder becomes redeemable for, or convertible into the right to receive cash, no adjustment need be made thereafter as to the cash.

(vi) Adjustment for Tax Purposes. The Corporation shall be entitled to make such reductions in the Conversion Price, in addition to those required by the preceding sections of this Section 6(c), as it in its discretion shall determine to be advisable in order that any stock dividends, subdivisions of shares, distributions of rights to purchase stock or securities or distributions of securities convertible into or exchangeable for stock hereafter made by the Corporation to its stockholders shall not be taxable.

(vii) Notice of Adjustment. Whenever the Conversion Price or conversion privilege is adjusted, the Corporation shall promptly notify the holder of the adjustment and provide the holder with an Officers’ Certificate briefly stating the facts requiring the adjustment and the manner of computing it.

(viii) Notice of Certain Transactions. In the event that:

(A) the Corporation takes any action which would require an adjustment in the Conversion Price;

(B) the Corporation consolidates or merges with, or transfers all or substantially all of its property and assets to, another corporation and shareholders of the Corporation must approve the transaction; or

(C) there is a dissolution or liquidation of the Corporation;

(d) Effect of Reclassification, Consolidation, Merger or Sale on Conversion Privilege. If any of the following shall occur, namely:

(i) any reclassification or change of shares of Common Stock issuable upon conversion of the Series A-2 Preferred Stock (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 any other change for which an adjustment is provided in Section 6(c));

(ii) any consolidation or merger or combination to which the Corporation is a party other than a merger in which the Corporation is the continuing corporation and which does not result in any reclassification of, or change (other than 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) in, Outstanding shares of Common Stock; or

(iii) any sale or conveyance as an entirety or substantially as an entirety of the property and assets of the Corporation, directly or indirectly, to any person,

then the Corporation, or such successor, purchasing or transferee corporation, as the case may be, shall, as a condition precedent to such reclassification, change, combination, consolidation, merger, sale or conveyance, execute and deliver to the holder a supplemental instrument providing that (A) the holder shall have the right to convert its shares of Series A-2 Preferred Stock into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, combination, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock deliverable upon conversion of such Series A-2 Preferred Stock, at a conversion price equal to the Conversion Price determined pursuant to Section 6(a)(i), immediately prior to such reclassification, change, combination, consolidation, merger, sale or conveyance, and (B) in the event of any exercise by the Corporation of its right to convert any shares of Series A-2 Preferred Stock held by such holder pursuant to Section 6(a)(ii), such shares of Series A-2 Preferred Stock shall be convertible into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, combination, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock deliverable upon conversion of such Series A-2 Preferred Stock, at a conversion price equal to the Corporation Conversion Price determined pursuant to Section 6(a)(ii)(A), immediately prior to such reclassification, change, combination, consolidation, merger, sale or conveyance. Any such supplemental instrument shall provide for adjustments of the Conversion Price which shall be as nearly equivalent as may be practicable to the adjustments of the Conversion Price provided for in Section 6(c). If, in the case of any such consolidation, merger, combination, sale or conveyance, the stock or other securities and property (including cash) receivable thereupon by a holder of Common Stock include shares of stock or other securities and property of a person other than the successor, purchasing or transferee corporation, as the case may be, in such consolidation, merger, combination, sale or conveyance, then such supplemental instrument shall also be executed by such other person and shall contain such additional provisions to protect the interests of the holder as the Board of Directors shall reasonably consider necessary by reason of the foregoing. The provisions of this Section 6(d) shall similarly apply to successive reclassifications, changes, combinations, consolidations, mergers, sales or conveyances. In the event the Corporation shall execute a supplemental instrument pursuant to this Section 6(d), the Corporation shall promptly file with the holder (x) an Officers’ Certificate briefly stating the reasons therefor, the kind or amount of shares of stock or other securities or property (including cash) receivable by the holder upon the conversion of its shares of Series A-2 Preferred Stock after any such reclassification, change, combination, consolidation, merger, sale or conveyance, any adjustment to be made with respect thereto and that all conditions precedent have been complied with and (y) an Opinion of Counsel that all conditions precedent have been complied with.

