NOVAVAX, INC.

 

 

NOTICE OF THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD WEDNESDAY, JUNE 20, 2007

 

 

To the Stockholders of Novavax, Inc.:

 

NOTICE IS HEREBY GIVEN that the 2007 Annual Meeting of Stockholders (the “Meeting”) of Novavax, Inc., a Delaware corporation (the “Company”), will be held on Wednesday, June 20, 2007 at 9:00 a.m., local time, at the Company’s headquarters at 9920 Belward Campus Drive, Rockville, Maryland 20850 (the “Meeting”) for the purpose of considering and voting upon the following matters:

 

 

The Board of Directors has no knowledge of any other business to be transacted at the Meeting.

 

The Board of Directors of the Company has fixed the close of business on Monday, April 23, 2007 as the record date for determining stockholders of the Company entitled to notice of and to vote at the Meeting and any adjournments or postponements thereof.

 

A copy of the Company’s Annual Report to Stockholders for the fiscal year ended December 31, 2006, which contains financial statements and other information of interest to stockholders, accompanies this Notice and the attached Proxy Statement.

 

By Order of the Board of Directors,

 

Jennifer Miller
Corporate Secretary

 

Rockville, Maryland

April 30, 2007

 

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY VOTE OVER THE INTERNET OR BY TELEPHONE AS PER THE INSTRUCTIONS ON THE ENCLOSED PROXY OR COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. NO POSTAGE NEED BE AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.

 

NOVAVAX, INC.

 

9920 Belward Campus Drive
Rockville, Maryland 20850

 

 

PROXY STATEMENT

 

For the Annual Meeting of Stockholders
To Be Held Wednesday, June 20, 2007

 

 

INFORMATION CONCERNING SOLICITATION AND VOTING

 

General

 

This Proxy Statement is being furnished to stockholders in connection with the solicitation of proxies by the Board of Directors of Novavax, Inc. (“Novavax” or the “Company”) for use at the Annual Meeting of Stockholders to be held on Wednesday, June 20, 2007 at 9:00 a.m. local time at the Company’s headquarters at 9920 Belward Campus Drive, Rockville, Maryland 20850 and at any adjournments or postponements thereof (the “Meeting”). The Notice of Meeting, this Proxy Statement, the enclosed proxy and the Company’s Annual Report to Stockholders for the fiscal year ended December 31, 2006 are being mailed to stockholders on or about April 30, 2007.

 

Solicitation

 

The Company will bear the cost of soliciting proxies. In addition to solicitations by mail, the Company’s directors, officers and regular employees may, without additional remuneration, solicit proxies by telephone, telegraph, facsimile and personal interviews. The Company may also engage the services of a proxy solicitation firm in conjunction with the Meeting, in which event such firm may solicit your proxy, in person or by telephone, mail, facsimile or other communication, and will be paid by the Company a fee and reimbursed its reasonable expenses for such services. The Company will also request brokerage houses, custodians, nominees and fiduciaries to forward copies of the proxy materials to those persons for whom they hold shares and request instructions for voting the proxies. The Company will reimburse such brokerage houses and other persons for their reasonable expenses in connection with this distribution.

 

Certain stockholders who share the same address may receive only one copy of this Proxy Statement and our 2007 Annual Report to Stockholders in accordance with a notice delivered earlier this year from such stockholders’ bank, broker or other holder of record, unless the applicable bank, broker or other holder of record received contrary instructions. This practice, known as “householding,” is designed to reduce printing and postage costs. If you own your shares through a bank, broker or other holder of record and wish to either stop or begin householding, you may request or stop householding, or you may request a separate copy of the Proxy Statement or the Annual Report, either by contacting your bank, broker or other holder of record at the telephone number or address provided in the above referenced notice, or contacting us by telephone at (240) 268-2000 or in writing to Novavax, Inc., 9920 Belward Campus Drive, Rockville, Maryland 20850, Attention: Secretary. If you request to begin or stop householding, you should provide your name, the name of your broker, bank or other record holder, and your account information.

 

 

VOTING PROCEDURE AND QUORUM

 

The Board of Directors has fixed Monday, April 23, 2007, as the record date for determining the stockholders entitled to receive notice of and to vote at the Meeting (the “Record Date”). The only class of stock of the Company entitled to vote at the Meeting is its Common Stock, $.01 par value (the “Common Stock”). Only the record holders of shares of Common Stock at the close of business on the Record Date may vote at the Meeting. On the Record Date, there were 61,905,050 shares of Common Stock outstanding and entitled to be voted. Each share entitles the holder to one vote on each of the matters to be voted upon at the Meeting. A stockholder may vote by mail, Internet or telephone as directed by the enclosed proxy.

 

All properly executed proxies will be voted in accordance with the instructions of the stockholder. If no contrary instructions have been indicated, the proxies will be voted in favor of the nominees named in Proposal I below and in favor of the amendment to the 2005 Stock Incentive Plan as set forth in Proposal II. The Board of Directors knows of no other matters to be presented for consideration at the Meeting.

 

Stockholders may revoke proxies at any time before they are exercised at the Meeting by (a) signing and submitting a later-dated proxy to the Secretary of the Company, (b) delivering written notice of revocation to the Secretary of the Company, or (c) voting in person at the Meeting. Attendance at the Meeting will not itself be deemed to revoke a proxy unless the stockholder gives affirmative notice at the Meeting that the stockholder intends to revoke the stockholder’s proxy and vote in person.

 

The presence in person or by proxy of the holders of a majority of the shares of Common Stock issued and outstanding on the Record Date and entitled to vote is required to constitute a quorum at the Meeting. If a quorum is not present, the stockholders entitled to vote who are present in person or represented by proxy at the Meeting have the power to adjourn the Meeting until a quorum is present, without notice other than an announcement at the Meeting and so long as such adjournment is less than 30 days and a new record date is not fixed. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the Meeting as originally scheduled. Abstentions and broker non-votes will count in determining whether a quorum is present at the Meeting. A broker non-vote occurs when a broker or other nominee holds shares represented by a proxy, has not received voting instructions with respect to a particular item and does not have discretionary authority to vote such shares.

 

PROPOSAL I — ELECTION OF CLASS III DIRECTORS

 

Pursuant to the Company’s Amended and Restated Certificate of Incorporation, the Company’s Board of Directors may consist of no fewer than three directors, with the specific number to be authorized by the Board of Directors from time to time at its discretion. The Board of Directors is presently authorized to consist of seven members, currently consisting of: Gary C. Evans, John Lambert, John O. Marsh, Jr., Michael A. McManus, Jr., Thomas P. Monath, M.D., Rahul Singhvi and James B. Tananbaum, M.D.

 

During fiscal 2006, Dr. Thomas Monath was elected by the Board of Directors to serve as a Class III Director and Dr. Jim Tananbaum was elected to serve as a Class II Director by the stockholders at the 2006 Annual Meeting. Mr. Mitchell Kelly resigned from the Board during fiscal 2006 and Mr. Michael Lazarus decided not to stand for election at the 2006 Annual Meeting.

 

During fiscal 2007, Dr. Denis O’Donnell resigned from the Board and Mr. John Lambert was elected to the Board of Directors as a Class I Director and named Chairman of the Board. Mr. Gary Evans, the previous Chairman, was named Lead Independent Director. Prior to his election to the Board, Mr. Lambert had been a consultant for the Company. Mr. Lambert continues to act as a consultant to the Company.

 

The members of the Company’s Board of Directors are divided into three classes, designated Class I, Class II and Class III, each serving staggered three-year terms. The terms of the Class III directors expire at the Meeting. The terms of the Class I and Class II directors will expire at the 2008 and 2009 Annual Meetings of Stockholders, respectively. A director of any class who is elected by the Board of Directors to fill a vacancy resulting from an increase in the number of directors holds office for the remaining term of the class to which he or she is elected. A director who is elected by the Board to fill a vacancy arising in any other manner holds office for the remaining term of his or her predecessor. Directors elected by the stockholders at an annual meeting to succeed those whose terms expire at such meeting are of the same class as the directors they succeed and are elected for a term to expire at the third annual meeting of stockholders after their election and until their successors are duly elected and qualified.

 

In the event of any increase or decrease in the authorized number of directors, the newly created or eliminated directorships must be apportioned by the Board among the three classes so as to ensure that no one class has more than one director more than any other class. However, no existing director may be reclassified from one class to another and, therefore, the number of directors in each class may become temporarily imbalanced.

 

Two directors are to be elected at the Meeting. The Board of Directors, after recommendation by the Nominating and Corporate Governance Committee, has designated Mr. McManus and Dr. Monath as nominees for reelection as Class III directors of the Company at the Meeting.

 

If elected, such nominees will serve until the expiration of their terms at the 2010 Annual Meeting of Stockholders and until their successors are elected and qualified. The nominees have consented to being named in this Proxy Statement and to serve if elected. The Board of Directors has no reason to believe that any nominee named herein will be unable or unwilling to serve if elected. If any nominee becomes unavailable to serve as a director, the persons named in the proxy will vote the proxy for a substitute nominee or nominees as they, in their discretion, shall determine.

 

The election of directors requires the affirmative vote of a plurality of the votes cast by stockholders entitled to vote at the Meeting. Accordingly, abstentions, broker non-votes and votes withheld for a nominee will not have any effect on the election of a director.

The principal occupations and qualifications of each nominee for director are as follows:

 

Nominees for Election as Class III Directors

 

 

The principal occupations and qualifications of each of the continuing directors are as follows:

 

Directors Continuing as Class I Directors

 

Directors Continuing as Class II Directors

 

 

Certain Relationships and Related Transactions

 

In March 2002, pursuant to the 1995 Stock Option Plan, the Company approved the payment of the exercise price of options by two individuals who served as directors during 2006, Dr. Denis O’Donnell and Mr. Mitchell Kelly, through the delivery of full recourse, interest-bearing promissory notes in the amount of $1,031,668 and $447,600, respectively. The borrowings accrued interest at 5.07% per annum and was secured by 166,667 and 95,000 shares of Company Common Stock, respectively owned by the two directors. The notes were originally payable upon the earlier to occur of the following: (a) the date on which the director ceases for any reason to be a director of the Company, (b) in part to the extent of net proceeds, upon the date on which the director sells all or any portion of the pledged shares, or (c) in full on March 21, 2007. In addition, during 2002, the Company executed a

conditional guaranty of a brokerage margin account for Dr. O’Donnell in the amount of $500,000. Dr. O’Donnell has repaid such margin debt in full and the Company’s guaranty has been cancelled and is no longer outstanding.

 

Following Mr. Kelly’s resignation as a director on May 22, 2006, the Company approved an extension of his note. The note continues to accrue interest at 5.07% per annum, remains secured by 95,000 shares of the Company’s Common Stock and is payable on December 31, 2007, or earlier to the extent of the net proceeds from any sale of the pledged shares. Following Dr. O’Donnell’s resignation as a director on March 20, 2007, the Company entered into discussions, that are ongoing, with Dr. O’Donnell regarding any additional collateral that could be pledged to secure the debt and the timing and method of payment.

 

There are no family relationships among any of the directors or executive officers (or any nominee therefor) of Novavax. Other than Mr. Lambert, no director, executive officer, nominee or any associate of any of the foregoing has any interest, direct or indirect, in any proposal to be considered and acted upon at the Meeting (other than the election of directors). On March 7, 2007, Mr. Lambert was granted 100,000 shares of Restricted Stock Units, which grant is subject to the approval of Proposal II to amend the 2005 Plan to increase the number of shares of Common Stock available for issuance hereunder.

 

The Company has agreed with two institutional investors, KPCB Holdings, Inc. and Prospect Venture Partners III, L.P., to nominate an individual recommended by each investor to the Board. Dr. Monath was recommended by KPCB Holdings, Inc. and Dr. Tananbaum was recommended by Prospect Venture Partners.

 

Prior to his election to the Board of Directors, Mr. Lambert was engaged by the Company as a consultant to assist with specific projects, including business development efforts to evaluate the commercialization of the Company’s influenza vaccines. At the time of his election, Mr. Lambert had been paid an aggregate of approximately $34,000 in consulting fees for such services rendered through the date on which he was elected to the Board of Directors. On April 27, 2007, effective as of March 7, 2007, Mr. Lambert entered into a consulting agreement with Novavax pursuant to which he will receive $220,000 annually in consulting fees for advice and input into material agreements to be entered into or amended by the Company and on significant matters related to clinical development of the Company’s product portfolio, including manufacturing issues and FDA approval and commercialization strategies. This consulting agreement has an initial term of three years.

 

The Company’s Code of Business Conduct and Ethics provides that the Audit Committee is responsible for approving all transactions or business relationships involving Novavax and any director or executive officer, including any indebtedness of such individuals to the Company and transactions between Novavax and either the director or officer personally, members of their immediate families, or entities in which they have an interest.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires the Company’s directors, executive officers and holders of more than 10% of the Company’s Common Stock to file with the Securities and Exchange Commission and the NASDAQ Global Market initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Based solely on a review of the copies of such reports (and any amendments thereto) furnished to the Company during or with respect to 2006 or written representations that no reports were required, the Company believes that during 2006 its executive officers, directors and holders of more than 10% of the Company’s Common Stock complied with all Section 16(a) filing requirements, except that Dr. Tananbaum, a director of the Company, filed a Form 3 to report his initial ownership one day late.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THE ELECTION OF THE NOMINEES.

 

Information Regarding the Board of Directors and Certain Committees

 

On March 7, 2007, the Board of Directors determined, upon a recommendation by the Nominating and Corporate Governance Committee, that, with the exception of Drs. Singhvi and O’Donnell and Mr. Lambert, each of whom is currently or was within the last three fiscal years an employee, a consultant or executive officer of the

Company, all of the members of the Board are “independent” directors, as that term is defined in Rule 4200(a)(15) of the listing standards of the National Association of Securities Dealers (the “NASD”).

 

The Board of Directors met 13 times during 2006 and acted by written consent in lieu of a meeting 6 times; in addition, the non-employee directors met 4 times in executive session during the same period. Each of the directors attended at least 75% of the aggregate of the total number of meetings of the Board of Directors they were eligible to attend and the total number of meetings held by all committees on which they served.

 

Recognizing that director attendance at the Company’s annual meetings of stockholders can provide stockholders with an opportunity to communicate with members of the Board, Novavax strongly encourages (but does not require) members of the Board to attend such meetings. All of the directors then in office attended the 2006 Annual Meeting of Stockholders.

 

The Board of Directors of Novavax currently has four standing committees: a Compensation Committee, an Audit Committee, a Nominating and Corporate Governance Committee and a Government Relations Committee. In addition to the descriptions below, please refer to the “Report of the Compensation Committee” and “Report of the Audit Committee” included in this Proxy Statement.

 

Compensation Committee

 

The Compensation Committee of the Board of Directors consists of directors — Mr. Marsh (Chairman), Dr. Monath and Dr. Tananbaum. Dr. O’Donnell and Mr. Lazarus also served on the Compensation Committee during 2006. Each director is a “non-employee director,” as defined by Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an “outside director,” as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) and an “independent director,” as defined by the listing standards of The NASDAQ Stock Market, Inc.

 

The Compensation Committee reviews and recommends salaries and other compensatory benefits for the employees, officers and directors of Novavax. The Compensation Committee also recommends actions to administer the equity incentive plans of the Company, recommending stock option grants and other awards for executive officers, key employees and directors of Novavax. The Compensation Committee acts pursuant to a written charter, a copy of which is posted on the Company’s website at www.novavax.com. The Compensation Committee reviews and evaluates the charter annually to ensure its adequacy and accuracy. In April 2007, the Compensation Committee approved revisions to its charter. During 2006, the Compensation Committee met 7 times and acted by written consent in lieu of a meeting one time.

 

As set forth in its charter, the Committee’s authority and responsibilities include but are not limited to:

 

 

 

 

The Committee is tasked with meeting at least four times a year, and more frequently if necessary. It may request that any officer or employee of the Company, outside counsel or consultant attend Committee meetings or confer with any members of, or consultants to, the Committee. The Committee has sole authority for and may retain compensation consultants, as it deems appropriate, to assist the Committee with the performance of its duties and

responsibilities, including sole authority to approve the fees and other retention terms for such consultants. The Committee is supported in its efforts by the Company’s human resources team, to which the Committee delegates authority for certain administrative functions. The Chief Executive Officer gives performance assessments and compensation recommendations for each executive officer of the Company (other than himself). The Compensation Committee considers the Chief Executive Officer’s recommendations and sets the compensation of the executive officers (other than the Chief Executive Officer) based on such deliberations. The Compensation Committee sets the Chief Executive Officer’s compensation in executive session without any member of management present. The Chief Executive Officer and the Senior Director, Human Resources, generally attend Compensation Committee meetings but neither is present for executive session or any discussion of their own compensation.

 

Compensation Committee Interlocks and Insider Participation

 

Throughout fiscal 2006, Dr. Lazarus, Mr. Marsh, Dr. Monath, Dr. O’Donnell and Dr. Tananbaum served on the Compensation Committee. None of the members of the Compensation Committee was at any time during 2006 an officer or employee of Novavax. However, Dr. O’Donnell served as Chairman of the Board of Directors of the Company until April 2005. Prior to 2006, Mr. Marsh served as interim Chief Executive Officer of the Company from July 1996 to March 1997.

 

No executive officer of the Company currently serves, or during 2006 served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company’s Board of Directors or Compensation Committee.

 

Audit Committee

 

The Audit Committee currently consists of Messrs. McManus (Chairman), Evans and Marsh, each of whom is a non-employee director and each of whom is an independent director as defined by the Exchange Act and the listing standards of The NASDAQ Stock Market, Inc. During fiscal 2006, Mr. Kelly also served on the Audit Committee. The Audit Committee met 4 times during the 2006 fiscal year and acted by written consent in lieu of a meeting one time.

 

The Board has determined that Mr. McManus qualifies as the committee’s “audit committee financial expert” as that term is defined by the rules and regulations of the Securities and Exchange Commission, and is financially sophisticated as required by the listing standards for The NASDAQ Stock Market, Inc.

 

The Audit Committee acts pursuant to the Audit Committee Charter as adopted by the Board. A copy of the charter is available on the Company’s website at www.novavax.com. The Audit Committee reviews and evaluates the charter annually to ensure its adequacy and accuracy, and is charged with performing an annual self-evaluation with the goal of continuing improvement. In April 2007, the Audit Committee approved revisions to its charter.

 

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the work of any independent registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company. To this end, the committee meets with the Company’s independent registered public accounting firm to discuss the scope and results of its examination and reviews the financial statements and reports contained in the Company’s periodic and other filings. The Audit Committee also reviews the adequacy and efficacy of the Company’s accounting, auditing and financial control systems, as well as the Company’s disclosure controls and procedures; monitors the adequacy of the Company’s accounting and financial reporting processes and practices; and considers any issues raised by its members, the Company’s independent registered public accounting firm and the Company’s employees. To assist in carrying out its duties, the Audit Committee is authorized to investigate any matter brought to its attention, retain the services of independent advisors (including legal counsel, auditors and other experts), and receive and respond to concerns and complaints relating to accounting, internal accounting controls and auditing matters.

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee (the “Governance Committee”) consists of Messrs. Evans (Chairman), Marsh and McManus, Dr. Monath and Dr. Tananbaum, each of whom is an independent

director as defined by the Exchange Act and the listing standards of The NASDAQ Stock Market, Inc. During fiscal 2006, Dr. Lazarus also served on the Governance Committee. The Governance Committee met 4 times during 2006.

 

The Governance Committee acts pursuant to a written charter, a copy of which is available on the Company’s website at www.novavax.com. The Governance Committee reviews and evaluates the charter annually to ensure its adequacy and accuracy. In April 2007, the Governance Committee approved revisions to its charter.