(e) Voluntary Reduction. The Corporation from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least twenty (20) days and if the reduction is irrevocable during the period if the Board of Directors determines that such reduction would be in the best interest of the Corporation or to avoid or diminish income tax to holders of shares of the Common Stock in connection with a dividend or distribution of stock or similar event, and the Corporation provides fifteen (15) days’ prior notice of any reduction in the Conversion Price; provided, however, that in no event may the Corporation reduce the Conversion Price to be less than the par value of a share of Common Stock.

(f) Miscellaneous.

(i) Except as otherwise explicitly contemplated by this Section 6, no adjustment in respect of any dividends or other payments or distributions made to holders of Series A-2 Preferred Stock or securities issuable upon the conversion of the Series A-2 Preferred Stock will be made during the term of the Series A-2 Preferred Stock or upon the conversion of the Series A-2 Preferred Stock. The provisions of this Section 6(f) are without prejudice to the right of holders of Series A-2 Preferred Stock to receive any dividends to which they may be entitled under Section 3.

(ii) If any event occurs of the type contemplated by the provisions of Section 6(c), (d), or (e) but not expressly provided for by such provisions (including the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Board of Directors shall make any appropriate adjustment in the Conversion Price necessary to protect the rights of the holder as and to the extent contemplated by Sections 6(c), (d), or (e); provided, that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 6 or decrease the number of shares of Common Stock issuable upon any conversion of shares of Series A-2 Preferred Stock.

(iii) If the Corporation shall enter into any transaction for the purpose of avoiding the application of the provisions of Sections 6(c), (d) or (e) or this Section 6(f), the benefits of such provisions shall nevertheless apply and be preserved.

(iv) Any dividend or distribution that was paid or distributed to, or otherwise made available to or set aside for, to the holders of Series A-2 Preferred Stock (pursuant to Section 3(a) or otherwise) shall not also result in an adjustment to the Conversion Price pursuant to Section 6.

7. SPECIAL REDEMPTION.

(a) Special Redemption Rights.

(i) At the Option of the Corporation. The Corporation may, at its option, and subject to the terms and conditions of this Section 7, redeem all of the shares of the Series A-2 Preferred Stock, in whole but not in part, on the Special Redemption Date at a cash redemption price per share equal to the Redemption Price.

(ii) At the Option of the Holder. Each holder of the Series A-2 Preferred Stock may, at its option, and subject to the terms and conditions of this Section 7, require the Corporation to redeem all, but not less than all, of the shares of the Series A-2 Preferred Stock then held by such holder on the Special Redemption Date at a cash redemption price per share equal to the Redemption Price.

(b) Special Redemption Price. In the event that the Corporation exercises its option to redeem the shares of the Series A-2 Preferred Stock pursuant to Section 7(a)(i), or holders of the shares of the Series A-2 Preferred Stock exercise their option to require the

Corporation to redeem shares of Series A-2 Preferred Stock pursuant to Section 7(a)(ii), on the Special Redemption Date the Corporation shall pay to each holder of shares of Series A-2 Preferred Stock to be redeemed the Redemption Price per share in immediately available funds (the sum of the Redemption Price of each share of Series A-2 Preferred Stock to be redeemed from a particular holder, the “AGGREGATE SPECIAL REDEMPTION PRICE”), provided that, on the Special Redemption Date, immediately following the receipt by a holder of the Aggregate Special Redemption Price for its shares, the holder of shares subject to redemption shall, at the Corporation’s request, make a loan to the Corporation in an amount equal to the Aggregate Special Redemption Price, in immediately available funds, and in exchange for such loan the holder shall receive from the Corporation a Convertible Subordinated Promissory Note in the form attached to this Certificate as Exhibit A (the “CONVERTIBLE NOTE”) with a principal amount equal to the Aggregate Special Redemption Price. The Corporation and the holder shall reasonably cooperate with each other to coordinate the timing of such transactions on the Special Redemption Date.