 

As provided in the charter, the primary function of the Governance Committee is to assist the Board in fulfilling its responsibilities by: reviewing and making recommendations to the Board regarding the Board’s size, structure and composition; establishing criteria for Board membership; identifying and evaluating candidates qualified to become members of the Board, including candidates proposed by stockholders; selecting, or recommending for selection, director nominees to be presented for approval at the annual meeting of stockholders and to fill vacancies on the Board; evaluating Company policies relating to the recruitment of Board members; developing and recommending to the Board corporate governance policies and practices applicable to the Company; monitoring compliance with the Company’s Code of Business Conduct and Ethics; and handling such other matters as the Board or committee deems appropriate. The Governance Committee’s goal is to contribute to the effective representation of the Company’s stockholders and to play a leadership role in shaping the Company’s corporate governance.

 

As noted above, it is the Governance Committee’s responsibility to review and evaluate director candidates, including candidates submitted by stockholders. In performing its evaluation and review, the Governance Committee does not differentiate between candidates based on the proposing constituency, but rather applies the same criteria to each candidate.

 

Nomination Procedures

 

Stockholders who wish to nominate qualified candidates to serve as directors of the Company may do so in accordance with the procedures set forth in the Company’s Amended and Restated By-laws (the “By-laws”), which procedures did not change during the last fiscal year. As set forth in the By-laws, a stockholder must notify the Company in writing, by notice delivered to the attention of the Secretary of the Company at the address of the Company’s principal executive offices, of a proposed nominee. In order to ensure meaningful consideration of such candidates, notice must be received not less than 60 days nor more than 90 days prior to the meeting. However, if the Company does not give notice or make public disclosure of the date of the meeting at least 70 days’ prior to the meeting date, notice will be considered timely if it is received no later than the close of business on the 10^th day following the date on which such notice was given or public disclosure was made (whichever occurred first).

 

The notice must set forth as to each proposed nominee:

 

 

The notice must also set forth with respect to the stockholder giving the notice:

 

 

The Company may require any proposed nominee to furnish such other information as may reasonably be required to determine the eligibility of the nominee to serve as a director. Submissions received through this process will be forwarded to the Governance Committee for review.

 

When considering candidates, the Governance Committee strives to achieve a balance of knowledge, experience and achievement such that the Company’s Board reflects a broad range of talent, age, skill and expertise. While there are no set minimum requirements, a candidate should:

 

 

 

In addition to the above criteria (which may be modified from time to time), the Governance Committee may consider such other factors as it deems in the best interests of the Company and its stockholders and that may enhance the effectiveness and responsiveness of the Board and its committees. Finally, the Governance Committee must consider a candidate’s independence to make certain that the Board includes at least a majority of “independent” directors to satisfy all applicable independence requirements, as well as a candidate’s financial sophistication and special competencies.

 

The Governance Committee identifies potential candidates through referrals and recommendations, including by incumbent directors, management and stockholders, as well as through business and other organizational networks. To date, the Governance Committee has not retained or paid any third party to identify or evaluate, or assist in identifying or evaluating, potential director nominees, although it reserves the right to engage executive search firms and other third parties to assist in finding suitable candidates.

 

Current members of the Board with the requisite skills and experience are considered for re-nomination, balancing the value of the member’s continuity of service with that of obtaining a new perspective, and considering each individual’s contributions, performance and level of participation, the current composition of the Board, and the Company’s needs. The Governance Committee also must consider the age and length of service of incumbent directors. In March 2005, the committee recommended to the Board, and the Board adopted, a rule not to re-nominate a director for re-election if such director has served ten years as a director or has reached 75 years of age. If any existing members do not wish to continue in service or if it is decided not to re-nominate a director, new candidates are identified in accordance with those skills, experience and characteristics deemed necessary for new nominees, and are evaluated based on the qualifications set forth above. In every case, the Governance Committee meets (in person or telephonically) to discuss each candidate, and may require personal interviews before final approval. Once a slate is selected, the Governance Committee presents it to the full Board.

 

Government Relations Committee

 

The Government Relations Committee consists of Messrs. Marsh (Chairman) and McManus and Dr. Singhvi. During fiscal 2006, Dr. O’Donnell also served on the Government Relations Committee. The purpose of the Government Relations Committee is to assist management of the Company with respect to government funding of its vaccine projects and to assist management with the education of state and federal executive and legislative branches of government regarding the Company’s programs. The Government Relations Committee met one time during 2006.

 

Code of Business Conduct and Ethics

 

Novavax’s Board of Directors adopted a written Code of Business Conduct and Ethics in March 2004, which applies to each of Novavax’s officers, directors and employees, including, but not limited to, Novavax’s Chief Executive Officer, Chief Financial Officer and Controller (principal accounting officer). Each of Novavax’s officers, directors and employees are required to adhere to this code in addressing the legal and ethical issues encountered in conducting their work. The code requires that employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner, and otherwise act with integrity and in the Company’s best interest. Employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the code. The Sarbanes-Oxley Act of 2002 requires companies to have procedures to receive, retain and treat complaints received regarding accounting, internal accounting controls or

auditing matters and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Company currently has such procedures in place. The Code of Business Conduct is reviewed at least annually by the Nominating and Corporate Governance Committee. In April 2006, the Board approved revisions to the Code of Business Conduct, a copy of which is posted on Novavax’s website at www.novavax.com.

 

Stockholder Communications with the Board of Directors

 

The Board welcomes communications from stockholders and has adopted a procedure for receiving and addressing such communications. Stockholders may send written communications to the entire Board or individual directors, addressing them to Novavax, Inc., 9920 Belward Campus Drive, Rockville, Maryland 20850, Attention: Secretary. Communications by e-mail should be addressed to ir@novavax.com and marked “Attention: Secretary” in the “Subject” field. All such communications will be forwarded to the full Board of Directors or to any individual director or directors to whom the communication is directed unless the communication is clearly of a marketing nature or is unduly hostile, threatening, illegal, or similarly inappropriate, in which case the Company has the authority to discard the communication or take appropriate legal action.

 

Compensation of Directors

 

Compensation for non-employee directors is comprised of two components — cash compensation and equity awards. Dr. Singhvi does not receive additional compensation for his service on the Board.

 

Cash Compensation

 

Mr. Lambert receives an annual retainer of $30,000 as compensation for his services as a director and as Chairman of the Board and does not receive additional compensation for attending board and committee meetings. Each independent director not employed by Novavax and not serving on a committee receives an annual retainer of $10,000; the chairs of the Audit, Compensation, Nominating & Corporate Governance and Government Relations Committees receive annual retainers of $20,000, $15,000, $15,000 and $20,000, respectively; and non-employee directors serving on one or more committees receive an annual retainer of $12,000. Annual retainers are paid quarterly.

 

Each independent non-employee director also receives $1,500 for each meeting of the Board of Directors he attends in person and $750 for each meeting attended telephonically. In addition, each committee member not employed by Novavax receives $500 per committee meeting attended in person and $250 for each meeting attended telephonically, except that the chair of each committee receives $1,000 per committee meeting attended in person and $500 for each meeting attended telephonically. In all cases, no fees are paid for telephonic meetings of the Board or any committee thereof lasting less than 30 minutes. Directors are also reimbursed by the Company for reasonable costs and expenses incurred for attending Board and committee meetings.

 

No other cash compensation was paid to the directors for their services to the Company as directors during 2006. For information relating to shares of the Company owned by each of the directors, see “Security Ownership of Certain Beneficial Owners and Management” below. For information concerning the compensation of directors who are also officers of the Company, see “Executive Compensation” below.

 

Equity Awards

 

In February 2006, the Board of Directors adopted the recommendation of the Compensation Committee and approved the grant to each director not employed by the Company of a non-statutory option under the 2005 Plan, effective February 17, 2006, to purchase 15,000 shares of the Company’s Common Stock in the case of all directors other than Mr. Evans, then the Chairman of the Board, and 50,000 shares of the Company’s Common Stock in the case of Mr. Evans, in each case at an exercise price of $4.60, the closing price of the Common Stock on the effective date. Such grants became vested and exercisable in full on August 17, 2006.

 

At its meeting on March 7, 2007, the Board granted options to purchase Company Common Stock to each of its directors. The Board granted an option to purchase 100,000 shares of Company Common Stock to Mr. Evans and an

option to purchase 15,000 shares of Company Common Stock to Mr. Marsh, Mr. McManus, Dr. Monath, Dr. O’Donnell and Dr. Tananbaum. All of the options have an exercise price of $2.77 per share and will vest in full six months after the date of the grant. In addition, the Board granted Mr. Lambert options to purchase 250,000 shares of Company Common Stock with an exercise price of $2.77 per share. The options vests in five separate tranches of 50,000 options. In addition, the Board granted Mr. Lambert 100,000 Restricted Stock Units. Each Restricted Stock Unit represents a contingent right to receive one share of Novavax Common Stock. The Restricted Stock Units shall vest in five separate tranches of 20,000 units. Mr. Lambert’s options and Restricted Stock Units shall vest upon the occurrence of the following milestones: (i) two tranches vest upon Novavax’s achievement of certain performance criteria; (ii) one tranche vests upon Novavax’s Common Stock achieving a market price of $6.00 per share; (iii) one tranche vests upon Novavax’s Common Stock achieving a market price of $10.00 per share; and (iv) one tranche vests on March 7, 2010. The grant of Restricted Stock Units is subject to the approval of the amendment to the 2005 Plan.