(c) Special Redemption Option Exercise. The Corporation may exercise the option granted to it in Section 7(a)(i), and holders may exercise the option granted to them in Section 7(a)(ii), by delivering to the other party, not less than sixty (60) days after the Initial Closing (as such term is defined in the Purchase Agreement), a written notice of such exercise (the “SPECIAL REDEMPTION NOTICE”), by first-class mail, postage prepaid. The Special Redemption Notice shall specify the date on which the Corporation shall redeem, or be required to redeem, the shares of the Series A-2 Preferred Stock in accordance with the provisions of this Section 7 (the “SPECIAL REDEMPTION DATE”), which date shall be no less than ten (10) Business Days and no more than thirty (30) days from the date on which such notice is delivered. Notwithstanding anything herein to the contrary, the party providing the Special Redemption Notice shall have the right to withdraw such notice at any time prior to the close of business on the Business Day next preceding the Special Redemption Date by written notice of withdrawal given to the other party.

(d) Special Redemption Terms. In the event that the Corporation or the holder of the Series A-2 Preferred Stock delivers to the other a Special Redemption Notice in accordance with the terms of this Section 7, the following terms and conditions shall apply:

(i) Effect of Special Redemption Notice. Delivery of a Special Redemption Notice shall be without prejudice to the right of the Corporation to redeem pursuant to Section 5(b) shares of Series A-2 Preferred Stock to which the Special Redemption Notice applies or the right of the holder or the Corporation pursuant to Section 6 to convert the shares of Series A-2 Preferred Stock to which the Special Redemption Notice applies into shares of Common Stock. The Special Redemption Notice shall be deemed qualified or withdrawn, as appropriate, to the extent of any redemption or conversion, as contemplated by the preceding sentence, of the shares of Series A-2 Preferred Stock to which it applies.

(ii) Surrender of Certificates. On or before the Special Redemption Date, each holder of Series A-2 Preferred Stock to be redeemed shall surrender its certificate or certificates representing all of the outstanding shares of Series A-2 Preferred Stock held

by it to the Corporation at the Corporation’s principal executive offices or such other location as the Corporation may by notice direct, and the Aggregate Special Redemption Price shall be delivered by the Corporation to the holder and each surrendered certificate shall be canceled. From and after the Special Redemption Date, unless there shall have been a default by the Corporation in the delivery of the Aggregate Special Redemption Price to the holder, all rights of the holder of Series A-2 Preferred Stock subject to redemption pursuant to this Section 7 (except the right to receive the Aggregate Special Redemption Price upon surrender of its certificate or certificates) shall cease with respect to the shares of the Series A-2 Preferred Stock subject to redemption, and such shares shall not thereafter be transferred on the books of the Corporation or deemed to be outstanding for any purpose whatsoever.

(iii) Consequences of Nonpayment. In the event that the Corporation does not redeem the shares of the Series A-2 Preferred Stock and pay to the holder the Aggregate Special Redemption Price on the Special Redemption Date, the Aggregate Special Redemption Price shall be calculated as if the Special Redemption Date were the later of such date and the date on which such payment is made. If the Corporation is unable on the Exchange Date to redeem any or all shares of Series A-2 Preferred Stock then to be redeemed because such redemption would violate the applicable laws of the State of Delaware, then, without limitation to any other right or remedy that may be available to the holder, the Corporation shall redeem such shares as soon thereafter as redemption would not violate such laws.

(iv) Effect of Special Redemption. Following the redemption of the shares of the Series A-2 Preferred Stock in accordance with this Section 7, all dividends thereon shall cease and the person entitled to receive the Convertible Note upon such exchange shall be treated as the registered holder of such Convertible Note unless and until such instrument is transferred on the note register of the Corporation in accordance with the terms thereof.