 

Summary Director Compensation Table

 

The following table sets forth information concerning the compensation paid by the Company by each individual who served as a non-employee director at anytime during fiscal 2006:

 

 

 

 

PROPOSAL II — AMENDMENT OF 2005 STOCK INCENTIVE PLAN

 

The 2005 Stock Incentive Plan (the “2005 Plan”) was adopted by our Board of Directors on February 24, 2005 and approved by Novavax’s stockholders on May 4, 2005. The number of shares originally authorized for issuance under the 2005 Plan was 2,565,724 shares, 565,724 shares of which were previously held for reserve under the 1995 Stock Option Plan (the “1995 Plan”) but which were unused. To the extent that options granted under the 1995 Plan expire unexercised, the shares underlying those options become available for grant under the 2005 Plan. As of the Record Date, options and other stock awards to purchase 4,434,633 shares of Common Stock were issued and outstanding under the 2005 Plan, and approximately 298,140 shares of Common Stock were available for issuance under the 2005 Plan. On March 7, 2007, our Board of Directors approved an amendment to the 2005 Plan, subject to stockholder approval, to increase the number of shares reserved for issuance under this plan by 3,000,000 shares. This amendment is being submitted to the Company’s stockholders for approval. The resolution to be presented to the stockholders approving the proposed amendment to the 2005 Plan is attached as Appendix A to this proxy statement and is incorporated herein by reference.

 

General

 

Purpose; Term.  The 2005 Plan provides for the grant to employees, officers and directors of, as well as consultants and advisors to, the Company, of stock options (non-statutory (“NSOs”) and incentive (“ISOs”)), restricted stock awards, stock appreciation rights (“SARs”) and restricted stock units. The stated purpose of the 2005 Plan is to secure for the Company and its stockholders the benefits arising from capital stock ownership by eligible participants who are expected to contribute to the Company’s future growth and success. Unless sooner terminated in accordance with its terms, the 2005 Plan will terminate upon the close of business on February 23, 2015.

 

Administration.  The 2005 Plan is administered by the Board of Directors, which may, as permitted by and consistent with applicable law, delegate any or all of its powers under the plan to a committee it appoints. Subject to the terms of the 2005 Plan, the Board (or such committee) has the authority to determine the individuals to whom, and the time or times at which, awards are made, the size of each award, and the other terms and conditions of each award (which need not be identical across recipients). The Board also has the authority, subject to the express provisions of the 2005 Plan, to construe the respective agreements under the plan, proscribe, amend and rescind rules and regulations relating to the plan, accelerate or extend the dates options may be exercised or other stock awards may vest, and make all other determinations which are in the Board’s judgment necessary or desirable for the administration of the plan. The Board’s construction and interpretation of the terms and provisions of the 2005 Plan are final and conclusive.

 

Initial Stock Subject to 2005 Plan; Transfer of Shares from 1995 Plan.  The number of shares of Common Stock that were initially set aside and reserved for issuance under the 2005 Plan was 2,565,724 shares (which amount is subject to adjustment as described herein), including 565,724 unused shares transferred from the 1995 Plan. The amendment to the 2005 Plan will increase the number of shares of Common Stock available under the plan by 3,000,000 shares, subject to stockholder approval.

 

The 1995 Plan continues to exist, and stock options previously granted under the 1995 Plan remain in existence in accordance with their terms. However, no new awards will be made under the 1995 Plan. If any existing stock options granted under the 1995 Plan should for any reason expire or otherwise terminate, in whole or in part, in the future without having been exercised in full, the shares of Common Stock that are not acquired shall revert to and become available for issuance under the 2005 Plan. There are currently 2,278,968 shares of Common Stock subject to existing options under the 1995 Plan as of April 23, 2007.

 

Reversion of Shares.  There are certain circumstances under which shares of Common Stock that are already subject to an outstanding award under the 2005 Plan may revert to such plan and become available for reissuance. Specifically, if a stock award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full (i.e., in the case of a stock option, SAR or restricted stock unit), or if any shares of Common Stock issued to a recipient pursuant to an award are forfeited back to or are repurchased by the Company (i.e., in the case of restricted stock), then the shares represented by such awards shall revert to and again become available for issuance under the 2005 Plan. A forfeiture or repurchase of stock may occur, for example, because of a recipient’s

failure to satisfy a contingency or condition that is required for the vesting of such shares. Restricted stock that has been issued, and which is then repurchased by the Company, shall only be reissued in the form of awards other than incentive stock options.

 

Effect on Share Reserve of Use of Shares to Cover Tax Withholding.  The Board has discretion under the 2005 Plan to allow a recipient of a stock option to use shares of Common Stock to satisfy the tax-withholding requirement that may arise upon exercise of such option. The shares may be shares previously owned by the recipient, or may be the shares acquired from the exercise of the option. Any shares of Common Stock that are not delivered to a recipient because those shares are used to satisfy the payment of taxes will revert to the share reserve under the 2005 Plan and shall again become available for issuance in the future.

 

Effect on Share Reserve of a “Net Exercise” or Cashless Exercise of Stock Options.  Payment of the exercise price of a stock option may be made in cash or check payable to the Company. The Board may also provide in the applicable stock option agreement under the 2005 Plan that a recipient may use shares of already-owned Common Stock to satisfy payment of the exercise price, or any other means approved by the Board (including a “net exercise” in which the Company withholds a number of shares that would otherwise be issued to a recipient upon the exercise of the option that have a fair market value equal to the option exercise price). Any shares of Common Stock that are not delivered to a recipient because those shares are used to satisfy the payment of the exercise price will revert to the share reserve under the 2005 Plan and shall again become available for issuance in the future.

 

Maximum Number of Shares Issued through Incentive Stock Options.  The maximum aggregate number of shares that may be issued under the 2005 Plan through the exercise of incentive stock options is 11,312,192, subject to stockholder approval of the amendment to the 2005 Plan.

 

Eligible Participants.  Subject to certain limitations, awards under the 2005 Plan of non-statutory options (“NSOs”), restricted stock awards, restricted stock units and SARs may be granted to any employee, officer, director, consultant or advisor to the Company. Only employees of the Company may be granted incentive stock options (“ISOs”) under the 2005 Plan. As of April 23, 2007, the Company had 62 full-time employees, two of whom are also current executive officers. As of April 23, 2007, there were six members of the Board of Directors who were not employees of the Company.

 

Plan Amendments and Termination.  The Board of Directors may at any time, and from time to time, modify or amend the 2005 Plan in any respect, provided that no such modification or amendment may adversely affect the rights of a recipient under an existing stock award. In addition, if at any time the approval of the stockholders of the Company is required under Section 422 of the Internal Revenue Code, as amended (the “Code”) or any successor provision with respect to ISOs, or under Rule 16b-3 under the Exchange Act (if then applicable) or other applicable rules and regulations, the Board of Directors may not effect such modification or amendment without such approval.

 

The Board may at any time suspend or terminate the 2005 Plan, provided that any such suspension or termination shall not adversely affect the rights of a recipient under any award previously granted while the 2005 Plan is in effect except with the consent of the recipient.

 

Options

 

The following is a description of the permissible terms of stock options under the 2005 Plan. Individual option grants may be more restrictive as to all or any of the permissible terms described below.

 

Option Duration.  The term of each ISO shall be 10 years from the date of grant or such shorter term as the Board determines, except that in the case of an ISO that is awarded to an employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the term of the ISO must be five years or such shorter period as the Board determines. The term of each NSO is as determined by the Board. The term of any option granted under the 2005 Plan, and all other materials terms and conditions of such option, will be evidenced by an option agreement between the Company and the recipient.

 

Exercise Price.  The exercise price for any NSO granted under the 2005 Plan shall be as determined by the Board of Directors, and may be less than the “Fair Market Value” of the Common Stock on the date of grant if the

Board so provides. The exercise price for any ISO may not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. If such ISO is granted to an employee who at the time of grant owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its parents or subsidiaries, the exercise price may not be less than 110% of the Fair Market Value on the date of grant.

 

Fair Market Value.  For purposes of the 2005 Plan, if the Common Stock is listed on an established stock exchange or traded on the NASDAQ Global Market or the NASDAQ Small Cap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. If the day of determination is not a market-trading day, then the trading day prior to the day of determination shall be used. In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board.

 

Exercise of Option and Payment for Stock.  Stock options are exercisable at such time or times and subject to such conditions as set forth in the agreement evidencing such option, subject to the provisions of the 2005 Plan.

 

Under the current form of stock option agreement approved by the Board for use under the 2005 Plan (which is subject to change), options vest and become exercisable in accordance with the following schedule: (a) 25% on each of the first four anniversaries of the date of grant for employees below the Vice President level, (b) 331/3% on each of the first three anniversaries of the date of grant for employees at or above the Vice President level, and (c) in full on the six-month anniversary of the date of the grant for directors. The Board has authority to accelerate the time at which an option may vest or be exercised. See “Corporate Changes” on page 17 for a description of how options vest upon a change in control of the Company.

 

The consideration to be paid for shares to be issued upon exercise of an option may be made by (a) delivery of cash or a check to the Company; (b) to the extent permitted by the applicable option agreement, delivery to the Company of shares of Common Stock already owned by the recipient having a Fair Market Value on the date of surrender equal to the aggregate exercise price of the shares being purchased; or (c) by any other means approved by the Board, including through a broker-assisted, same-day sale program.

 

Effect of Recipient’s Termination of Employment or other Service, Death or Disability.  The Board has the power to determine the period of time during which a recipient (or, if applicable, the recipient’s estate or representative) may exercise a stock option under the 2005 Plan following the termination of the recipient’s employment or other relationship with the Company, including upon the death or disability (within the meaning of Section 22(e)(3) of the Code) of the recipient. Such periods must be set forth in the agreement evidencing the option. The current form of option agreement under the 2005 Plan provides in general that a recipient shall have three months to exercise the vested portion of the option following termination of service with the Company, after which time the option shall expire and is no longer exercisable. The unvested portion of the stock option cannot be exercised and is forfeited on the date of termination. However, under the form of option agreement, if a recipient’s employment or other service on behalf of the Company or an affiliate is terminated because of his or her death (which occurs while the recipient is either actively providing such services or within three months after the recipient’s termination for a reason other than cause), then the exercise period is extended to one year after the date of death. If the recipient is terminated because of a disability, the exercise period is also extended to one year after the date of termination. In no event, however, may a stock option be exercised after the expiration date of the option. In the case of a termination for “cause” under the form of stock option agreement (as defined therein), the option cannot be exercised and is forfeited both as to the vested and unvested shares subject to the option. The Board in its discretion may in the future change the form of option agreement to provide for shorter or longer exercise periods upon termination of service than the periods described above.

 

For an option to retain its status as an ISO, the recipient must have been in the continuous employment of the Company or an affiliate since the date of grant of the ISO, and the ISO must be exercised within three months after the date the recipient ceases to be an employee of the Company or an affiliate. An option shall be considered an NSO if these requirements are not met.

 

Transferability.  Options are not assignable or transferable by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the recipient, shall be exercisable only by the recipient. NSOs may, however, be transferred pursuant to a qualified domestic relations order (as defined in Rule 16b-3) or as otherwise expressly permitted in the agreement evidencing such NSO.

 

Repricing.  The 2005 Plan does not affirmatively give the Board authority, in the event of a decline in the value of the Company’s Common Stock, to replace outstanding higher priced options with new lower priced options, nor does it give the Board authority to reprice any out-of-the-money options.

 

Restricted Stock Awards, Restricted Stock Units and SARs

 

Generally.  As a condition to the grant of a restricted stock award, restricted stock unit or SAR, each recipient must execute an agreement evidencing such award not inconsistent with the 2005 Plan. The terms and conditions of each such agreement may change from time to time and agreements need not be identical, with certain exceptions noted below.

 

Restricted Stock Awards.  The Board will determine the purchase price per share at the time of grant of a restricted stock award, which may not be less than the par value of the Common Stock. A restricted stock award may be awarded as a stock bonus with no cash purchase price to be paid by a recipient to the extent permitted under applicable law. At the time of the grant, the Board will also determine the permitted consideration for the payment of the purchase price, if any, which may be: (a) cash at the time of purchase; (b) services rendered or to be rendered to the Company; or (c) any other form of legal consideration that may be acceptable to the Board, subject to applicable law (including Delaware corporate law). Shares of Common Stock acquired under a restricted stock award may be subject to a share repurchase option in favor of the Company or an affiliate in accordance with a vesting schedule as determined by the Board.

 

Transferability.  Rights to purchase or receive shares of Common Stock granted under a restricted stock award are transferable by the recipient only upon such terms and conditions as are set forth in the restricted stock award agreement, as the Board shall determine in its discretion, and so long as the Common Stock awarded then remains subject to the terms of the restricted stock award agreement. Transferability of other awards will be as determined by the Board. The current restricted stock agreement provides that the Company shall have an option to redeem any invested restricted stock within 90 days following the termination of the recipients’ employment. All restricted shares subject to that opinion cannot be transferred.

 

Restricted Stock Units.  A restricted stock unit is a promise by the Company to issue shares of Common Stock equivalent to the number of units covered by the award at or after vesting of the Common Stock underlying the units. The Board will determine the consideration, if any, to be paid by the recipient upon delivery of each share of Common Stock subject to an award of a restricted stock unit that, to the extent required by applicable law, may not be less than par value. A recipient may settle a restricted stock unit by delivery of shares of Common Stock, their cash equivalent or any combination of the two. At the time of grant, the Board may also determine any restrictions or conditions to the vesting of the shares subject to the award or any other restrictions or conditions that delay delivery of such shares. Dividend equivalents may be credited in respect of restricted stock units as the Board determines. If the recipient’s service with the Company terminates for any reason, unvested restricted stock units will be forfeited unless the applicable award agreement provides otherwise.

 

SARs.  A stock appreciation right entitles the recipient to a payment equal in value to the appreciation in the value of the underlying share of the Company’s Common Stock for a predetermined number of shares over a specified period. SARs will be denominated in shares of Common Stock equivalents. Payment may be made in shares of Common Stock, cash or any combination of the two, as the Board deems appropriate. The amount payable on the exercise of a SAR may not be greater than an amount equal to the excess of (1) the aggregate Fair Market Value on the date of the exercise of the SAR of a number of shares of Common Stock equal to the number of shares of Common Stock equivalents in which the recipient is vested under such SAR (and with respect to which the recipient is exercising the SAR on such date), over (2) an amount that is determined by the Board at the time of grant. The Board may impose any restrictions it deems appropriate on the vesting of SARs. If the recipient’s service

with the Company terminates for any reason, unvested SARs will be forfeited and the Company will automatically redeem vested SARs.

 

Corporate Changes

 

Adjustment Provisions.  Transactions not involving receipt of consideration by the Company, such as certain mergers, consolidations, reorganizations, stock dividends or stock splits, may change the type, class and number of shares of Common Stock subject to the 2005 Plan and outstanding awards. In such event, the 2005 Plan will be appropriately adjusted as to the type, class and the maximum number of shares of Common Stock subject to the plan, and outstanding awards will be adjusted as to the type, class, number of shares and price per share of Common Stock subject to such awards.

 

Change in Control.  In the event of certain specified organizational changes, including but not limited to (a) a consolidation, merger, combination or reorganization of the Company, (b) the sale, lease or other disposition of all or substantially all of the assets, or a dissolution or liquidation, of the Company, or (c) a transaction or series of related transactions in which persons who were not stockholders of the Company immediately prior to acquiring Company capital stock as part of such transaction(s) become the owners of capital stock of the Company that represents more than 50% of the combined voting power of the Company’s outstanding capital stock, then the Board of Directors of the Company or the board of any corporation assuming the Company’s obligations may take any one or more actions as to outstanding awards under the 2005 Plan, including:

 

 

In 2005, the Board adopted a Change in Control Severance Benefit Plan (the “Severance Plan”), which provided, among other things, that all outstanding awards shall become vested and exercisable in full upon a change in control of the Company (a “Single Trigger Acceleration”). In July 2006, the Board amended the Severance Plan to provide that, upon a termination of employment following a change in control, all outstanding awards shall become vested and exercisable in full (a “Double Trigger Acceleration”). In April 2007, the Compensation Committee recommended and the Board adopted revised stock option agreements, restricted stock agreements and restricted stock unit agreements for all awards made in March 2007 and thereafter that provide for Double Trigger Acceleration. This action did not alter awards before March 2007.

 

Changes to Incumbent Board.  The Board or its designee may also provide for the accelerated vesting or exercisability of an award under the 2005 Plan (including the lapse of any reacquisition or repurchase rights in favor of the Company) upon the occurrence of a change in the incumbent board (as defined below) in an option agreement or other stock award agreement at the time of grant of the award, or at any time thereafter. A “change in the incumbent board” is deemed to occur if the existing members of the Board on the date the 2005 Plan is initially adopted by the Board cease to constitute at least a majority of the members of the Board, with certain exceptions. In that regard, any person that becomes a new Board member after the adoption of the 2005 Plan shall be deemed a member of the incumbent board for this purpose if his or her election or appointment was approved or recommended by a majority vote of the members of the existing incumbent board who are then still in office.

Tax Matters

 

Incentive Stock Options.  In general, taxable income is recognized with respect to an ISO only upon the sale of Common Stock acquired through the exercise of the ISO (“ISO Stock”) and not in connection with the grant or exercise of such ISO. However, the exercise of an ISO may subject the recipient to the alternative minimum tax. The tax consequences of selling ISO Stock will vary with the length of time that the recipient has owned the ISO Stock at the time it is sold. If the recipient sells ISO Stock after having owned it for the greater of (a) two years from the date the option was granted, and (b) one year from the date the option was exercised, then the recipient will recognize a long-term capital gain in an amount equal to the excess of the amount realized by the recipient on the sale price of the ISO Stock over the exercise price. If the recipient sells ISO Stock for more than the exercise price prior to having owned it for at least two years from the grant date and one year from the exercise date (a “Disqualifying Disposition”), then all or a portion of the gain recognized by the recipient will be ordinary compensation income and the remaining gain, if any, will be a capital gain. Any capital gain realized by the recipient from the sale of ISO Stock will be a long-term capital gain if the recipient has held the ISO Stock for more than one year prior to the date of sale. If a recipient sells ISO Stock for less than the exercise price, then the recipient will recognize a capital loss equal to the excess of the exercise price over the sale price of the ISO Stock. This capital loss will be a long-term capital loss if the recipient has held the ISO Stock for more than one year to the date of sale.

 

Nonstatutory Stock Options.  As with ISOs, the grant of NSOs with an exercise price per share that is at least equal to the Fair Market Value of a share of Common Stock on the date of grant does not result in the recognition of taxable income to the recipient. The exercise of an NSO results in the recognition of ordinary income to the recipient in the amount by which the fair market value of the Common Stock acquired through the exercise of the NSO (“NSO Stock”) on the exercise date exceeds the exercise price. Because of this tax consequence, NSOs are typically exercised simultaneously with the sale of the NSO Stock. If the NSO stock is not sold upon exercise, the recipient acquires a tax basis in the NSO Stock equal to the effective fair market value of the stock on the day of exercise (i.e., the exercise price plus any income recognized upon the exercise of the option). The sale of NSO Stock generally will result in the recognition of a capital gain or loss in an amount equal to the excess of the sale price of the NSO Stock over the recipient’s tax basis in the NSO Stock. This capital gain or loss will be a long-term gain or loss if the recipient has held the NSO Stock for more than one year prior to the date of the sale and any such capital gain may be eligible for the lower capital gains rate if held for more than a year.

 

Notwithstanding the above, in the case of an award of an in-the-money NSO (i.e., an NSO with a below-Fair Market Value exercise price on the date of grant), this will be deemed to result in a deferral of compensation for purposes of Section 409A of the Code. Non-compliance with Section 409A can result in the imposition of income tax and penalties on a recipient at the time of grant of the option or upon later vesting.

 

Federal Income Tax Consequences to the Company in connection with Stock Options.  The grant and exercise of ISOs and NSOs generally have no direct tax consequences to the Company. The Company generally will be entitled to a compensation deduction with respect to any ordinary income recognized by a recipient, including income that results from the exercise of a NSO or a Disqualifying Disposition of an ISO. Any such deduction will be subject to the limitations of Section 162(m) of the Code. The Company has a statutory obligation to withhold appropriate income taxes from the ordinary income that is realized from the exercise of NSOs by employees.