(e) Covenant of Corporation. The Corporation hereby represents, warrants and covenants that, on the date that the shares of Series A-2 Preferred Stock are issued in accordance with the Purchase Agreement, and for a period of not less than one hundred and twenty (120) days after such date, the Corporation has and shall maintain sufficient surplus (as such term is used in the General Corporation Law of the State of Delaware) to permit the Corporation to effect the exchange provided for in this Section 7 consistent with the requirements of the General Corporation Law of the State of Delaware and any other applicable law.

8. STATUS OF SHARES. All shares of Series A-2 Preferred Stock that are at any time redeemed pursuant to Section 5 or Section 7 or converted pursuant to Section 6 and all shares of Series A-2 Preferred Stock that are otherwise reacquired by the Corporation shall (upon compliance with any applicable provisions of the laws of the State of Delaware) have the status of authorized but unissued shares of Preferred Stock, without designation as to series, subject to reissuance by the Board of Directors as shares of any one or more other series.

9. VOTING RIGHTS.

(a) Limited Voting Rights. The holders of record of shares of Series A-2 Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this Section 9 or as otherwise provided by law.

(b) Right to Vote with Common Stock. The holders of the shares of Series A-2 Preferred Stock (i) shall be entitled to vote with the holders of the Common Stock on all matters submitted for a vote of holders of Common Stock (voting together with the holders of Common Stock as one class) and (ii) shall be entitled to a number of votes equal to the number of votes to which shares of Common Stock issuable upon conversion by the holder of such shares of Series A-2 Preferred Stock pursuant to Section 6(a)(i) would have been entitled if such shares of Common Stock had been Outstanding at the time of the applicable record date.

(c) Right to Vote as a Separate Class. In addition to the rights provided in Section 9(b) and any other rights provided by law, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority by voting power of the then outstanding shares of Series A-2 Preferred Stock voting together as a single class:

(i) change the rights, preferences, privileges or restrictions of the shares of Series A-2 Preferred Stock;

(ii) increase or decrease the aggregate number of authorized shares of Series A-2 Preferred;

(iii) create, authorize, designate or issue Senior Securities; or

(iv) merge or consolidate into or with any other corporation or entity if the effect of any such transaction would be to change or adversely affect in any manner whatsoever the rights, privileges, seniority or preferences of the Series A-2 Preferred Stock.

10. AGGREGATE OWNERSHIP LIMITATION. If upon any proposed conversion of Series A-2 Preferred Stock pursuant to Section 6(a), any holder of Series A-2 Preferred would be entitled to receive Common Stock that, taken together with all other shares of Common Stock Beneficially Owned by such holder and its Affiliates, would result in such holder and its Affiliates acquiring Beneficial Ownership of more than 19.9% of the Corporation’s Common Stock then Outstanding immediately following such conversion (the “OWNERSHIP THRESHOLD”), then:

(a) Such holder shall instead receive upon conversion a number of shares of Common Stock up to the Ownership Threshold; and

(b) To the extent such holder would have otherwise received shares of Common Stock in excess of the Ownership Threshold, the Corporation shall redeem such number of shares of Series A-2 Preferred Stock as would result in such holder exceeding the Ownership

Threshold at a cash redemption price equal to the product of (i) such number of shares of Common Stock in excess of the Ownership Threshold times (ii) the Current Average Market Price on the relevant Conversion Date (the “OWNERSHIP THRESHOLD REDEMPTION AMOUNT”). Except in the case of a proposed conversion by the Corporation of Series A-2 Preferred Stock pursuant to Section 6(a) as a result of an election by the Corporation pursuant to clause (2) of Section 5(d)(i)(A) or clause (2) of Section 5(d)(i)(B), in the event that the Corporation provides written notice to such holder at least ten (10) days prior to the date on which the Corporation shall redeem such shares and pay to such holder the Ownership Threshold Redemption Amount (such date, the “OWNERSHIP THRESHOLD REDEMPTION DATE”), the Corporation shall have the right to obtain from such holder a loan in the principal amount designated by the Corporation in such notice, which amount shall not exceed the Ownership Threshold Redemption Amount, and in exchange for such loan the holder shall receive from the Corporation a two-year, interest free Subordinated Promissory Note, with a face amount equal to the principal amount of the loan, in the form attached to this Certificate as Exhibit B (a “SUBORDINATED PROMISSORY NOTE”), and, in the event that multiple Subordinated Promissory Notes shall be made pursuant hereto, mutatis mutandis as necessary to provide for any prepayment due in respect of a Type II Prepayment Event among the successive Subordinated Promissory Notes sequentially in the order in which such Subordinated Promissory Notes were made. The holder shall provide such loan to the Corporation in exchange for such Subordinated Promissory Note on the Ownership Threshold Redemption Date, immediately following the receipt by the holder of the Ownership Threshold Redemption Amount in immediately available funds. The Corporation and the holder shall reasonably cooperate with each other to coordinate the timing of such transactions on the Ownership Threshold Redemption Date.