 

Restricted Stock Awards and Stock Bonuses.  Restricted stock awards and stock bonuses granted under the 2005 Plan generally have the following federal income tax consequences.

 

Upon acquisition of the stock, the recipient normally will recognize taxable ordinary income equal to the excess, if any, of the stock’s Fair Market Value on the acquisition date over the purchase price. However, to the extent the stock is subject to certain types of vesting restrictions, the taxable event will be delayed until the vesting restrictions lapse unless the recipient elects to be taxed on receipt of the stock. With respect to employees, the Company is generally required to withhold from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax-reporting obligation, the Company will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the recipient.

 

Upon disposition of the stock, the recipient will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon acquisition (or vesting) of the stock. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one year. Slightly different rules may apply to recipients who acquire stock subject to certain repurchase options or who are subject to Section 16(b) of the Exchange Act.

 

Stock Appreciation Rights.  No taxable income is realized upon the receipt of a SAR, but upon exercise of the SAR the Fair Market Value of the shares (or cash in lieu of shares) received must be treated as compensation taxable as ordinary income to the recipient in the year of such exercise. Generally, with respect to employees, the Company is required to withhold from the payment made on exercise of the SAR or from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Subject to the requirement of reasonableness, Section 162(m) of the Code and the satisfaction of a reporting obligation, the Company will be entitled to a business expense deduction equal to the taxable ordinary income recognized by the recipient.

 

Notwithstanding the above, a SAR is considered deferred compensation for purposes of Section 409A of the Code unless the following criteria are met: (1) the SAR can be settled only in stock of the recipient, (2) the stock underlying the SAR is publicly traded on an established securities market, (3) the recipient cannot elect upon exercise of the SAR to defer payout of the stock to a later date, and (4) the SAR pays only the excess in value of the underlying stock on the exercise date over the value of such stock on the grant date. Non-compliance with Section 409A can result in the imposition of income tax and penalties on a recipient at the time of grant of the SAR or upon later vesting.

 

Restricted Stock Units.  A recipient does not have taxable ordinary income upon the grant of a restricted stock unit. Ordinary income arises on the actual or constructive receipt of the restricted stock underlying the units (or upon receipt of cash, if the restricted stock unit is settled in cash), which generally occurs when the restricted stock units vest. The Board may permit deferral of the payout of the restricted stock or cash to a date beyond the vesting date, in which case the recognition of ordinary income is delayed until the date of receipt (assuming that Section 409A of the Code does not require earlier recognition of income).

 

Section 409A of the Code provides that a restricted stock unit does not result in the deferral of compensation if the stock must be issued shortly after vesting occurs. If the recipient has the right to elect to defer payout of the stock to a future taxable year, this will be considered a deferred compensation arrangement under Section 409A. Non-compliance with Section 409A can result in the imposition of income tax and penalties on a recipient at the time of grant of the restricted stock unit or upon later vesting.

 

Potential Limitation on Company Deductions.  Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to certain “covered employees” in a taxable year to the extent that compensation to such covered employee exceeds $1 million. It is possible that compensation attributable to awards, when combined with all other types of compensation received by a covered employee from the Company, may cause this limitation to be exceeded in any particular year.

 

Certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for purposes of the deduction limitation. In accordance with Treasury Regulations issued under Section 162(m), compensation attributable to stock options and SARs will qualify as performance-based compensation if the award is granted by a compensation committee comprised solely of “outside directors” and either (i) the plan contains a per-employee limitation on the number of shares for which such awards may be granted during a specified period, the per-employee limitation is approved by the stockholders, and the exercise price of the award is no less than the Fair Market Value of the stock on the date of grant, or (ii) the award is granted (or exercisable) only upon the achievement (as certified in writing by the compensation committee) of an objective performance goal established in writing by the compensation committee while the outcome is substantially uncertain, and the award is approved by stockholders.

 

Awards to purchase restricted stock and stock bonus awards will qualify as performance-based compensation under the Treasury Regulations only if (i) the award is granted by a compensation committee comprised solely of “outside directors,” (ii) the award is granted (or exercisable) only upon the achievement of an objective performance goal established in writing by the compensation committee while the outcome is substantially uncertain, (iii) the compensation committee certifies in writing prior to the granting (or exercisability) of the award that the performance goal has

been satisfied and (iv) prior to the granting (or exercisability) of the award, stockholders have approved the material terms of the award (including the class of employees eligible for such award, the business criteria on which the performance goal is based, and the maximum amount — or formula used to calculate the amount — payable upon attainment of the performance goal).

 

The foregoing is only a summary of the effect of federal income taxation upon the recipient and the Company with respect to awards granted under the 2005 Plan. It does not purport to be complete and does not discuss the tax consequences arising in the event of a recipient’s death or the income tax laws of the municipality, state or foreign country under which the recipient’s income may be taxable.

 

New Plan Benefits

 

Awards of stock options, restricted stock, restricted stock units and SARs made to eligible participants under the 2005 Plan are subject to the discretion of the Board, upon recommendation by the Compensation Committee and, therefore, are not determinable at this time. In addition, Mr. Lambert was granted 100,000 shares of Restricted Stock Units, which grant is subject to the approval of the amendment to the 2005 Plan.

 

Each grant of an ISO under the 2005 Plan will be made at Fair Market Value on the date of grant; the Company expects that each grant other than for ISOs will be made with an exercise price at or near the Fair Market Value of the Company’s Common Stock on the day of grant. Prices and consideration for restricted stock awards, restricted stock units and SARs under the 2005 Plan will be as determined by the Board. The value of each such grant and award may depend on the market value of the Company’s Common Stock on the day of exercise and therefore cannot be determined or estimated at this time. The market value of the Company’s Common Stock on April 23, 2007 was $3.46 per share.

 

Approval of the amendment to the 2005 Plan to increase the number of shares reserved for issuance under such plan by 3,000,0000 shares requires the affirmative vote of the holders of a majority of the shares of Common Stock present in person or represented by proxy and voting on the matter. Abstentions and broker non-votes will not be counted as shares voting on such matter and accordingly will have no effect on the approval of this Proposal II.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR

ADOPTION OF THE AMENDMENT TO THE 2005 STOCK INCENTIVE PLAN TO INCREASE

THE NUMBER OF SHARES RESERVED FOR ISSUANCE THEREUNDER.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information as of March 31, 2007 with respect to the beneficial ownership of shares of our Common Stock by (i) each person (including any group) known to the Company to beneficially own more than 5% of the outstanding shares of our Common Stock, (ii) the directors of the Company and nominees, (iii) the Named Executive Officers of the Company as identified in the “Summary Compensation Table” below, and (iv) all current directors and executive officers of the Company as a group.

 

 

 

 

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table provides the Company’s equity compensation plan information as of December 31, 2006. Under these plans, the Company’s Common Stock may be issued upon the exercise of options. See also the information regarding stock options in Note 9 to the Company’s consolidated financial statements for the year ended December 31, 2006, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2007.

 

 

 

 

EXECUTIVE COMPENSATION

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The Compensation Committee (the “Committee”) is appointed by the Board of Directors of the Company to assist the Board with its responsibilities relating to the compensation of the Company’s employees, officers and directors and the development and administration of the Company’s compensation plans. The goal of the Committee is to support the development of compensation programs that achieve the strategic goals and objectives of the Company, attract, motivate and retain key executives critical to the success of the Company, and align executive officers’ interests with the success of the Company, while continuing to create shareholder value. Throughout this proxy statement, the individuals who served as our President and Chief Executive Officer, and Chief Financial Officer during fiscal 2006, as well as the other individuals included in the Summary Compensation Table, are referred to as the “executive officers.”

 

Philosophy & Objectives

 

The philosophy underlying the Company’s compensation program is to be both market competitive and internally equitable, such that individuals are compensated at a level commensurate with their industry colleagues outside the Company in comparable positions and fairly when compared to their colleagues within the Company. The Compensation Committee’s overall goals with respect to executive officers are to provide compensation sufficient to attract, motivate and retain executives of outstanding ability, performance, and potential, and to establish and maintain an appropriate relationship between executive compensation and the creation of shareholder value.

 

The Compensation Committee believes that the most effective compensation program is one that provides competitive base pay, rewards the achievement of established annual and long-term goals and objectives, and provides an incentive for retention.

 

To this end, the three compensation elements used for executive officers in 2006 were base salary, cash bonus, and equity awards. The Compensation Committee believes that these three elements are the most effective combination in motivating and retaining the officers at this stage in our development.

 

Base Salary.  The Compensation Committee’s philosophy is to maintain base salary at a competitive level sufficient to recruit and retain individuals possessing the skills and capabilities necessary to achieve our goals over the long term. Each individual’s base salary is determined by the Compensation Committee after considering a variety of factors that include market value and prospective value to us, including the knowledge, experience, and accomplishments of the individual, the individual’s level of responsibility, and the typical compensation levels for individuals with similar credentials. The Compensation Committee may, considering the advice of our management, change the salary of an individual on the basis of its judgment for any reason, including our performance or that of the individual, changes in responsibility, and changes in the market for executives with similar credentials.

 

Cash Bonus.  The purpose of the cash bonus program for executive officers is to motivate and reward the achievement of specific preset corporate goals, agreed to in advance by the Board of Directors, along with the achievement of individual performance goals. Achievement of established goals at the end of the measurement period is agreed upon by the Executive Committee, which for 2006 consisted of the Chief Executive Officer, Chief Financial Officer, Senior Vice President, Commercial Operations, Chief Medical Officer and Senior Director, Human Resources and the Board of Directors. Target cash bonuses for executive officers are set based upon analysis of competitive data and individual goals.

 

Stock Incentive Awards.  Stock incentive awards are a fundamental element in our executive compensation program because they emphasize our long-term performance, as measured by creation of stockholder value, and foster a commonality of interest between stockholders and our company leaders. In addition, they are crucial to a competitive compensation program for executive officers, and they act as a powerful retention tool. The Compensation Committee views the organization as still facing significant risk, but with the potential for a high upside, and therefore believes that stock incentive awards are appropriate for executive officers.

 

Setting Officer Compensation

 

Compensation packages for executive officers are analyzed and discussed individually at the Committee’s first meeting of the year. Prior to that meeting, the Company’s human resources team performs an analysis, considering the goals of market competitiveness and internal equity and for each executive officer position within the Company benchmarking current compensation against the 50^th percentile of salary survey data. At this and subsequent meetings, the Committee may request additional information from the human resources team. Once the Committee has obtained all of the information it deems necessary, it forms and approves recommendations for the full Board of Directors. These recommendations are then presented to the Board of Directors. No adjustment is made if the individual did not receive the minimum required performance rating in his or her annual performance appraisal.

 

Specifically, for the President and Chief Executive Officer, additional relevant market data is gathered to ensure the compensation decisions reflect both market competitiveness and internal equity. The Compensation Committee chose seven biopharmaceutical companies for 2006. Inclusion in the peer company group was based on vaccine business focus, competition for talent, and size (market capitalization). The peer companies are listed below:

 

 

Three cuts of the data were provided for the full peer group. The analyses included: (i) base salary as of December 31, 2005, (ii) actual 2005 bonus; and (iii) 2005 equity award. Peer group data were based on information contained in proxy statements filed by the peer group companies in 2006. The data was supplemented by data from the 2006 Global Life Sciences Salary Survey — Executive Survey Results.

Once the Compensation Committee has reviewed this analysis, there is a separate meeting of the full Board of Directors to discuss and approve the recommendations of the Compensation Committee. There is no pre-established policy or target for the allocation between cash and equity compensation. Rather, the Compensation Committee reviews information provided by the human resources team to determine the appropriate level and mix of incentive compensation.

 

2006 Compensation Elements

 

Base Salary.  Each year, salary levels are benchmarked to the Global Life Sciences Salary Survey — Executive Survey Results. The base salary information which is provided as of mid-April of the previous year (2005) is adjusted to reflect current market conditions, making the data competitive for the following year (2006). Annual performance evaluations are conducted for each executive officer assessing their performance against their job responsibilities and management skills. The overall performance ratings of the executive officers are included with the overall performance ratings of all of the employees, in order to create a merit matrix for awarding 2006 merit increases. As a result of the distribution of ratings, the merit increases for employees in 2006 were: 6.4%, 5.0% and 3.2% for overall performance ratings of Outstanding, Exceeds Expectations and Meets Expectations. Executive officers whose performance was not at least Meets Expectations did not receive a merit increase. Dr. Singhvi received an additional market salary adjustment in 2006 bringing his overall increase in base salary to 16.6%.

 

Cash Bonus.  In determining bonuses payable under the cash bonus program for 2006 performance, the Compensation Committee considered the senior management team’s achievement of approved corporate goals and each executive officer’s performance on their individual goals. The corporate portion of the cash bonus for 2006 was based on specific objectives relating to the following goals:

 

 

In establishing guidelines for administering the cash bonus program for 2006 performance, the Board of Directors approved the following criteria:

 

 

 

The Committee would review the extent to which the Company accomplished the 2006 objectives as well as the extent to which the individuals achieved their individual objectives and, if at least 75% of the Company objectives were met, set maximum bonus award amounts payable based on that review; and

 

 

Based upon the Company’s 2006 performance in relation to the specific objectives as well as the achievement of individual goals, the Compensation Committee determined that the maximum bonus award would be at 90% of bonus targets. For executive officers other than the CEO, once Compensation Committee set the maximum bonus award, a multiplier was applied based upon the executive officer’s overall individual performance rating to determine the bonus award payable. Specifically, multipliers of 100%, 90% and 80% were applied based upon overall performance ratings of Exceeds Expectations, Exceeds Expectations/Meets Expectations and Meets Expectations. In addition, on the recommendation of the President and Chief Executive Officer, the Compensation Committee further adjusted the bonus awards made to Dr. Gale Smith and Dr. Rick Bright. In further adjusting the bonus award for Dr. Singhvi, the Board of Directors took into consideration such factors as: the market expectations, the performance of the company’s stock price and the growth stage of the company. For executive officers who were not with the Company for the full year, the bonus award was pro-rated based upon the executive officers’ date of hire. Executive officers who left the Company before the bonus targets were determined, did not receive a bonus award for 2006 performance. The bonus targets for each of the executive officers was determined based upon reviewing data from the Global Life Sciences Salary Survey — Executive Survey Results and comparator companies from which Novavax, Inc. attracts executive talent. Bonus targets ranged from 100% for the President and Chief Executive Officer to 20% for the Controller and Chief Accounting Officer. The bonus awards of the executive officers are reported in the Summary Compensation Table.

 

Stock Incentive Awards.  Stock incentive awards may include stock options, stock appreciation rights, restricted or unrestricted stock awards, stock-equivalent units, and any other stock-based awards under Section 162(m) of the Internal Revenue Code, and are intended to provide the most meaningful component of executive compensation. They provide compensation in a manner that is intrinsically related to long-term stockholder value because they are linked to the value of our Common Stock. Historically, we have relied solely on stock options as a means of providing equity incentives for our executives. However, our 2005 Plan enables the grant of all of the forms of equity-based compensation referred to above. More recently, we have also awarded restricted stock and stock units to executive officers and to our new Chairman of the Board.

 

For 2006, in determining the size of the option awards to the executive officers, the Compensation Committee considered company performance, the individual’s scope of responsibility and continuing performance. Based upon these factors, the Compensation Committee recommended approval of stock awards based upon approved guidelines established for awarding discretionary, ongoing equity awards.

 

For 2007, in determining the size of option awards to the executive officers, the Compensation Committee considers company performance, competitive data, and the individual’s scope of responsibility and continuing performance. Most importantly, since the stock options are meant to be a retention tool, the Compensation Committee considered the importance to stockholders of that person’s continued service with the Company. As a result of this review, the Compensation Committee applied a model whereby the size of the stock option award was equal to the amount of vested options and/or shares of restricted stock from the individual’s initial equity award.

 

Options are granted at no less than 100% of the fair market value on the date of grant, and vest over the first three years of the ten-year option term.

 

The 2005 Stock Incentive Plan gave the Company the ability to award shares of restricted stock. In general, awards of restricted stock made in 2005, 2006 and 2007 were utilized as a tool to attract and hire top talent and were primarily awarded at the time of the initial equity award. Since the beginning of 2006, other than restricted stock awards for new hires, Dr. Singhvi was the only executive officer to receive an award of shares of restricted stock as a discretionary, ongoing award. This award was based upon his accomplishments during the first six months that he served as the Company’s President and Chief Executive Officer.

 

Change in Control Severance Plan

 

In 2005, the Company adopted the Change in Control Severance Plan. For a full description of all benefits available under the Change in Control Severance Plan, see “Termination upon Change in Control” on page 35. The benefits available under the Change in Control Severance Plan were set to be competitive with change in control benefits generally offered to similarly situated executives in the Company’s industry.

 

Timing of Annual Awards

 

In order to assess the performance of a full calendar year, annual awards are distributed in February or March of the following year. Salary increases for 2006 were effective on April 1, 2006. Bonus awards for 2006 performance were paid on March 13, 2007. Stock option awards for executive officers were effective on the date of approval by the Compensation Committee and the Board of Directors, which for 2006 was February 17, 2006. Other than in the case of new hires, stock option awards are normally granted at the Compensation Committee meeting that occurs in conjunction with the regularly scheduled Board of Directors meeting during the first quarter of the calendar year.

 

Compensation for Newly Hired Executive Officers

 

When determining compensation for a new executive officer, factors taken into consideration are the individual’s skills, background and experience, the individual’s potential impact on our short-and long-term success, and competitive data from both the list of peer companies and industry-specific published surveys, and data collected from executive search consultants and prospective candidates during the recruitment process.

 

In addition, we make a grant of stock options when an executive officer joins us and may, at our discretion, also grant restricted stock upon hire. Options are granted at no less than 100% of the fair market value on the date of grant. Options are granted on the later of: (i) the date on which the executive officer commences employment or (ii) the date that the Board of Directors approve such option grants. In 2006, we provided a stock option grant of 200,000 options and 25,000 shares of restricted stock to the Company’s new Vice President, Chief Financial Officer and Treasurer upon his arrival. Mr. Church resigned from the Company effective April 20, 2007, at which time none of his equity awards had vested and he was obligated to repay his $10,000 sign-on bonus.

 

Chief Executive Officer’s Compensation

 

Dr. Singhvi’s base salary was set at $350,000 for 2006, and he received a grant of 100,000 stock options and 50,000 shares of restricted stock. His bonus for 2006 performance was $100,000. The Compensation Committee determined Dr. Singhvi’s compensation awards after considering a variety of factors, including the Company’s performance, Dr. Singhvi’s performance, his level of responsibility within the company and industry surveys.

 

Perquisites and Other Personal Benefits

 

We provide certain executive officers with perquisites and other personal benefits that the Compensation Committee believes are reasonable and consistent with our overall compensation program and with competitive practice in our industry. In 2006, benefits included a relocation package for Dr. Singhvi and Mr. Hage related to the Company’s move from Malvern, Pennsylvania to Rockville, Maryland totaling $200,000 and $100,000, respectively. In addition, in 2006, Dr. Singhvi was reimbursed for relocation expenses totaling $85,754. In 2004, in connection with his joining the Company, Dr. Singhvi received a signing bonus of $55,000, which was designed to reimburse Dr. Singhvi for education costs paid by a previous employer which had become Dr. Singhvi’s responsibility in connection with his leaving that employer. The amount of such bonus amortized in 2006 for accounting purposes is reflected in the Summary Compensation Table. The Compensation Committee periodically reviews the levels of perquisites and other personal benefits to our executive officers.