11. CERTAIN DEFAULTS AND REMEDIES.

(a) Events of Default. Subject to Section 11(b), an “EVENT OF DEFAULT” shall occur if:

(i) the Corporation (A) defaults in the payment of any principal of (including any premium on) (1) any Convertible Note or any Promissory Note (as such term is defined in the Purchase Agreement) held by AstraZeneca UK Limited or any of its Affiliates when the same becomes due and payable (whether at maturity, on a date specified for prepayment, or otherwise); or (B) fails to redeem (including pursuant to Section 7), and to pay to any holder the Redemption Price for, each share of Preferred Stock that the Corporation is required to redeem on the date specified for such redemption herein;

(ii) the Corporation fails to comply with any of its obligations under (A) any Convertible Note or any Promissory Note held by AstraZeneca UK Limited or any of its Affiliates or (B) Section 5.6(a) or Section 5.8 of the Purchase Agreement, in each case other than any obligation specified in Section 11(a)(i), and the default continues for the period and after the notice specified in Section 11(b);

(iii) the Corporation fails to provide notice of a Redemption Event to the holder when required by Section 5(d)(ii) for a period of thirty (30) days after notice of failure to do so;

(iv) the Corporation shall default in respect of any of its obligations under the Preferred Stock other than any obligation specified in Section 11(a)(i) and the default continues for the period and after the notice specified in Section 11(b);

(v) the Purchase Agreement, or any other agreement or instrument contemplated by the Purchase Agreement, shall be asserted by the Corporation not to be a legal, valid and binding obligation of the Corporation, enforceable against the Corporation in accordance with its terms;

(vi) the Corporation or any Significant Subsidiary, pursuant to or within the meaning of any Bankruptcy Law:

(A) commences a voluntary case or proceeding;

(B) consents to the entry of an order for relief against it in an involuntary case or proceeding;

(C) consents to the appointment of a Custodian of it or for all or substantially all of its property; or

(D) makes a general assignment for the benefit of its creditors; or

(vii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:

(A) is for relief against the Corporation or any Significant Subsidiary in an involuntary case or proceeding;

(B) appoints a Custodian of the Corporation or any Significant Subsidiary or for all or substantially all of the property of the Corporation or any Significant Subsidiary; or

(C) orders the liquidation of the Corporation or any Significant Subsidiary;

and in each case the order or decree remains unstayed and in effect for sixty (60) consecutive days.

(b) Notice and Cure.

(i) A default under Section 11(a)(ii) or (a)(iv) is not an Event of Default until the holder notifies the Corporation in writing of the default and the Corporation does not cure the default within sixty (60) days after receipt of such notice. The notice given pursuant to this Section 11(b) must specify the Event of Default, demand that it be remedied and state that the notice is a “NOTICE OF DEFAULT.”

(ii) When any Event of Default under Section 11(a) is cured, it ceases.

(iii) The Corporation shall immediately notify each holder of Series A-2 Preferred Stock upon becoming aware of the existence of any condition or event which constitutes a default or an Event of Default hereunder by written notice which specifies the nature and period of existence of such default or Event of Default and what action the Corporation is taking or proposes to take with respect thereto. No holder shall be charged with knowledge of any Event of Default unless written notice thereof shall have been given to the holder or any agent of the holder.

(c) Redemption.

(i) If an Event of Default (other than an Event of Default specified in Section 11(a)(vi) or (vii)) occurs and is continuing, the holders of a majority of the shares of Series A-2 Preferred Stock then outstanding may, by notice to the Corporation, demand in a notice to the Corporation that the Corporation redeem, on a Business Day specified in such notice, which day shall be not less than ten (10) days following the date of such notice (such specified date the “DEFAULT REDEMPTION DATE”), all of the shares of Series A-2 Preferred Stock then outstanding, and the Corporation shall redeem all such shares at a cash redemption price per share equal to the Redemption Price. If an Event of Default specified in Section 11(a)(vi) or (vii) occurs, all Series A-2 Preferred Stock then outstanding shall ipso facto become and be immediately redeemable by the Corporation at a cash redemption price per share equal to the Redemption Price without any declaration or other act on the part of the holders. Each holder may at any time, by notice to the Corporation, rescind a redemption notice and its consequences. No such rescission shall affect any subsequent default of impair any right consequent thereto.

(ii) On or prior to the Default Redemption Date, the holders of the Series A-2 Preferred Stock shall surrender their certificates representing such shares to the Corporation at the Corporation’s principal executive offices or such other location as the Corporation may by notice direct, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on each such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. From and after the Default Redemption Date, unless there shall have been a default in payment of Redemption Price, all rights of the holders of the Series A-2 Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or deemed to be outstanding for any purpose whatsoever.

(iii) In the event that the Corporation does not pay the Redemption Price on the Default Redemption Date, the Redemption Price shall be calculated as if the Default Redemption Date were the later of such date and the date on which such payment is made. If the Corporation is unable at the Default Redemption Date to redeem any or all shares of Series A-2 Preferred Stock then to be redeemed because such redemption would violate the applicable laws of the State of Delaware, then the Corporation shall redeem such shares as soon thereafter as redemption would not violate such laws. In the event of any redemption of only a part of the then outstanding Series A-2 Preferred Stock, the Corporation shall effect such redemption pro rata among the holders thereof (based on the number of shares of Series A-2 Preferred Stock held on the date of notice of redemption).

(d) Other Remedies. A delay or omission by any holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law.

12. DEFINITIONS.

(a) General. Unless otherwise specified, references in this Certificate to any section are references to such section of this Certificate and, unless otherwise specified, references in any section or definition to any clause are references to such clause of such section or definition. Terms for which meanings are defined in this Certificate shall apply equally to the singular and plural forms of the terms defined. Whenever the context may permit or require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The term “including” means including, without limiting the generality of any description preceding such term. Each reference herein to any person shall include a reference to such person’s successors and permitted assigns. Unless otherwise specified, references to any agreement, instrument or other document in this Certificate refer to such agreement, instrument or other document as originally executed or, if subsequently varied, replaced or supplemented from time to time, as so varied, replaced or supplemented and in effect at the relevant time of reference thereto.

(b) Defined Terms. Unless the context otherwise requires, when used herein the following terms shall have the meaning indicated:

“Aggregate Special Redemption Price” has the meaning set forth in Section 7(b).

“Approved Market” means the NNM, the New York Stock Exchange, or the American Stock Exchange.

“Average Market Price for Corporation’s Conversion Option” means, with respect to shares of Common Stock, the arithmetic mean of the daily Market Prices of shares of Common Stock for the ten (10) consecutive Trading Days commencing on the eleventh (11th) Trading Day preceding the Conversion Date and ending on the Trading Day next preceding the Conversion Date; provided, however, that in no event shall the “Average Market Price for Corporation’s Conversion Option” be more than one hundred one percent (101%) of the Market Price of shares of Common Stock for the last Trading Day preceding the Conversion Date.

“Bankruptcy Law” has the meaning set forth in Section 11(a).