 

Tax and Accounting Implications

 

Compensation Deduction Limit.  As part of its role, the Compensation Committee considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that we may not deduct non-performance-based compensation of more than $1,000,000 that is paid to certain individuals. The Compensation Committee has considered the $1,000,000 limit for federal income tax purposes on deductible executive compensation that is not performance-based and believes that the compensation paid is generally fully deductible for federal income tax purposes. However, in certain situations, the Compensation Committee may approve compensation that will not meet these requirements in order to ensure competitive levels of total compensation for the Company’s executive officers.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

COMPENSATION COMMITTEE

 

John O. Marsh, Chairman

Thomas P. Monath

James B. Tananbaum

 

This report of the compensation committee shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934 except to the extent that Novavax specifically incorporates this information by reference, and shall not otherwise be deemed filed under the Securities Act of 1933 and the Securities Exchange Act of 1934 and shall not be deemed soliciting material.

SUMMARY COMPENSATION TABLE

 

The following table sets forth information concerning the compensation earned during the fiscal year ended December 31, 2006 by the Company’s Chief Executive Officer, each person who served as the Chief Financial Officer during 2006, and the three other most highly compensated individuals serving as executive officers on December 31, 2006 and one individual who would have been one of the three most highly compensated executives except that he was not an executive officer on December 31, 2006 (collectively, the “Named Executive Officers”):

 

 

 

 

 

GRANTS OF PLAN-BASED AWARDS

 

The following table sets forth information with respect to option awards and other plan-based awards granted during the fiscal year ended December 31, 2006 to the Company’s Named Executive Officers:

 

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

The following table sets forth certain information with respect to the value of all unexercised options previously awarded to the Company’s Named Executive Officers as of December 31, 2006:

 

 

 

 

OPTION EXERCISES AND STOCK VESTED

 

The following table sets forth certain information concerning option exercises by the Company’s Named Executive Officers and vesting of the Company’s Common Stock held by them during the fiscal year ended December 31, 2006:

 

 

 

 

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

 

Termination without a Change in Control

 

We have entered into certain agreements and maintain certain plans that may require us to make certain payments and/or provide certain benefits to the executive officers named in the Summary Compensation Table in the event of a termination of employment or a change of control.

 

Rahul Singhvi

 

The Company entered into an employment agreement with Dr. Singhvi in November 2005 pursuant to which he receives a base salary, initially $300,000, and currently $350,000, subject to annual performance reviews. In addition, he is entitled to receive a performance and incentive bonus in respect of his employment with the Company each year, payable the following year, in an amount to be determined by the Board, or any committee thereof authorized to make such determination, to be appropriate based on Dr. Singhvi’s and the Company’s achievement of certain specified goals, with a maximum bonus of 60% of his salary during 2005 and 100% of salary during 2006. The bonus is to be paid partly in cash and partly in shares of restricted stock in the discretion of the Board. Dr. Singhvi is also entitled to additional stock awards based upon performance and subject to the Board’s approval, reimbursement of reasonable expenses incurred by him in connection with the performance of his duties, and to participate in the Company’s Change of Control Severance Benefit Plan (discussed below).

 

Dr. Singhvi has agreed to maintain the confidentiality of the Company’s proprietary information, and that all work product discovered or developed by him in the course of his employment belongs to the Company. In addition, he has agreed not to compete with the Company, directly or indirectly, within the United States or interfere with or solicit the Company’s contractual relationships, in each case during the term of his employment and for a period of one year following the termination of his employment.

 

In the event of a termination without cause (as defined in the employment agreement) or Dr. Singhvi’s termination of his employment for good reason (as defined in the employment agreement) as of December 31, 2006, Dr. Singhvi would have been entitled to a lump-sum cash payment in an amount equal to 12 months of his then-effective salary or $350,000.

 

Jeffrey W. Church

 

The Company entered into an employment agreement with Mr. Church in August 2006 pursuant to which he receives an annual base salary of $245,000, subject to review by the Chief Executive Officer of the Company and the Board when compensation is reviewed after the completion of the audit with respect to 2006, and each year thereafter. In addition, he is entitled to receive a performance and incentive bonus in respect of his employment with the Company each year, payable the following year, in an amount to be determined by the President and Chief Executive Officer and Board (or any committee thereof authorized to make such determination) to be appropriate based on Mr. Church’s and the Company’s achievement of certain specified goals, with a maximum bonus of 40% of his salary during the year to which the bonus relates. The bonus is to be paid partly in cash and partly in shares of restricted Common Stock in the discretion of the Board. Mr. Church is also eligible to receive additional stock awards based upon performance and subject to approval of the President and Chief Executive Officer and the Board and is entitled to reimbursement of reasonable expenses incurred by him in connection with the performance of his duties, and to participate in the Company’s Change of Control Severance Benefit Plan.

 

Mr. Church has agreed to maintain the confidentiality of the Company’s proprietary information, and that all work product discovered or developed by him in the course of his employment belongs to the Company. In addition, he has agreed not to compete with the Company, directly or indirectly, within the United States or interfere with or solicit the Company’s contractual relationships, in each case during the term of his employment and for a period of six months following the termination of his employment.

 

In the event of a termination without cause (as defined in the employment agreement) or Mr. Church’s termination of his employment for good reason (as defined in the employment agreement) as of December 31, 2006,

Mr. Church would have been entitled to a lump-sum cash payment in an amount equal to six months of his then-effective salary or $122,500.

 

Raymond J. Hage, Jr.

 

The Company entered into an employment agreement with Mr. Hage in November 2005 pursuant to which he receives an annual base salary of $220,000, subject to review by the Chief Executive Officer of the Company and the Board when compensation is reviewed after the completion of the audit with respect to 2005, and each year thereafter. In addition, he is entitled to receive a performance and incentive bonus in respect of his employment with the Company each year, payable the following year, in an amount to be determined by the President and Chief Executive Officer and Board (or any committee thereof authorized to make such determination) to be appropriate based on Mr. Hage’s and the Company’s achievement of certain specified goals, with a maximum bonus of 40% of his salary during the year to which the bonus relates. The bonus is to be paid partly in cash and partly in shares of restricted Common Stock in the discretion of the Board. Mr. Hage is also eligible to receive additional stock awards based upon performance and subject to approval of the President and Chief Executive Officer and the Board and is entitled to reimbursement of reasonable expenses incurred by him in connection with the performance of his duties, and to participate in the Company’s Change of Control Severance Benefit Plan.

 

Mr. Hage has agreed to maintain the confidentiality of the Company’s proprietary information, and that all work product discovered or developed by him in the course of his employment belongs to the Company. In addition, he has agreed not to compete with the Company, directly or indirectly, within the United States or interfere with or solicit the Company’s contractual relationships, in each case during the term of his employment and for a period of six months following the termination of his employment.

 

In the event of a termination without cause (as defined in the employment agreement) or Mr. Hage’s termination of his employment for good reason (as defined in the employment agreement) as of December 31, 2006, Mr. Hage would have been entitled to a lump-sum cash payment in an amount equal to six months of his then-effective salary or $113,500.

 

Termination upon a Change of Control

 

On August 10, 2005, the Board of Directors adopted a Change of Control Severance Benefit Plan (the “Severance Plan”). The purpose of the Severance Plan is to provide severance pay and benefits to a select group of employees who terminate their employment with the Company following a change in control event, to provide such employees with an incentive to remain with the Company and consummate a strategic corporate sale or transaction that maximizes shareholder value.

 

Severance pay and benefits are triggered under the Severance Plan upon the involuntary termination of a participant’s employment for a reason other than “cause” or a participant’s voluntary resignation as a result of a “constructive termination,” within 24 months (in the case of the President and Chief Executive Officer); 18 months (in the case of the Chief Financial Officer); or 12 months (in the case of other participating employees) of a “change in control”, as each such term is defined in the Severance Plan.

 

In the event that pay and benefits are triggered, the President and Chief Executive Officer is entitled, among other things, to receive severance pay in an amount equal to 24 months’ base salary, payable in a lump-sum cash payment; the payment of premiums for health, dental and vision coverage under Company plans for a period of 24 months; a bonus of 100% of such executive’s target annual bonus award; and the vesting of all unvested stock option grants, exercisable within one year.

 

In the event that pay and benefits are triggered, the Chief Financial Officer is entitled, among other things, to receive severance pay in an amount equal to 18 months’ base salary, payable in a lump-sum cash payment; the payment of premiums for health, dental and vision coverage under Company plans for a period of 18 months; a bonus of 100% of such executive’s target annual bonus award; and the vesting of all unvested stock option grants, exercisable within one year.

 

Participating employees other than the President and Chief Executive Officer and the Chief Financial Officer are entitled, among other things, to receive severance pay in an amount equal to 12 months’ base salary, payable in a

lump-sum cash payment; the payment of premiums for health, dental and vision coverage under Company plans for a period of 12 months; a bonus of 100% of such executive’s target annual bonus award; and the vesting of all unvested stock option grants, exercisable within one year.

 

Initially, the Severance Plan provided that all outstanding equity awards held by participants in the 2005 Plan, became vested and exercisable in full upon a change in control of the company (a “Single Trigger Acceleration”). In July 2006, the Board amended the Severance Plan to provide that, upon a termination of employment following a change in control, all awards granted thereafter and held by participants in the 2005 Plan shall become vested and exercisable in full (a “Double Trigger Acceleration”). In April 2007, the Compensation Committee recommended and the Board of Directors adopted revised stock option agreements, restricted stock agreements and restricted stock unit agreements for all awards made in March 2007 and thereafter that provide for Double Trigger Acceleration to conform with the amendment to the Severance Plan. This action did not alter awards granted before March 2007.

 

Participants in the Severance Plan are recommended by the President and Chief Executive Officer and approved by the Board of Directors. Selected participants with existing severance agreements will be given the choice to elect coverage under the Severance Plan or under their existing agreements, whichever is more favorable. Current participants in the Severance Plan include Dr. Singhvi, Mr. Church, Mr. Hage, Dr. Smith and Dr. Bright. The following table sets forth information with respect to compensation to the executives upon a Change in Control as of December 31, 2006: