Novavax Annual Report 1997

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 Commission File No. 0-26770 NOVAVAX, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2816046 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8320 GUILFORD ROAD, COLUMBIA, MARYLAND 21046 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 854-3900 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class: Name of each exchange on which registered:COMMON STOCK ($.01 PAR VALUE) AMERICAN STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NoneIndicate by check mark whether the registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes X No -------- --------Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of the registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ------The aggregate market value of 9,501,996 shares of the registrant's Common Stock,par value $.01 per share, held by non-affiliates of the registrant at March 20,1998, as computed by reference to the closing price of such stock, wasapproximately $42,758,982.The number of shares of the registrant's Common Stock, par value $.01 per share,outstanding at March 20, 1998 was 12,060,443 shares.DOCUMENTS INCORPORATED BY REFERENCE: Portions of the 1998 Novavax, Inc. ProxyStatement are incorporated by reference into Part III of this Report. 7 2PART IITEM 1. BUSINESSNovavax, Inc. ("Novavax" or the "Company") is a biopharmaceutical, drug deliverycompany focused on the research and development of proprietary topical and oraldrug delivery technologies and the applications of those technologies. TheCompany's technology platforms involve the use of proprietary microscopicorganized lipid structures as vehicles for the delivery of a wide variety ofdrugs and other therapeutic products, including certain hormones, anti-bacterialand anti-viral products and vaccine adjuvants. The Company recently formed two operating divisions, NOVAVAX PHARMACEUTICALDIVISION (the "PHARMACEUTICAL DIVISION") and NOVAVAX BIOLOGICS DIVISION (the"BIOLOGICS DIVISION"). This reorganization is intended to streamline operationsand give each business division dedicated resources, stronger focus, and tightermanagement. The PHARMACEUTICAL DIVISION utilizes a range of microencapsulationtechnologies to develop novel biopharmaceuticals, often reformulating existing,approved drugs for topical delivery in cosmetic-like cream formulations. Itsstrong technology provides a basis for development of novel products whileutilizing resources with little short term opportunity for immediate revenue.The BIOLOGICS DIVISION is a revenue center focused on vaccines, adjuvants andanti-infectives. It has business objectives focused on generating contractrevenues and providing research for the PHARMACEUTICALS DIVISION. The BIOLOGICSDIVISION has historically entered into contractual arrangements which usuallyprovide upfront and milestone payments as compensation during developmentcontracts. These contracts may also provide for potential license and royaltyfees. Currently the BIOLOGICS DIVISION is working under contract on severalgovernmental and private sector programs in the fields of vaccines andbiological defense systems. These contracts include development of an adjuvantfor an immunotherapeutic against the human papilloma virus for a British vaccinecompany and a subcontractor agreement with University of Michigan who issupplying anti-infective defense systems against biological warfare agents forthe U.S. military. They are anticipated to generate approximately $.5 millionin revenue in 1998 with potential revenue opportunities beyond 1998. The Company has three lead pharmaceutical product candidates: ESTRASORB, atopical estrogen cream, ANDROSORB, a topical testosterone cream and Helicore, anoral, non-antibiotic, anti-bacterial preparation for the treatment ofHelicobacter pylori infection. These products are in various phases of clinicaldevelopment. The Company has completed animal and human safety studies for bothESTRASORB and ANDROSORB and has other clinical studies underway. Currently,several formulations of Helicore are in animal and human safety studies. Although the Company began development of its pharmaceutical productcandidates later than, and as byproducts of its vaccine research anddevelopment, its primary emphasis is now on these pharmaceutical productcandidates for the following reasons: - Much larger potential markets - Measurements of clinical efficacy are more easily defined - The Company's belief that resources should be focused on few initiatives that may offer the best potential return on investment. Consistent with prudent use of the Company's limited cash resources, theclinical development programs for oral active vaccine immunization programs,ECOVAX 0157J and Shigella flexneri 2a, were suspended late in 1996 in favor ofthe development of its three lead pharmaceutical product candidates. The Companysubmitted dose ranging clinical study plans for both ESTRASORB and Helicore tothe FDA in 1997. The Company has the potential, dependent on future capital, todevelop other human pharmaceutical products utilizing its proprietary drugdelivery platform technologies. It has several such products in various stagesof pre-clinical development. Novavax, Inc. was incorporated in Delaware in 1987. On December 12, 1995,the Company's former parent, IGI, Inc. ("IGI") distributed its majorityinterest in Novavax to the IGI stockholders (the "Distribution"). Until then,Novavax had been the human pharmaceuticals subsidiary of IGI. The Company'sprincipal executive offices are located at 8320 Guilford Road, Columbia,Maryland, 21046. THE NOVAVAX TECHNOLOGY PLATFORMSNovavax has developed proprietary topical and oral drug delivery technologiesusing organized lipid structures (collectively, the "Novavax Technologies"). Todate, the Company has utilized its technologies in the development ofNovasome(R) lipid vesicles and micellar nanoparticles, which are sub-micron sizelipid structures that also possess encapsulation capabilities. These structuresmay help with targeted delivery and controlled release. The Company believes itstechnologies may allow for a more cost-effective delivery of a wide variety ofdrugs and other therapeutics than phospholipid liposomes and other deliveryvehicles. Its technologies may be preferred over other transdermal deliverysystems because of the reduction in side effects, primarily skin irritation.Additionally, future applications may show advantages over injectable deliverytechnologies which are invasive, inconvenient and sometimes painful. Most commercial liposomes are composed of delicate phospholipids. Due totheir inherent lack of stability and carrying capacity limitations, a limitednumber of drugs may be used with phospholipid liposomes. While capable ofencapsulating certain (principally water soluble) drugs, phospholipid liposomeshave a number of significant disadvantages including their expense and the needto use potentially hazardous organic solvents in their manufacture. In addition,the standard, multi-step phospholipid manufacturing process yields relativelysmall quantities of liposomes.8 3Novasome lipid vesiclesNovasome lipid vesicles are proprietary, organized, lipid structures in whichdrugs or other materials may be encapsulated for delivery into the bodytopically or orally. Novasome lipid vesicles are made using the Company'spatented manufacturing process from a variety of readily available chemicalscalled amphiphiles, which include fatty alcohols and acids, ethoxylated fattyalcohols and acids, glycol esters of fatty acids, glycerol fatty acid mono anddiesters, ethoxylated glycerol fatty acid esters, glyceryl ethers, fatty aciddiethanolamides and dimethyl amides, fatty acyl sarcosinates, and alkyds as wellas phospholipids. The Company entered into a licensing agreement with IGI, theCompany's former parent, in December 1995 entitling IGI to the exclusive use ofthe Novavax Technologies in certain fields. Currently, IGI uses Novasome lipidvesicles in a wide variety of cosmetic applications, including products sold byEstee Lauder and Revlon. The Company retains rights to Novasome lipid vesicletechnologies for use in human pharmaceuticals except for topical dermatologicalproducts for localized usage at the delivery zone.Micellar NanoparticlesMicellar nanoparticles ("MNPs") are submicron-sized, water miscible lipidstructures that have different structural characteristics and are generallysmaller than Novasome lipid vesicles. MNPs, like Novasome lipid vesicles, arederived from amphiphile molecules. Novavax scientists have demonstrated the ability to incorporate alcoholsoluble drugs and pesticides, vaccine adjuvants, proteins, whole viruses,flavors, fragrances and colors into MNPs. MNPs have the ability to entrapethanol or methanol soluble drugs and to deliver certain of these drugs throughintact skin. The MNP formulations used for the transdermal delivery of drugshave cosmetic properties like creams and lotions. There may be inherentadvantages over injectable delivery systems which are invasive and inconvenientand over patch transdermal delivery systems which often cause skin irritation.NOVAVAX PRODUCT CANDIDATESTopical Drug DeliveryThe Company is using its micellar nanoparticle technology in the development ofESTRASORB, a cream designed for the delivery of 17b estradiol (estrogen) throughthe skin. Estrogen replacement therapy is currently used worldwide by menopausalwomen to prevent osteoporosis, cardiovascular disease and other menopausalsymptoms (e.g. "hot flashes"). Current estrogen replacement products includeoral tablets or, more recently, transdermal patches. Oral estrogen tablets,however, have been associated with side effects primarily resulting fromfluctuating blood hormone levels. Because of these side effects, transdermalpatches for estrogen replacement were developed. While these patches help reduceblood hormone fluctuations, they may cause skin irritation and patientinconvenience associated with wearing and changing an external patch. The Company believes that ESTRASORB may offer several advantages overexisting therapies used for estrogen replacement. ESTRASORB is a cream that maybe applied to the skin much like a topical cosmetic-like cream. The Companybelieves ESTRASORB will be able to deliver a continuous amount of estrogen tothe patient without the fluctuations in blood hormone levels associated withoral tablets. In addition, ESTRASORB does not contain materials that may causeskin irritation associated with transdermal patches. In 1995, the Company completed preclinical testing of ESTRASORB in a primatemodel. Results of this study demonstrated that ESTRASORB can be utilized todeliver estradiol through intact skin with maintenance of therapeutic serumestradiol levels for six days after a single topical application. Based on theseresults, the Company initiated a Phase I human clinical trial of ESTRASORBinvolving 10 symptomatic menopausal women. In this study, each woman received asingle topical application of ESTRASORB. This study was completed in the fourthquarter of 1996 with no significant adverse experiences noted. The Companycompleted two additional human clinical studies with ESTRASORB. The first is amultiple-dose, dose ranging, pharmacokinetic study begun in the second quarterof 1997. The second is a multiple-dose, pharmacokinetic, placebo controlledstudy was started in third quarter of 1997. These studies demonstrated no skinirritation and delivery of therapeutic levels of the drug. In September, 1996, the Company completed the animal testing of ANDROSORB(testosterone) in its MNP transdermal drug delivery platform. In these tests,peak blood levels of testosterone were approximately three times higher thantestosterone dissolved in ethanol. After a single topical cream application,peak serum levels of testosterone were as high as 35 nanograms per milliliterand persisted in the therapeutic range for 48 hours. The Company completed thehuman safety studies and submitted the results to the FDA in the third quarterof 1997. A multiple-dose, pharmacokinetic human study began in the third quarterof 1997 and was completed in the first quarter of 1998. This study demonstratedno skin irritation and delivery of therapeutic levels of the drug. Testosterone replacement therapy is currently used by males who aretestosterone deficient as a result of either primary or secondary hypogonadism.Testosterone in males is required to maintain sexual function and libido,maintain lean body mass, increase hemoglobin synthesis and maintain bonedensity. Current testosterone replacement therapy products include deepintramuscular injections or transdermal patches. The injections require frequentvisits to a physician and may be associated with pain at the injection site andabscess. The transdermal patches may cause skin irritation and patientinconvenience associated with wearing and changing two to three external patchesper day. The Company believes that ANDROSORB may offer several advantages over currenttestosterone replacement therapies. ANDROSORB is a lotion that may be applied tothe skin. This would eliminate the need for intramuscular injections. Inaddition, ANDROSORB does not contain materials that may cause the skinirritation associated with transdermal patches. 9 4 All clinical trials to date, for both ESTRASORB and ANDROSORB, have beenconducted with product formulations that have been refrigerated. The Company iscurrently developing and evaluating several other formulations, along withpackaging alternatives, that will not be refrigerated and will have a two yearshelf life. Clinical trials to determine that therapeutic blood levels of thedrug are delivered with these formulations are expected to be completed by theend of the third quarter in 1998. These formulations are believed to havecommercial and patient compliance advantages over refrigerated productformulations. The Company anticipates most future clinical trials to be withformulations that require no refrigeration. The Company has developed several other applications of its MNP transdermaldrug delivery technology platform. These product applications are in variousstages of pre-clinical testing. The Company believes its MNP and othertechnologies are suitable for the delivery of ethanol soluble drugs.Helicore Microbicidal PreparationsThe Company has developed proprietary lipid structure formulations that it isusing in the development of a non-antibiotic anti-bacterial preparation for thetreatment of Helicobacter pylori ("H. pylori") infection in humans. H. pyloriwas recognized in 1994 by the National Institutes of Health as a causative agentof peptic ulcer disease, antral gastritis and certain types of gastric cancer.It is estimated that 30-80 million adults in the U.S. are infected with H.pylori. Each year the treatment of complications of H. pylori infections (i.e.,peptic ulcer disease) in the U. S. alone costs in excess of five billiondollars. Current therapies for the treatment of H. pylori include the use ofantibiotics alone or antibiotics in combination with drugs that inhibit acidproduction in the stomach. Problems associated with such therapies include, butare not limited to, cost, toxicity, failure to sufficiently eradicate all thebacteria, and acquired resistance to the antibiotic. The Company began in 1995 to test formulations of Helicore in both animalstudies and human safety studies. Results from studies completed in 1996 weresubmitted to the FDA. A multiple-dose, dose ranging study began in the secondquarter of 1997 is currently being completed. Additional pre-clinical studies onvarious formulations are still in process.Vaccine AdjuvantsAdjuvants are substances that make vaccines more effective. The Company believesthat certain of its organized lipid structures (e.g. Novasome lipid vesicles)may provide effective and safe adjuvant carrier systems for a variety ofvaccines. The Company believes that Novasome lipid vesicles may be used asvaccine adjuvants and protective carriers in a variety of circumstances,including: (i) encapsulation and protection of delicate antigenic materials fromdestruction by the body's normal enzymatic processes; (ii) encapsulation oftoxic materials, such as endotoxins and other potent toxins, for gradualreleases, thereby providing protection of the body from the toxin whilegenerating an immune response to the toxic antigen; (iii) presentation of smallpeptide antigens to elicit a heightened cellular immune response. Additionally,the Company has developed structures for delivery of biologically activemolecules like anti-sense, genes and proteins. The Company has several research contracts in place to provide vaccineproducts, services and adjuvant technologies. These contracts includedevelopment of an adjuvant for an immunotherapeutic against human PapillomaVirus for a British vaccine company and a subcontract agreement with Universityof Michigan who is supplying anti-infective defense systems against biologicalwarfare agents for the U.S. military. They are anticipated to generateapproximately $.5 million in revenue in 1998 with potential revenueopportunities beyond 1998. MANUFACTURINGThe development and manufacture of the Company's products are subject to goodlaboratory practices ("GLP") and good manufacturing practices ("GMP")requirements prescribed by the FDA and to other standards prescribed by theappropriate regulatory agency in the country of use. The Company has the abilityto produce quantities of Novasome lipid vesicles sufficient to support itscurrent needs. The Company also has the ability to produce quantities ofNovasome lipid vesicles and MNPs sufficient to support its needs for early-stageclinical trials. It does not presently have FDA certified facilities capable ofproducing the larger quantities of pharmaceutical products required for largerscale clinical trials or commercial production. The Company will need to rely oncollaborators, licensees or contract manufacturers or acquire such manufacturingfacilities for later stage clinical trials and commercial production of its ownpharmaceuticals. There can be no assurance that the Company will be able toobtain such facilities or manufacture such products in a timely fashion atacceptable quality and prices, that it or its suppliers will be able to complywith GLP or GMP, as applicable, or that it or its suppliers will be able tomanufacture an adequate supply of product.MARKETINGThe Company plans to market its pharmaceuticals for which it obtains regulatoryapprovals either through joint ventures or corporate partnering arrangements.The Company expects that such arrangements could include technology licenses,research funding, milestone payments, collaborative product development,royalties and equity investments in Novavax. Implementation of this strategywill depend on many factors, including the market potential of its products andtechnologies, the success in developing relationships with distributors ormarketing partners for the Company's products and the financial resourcesavailable to the Company.10 5COMPETITIONA number of large companies, such as Novartis, Procter & Gamble, American HomeProducts, Parke-Davis, Solvay Pharmaceuticals, SmithKline Beecham, AbbottLaboratories, Ortho Pharmaceuticals and Mead Johnson Laboratories, produce andsell estrogen preparations for clinical indications identical to those theCompany proposes to target. SmithKline Beecham currently markets a transdermaltestosterone patch and Novartis markets an estrogen transdermal patch. Thecompetition to develop FDA approved hormone replacement therapies is intense andno assurance can be given that the Company's product candidates will bedeveloped into commercially successful products. Many companies, such as Merck, Merck-Astra, Glaxo-Wellcome, Procter & Gamble,SmithKline Beecham, OraVax and others, are currently evaluating varioustreatment programs for peptic ulcer disease and the treatment of H. pylori. Mostof the therapies under investigation today involve a combination of a currentlyused ulcer treatment medication (e.g., Prilosec(R), Zantac(R) or Tagamet(R),) inassociation with an antibiotic (e.g., amoxicillin, Flagyl(R) or Biaxin(R)). Themarket for the development of treatment programs for peptic ulcer disease and H.pylori infection is competitive and no assurance can be given that the Company'sH. pylori product candidates will be developed into commercially successfulproducts. A number of other companies have been working on vaccine adjuvants for use inhuman vaccines. These include, but are not limited to, Chiron, Ribi ImmunochemResearch, Cambridge Biotech, Iscotec, Proteus International and Biomira. Thecompetition to develop FDA-approved human vaccine adjuvants is intense and noassurance can be given that the Company's adjuvant product candidates will bedeveloped into commercially successful products. Primary competitors in the development of lipid structure and vesicleencapsulation technologies are The Liposome Company, Sequus Pharmaceuticals,Nexstar Pharmaceuticals and L'Oreal, as well as other pharmaceutical, vaccineand chemical companies. The Company believes that, except for L'Oreal, thesecompanies have focused their development efforts on pharmaceutical carriersystems for the treatment of infections and certain cancers. To the Company'sknowledge, The Liposome Company, Sequus and Nexstar all base their lipid vesicletechnologies on phospholipids. Most of the Company's competitors are larger than the Company and havesubstantially greater financial, marketing and technical resources. In addition,many of these competitors have substantially greater experience than the Companyin developing, testing and obtaining FDA and other approvals of pharmaceuticals.Furthermore, if the Company commences commercial sales of pharmaceuticals, itwill also be competing with respect to manufacturing efficiency and marketingcapabilities, areas in which it has limited or no experience. If any of thecompetitors develop new encapsulation technologies that are superior to theCompany's Novasome and MNP technologies, the ability of the Company to expandinto the pharmaceutical and vaccine adjuvant markets will be materially andadversely affected. Competition among products will be based, among other things, on productefficacy, safety, reliability, availability, price and patent position. Animportant factor will be the timing of market introduction of the Company's orcompetitors' products. Accordingly, the relative speed with which the Companycan develop products, complete the clinical trials and approval processes andsupply commercial quantities of the products to the market is expected to be animportant competitive factor. The Company's competitive position will alsodepend upon its ability to attract and retain qualified personnel, to obtainpatent protection or otherwise develop proprietary products or processes and tosecure sufficient capital resources for the often substantial period betweentechnological conception and commercial sales.RESEARCH AND DEVELOPMENTThe Company's research is focused principally on the development andcommercialization of formulations for topical drug delivery and therapeuticproducts, including antibacterial and anti-viral products and adjuvants forvaccines. The Company intends to use third-party funding when available, throughcollaborations, joint ventures or strategic alliances with other companies,particularly potential distributors of the Company's products. Because of thesubstantial funds required for clinical trials, the Company will have to obtainadditional financing for its future human clinical trials. No assurance can begiven that such financing will be available on terms attractive to the Company,if at all. The Company bases its development decisions on development costs andpotential return on investment, regulatory considerations, and the interest,sponsorship and availability of funding from third parties. As of December 31,1997, the Company's research and development staff numbered 8 individuals. Inaddition to its internal research and development efforts, the Companyencourages the development of product candidates in areas related to its presentlines by working with universities and government agencies. Novavax's researchand development expenditures, approximated $2,874,000, $3,716,000 and $3,708,000and in the years ended December 31, 1997, 1996 and 1995, respectively.PATENTS AND PROPRIETARY INFORMATIONThe Company, through a wholly-owned subsidiary, holds 46 U.S. patents and 53foreign patents covering its technologies (which include a wide variety ofcomponent materials, its continuous flow vesicle production process and itsNovamix(R) production equipment). The Company believes that these patents areimportant for the protection of its technology as well as certain of thedevelopment processes that underlie that technology. In addition, 8 U.S. patentapplications and 53 foreign patent applications are pending covering thecomposition, manufacture and use of its organized lipid structures and relatedtechnologies. The Company expects to engage in collaborations, sponsored researchagreements and preclinical testing agreements in connection with its futurepharmaceutical products and vaccine adjuvants, as well 11 6as clinical testing agreements with academic and research institutions and U.S.government agencies, such as the NIH, to take advantage of the technicalexpertise and staff of these institutions and to gain access to clinicalevaluation models, patients and related technologies. Consistent withpharmaceutical industry and academic standards, and the rules and regulationspromulgated under the federal Technology Transfer Act of 1986, these agreementsmay provide that developments and results will be freely published, thatinformation or materials supplied by the Company will not be treated asconfidential and that the Company will be required to negotiate a license to anysuch developments and results in order to commercialize products incorporatingthem. There can be no assurance that the Company will be able to successfullyobtain any such license at a reasonable cost or that such developments andresults will not be made available to competitors of the Company on an exclusiveor nonexclusive basis.GOVERNMENT REGULATIONThe Company's research and development activities are subject to regulation forsafety, efficacy and quality by numerous governmental authorities in the UnitedStates and other countries. The development, manufacturing and marketing ofhuman pharmaceuticals are subject to regulation in the United States for safetyand efficacy by the FDA in accordance with the Food, Drug and Cosmetic Act. In the United States, human pharmaceuticals are subject to rigorous FDAregulation including preclinical and clinical testing. The process of completingclinical trials and obtaining FDA approvals for a new drug is likely to take anumber of years, requires the expenditure of substantial resources and is oftensubject to unanticipated delays. There can be no assurance that any product willreceive such approval on a timely basis, if at all. The steps required before new products for use in humans may be marketed inthe United States include (i) preclinical tests, (ii) submission to the FDA ofan application for an Investigational New Drug application (IND), which must beapproved before human clinical trials commence, (iii) adequate andwell-controlled human clinical trials to establish the safety and efficacy ofthe product, (iv) submission of a New Drug Application ("NDA") for a new drug ora Product License Application ("PLA") for a new biologic to the FDA and (v) FDAapproval of the NDA or PLA prior to any commercial sale or shipment of theproduct. Preclinical tests include laboratory evaluation of product formulation, aswell as animal studies (if an appropriate animal model is available) to assessthe potential safety and efficacy of the product. Formulations must bemanufactured according to GMP and preclinical safety tests must be conducted bylaboratories that comply with FDA regulations regarding GLP. The results of thepreclinical tests, are submitted to the FDA as part of an IND and are reviewedby the FDA prior to the commencement of human clinical trials. There can be noassurance that submission of an IND will result in FDA authorization to commenceclinical trials. Clinical trials involve the administration of theinvestigational new drug to healthy volunteers and to patients under thesupervision of a qualified principal investigator and are typically conducted inthree sequential phases, although the phases may overlap. The Company or the FDAmay suspend clinical trials at any time if the participants are being exposed toan unacceptable health risk. The FDA may deny an NDA or PLA if applicableregulatory criteria are not satisfied, require additional testing orinformation, or require post marketing testing and surveillance to monitor thesafety of the Company's products. In addition to obtaining FDA approval for each PLA, an Establishment LicenseApplication ("ELA") must be filed and approved by the FDA for the manufacturingfacilities of a biologic product before commercial marketing of the biologicproduct is permitted. The regulatory process may take many years and requiresthe expenditure of substantial resources. In addition to regulations enforced by the FDA, the Company also is subjectto regulation under the Occupational Safety and Health Act, the EnvironmentalProtection Act, the Toxic Substances Control Act, the Resource Conservation andRecovery Act and other present and potential future federal, state or localregulations. The Company's research and development involves the controlled useof hazardous materials, chemicals and viruses. Although the Company believesthat its safety procedures for handling and disposing of such materials complywith the standards prescribed by state and federal regulations, the risk ofaccidental contamination or injury from these materials cannot be completelyeliminated. In the event of such an accident, the Company could be held liablefor any damages that result, and any such liability could exceed the resourcesof the Company. In both domestic and foreign markets, the ability of the Company tocommercialize its product candidates will depend, in part, on the availabilityof reimbursement from third-party payers, such as government healthadministration authorities, private health insurers and other organizations. Ifadequate coverage and reimbursement levels are not provided by government andthird-party payers for uses of the Company's therapeutic products, the marketacceptance of these products would be adversely affected. There have been a number of federal and state proposals during the last fewyears to subject the pricing of pharmaceuticals to government control and tomake other changes to the medical care system of the United States. It isuncertain what legislative proposals will be adopted or what actions federal,state or private payers for medical goods and services may take in response toany medical reform proposals or legislation. The Company cannot predict theeffect medical reforms may have on its business, and no assurance can be giventhat any such reforms will not have a material adverse effect on the Company.12 7EMPLOYEESThe Company had 15 full-time employees as of December 31, 1997, of whom 8 are inresearch and development. The Company has no collective bargaining agreementwith its employees and believes that its employee relations are good.ITEM 2. PROPERTIESThe Company leases approximately 12,000 square feet of administrative officesand laboratory space for its corporate headquarters and PHARMACEUTICAL DIVISION,located at 8320 Guilford Road, Columbia, Maryland. The Company believes itsfacilities are adequate to produce quantities of Novasome lipid vesicles andMNPs sufficient to support its needs for early-stage clinical trials. It doesnot presently have FDA certified facilities capable of producing the largerquantities of pharmaceutical products required for larger scale clinical trialsor commercial production. The Company will need to rely on collaborators,licensees or contract manufacturers or acquire such manufacturing facilities forlater stage clinical trials and commercial production of its ownpharmaceuticals. The Company's BIOLOGICS DIVISION also leases 2,363 square feet of spacelocated in Rockville, Maryland. This space contains the Company's certifiedanimal facility and laboratories for its biologics development which includesthe vaccine and vaccine adjuvant product and services group.ITEM 3. LEGAL PROCEEDINGSNot Applicable.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNo matters were submitted to a vote of security holders during the fourthquarter of the fiscal year ended December 31, 1997.EXECUTIVE OFFICERS OF THE REGISTRANTThe Company's executive officers hold office until the first meeting of theBoard of Directors following the annual meeting of stockholders and until theirsuccessors are duly chosen and qualified, or until they resign or are removedfrom office in accordance with the Company's By-laws. PRINCIPAL OCCUPATION AND OTHER BUSINESSNAME AGE EXPERIENCE DURING PAST FIVE YEARS- -------------------------------------------------------------------------------RICHARD F. MARADIE 50 Chief Executive Officer of Novavax since March, 1997. Co-Founder, Director, President and Chief Executive Officer of Protyde Pharmaceuticals, Inc. from 1994 to 1997. Director, Executive Vice President and Chief Operating Officer of Platelet Research Products, Inc. from 1991 to 1994. Director, President and Chief Executive Officer of VimRx Pharmaceuticals, Inc. from 1988 to 1991. Executive Vice President and Chief Operating Officer of Creative Biomolecules, Inc. from 1987 to 1988. Senior Director Cetus Corporation and General Manager and Chairman of the Board of Managers for Cetus/BenVenue Oncology Therapeutics from 1983 to 1987. Director of Oncology Marketing and Sales of Adria Laboratories, Inc. from 1974 to 1983.D. CRAIG WRIGHT, M.D. 47 Vice President, Research and Development and Operations of Novavax since 1993. Founder and Senior Director of Medical Research of Univax Biologics, Inc., a biopharmaceutical company, from 1988 to 1992.BRENDA L. FUGAGLI 41 Vice President, Chief Financial Officer and Treasurer of Novavax since July, 1997. President, Chief Operating Officer, Carestream a division of FoxMeyer Corporation, 1995. Senior Vice President of Marketing FoxMeyer Drug Company 1992 to 1995. Vice President and Controller FoxMeyer Corporation from 1989 to 1992. 13 8 PRINCIPAL OCCUPATION AND OTHER BUSINESS EXPERIENCENAME AGE DURING PAST FIVE YEARS- --------------------------------------------------------------------------------THOMAS G. TACHOVSKY, PH.D. 51 Vice President, Business Development since February, 1998. General Partner and Founder, Matco & Associates, a consulting firm, 1991 to 1998. Executive Vice President R&D, Director and Founder, Protyde Pharmaceuticals, Inc., 1995 to 1997. Vice President Business Development, Cytogen Corporation, 1989 to 1991.RICHARD J. HARWOOD, PH.D. 54 Vice President, Pharmaceutical Product Development since March, 1998. Consultant K. W. Tunnell Company, Inc., 1995 to 1998. Vice President, Research and Development, Private Formulations, Inc., 1993 to 1995. Technical Planning Director, Worldwide Strategic Product Planning, Bristol-Myers Squibb, 1986 to 1993. Department Director, Product Development, Rorer Group, Inc., 1982 to 1986. Research Fellow, Merck and Co., Inc., 1970 to 1982.PART IIITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock was held by 952 stockholders of record as ofMarch 20, 1998. The Company has never paid cash dividends on its Common Stock.The Company currently anticipates that it will retain all of its earnings foruse in the development of its business and does not anticipate paying any cashdividends in the foreseeable future. The principal market for the Company's Common Stock ($.01 par value) istraded on the American Stock Exchange under the symbol "NOX". The followingtable shows the range of high and low closing prices of the Company's commonstock on the American Stock Exchange for the periods indicated. HIGH LOW- ----------------------------------------------------1997First quarter $4 3/4 $3 1/4Second quarter 4 7/16 2 5/8Third quarter 6 4Fourth quarter 5 3/4 4 1/81996First quarter $6 5/8 $3 3/8Second quarter 8 1/4 5 1/4Third quarter 7 1/8 3 1/8Fourth quarter 4 5/8 2 7/8RECENT SALES OF UNREGISTERED SECURITIESOn October 30, 1996, Novavax received $1,655,877, net of all transaction costs,from the sale of 505,000 common shares that were privately placed withaccredited institutional investors by Vector Securities International, Inc. OnFebruary 10, 1997, Novavax signed a definitive agreement to privately place1,200,000 common shares with Anaconda Opportunity Fund, L.P., an accreditedinstitutional investor, at an aggregate price of $5,100,000. Effective on orabout the closing dates the 1,705,000 common shares were registered and freelytradable. On January 23, 1998, the Company entered into Subscription Agreements toeffectuate the private placement of 6,500 shares of Series A Custom ConvertiblePreferred Stock, $.01 par value per share (the "Series A Preferred Stock"). Theclosing occurred on January 28, 1998 (the "Issuance Date") at an aggregatepurchase price of $6,500,000. The Company received the proceeds therefor andpaid Diaz & Altschul, LLC a fee of $425,233 in consideration for its services asplacement agent. The Series A Preferred stock is convertible into shares of Common Stock at aconversion price equal to (i) during a period of 90 days following the IssuanceDate, 100% of the average of the two lowest consecutive trade prices of theCommon Stock as reported on the American Stock Exchange for the 25 trading daysimmediately preceeding the conversion date (the "Two Day Average Trading Price")or (ii) during the period on and after the date which is 91 days after theIssuance date, 94% of the Two Day Average Trading Price (the "ConversionPrice"). From the Issuance Date, there is ceiling price of $6.33 and within the first180 days after the Issuance Date, the Conversion Price has applicable floorprices based on conversion dates. The floor prices range from $5.67 to $4.32.The maximum number of shares as measured by the conversion terms most beneficialto the holders of the Series A Preferred Stock at the time of closing willresult in a deemed dividend in the amount of $455,048 which has been recorded toAccumulated Deficit and Additional Paid In Capital during the three months endedMarch 31, 1998.14 9ITEM 6. SELECTED FINANCIAL DATA For the years ended December 31, ------------------------------------------------------------------------------------ 1993 1994 1995 1996 1997- ----------------------------------------------------------------------------------------------------------------------------------STATEMENT OF OPERATIONS DATA:Revenues: Research revenues (1) $ 380,700 $ 475,000 $ -- $ -- $ --Sales -- -- -- 55,553 519,714Royalties from former parent (2) 198,546 209,877 268,002 -- -- Total Revenues 579,246 684,877 268,002 55,553 519,714Costs and expenses:Selling and marketing 278,836 323,640 398,776 -- -- General and administrative (3) 1,976,356 2,162,431 2,905,873 1,874,418 2,437,166Research and development 2,701,038 2,860,048 3,708,005 3,715,545 2,874,129Interest expense to former parent (4) 413,049 1,028,794 1,749,706 -- -- Interest income -- -- -- (137,539) (244,964)Income tax expense -- -- -- 98,094 -- Net loss (4,790,033) (5,690,036) (8,494,358) (5,494,985) (4,546,617)Net loss per share (basic and diluted)(5) n/a n/a $ (0.85) $ (0.54) $ (0.39)Weighted average number of common shares outstanding n/a n/a 9,937,936 10,132,896 11,667,428BALANCE SHEET DATA:Total current assets $ 268,050 $ 501,845 $ 4,761,199 $ 3,220,772 $ 4,303,044Working capital 202,914 306,159 4,330,412 2,639,505 4,014,406Total assets 2,819,631 3,132,688 7,529,544 5,721,952 6,823,271Capital lease obligations -- -- -- 34,351 23,607Stockholders' (deficit) equity (1,070,994) (2,202,868) 7,098,757 5,117,078 6,521,770(1) Includes payments for licensing agreements and technology application review.(2) Includes royalties for product sales in IGI's animal health products, cosmetic and consumer products businesses through the date of the Distribution.(3) Includes administrative expenses incurred by IGI allocated to Novavax through the date of the Distribution.(4) Interest expense is solely attributable to debt incurred by Novavax to fund its operations through the date of the Distribution.(5) On December 12, 1995, IGI distributed to the holders of record of IGI's common stock , at the close of business on the Record Date, November 28, 1995, one share of the Company's common stock for every one share of IGI common stock outstanding. Pro forma net loss per common share for the year ended December 31, 1995 is based upon weighted average shares outstanding of 9,937,936. See footnote 5 of the Financial Statements. 15 10ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements under Item 1 and Item 7 contained herein or asmay otherwise be incorporated by reference herein constitute "forward-lookingstatements" within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include but are not limited to: statementsregarding future product development and related clinical trials and statementsregarding future research and development. Such forward-looking statementsinvolve known and unknown risks, uncertainties and other factors which may causethe actual results, performance or achievements of the Company, or industryresults, to be materially different from any future results, performance orachievements expressed or implied by such forward-looking statements. Suchfactors include, among other things, the following: general economic andbusiness conditions; competition; technological advances; ability to obtainrights to technology; ability to obtain and enforce patents; ability tocommercialize and manufacture products; results of preclinical studies; resultsof research and development activities; business abilities and judgment ofpersonnel; availability of qualified personnel; changes in, or failure to complywith, governmental regulations; ability to obtain adequate financing in thefuture; and other factors referenced herein. All forward-looking statementsincluded in this document are based on information available to the Company onthe date hereof, and the Company assumes no obligation to update any suchforward-looking statements. Accordingly, past results and trends should not beused by investors to anticipate future results or trends. The following is a discussion of the historical consolidated financialcondition and results of operations of Novavax and its subsidiaries. Thediscussion should be read in conjunction with the consolidated financialstatements and notes thereto set forth in Item 8 to this Report. On December 12, 1995, the Company's former parent, IGI, Inc., distributed itsmajority interest in Novavax to the IGI stockholders (the "Distribution"). Priorto the Distribution, IGI owned 93.2% of the outstanding shares of the Company,all of which were distributed to IGI stockholders. Certain periods covered bythe discussion below occurred when the Company was a subsidiary of IGI and maynot be indicative of current or future performance.RESULTS OF OPERATIONSThe Company has incurred net losses since its inception from the development ofits technologies for human pharmaceuticals, vaccines and vaccine adjuvants.Novavax expects the losses to continue and to most likely increase in thenear-term, as it conducts additional human clinical trials and seeks regulatoryapproval for its product candidates. The Company also expects to continue toincur substantial operating losses over the extensive time period required todevelop the Company's products , or until such time as revenues, to offset thelosses, are sufficient to fund its continuing operations. Until the second quarter of 1996, the Company had recorded revenues from twosources: (i) research revenues from industry partners in consideration of eitherexclusive licenses or technology application reviews and (ii) royalty revenuesthat were attributable to product sales by IGI. Revenues from the sale ofscientific prototype vaccines and adjuvants have been recorded in the second,third and fourth quarters of 1996 and in each quarter of 1997.1997 COMPARED TO 1996The net loss of $4,546,617 for the year ended December 31, 1997 was $948,368 or17%, lower than the net loss of $5,494,985 for the year ended December 31, 1996.The 1997 net loss includes non-cash compensation expense of $577,643 compared to$1,506,790 included in the 1996 net loss. This compensation expense relates tothe amortization of below-market priced stock options and warrants issued at thetime of the Distribution. Other 1997 non-cash charges include $253,591 ofdepreciation and patent amortization expense. Non-cash charges in 1996 included$334,564 for the disposal of property and equipment and $328,225 of depreciationand patent amortization expense. Revenues of $519,714 were recognized during 1997 compared to $55,533 during1996. The increase was due primarily to two contracts related to vaccineproducts, services and adjuvant technologies. Selling, general and administrative expenses include all costs associatedwith the marketing of the Company's technology to potential industry partnersand those activities associated with identifying additional sources of capital.It also includes costs associated with management and administrative activities.Selling, general and administrative expenses were approximately $2,437,166 and$1,874,418 for the years ended December 31, 1997 and 1996, respectively. Theincrease of $562,748 was attributable to increased costs associated withsecuring strategic alliances and potential sources of financing as well as theincreased staffing and infrastructure growth including the hiring of a new ChiefFinancial Officer and Chief Executive Officer. Research and development expenses include scientific staffing, supplies andother costs related to the ongoing development of the Novavax technologies aswell as the development of the Company's three lead product candidates. Researchand development expenses were approximately $2,874,129 and $3,715,545 for theyears ended 16 11December 31, 1997 and 1996, respectively. Although such expenses have decreasedby $841,416, this change is primarily caused by the net decrease in theamortization of below-market priced stock options issued at the time of theDistribution of $933,742 and the non-recurring charge of $334,564 for thedisposal of assets in 1996. Research and development expenses, before these items were $2,407,258 and$1,908,370 for 1997 and 1996. After considering the impact of theseaforementioned non-cash expenses, research and development costs increased by$498,888. The increase was primarily due to the number of product candidates inclinical trials and the growth of the underlying research and developmentinfrastructure including facility expansion. Interest income was approximately $244,964 and $137,539 for the years endedDecember 31, 1997 and 1996, respectively. The increase in net interest incomewas a direct result of an increase in the average cash balances on handthroughout the year.1996 COMPARED TO 1995The net loss of $5,494,985 for the year ended December 31, 1996 was $2,999,373,or 35%, lower than the net loss of $8,494,358 for the year ended December 31,1995. The 1996 net loss includes $1,506,790, compared to $101,183 included inthe 1995 net loss, of non-cash compensation expense. Other non-cash chargesinclude $334,564 for the disposal of property and equipment and $328,225 ofdepreciation and patent amortization expense. Non-cash charges of $272,886 fordepreciation and patent amortization have been included in the 1995 expense. Revenues of $55,533 were recognized during the year ended December 31, 1996from the sale of scientific prototype vaccines and adjuvants. Novavax earnedroyalties from IGI of 10% of licensed product sales, or $268,002, in the yearended December 31, 1995. Total operating expenses were $5,589,963 in 1996, decreasing $1,422,691, or20%, from the $7,012,654 incurred in 1995. Reduced cash resources caused theCompany to reduce spending and achieve other efficiencies including a refocus ofits efforts on the development of its three lead product candidates inconnection with FDA human clinical trials. Total selling, general and administrative expenses were $1,874,418 and$3,304,649 for the years ended December 31, 1996 and 1995, respectively. Costsassociated with the Distribution are included in the 1995 expenses. Nonrecurringcharges of $230,474 were incurred through June 30, 1996 for transitionalservices provided by IGI. The agreement providing these services terminated onJune 30, 1996 and no additional charges have been recorded. Certain costsincluded in the 1995 expenses were estimates allocated from IGI, based onNovavax being a separate public company, and may not compare with the actualcosts Novavax incurred in 1996. These estimated costs were $850,000 for the yearended December 31, 1995. Research and development expenses were $3,715,545 and $3,708,005 for theyears ended December 31, 1996 and 1995, respectively. The 1996 expenses includenon-cash charges of $1,410,648, compared to $101,183 in 1995, related to theamortization of below-market priced stock options issued at the time of theDistribution, and non-cash charges of $334,564 for the disposal of property andequipment related to the closing of one of the Novavax subsidiaries' laboratory. Net interest income of $137,539 was recorded during the twelve months endedDecember 31, 1996, compared with net interest expense of $1,749,706 for the sameperiod ended December 31, 1995, that was charged to Novavax by IGI forborrowings and notes due to IGI through the date of the Distribution to fundoperating losses, capital equipment purchases and patent costs. In connection with the filing of the Company's 1995 tax return during 1996,it was determined that the Company had an Alternative Minimum Tax liabilityresulting from the cash received from IGI in return for the license. Net incometax expense of $98,094 for 1996 is attributable to the Alternative Minimum Taxcalculation.LIQUIDITY AND CAPITAL RESOURCESNovavax's capital requirements depend on numerous factors, including but notlimited to the progress of its research and development programs, the progressof preclinical and clinical testing, the time and costs involved in obtainingregulatory approvals, the costs of filing, prosecuting, defending and enforcingany patent claims and other intellectual property rights, competingtechnological and market developments, and changes in Novavax's development ofcommercialization activities and arrangements. During 1996, the Company movedthree product candidates into clinical trials in less than one year. This rapiddevelopment prompted the need for expansion in late 1996. On October 31, 1996,the Company completed the relocation of its administrative offices andpharmaceutical laboratories to a leased facility in Columbia, Maryland. Futureactivities to establish commercial-scale manufacturing capabilities are subjectto the Company's ability to raise funds through equity financing, orcollaborative arrangements with corporate partners. Novavax's future growth willdepend on its ability to commercialize its Novavax technologies for humanpharmaceutical applications. Net cash used in 1997 for operating activities was $4,244,733. From the dateof the Distribution, Novavax has conducted its operations with approximately$5,000,000 paid by IGI under the IGI License Agreement along with net proceedsfrom several financing transactions completed and described herein. Additionallythe Company has received sources of cash from the sale of scientific prototypevaccines and adjuvants and from the exercise of stock options. On October 30, 1996, Novavax received $1,655,877, net of all transactioncosts, from the sale of 505,000 common shares that were privately placed withaccredited institutional investors by Vector Securities International, Inc. 17 12 On February 10, 1997, Novavax signed a definitive agreement to privatelyplace 1,200,000 common shares with Anaconda Opportunity Fund, L.P., anaccredited institutional investor, at an aggregate price of $5,100,000. As partof the transaction, Novavax also granted warrants to purchase an additional600,000 shares at a price of $6.00 per share and 600,000 shares at a price of$8.00 per share. The warrants have a three-year term. The transaction was closedMarch 14, 1997 with net proceeds of $5,002,718. On January 23, 1998, the Company entered into Subscription Agreements witheach of four purchasers to effectuate the private placement of 6,500 share ofSeries A Custom Convertible Preferred Stock, $.01 par value per share (the"Series A Preferred Stock"). The closing occurred on January 28, 1998 (the"Issuance Date") at an aggregate purchase price of $6,500,000. The Companyreceived the proceeds therefor and paid Diaz & Altschul, LLC a fee of $425,233in consideration for its services as placement agent. The Series A Preferred Stock is convertible into shares of Common Stock at aconversion price equal to (i) during a period of 90 days following the IssuanceDate, 100% of the average of the two lowest consecutive trade prices of theCommon Stock as reported on the American Stock Exchange for the 25 trading daysimmediately preceding the conversion date (the "Two Day Average Trading Price")or (ii) during the period on and after the date which is 91 days after theIssuance Date, 94% of the Two Day Average Trading Price (the "ConversionPrice"). From the Issuance Date, there is a ceiling price of $6.33 and withinthe first 180 days after the Issuance Date, the Conversion Price has applicablefloor prices, ranging from $5.67 to $4.32, based on conversion dates. Themaximum number of shares as measured by the conversion terms most beneficial tothe holders of the Series A Preferred Stock at the time of closing results in adeemed dividend in the amount of $455,048 which will be recorded in the firstquarter of 1998. As of December 31, 1997, Novavax estimates that the money received from themost recent sale of the privately placed Preferred Stock, and its existing cashresources will be sufficient to finance its operations at current and projectedlevels of development activity for approximately 18 to 24 months. On December31, 1997, the Company had $3,847,072 in cash, cash equivalents and marketablesecurities on hand. Past spending levels are not necessarily indicative of future spending.Future expenditures for product development, especially relating to outsidetesting and human clinical trials, are discretionary and, accordingly, can beadjusted to available cash. Moreover, the Company will seek to establish one ormore collaborations with industry partners to defray the costs of clinicaltrials and other related activities. Novavax will also seek to obtain additionalfunds through public or private equity or debt financings, collaborativearrangements with pharmaceutical companies or from other sources. There can beno assurance that additional funding or bank financing will be available at allor on acceptable terms to permit successful commercialization of Novavax'stechnologies and products. If adequate funds are not available, Novavax may berequired to significantly delay, reduce the scope of or eliminate one or more ofits research or development programs, or seek alternative measures includingarrangements with collaborative partners or others that may require Novavax torelinquish rights to certain of its technologies, product candidates orproducts.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSNot applicable.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe financial statements and notes thereto listed in the accompanying index tofinancial statements (Item 14) are filed as part of this Annual Report and areincorporated herein by this reference.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.18 13PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in part under the caption"Executive Officers of the Registrant" in Part I hereof, and the remainder iscontained in the Company's Proxy Statement for the Company's Annual Meeting ofStockholders to be held on May 14, 1998 (the "1998 Proxy Statement") under thecaptions "Proposal 1 -- Election of Directors" and "Beneficial Ownership ofCommon Stock" and is incorporated herein by this reference. The Company expectsto file the 1998 Proxy Statement within 120 days after the close of the fiscalyear ended December 31, 1997. Officers are elected on an annual basis and serve at the discretion of theBoard of Directors.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item is contained in the Company's 1998 ProxyStatement under the captions "Executive Compensation" and "DirectorCompensation" and is incorporated herein by this reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTThe information required by this item is contained in the Company's 1998 ProxyStatement under the caption "Beneficial Ownership of Common Stock" and isincorporated herein by this reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSThe information required by this item is contained in the Company's 1998 ProxyStatement under the caption "Certain Relationships and Related Transactions" andis incorporated herein by this reference.PART IVITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Operations for the years ended December 31, 1997,1996, and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997,1996, and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997,1996, and 1995 Notes to Consolidated Financial Statements(2) Financial Statement Schedules: Schedules are either not applicable or not required because the information required is contained in the financial statements or notes thereto. Condensed financial information of the Registrant is omitted since there are no substantial amounts of restricted net assets applicable to the Company's consolidated subsidiaries.(3) Exhibits Required to be Filed by Item 601 of Regulation S-K. Exhibits marked with a single asterisk are filed herewith, and exhibits marked with a double asterisk reference management contract, compensatory plan or arrangement, filed in response to Item 14 (a)(3) of the instructions to Form 10-K. The other exhibits listed have previously been filed with the Commission and are incorporated herein by reference.3.1 Amended and Restated Certificate of Incorporation of Novavax, Inc. [Incorporated by reference to Exhibit 3.1 to the Company's Annual Report Form 10-K for the fiscal year end December 31, 1996, File No. 0-26770, filed March 21, 1997 (the "1996 Form 10-K")]3.2 Amended and Restated By-laws of Novavax, Inc. [Incorporated by reference to Exhibit 3.2 to the 1996 Form 10-K.]3.3 Certificate of Designations of Series A Custom Convertible Preferred Stock dated January 28, 1998 by and between the Company and each of the four purchasers, Delta Opportunity Fund, Ltd., Olympus Securities, Ltd., Nelson Partners, OTATO Limited Partnership. [Incorporated by reference to Exhibits 4.2 19 14 to the Company's Registration Statement on Form S-3, File No. 333-46409, filed February 17, 1998. ] 4 Specimen stock certificate for shares of Common Stock par value $.01 per share. [Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form 10, File No. 0-26770, filed September 14, 1995 (the "Form 10").] 10.1 Tax Matters Agreement between Novavax and IGI. [Incorporated by reference to Exhibit 10.1 to the Form 10.] 10.2 Transition Services Agreement between Novavax and IGI. [Incorporated by reference to Exhibit 10.2 to the Form 10.] 10.3 License Agreement between IGEN, Inc. and Micro-Pak, Inc.[Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 0-26770, filed April 1, 1996, (the "1995 Form 10-K").] **10.4 1995 Stock Option Plan. [Incorporated by reference to Exhibit 10.4 to the Form 10.] **10.5 1995 Director Stock Option Plan. [Incorporated by reference to Exhibit 10.5 to the Form 10.] 10.6 Stock Purchase Agreement dated October 9, 1996 by and between the Company and the purchasers named therein. [Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-3, File No. 333-14305, filed October 17, 1996.] 10.7 Agreement of Lease by and between the Company and Rivers Center Associates Limited Partnership, dated September 25, 1996. [Incorporated by reference to Exhibit 10.7 to the 1996 Form 10-K.] 10.8 Stock and Warrant Purchase Agreement dated February 10, 1997 by and between the Company and Anaconda Opportunity Fund, L.P. [Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-3, File No. 333-22685, filed March 4, 1997(the "Anaconda S-3").] 10.9 Form of Warrant issued by the Company to Anaconda Opportunity Fund, L.P. [Incorporated by reference to Exhibit 4.5 to the Anaconda S-3.] **10.10 Employment Agreement dated May 15, 1997, by and between the Company * and Richard F. Maradie. **10.11 Employment Agreement dated July 24, 1997, by and between the Company * and Brenda L. Fugagli. **10.12 Letter Agreement dated February 19, 1998, by and between the Company * and Richard J. Harwood. **10.13 Letter Agreement dated February 19, 1998, by and between the Company * and Thomas G. Tachovsky. 10.14 Form of Subscription Agreement dated January 23, 1998 by and between the Company and each of the four purchasers, Delta Opportunity Fund, Ltd., Olympus Securities, Ltd., Nelson Partners, OTATO Limited Partnership. [Incorporated by reference to Exhibits 4.5 to the Company's Registration Statement on Form S-3, File No. 333-46409, filed February 17, 1998.] 21 List of Subsidiaries [Incorporated by reference to Exhibit 21 to the 1995 Form 10-K.] *23 Consent of Coopers & Lybrand L.L.P. *27 Financial Data Schedule (B) Reports on Form 8-K: None.20 15INDEX TO CONSOLIDATED FINANCIAL STATEMENTSDESCRIPTIONReport of Independent Accountants 20Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997 21Consolidated Balance Sheets as of December 31, 1997 and 1996 22Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1997 23Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997 24Notes to Consolidated Financial Statements 25 21 16REPORT OF INDEPENDENTACCOUNTANTSTo the Board of Directors and Stockholders of Novavax, Inc.:We have audited the accompanying consolidated balance sheets of Novavax, Inc.and Subsidiaries as of December 31, 1997 and 1996, and the related consolidatedstatements of operations, stockholders' equity and cash flows for eachof the three years in the period ended December 31, 1997. These financialstatements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of Novavax, Inc. andSubsidiaries as of December 31, 1997 and 1996, and the consolidated results oftheir operations and their cash flows for each of the three years in the periodended December 31, 1997 in conformity with generally accepted accountingprinciples.COOPERS & LYBRAND L.L.P.McLean, VirginiaMarch 13, 199822 17NOVAVAX, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, ------------------------------------------- 1997 1996 1995- --------------------------------------------------------------------------------------------------- Revenues: Contract Revenue $ 519,714 $ 55,533 $ -- Royalties from former parent -- -- 268,002 ----------- ----------- ----------- Total Revenues 519,714 55,533 268,002Operating expenses: Selling and marketing -- -- 398,776 General and administrative 2,437,166 1,874,418 2,905,873 Research and development 2,874,129 3,715,545 3,708,005 ----------- ----------- ----------- Total operating expenses 5,311,295 5,589,963 7,012,654 Loss from operations (4,791,581) (5,534,430) (6,744,652) Interest expense to former parent -- -- (1,749,706) Interest income, net 244,964 137,539 -- ----------- ----------- ----------- Loss before income taxes (4,546,617) (5,396,891) (8,494,358)Income tax expense -- (98,094) -- ----------- ----------- ----------- Net loss $(4,546,617) $(5,494,985) $(8,494,358) =========== =========== =========== Net loss per share (basic and diluted) $ (0.39) (0.54) (0.85) =========== =========== =========== Weighted average number of common shares outstanding 11,667,428 10,132,896 9,937,936 =========== =========== =========== The accompanying notes are an integral part of the consolidated financialstatements. 23 18NOVAVAX, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS As of December 31, ---------------------------- 1997 1996- ------------------------------------------------------------------------------------------ ASSETSCurrent Assets: Cash and cash equivalents $ 3,847,107 $ 2,481,258 Marketable securities -- 500,820 Accounts receivable 217,150 -- Receivable from former parent 32,835 -- Prepaid expenses and other current assets 205,952 238,694 ------------ ------------ Total current assets 4,303,044 3,220,772 ------------ ------------ Property and equipment-- cost 1,428,638 1,383,123 Accumulated depreciation (539,463) (405,212) ------------ ------------ Property and equipment -- net 889,175 977,911 Patent costs, net of accumulated amortization of $549,397 and $430,057 in 1997 and 1996, respectively 1,573,454 1,494,880 Other assets 57,598 28,389 ------------ ------------ Total assets $ 6,823,271 $ 5,721,952 ============ ============LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities: Capital lease obligations $ 10,744 $ 10,744 Accounts payable 237,884 367,754 Accrued payroll 40,010 196,593 Payable to former parent -- 6,176 ------------ ------------ Total current liabilities 288,638 581,267 Capital lease obligations, less current maturities 12,863 23,607 ------------ ------------Stockholders' Equity: Preferred stock, $.01 par value, 2,000,000 shares authorized -- -- Common stock, $.01 par value, 30,000,000 shares authorized, 12,031,757 issued and 12,012,013 outstanding at December 31, 1997 and 10,660,710 shares issued and outstanding at December 31, 1996 120,318 106,607 Additional paid-in capital 38,020,621 32,409,899 Accumulated deficit (31,342,780) (26,796,164) Deferred compensation on stock options granted (25,620) (603,264) ------------ ------------ Treasury stock, 19,744 shares, cost basis (250,769) -- Total stockholders' equity 6,521,770 5,117,078 ------------ ------------ Total liabilities and stockholders' equity $ 6,823,271 $ 5,721,952 ============ ============The accompanying notes are an integral part of the consolidated financialstatements.24 19NOVAVAX, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, ----------------------------------------- 1997 1996 1995- -------------------------------------------------------------------------------------------------Cash flows from operating activities: Net Loss $(4,546,617) $(5,494,985) $(8,494,358) Reconciliation of net loss to net cash used by operating activities: Non-cash restructuring and recapitalization -- -- 1,513,253 Reimbursement to former parent -- -- (250,000) Non-cash compensation expense 577,644 1,506,790 101,183 Depreciation and amortization 253,591 328,225 272,886 Disposal of property and equipment -- 334,564 -- Issuance of stock to 401k plan 9,729 -- -- Changes in operating assets and liabilities Accounts receivable (217,150) -- 475,000 Prepaid expenses and other assets 3,534 (185,074) (58,993) Payable to/receivable from former parent (39,011) 60,930 (54,754) Accounts payable and accrued expenses (286,453) 133,560 235,101 ----------- ----------- -----------Net cash used by operating activities (4,244,733) (3,315,990) (6,260,682)Cash flows from investing activities: Proceeds from the sale of marketable securities 500,820 (500,820) -- Capital expenditures (45,515) (98,363) (45,562) Deferred patent costs (197,914) (244,321) (367,418) ----------- ----------- -----------Net cash used by investing activities 257,391 (843,504) (412,980)Cashflows from financing activities: Payable to former parent -- -- 2,081,776 Notes payable to former parent -- -- 4,172,401 License agreement with former parent -- -- 5,000,000 Payment of capital leases (10,744) -- -- Proceeds from the private placement of Common Stock, net 5,002,718 1,655,877 -- Proceeds from the exercise of options 361,217 350,639 37,500 ----------- ----------- -----------Net cash provided by financing activities 5,353,191 2,006,516 11,291,677 ----------- ----------- -----------Net change in cash and cash equivalents 1,365,849 (2,152,978) 4,618,015Cash and cash equivalents at beginning of the period 2,481,258 4,634,236 16,221 ----------- ----------- -----------Cash and cash equivalents at end of the period $ 3,847,107 $ 2,481,258 $ 4,634,236 =========== =========== ===========The accompanying notes are an integral part of the consolidated financialstatements. 25 20NOVAVAX, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYFor the years ended December 31, 1997, 1996 and 1995 Additional Note Payable Combined Common Stock Paid-in to Former Equity Shares Dollars Capital Parent Capital Deficit- ---------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1995 14,973 $12,851,599 $ 4,974,000 $(20,028,467) Proceeds from payable to former parent 7,221,646 Proceeds from note payable to former parent 4,172,401 Restructuring and recapitalization 9,872,963 $ 98,879 $23,162,374 (17,024,000) (4,974,000) License agreement with former parent 5,000,000 Options granted as compensation 1,988,748 Amortization of deferred compensation Exercise of stock options 50,000 500 37,000 Net loss (8,494,358) ---------- --------- ----------- -------- ---------- ------------Balance, December 31, 1995 9,937,936 99,379 30,188,122 -- -- (21,301,179) Options and warrants granted as compensation 222,489 Amortization of deferred compensation Private sale of common stock, net 505,000 5,050 1,650,827 Exercise of stock options 217,774 2,178 348,461 Net loss (5,494,985) ---------- --------- ----------- -------- ---------- ------------Balance, December 31, 1996 10,660,710 106,607 32,409,899 (26,796,164) Options granted as compensation Company contribution to Employee 401k plan 771 8 2,491 Amortization of deferred compensation Private sale of common stock, net 1,200,000 12,000 4,990,718 Exercise of stock options 170,276 1,703 617,513 Net loss (4,546,617) ---------- --------- ----------- -------- ---------- ------------Balance, December 31, 1997 12,031,757 $120,318 $38,020,621 $ -- $ -- $(31,342,780) ========== ========= =========== ======== ========== ============ Deferred Total Compensation Stockholders' on Stock Treasury Stock Equity Options Granted Shares Dollars (Deficit)- ----------------------------------------------------------------------------------------------------------------- Balance, January 1, 1995 $(2,202,868) Proceeds from payable to former parent 7,221,646 Proceeds from note payable to former parent 4,172,401 Restructuring and recapitalization 1,263,253 License agreement with former parent 5,000,000 Options granted as compensation $(1,988,748) -- Amortization of deferred compensation 101,183 101,183 Exercise of stock options 37,500 Net loss (8,494,358) ----------- ------ --------- ---------Balance, December 31, 1995 (1,887,565) -- -- 7,098,757 Options and warrants granted as compensation (222,489) -- Amortization of deferred compensation 1,506,790 1,506,790 Private sale of common stock, net 1,655,877 Exercise of stock options 350,639 Net loss (5,494,985) ----------- ------ --------- ---------Balance, December 31, 1996 (603,264) -- 5,117,078 Options granted as compensation Company contribution to Employee 401k plan 1,330 $ 7,230 9,729 Amortization of deferred compensation 577,644 577,644 Private sale of common stock, net 5,002,718 Exercise of stock options (21,074) (257,999) 361,217 Net loss (4,546,616) ----------- ------ --------- ---------Balance, December 31, 1997 $ (25,620) (19,744) $(250,769) $6,521,770 =========== ====== ========= =========The accompanying notes are an integral part of the consolidated financialstatements.26 21NOVAVAX, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL STATEMENTS1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATIONDESCRIPTION OF BUSINESSNovavax, Inc., a Delaware corporation ("Novavax" or the "Company"), is abiopharmaceutical company focusing on the research and development ofproprietary topical and oral drug delivery technologies and applications ofthose technologies. The Company's technology platforms involve the use ofproprietary organized lipid structures made into microscopic vesicles for thedelivery of a wide variety of drugs and other therapeutic products, includingcertain hormones, antibacterial and anti-viral products and vaccine adjuvants.The Company currently has three lead product candidates in various stages ofdevelopment and animal and human trials. These include, ESTRASORB(TM), atopical estrogen cream, ANDROSORB(TM), a topical testosterone cream, andHelicore(TM), an oral anti-bacterial preparation for the treatment ofHelicobacter pylori infection. The regulatory process is lengthy, requiringsubstantial funds, and the Company cannot predict when approval of any productor a license to sell any product might occur. In addition, there can be noassurances the Company will have sufficient funds necessary or that theadditional funds will be available at all or on acceptable terms. The Companyalso recognizes that the commercial launch of any product is subject to certainrisks including but not limited to manufacturing scale-up and marketacceptance.BASIS OF PRESENTATIONThe accompanying consolidated financial statements include the accounts ofNovavax (formerly Molecular Packaging Systems, Inc.), its wholly-ownedsubsidiaries Micro-Pak, Inc. ("Micro-Pak") and Micro Vesicular Systems, Inc.("MVS"), and Lipovax, Inc. ("Lipovax", formerly known as Novavax, Inc.). Allsignificant intercompany accounts and transactions have been eliminated inconsolidation. The financial statements for the period January 1, 1995 through December 12,1995 have been prepared for the aforementioned companies on a combined basisfrom books and records maintained by IGI, Inc. ("IGI"). These combined financialstatements reflect the financial position and results of operations of thecombined companies at their historical bases, including allocations of certaincosts by IGI. The accounts and transactions between the companies have beeneliminated. The financial statements may not be indicative of the results thatwould have been attained had the entities operated together independently ofIGI.2. DISTRIBUTIONOn December 12, 1995 (the "Distribution Date"), IGI distributed to the holdersof record of IGI's common stock, at the close of business on the Record Date,November 28, 1995, one share of the Company's common stock for every one shareof IGI common stock outstanding (the "Distribution"). The Distribution resultedin 93.2% of the outstanding shares of the Company's common stock beingdistributed to holders of IGI common stock on a proportionate basis after takinginto account the Restructuring and Recapitalization described in Note 3. As aresult of the Distribution, the Company is no longer a subsidiary of IGI but anindependent publicly-owned company whose shares are traded on the American StockExchange under the trading symbol NOX.3. RESTRUCTURING AND RECAPITALIZATIONPrior to the Distribution, IGI consolidated its animal health products andcosmetics and consumer products businesses (the "Core Businesses") within itselfand its subsidiaries. Concurrently it consolidated the biotechnology business(the "Biotechnology Business") within Novavax and its subsidiaries (the"Restructuring"). At the time of the Restructuring, IGI owned, through itswholly-owned subsidiary, IGEN, Inc. ("IGEN"), the following percentages of thevoting power of the subsidiaries conducting the Biotechnology Business: 84.7% ofthe voting power of Novavax, the sole stockholder of both Micro-Pak and MVS, and90.3% of the voting power of Lipovax. The Biotechnology Business resided, andcontinues to reside, within Novavax, Micro-Pak, MVS and Lipovax. Prior to theRestructuring, the current and former employees of Novavax and Lipovax heldapproximately 15.3% and 9.7% of the voting power of Novavax and Lipovax,respectively. On September 20, 1995, Novavax, Lipovax and Novavax Acquisition Subsidiary,Inc., a wholly-owned subsidiary of Novavax created for purposes of theRestructuring ("Acquisition Corporation"), entered into a merger agreement (the"Merger Agreement"). The Merger Agreement, which was approved by Lipovaxstockholders on October 12, 1995, provided, among other things, for a reversetriangular merger (the "Merger") in which Acquisition Corporation merged withand into Lipovax and Lipovax became a wholly-owned subsidiary of Novavax. Asconsideration for the Merger, Novavax issued an aggregate of 21,698 shares, ofwhich 90.3% were issued to IGEN and the remaining 9.7% to the minoritystockholders of Lipovax. The issuance of shares to the minority stockholders ofLipovax resulted in a charge to the statement of operations of $866,966 toreflect the purchase of in process research and development. After the Merger,IGEN owned 85.5% of the outstanding shares of Novavax, and the remaining 14.5%were held by the minority stockholders of Novavax (8.8%) and by the formerminority stockholders of Lipovax (5.7%). As part of the Restructuring, Novavax issued to IGEN 41,569 shares of NovavaxCommon Stock in exchange for the transfer by 27 22IGEN to Novavax of all of IGEN's rights to the payment of $17,024,000 aggregateindebtedness owed to ImmunoGenetics, Inc., a wholly-owned subsidiary of IGEN(and the primary operating entity of the Core Businesses ("ImmunoGenetics")), byMVS ($9,996,504) and Lipovax ($7,027,496) (collectively, "Novavax Sub Debt").The Novavax Sub Debt resulted from loans made by ImmunoGenetics to MVS andLipovax during the period from 1991 to the Distribution Date. The number ofshares of Novavax Common Stock issued in exchange for the Novavax Sub Debt wasbased on the value of $409.54 per share of Novavax Common Stock. In connectionwith the Restructuring, Novavax converted $17,024,000 of these loans for 41,569shares of Novavax stock. In addition to the Restructuring, Novavax recapitalized its capital stock(the "Recapitalization"). Immediately prior to the Recapitalization, Novavax'sissued and outstanding capital stock consisted of approximately 75,240 shares ofClass A Common Stock and 3,000 shares of Class B Common Stock. As a result ofthe Recapitalization, each share of Class A and Class B Common Stock wasconverted into approximately 126.37944 shares of Novavax Common Stock. After theRestructuring and Recapitalization, there were 9,887,936 shares of NovavaxCommon Stock outstanding. To complete the separation of the Core Businesses from the BiotechnologyBusiness, on December 12, 1995, IGEN distributed all of the shares of NovavaxCommon Stock held by IGEN (approximately 93.2% of the voting securities ofNovavax) to IGI in a transaction intended to qualify as a tax-free distributionunder section 355 of the Code. IGI received a private letter ruling from theInternal Revenue Service ("IRS") that the Distribution would not be taxable toIGI or its shareholders.4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESCASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIESCash equivalents are considered to be short-term highly liquid investments withoriginal maturities of 90 days or less. Marketable securities consist ofinvestments in fixed income securities with original maturities of greater thanthree months and less than one year. Marketable securities are stated at costwhich approximates market. Interest income is accrued as earned.PROPERTY AND EQUIPMENTProperty and equipment are recorded at cost. Depreciation of furniture, fixturesand equipment is provided under the straight-line method over the estimateduseful lives, generally five years. Amortization of leasehold improvements isprovided over the estimated useful lives of the improvements or the term of thelease, which ever is shorter. Furniture and equipment held under capital leasesare amortized under the straight-line method over the shorter of the lease termor the estimated useful life of the asset. Repair and maintenance costs are charged to operations as incurred whilemajor improvements are capitalized. When assets are retired or disposed of, thecost and accumulated depreciation thereon are removed from the accounts and anygains or losses are included in operations.PATENT COSTCosts associated with obtaining patents, principally legal costs and filingfees, are being amortized on a straight line basis over the remaining economiclives of the respective patents. The Company periodically evaluates the carryingamount of these assets based on current licensing and future commercializationefforts and if warranted, impairment would be recognized. Accumulatedamortization of patent costs was $549,397 and $430,057 at December 31, 1997 and1996, respectively.REVENUE RECOGNITIONRevenues from the sale of scientific prototype vaccines and adjuvants arerecorded as the products are produced and shipped. Revenues earned underresearch contracts are recognized when the related contract provisions are met.NET LOSS PER SHAREIn 1997, the Company adopted SFAS No. 128, Earnings per Share. Basic earningsper share is computed by dividing the net loss available to common shareholdersby the weighted average number of common share outstanding during the period.Diluted earnings per share is computed by dividing net earnings available tocommon shareholders by the weighted average number of common shares outstandingafter giving effect to all dilutive potential common shares that wereoutstanding during the period. Potential common shares are not included in the computation of dilutiveearning per share if they are antidilutive. Net loss per share as reported wasnot adjusted for potential common shares as they are antidilutive. Earnings pershare for all other periods presented conform to SFAS No. 128. Pro forma net loss per share for the year ended December 31, 1995 is basedupon weighted average shares outstanding of 9,937,936 representing primarilyshares issued in connection with the Recapitalization. These shares have beentreated as outstanding as if the transaction had occurred on January 1, 1995.INCOME TAXESThe Company's income taxes are determined in accordance with the provisions ofStatement of Financial Accounting Standards (SFAS) No. 109 which requires theasset and liability method of accounting for income taxes. Under the asset andliability method deferred income taxes are recognized for the tax consequencesof temporary differences by applying enacted statutory tax rates applicable tofuture years to 28 23differences between the financial statement carrying amounts and the tax basisof existing assets and liabilities. The effect on deferred taxes of changes in tax rates is recognized in incomein the period that includes the enactment date. A valuation allowance isrecorded based on management's determination of the ultimate realizability offuture deferred tax assets. Novavax was included in IGI's consolidated federalincome tax return through the effective date of the Distribution. Provisions forincome taxes were calculated on a separate return basis and were determined inaccordance with the provisions of SFAS No. 109.USE OF ESTIMATESThe preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Significant estimates include valuation of patent costs and benefits for incometaxes and related valuation allowances. Actual results could differ from thoseestimates.NEW ACCOUNTING STANDARDSThe Financial Accounting Standards Board has issued two new standards whichbecome effective for reporting periods beginning after December 15, 1997. SFASNo. 130, Reporting Comprehensive Income, requires additional disclosures withrespect to certain changes in assets and liabilities that previously were notrequired to be reported as results of operations for the period. The Companywill begin making the additional disclosures required by SFAS No. 130 in thefirst quarter of 1998. SFAS no. 131, Disclosures about Segments of an Enterpriseand Related Information, requires financial and descriptive information withrespect to "operating segments" of an entity based on the way management makesinternal operating decisions. The Company will begin making the disclosuresrequired by SFAS No. 131 with financial statements for the period endingDecember 31, 1998.5. TRANSACTIONS WITH FORMER PARENTCHARGESThrough the Distribution Date, IGI charged Novavax for expenses incurred on itsbehalf, including executive, legal, accounting, data processing, consulting,cash management, human resources and employee benefits. These costs wereallocated on a variety of methods, including:- - Specific identification based on estimates of time and services provided- - Relative identification allocated based on Novavax's relationship to the entire pool of beneficiaries The allocation methods, while reasonable under the then currentcircumstances, may not represent the cost of similar activities on a separateentity basis. For the period January 1, 1995 through December 31, 1995 suchcosts have been included in general and administrative expenses ($850,000), andinterest expense ($1,749,706). These amounts have been accumulated on Novavax'saccompanying Balance Sheet as payable to parent through the Distribution Date,at which time such amounts were reversed to the Deficit since these charges willnot be repaid.BORROWING ARRANGEMENTSOn the Distribution Date, Novavax had a note payable to IGI under whichborrowings bore interest at IGI's borrowing rate. The note was converted intoshares of Novavax common stock based on an appraisal of Novavax common stock.The outstanding loan balance of $17,024,000 was converted into 5,253,494 sharesof Novavax common stock after the Restructuring and Recapitalization. Suchamount was included in the Distribution and, accordingly, has been included instockholders' equity in the accompanying balance sheets. In accordance with theplan of Distribution, $250,000, representing loans made by IGI to Novavax inexcess of $17,024,000, was deducted from IGI's $5,000,000 payment due under theLicense Agreement. Novavax has no outside borrowing arrangements.TRANSITION SERVICESUnder a Transition Services Agreement, established at the time of theDistribution, IGI continued to provide certain administrative services toNovavax, including services relating to human resources, purchasing andaccounting, data processing and payroll services from the day of theDistribution until June 30, 1996. Novavax paid IGI a fee for all servicesprovided by IGI employees, based on IGI's cost. The agreement was terminated onJune 30, 1996. Costs of $230,474 were incurred for the six month period endedJune 30, 1996. For the period December 13, 1995 through December 31, 1995,$35,000 of such costs were incurred. These charges have been offset in part byreceivables due from IGI and recorded as a payable to former parent on theDecember 31, 1995 balance sheet. At December 31, 1996 the Company was owed$32,285 from IGI primarily related to patent costs.ROYALTY REVENUESNovavax earned royalties from IGI at 10% of the sales of the licensed products.The agreements were terminated in connection with the Distribution and executionof the License Agreement. In connection with the Distribution, IGI paid Novavax$5,000,000 in return for a fully paid-up, ten-year license (the "LicenseAgreement") entitling it to the exclusive use of the Novavax Technologies in thefields of (i) animal pharmaceuticals, biologicals and other animal healthproducts; (ii) foods, food applications, nutrients and flavorings; (iii)cosmetics, consumer products and dermatological over-the-counter and 29 24prescription products (excluding certain topically delivered hormones); (iv)fragrances; and (v) chemicals, including herbicides, insecticides, pesticides,paints and coatings, photographic chemicals and other specialty chemicals; andthe processes for making the same. IGI has the option, exercisable within thelast year of the ten-year term, to extend the License Agreement for anadditional ten-year period for $1,000,000. Novavax will retain the right to useits Novavax Technologies for all other applications, including human vaccinesand pharmaceuticals. Novavax has presented the payment under the License Agreement as a capitalcontribution in its financial statements to reflect the intercompany nature andsubstance of the transaction. The form was structured as a prepaid licenseagreement to address various considerations of the Distribution including taxand financing considerations. For tax purposes, the transaction was treated asincome for the period ended December 31, 1995. IGI has no further obligations orintentions to fund Novavax.6. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for: 1997 1996 1995- -------------------------------------------------- Taxes $ -- $100,000 $--Interest -- 10,955 -- For the years ended December 31, 1997, 1996 and 1995, the Company had thefollowing non-cash financing and investing activities: 1997 1996 1995- ------------------------------------------------------------------------ Reversal against deficit of payable to former parent $ -- $ -- $7,221,646Options granted as compensation -- -- $1,988,748Capital lease obligation for the purchase of furniture and equipment $36,285 $ 36,285 $ --7. PROPERTY AND EQUIPMENTProperty and equipment, stated at cost, is comprised of the following: 1997 1996- ------------------------------------------------------------- Leasehold improvements $ 327,682 $ 321,506Machinery and equipment 1,021,135 993,202Equipment under capital leases 36,285 36,285Furniture and fixtures 43,536 32,130 ---------- ---------- 1,428,638 1,383,123Less accumulated depreciation (539,463) (405,212) ---------- ---------- $ 889,175 $ 977,911 ========== ========== During 1996, the disposal of property and equipment having a net book valueof $334,564 was recorded relating to the closing of one of the Novavaxsubsidiaries' laboratory. Depreciation expense of $134,251, $221,237 and$189,085 and was recorded in the years ended December 31, 1997 and 1996, 1995,respectively.8. STOCK OPTIONS AND WARRANTS1995 STOCK OPTION PLANVarious directors, officers and employees of IGI including those employed byNovavax have been awarded stock options under various IGI stock option plans at100% of the fair market value of IGI's stock at the date of grant. In connectionwith the Distribution, the Board of Directors of Novavax authorized the grant ofNovavax options to all holders of options to purchase IGI Common Stock as of theDistribution Date ("Spin-off Options"). The Spin-off Options were granted tosuch holders on substantially similar terms to the corresponding options topurchase IGI Common Stock. The number of shares of Novavax common stock underthe options as compared to their IGI counterparts reflects the distributionratio of one share of Novavax common stock for one share of IGI common stock.Exercise prices of the options were based on the relative market capitalizationof IGI and Novavax on the 20 trading days immediately following the DistributionDate to restore holders of each option to the economic position prior to theDistribution Date. As of the Distribution Date, 2,034,015 Spin-off Options topurchase shares of Novavax common stock were granted to holders of options topurchase IGI common stock at $3.69 per share. Under the Novavax 1995 Stock Option Plan (the "Plan"), options may be grantedto officers, employees and consultants or advisors to Novavax and any presentor future subsidiary to purchase a maximum of 4,000,000 shares of Novavaxcommon stock (including the Spin-off Options). Incentive options, having amaximum term of ten years, can be granted at no less than 100% of the fairmarket value of Novavax's stock at the time of grant and are generallyexercisable in cumulative increments over several years from the date of grant.Both incentive and non-statutory stock options may be granted under the 1995plan. There is no minimum exercise price for non-statutory stock options. The Board of Directors of Novavax granted, as of the Distribution Date,options to purchase 600,000 shares of Novavax common stock to various employeesat an exercise price of $.01 per share. Concurrently, the Board granted optionsto purchase 415,000 shares of Novavax common stock at $3.24 per share to Novavaxemployees, the estimated fair market value. 890,000 of these options firstbecome exercisable on the six month anniversary of the Distribution Date as to50% of the shares covered thereby and as to an additional 25% of the shares oneach of the first and second anniversaries of the Distribution Date. 125,000 ofthese options first become exercisable in increments of 30 2525% of the shares on each of the first through fourth anniversaries of theDistribution Date. These options become immediately exercisable in the event ofthe acquisition of Novavax, including a merger in which Novavax is not thesurviving entity, the sale of all or substantially all of the assets of Novavaxor the acquisition of a majority of the equity securities of Novavax. Theoptions also become immediately exercisable in the event the optionee isterminated without cause. As of the Distribution Date, 28,871 substitute optionswere issued in exchange for options to purchase Lipovax, which existed prior to the Distribution Date.1995 DIRECTOR STOCK OPTION PLANThe 1995 Director Stock Option Plan (the "Director Plan") provides for theissuance of up to 500,000 shares of Novavax Common Stock. 110,000, 80,000 and120,000 options were granted under this plan in 1997, 1996 and 1995,respectively. In addition, each Eligible Director then serving as a director onthe last business day of 1998 will be granted a non-qualified option to purchase10,000 shares of Common Stock. The exercise price per share is the fair marketvalue on the date of grant. Options granted to Eligible Directors areexercisable in full beginning six months after the date of grant and terminateten years after the date of grant. Such options cease to be exercisable at the earlier of their expiration orthree years after an Eligible Director ceases to be a director for any reason.In the event that an Eligible Director ceases to be a director on account of hisdeath, his outstanding options (whether exercisable or not on the date of death)may be exercised within three years after such date (subject to the conditionthat no such option may be exercised after the expiration of ten years from itsdate of grant). Activity under the 1995 Stock Option Plan and 1995 Director Stock Option Planwas: 1995 1995 Stock Director Stock Option Plan Option Plan- ---------------------------------------------------------------------------- Balance January 1, 1995 22,749 Granted at average price of $2.97 per share 3,077,886 120,000 Exercised at average price of $.75 per share (50,000) Expired or canceled at average price of $3.66 per share (2,000) ---------- ---------December 31, 1995 3,048,635 120,000 Granted at average price of $4.96 per share 660,000 80,000 Exercised at average price of $1.61 per share (215,274) Expired or canceled at average price of $3.84 per share (20,500) ---------- --------- December 31, 1996 3,472,861 200,000 Granted at average price of $4.18 per share 300,000 110,000 Exercised at average price of $2.86 per share (190,693) Expired or canceled at average price of $3.58 per share (378,610) ---------- --------- December 31, 1997 3,203,558 310,000 ---------- ---------Price Range $.01 to 7.00 $3.24 to 5.81 ------------ -------------Weighted average $3.35 $4.01Exercisable 2,603,925 240,000Available for grant December 31, 1996 259,365 300,000 December 31, 1997 361,549 190,000 ---------- ---------Information with respect to stock options outstanding at December 31, 1997 is asfollows: Weighted Number Average Weighted of Remaining Average Options Contractual ExercisePrice Range Outstanding Life Price- --------------------------------------------------------------Options issued at below Market Value $0.01 523,383 7.7 $0.01- --------------------------------------------------------------Options issued at Market Value$1.21 to 2.50 20,622 7.9 $1.21$2.51 to 3.50 1,193,788 6.0 $3.06$3.51 to 4.50 947,800 7.0 $3.90$4.51 to 7.00 827,965 7.4 $5.54 --------- --- ----- 2,990,175 6.7 $4.00 --------- --- ----- 31 26 In connection with its stock option plans, Novavax makes no charges tooperations in connection with stock options granted at the fair market value atthe date of grant. With respect to options which were granted below fair marketvalue at the date of grant, the Company records compensation expense for thedifference between the fair market value at the date of grant and the exerciseprice as the options become exercisable. $471,924, $1,410,648 and $101,183related to such options has been included as compensation expense in 1997, 1996and 1995, respectively. The Company has adopted the disclosure - only provisions of Statement ofFinancial Accounting Standards No. 123 ("SFAS 123") as they pertain to financialstatement recognition of compensation expense attributable to option grants. Assuch, no compensation cost has been recognized on the Company's option plans. Ifthe Company had elected to recognize the compensation cost for the 1995 StockOption Plan and the 1995 Director Stock Option Plan consistent with SFAS 123,the Company's net loss and loss per share on a pro forma basis would be: 1997 1996 1995- -------------------------------------------------------------------------------- Net loss As reported $(4,546,617) $(5,494,985) $ (8,494,358) Pro forma $(5,113,882) $(6,354,089) $(10,110,754)Basic earnings per share (in dollars) As reported $ (.39) $ (.54) $ (.85) Pro forma $ (.44) $ (.63) $ (1.02)Risk-free interest rates 5.2%-7.2% 5.97% 5.97%Expected life in years Employees 6.0 6.0 6.0 Directors 3.0 3.0 3.0Dividend Yield 0.0% 0.0% 0.0%Volatility Options issued by Novavax after November 28, 1995 47% 75% 75% Options issued by Novavax prior November 28, 1995 -- 50% 50%Weighted average remaining contractual life in years 6.9 5.7 5.7Weighted average fair value at date of grant (in dollars) $3.41 $3.11 $3.11NON-EMPLOYEE OPTIONSThe Company has entered into agreements to receive advisory and consultingservices from several individuals, four of whom serve on the Novavax ScientificAdvisory Board. Non-qualified stock options have been granted to theseindividuals under the 1995 Stock Option Plan. Using the Black-Scholes optionpricing model, a charge of $39,685 and $30,107 related to these options has beenrecorded in 1997 and 1996 respectively.COMMON STOCK WARRANTSIn connection with the October 1996 private stock sale, the Company provided theunderwriter warrants for the purchase of 50,000 shares of common stock, parvalue $.01 per share. The warrants are fully exercisable at $3.75 per share andexpire on October 30, 2001. In November 1996, in consideration for servicesperformed by a consultant, the Company also issued warrants for 50,000 shares ofcommon stock, par value $.01 per share. The warrants are exercisable at $5.00per share, and are fully vested at December 31, 1997. These warrants expire onNovember 18, 2001. As of December 31, 1997, no warrants had been exercised.Using the Black-Scholes option pricing model, a charge related to these warrantsof $66,035, and $66,035 has been recorded in 1997 and 1996 to the Statement ofOperations.9. INCOME TAXESDeferred tax assets (liabilities) included in the balance sheets consist of thefollowing: 1997 1996- -------------------------------------------------------------- Net operating losses $ 4,888,610 3,516,909Research tax credits 820,641 721,333Disqualifying stock options 716,428 523,746Deferred patent costs (607,668) (515,675)Alternative-minimum tax credit 93,674 93,674Other, net 17,985 10,927 ------------ ---------- 5,929,670 4,350,914Less valuation allowance (5,929,670) (4,350,914) ------------ ----------Deferred taxes, net $ -- $ -- ============ ========== Realization of net deferred tax assets at the balance sheet dates isdependent on the company's ability to generate future taxable income which isuncertain. Accordingly, a full valuation allowance was recorded against theseassets as of December 31, 1997 and 1996. In connection with the filing of the Company's 1995 tax return during 1996,it was determined that the Company had an Alternative Minimum Tax liabilityresulting from the cash received from IGI in return for the license. The 1996income tax expense is fully attributable to the Alternative Minimum Taxcalculation.32 27 Federal net operating losses and tax credits available to Novavax and are asfollows:- -------------------------------------------------------------------------------Net operating losses expiring through the year 2012 $12,089,502 Research tax credits expiring through the year 2012 820,641 Alternative-minimum tax credit (no expiration) 93,67410. COMMITMENTS AND CONTINGENCIESNovavax leases laboratory and office space, machinery and equipment undercapital and noncancelable operating lease agreements expiring at various datesthrough 2006. Future minimum rental commitments under noncancelable leases as ofDecember 31, 1997 are as follows: OPERATING LEASES CAPITAL LEASES- ----------------------------------------------------------------------------- 1998 $ 201,709 $14,8221999 176,921 12,0622000 151,014 --2001 145,725 --2002 149,489 --Thereafter 610,450 -- ---------- -------Total Lease Payments $1,435,308 $26,884 ========== Less: amount representing interest 3,277 -----Present value of net minimum lease payments $23,607 ======= Aggregate rental expenses approximated $279,398, $183,327, $260,041, and in1997,1996 and 1995 respectively. In October 1996, the Company entered into a 10-year operating lease foroffice and laboratory facilities. In connection with this lease agreement,Novavax is required to maintain a "Net Asset Value" of $2,000,000. The term "NetAsset Value" is defined as the difference between the total assets and the totalliabilities. If the Net Asset Value falls below $2,000,000, the Company isrequired to provide other reasonable financial assurances to the Landlord withinfive days of the Landlords request. The financial assurances may be, butwithout limitation to, the following: a bond for the Landlord's benefit, anincrease in the deposit, or a letter of credit, as reasonably believed necessaryby the Landlord or its lenders. Also in October 1996, the Company entered into a 2-year operating lease forapproximately 2,363 square feet of laboratory space. This shared space housesthe Company's certified animal facility and laboratories for its biologicsdevelopment which includes the vaccine adjuvant program. Both leases includevarious renewal options, purchase options, and escalation clauses.11. SIGNIFICANT CUSTOMERSNovavax's revenue includes amounts earned from arrangements with variousindustry partners. In the year ended December 31, 1997, two different customerseach represented in excess of 10% of revenues.12. SUBSEQUENT EVENTSOn January 23, 1998, the Company entered into Subscription Agreements toeffectuate the private placement of 6,500 share of Series A Custom ConvertiblePreferred Stock, $.01 par value per share (the "Series A Preferred Stock"). Theclosing occurred on January 28, 1998 (the "Issuance Date") at an aggregatepurchase price of $6,500,000. The Company received the proceeds therefor andpaid Diaz & Altschul, LLC a fee of $425,233 in consideration for its services asplacement agent. The Series A Preferred Stock is convertible into shares of Common Stock at aconversion price equal to (i) during a period of 90 days following the IssuanceDate, 100% of the average of the two lowest consecutive trade prices of theCommon Stock as reported on the American Stock Exchange for the 25 trading daysimmediately preceding the conversion date (the "Two Day Average Trading Price")or (ii) during the period on and after the date which is 91 days after theIssuance Date, 94% of the Two Day Average Trading Price (the "ConversionPrice"). From the Issuance Date, there is ceiling price of $6.33 and within the first180 days after the Issuance Date, the Conversion Price has applicable floorprices based on conversion dates. The floor prices range from $5.67 to $4.32.The maximum number of shares as measured by the conversion terms most beneficialto the holders of the Series A Preferred Stock at the time of closing willresult in a deemed dividend in the amount of $455,048 which has been recorded toAccumulated Deficit and Additional Paid in Capital during the three months endedMarch 31, 1998. 33 28SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. NOVAVAX, INC.Date: March 27, 1998 By: /s/ Richard F. Maradie ------------------------ Richard F. Maradie Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this reporthas been signed below by the following persons on behalf of the Registrant inthe capacity and on the date indicated.NAME TITLE DATE- -------------------------------------------------------------------------------/s/ Richard F. Maradie Chief Executive Officer March 27, 1998- ----------------------Richard F. Maradie/s/ Brenda L. Fugagli Vice President, March 27, 1998- --------------------- Principal Financial andBrenda L. Fugagli Accounting Officer /s/ Wayne A. Downing Director March 27, 1998- --------------------Wayne A. Downing/s/ Mitchell J. Kelly Director March 27, 1998- ---------------------Mitchell J. Kelly/s/ J. Michael Lazarus Director March 27, 1998- ----------------------J. Michael Lazarus/s/ John O. Marsh, Jr. Director March 27, 1998- ----------------------John O. Marsh, Jr./s/ Ronald A. Schiavone Director March 27, 1998- -----------------------Ronald A. Schiavone/s/ Ronald H. Walker Director March 27, 1998- --------------------Ronald H. Walker34 29EXHIBIT INDEXExhibit - ----------------------------------3.1 * 3.2 * 3.3 * 4 * 10.1 * 10.2 * 10.3 * 10.4 * 10.5 * 10.6 * 10.7 * 10.9 * 10.10 10.11 10.12 10.13 10.14 * 21 * 23 27 * These exhibits are incorporated by reference 35 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT AGREEMENT (the "Employment Agreement" or this "Agreement") dated as ofthe 15 day of May, 1997, between Novavax, Inc., a Delaware corporation havingits principal office at 8320 Guilford Road, Columbia, Maryland 21046 (the"Company") and Richard F. Maradie ("Employee") residing at 86 Great PlainAvenue, Wellesley, Massachusetts 02181. The Company and Employee hereby agree as follows: 1. Employment. The Company hereby employs Employee and Employee herebyaccepts employment upon the terms and conditions hereinafter set forth. (As usedthroughout this Agreement, "Company" shall mean and include any and all of itspresent and future subsidiaries and any and all subsidiaries of a subsidiary.)Employee warrants that he is free to enter into and perform this Agreement andis not subject to any employment, confidentiality, non-competition or otheragreement which would restrict his performance under this Agreement. 2. Duties. Employee shall devote his full business time to theperformance of services as Chief Executive Officer or such other seniormanagement services as may from time to time be designated by the Company'sChairman of the Board or the Board of Directors. During the term of thisAgreement, Employee's services shall be completely exclusive to the Company andhe shall devote his entire business time, attention and energies to the businessof the Company and the duties to which the Company shall assign him from time totime. Employee agrees to perform his services faithfully and to the best of hisability and to carry out the policies and directives of the Company. Employeeagrees to take no action which is in bad faith and prejudicial to the interestsof the Company during his employment hereunder. Employee shall be based inColumbia, Maryland but he may be required from time to time to perform dutieshereunder for reasonably short periods of time outside said area. 3. Term. The term of this Agreement shall begin on March 4, 1997 andshall end on December 31, 1999 (the "Term"). 4. Compensation. (a) Base Compensation. For all Employee's services and covenants underthis Agreement, the Company shall pay Employee a base annual salary of $220,000,payable in accordance with the Company's payroll policy as constituted from timeto time. (b) Performance Bonus. In addition to the base compensation payable toEmployee, the Employee shall be eligible to receive an annual cash performancebonus in such amount, if any, as the Compensation and Stock Option Committee ofthe Company's Board of Directors (or any committee of the Board of Directorswhich shall replace such committee, or in the absence of any such committee, theBoard of Directors) shall, in its sole discretion, deem appropriate. Suchdetermination will be based, in part, upon the achievement of certain specifiedgoals, which shall be determined in consultation with the Employee. The bonusfor fiscal year 1997 is targeted to be approximately $25,000. Payment of theperformance bonus, if any, will be made within 60 days following the end of theCompany's fiscal year. (c) Stock Options. Employee shall be entitled to receive stock optionsto purchase 200,000 shares of the Company's Common Stock, $.01 par value, at anexercise price equal to the closing price of the Company's Common Stock on thedate of grant. The options will be subject to a Incentive Stock Option Agreementwhich shall include an option vesting schedule as follows: one-third of theshares on the six month anniversary of the date of grant, one-third of theshares on the eighteen-month anniversary of the date of grant and one-third ofthe shares on the thirty-month anniversary of the date of grant. Employee willalso be eligible to receive additional stock options 2annually, based on job performance, in an amount to be determined by theCompensation and Stock Option Committee of the Board of Directors at theDecember Board meetings. 5. Relocation. Employee is expected to relocate to the Columbia,Maryland area within six months of the date hereof, for which the Company willreimburse Employee for actual moving expenses in an amount not to exceed$50,000. 6. Expenses. Employee shall be entitled to reimbursement for reasonableexpenses incurred by Employee in connection with the performance of his dutieshereunder upon receipt of vouchers therefor in accordance with such proceduresas the Company has heretofore or may hereafter establish. 7. Employee Benefits. (a) Employee shall be entitled to two weeks of vacation time duringthe first year, calculated on a calendar year basis in accordance with Companypolicies in effect from time to time. Thereafter, Employee shall be entitled totwo weeks of vacation plus one day for each year of Employee's employment afterthe first year, up to a maximum of four weeks per year. (b) Employee shall be entitled to the use of a Company automobile duringthe Term in accordance with Company policies in effect from time to time. (c) Nothing herein contained shall preclude Employee, to the extent heis otherwise eligible, from participation in all group insurance programs, stockoption plans or other fringe benefit plans which the Company may now orhereafter in its sole and absolute discretion make available generally to itsemployees, but the Company shall not be required to establish any such programor plan. 8. Termination of Employment. Notwithstanding any other provision of this Agreement, Employee's employment may be terminated: (a) By the Company, in the event of Employee's willful failure orrefusal to perform in all material respects the services required of him hereby,after a specific warning with regard thereto has been given to Employee by theBoard of Directors, his willful failure or refusal to carry out any properdirection by the Board of Directors with respect to the services to be renderedby him hereunder or the manner of rendering such services, his willfulmisconduct in the performance of his duties hereunder or his commission of afelony involving moral turpitude; (b) By the Company, upon 30 days' notice to Employee, if he should beprevented by illness, accident or other disability (mental or physical) fromdischarging his duties hereunder for one or more periods totalling three monthsduring any twelve-month period; (c) By the Company, without cause, provided that if Employee'semployment is terminated pursuant to this Section 8(c), Employee shall beentitled to receive his salary, but not a performance bonus, for the threemonths from the date of termination, payable in accordance with the Company'spayroll policy and in the amounts set forth in Section 4(a) above, excluding anyperformance bonus. (d) In the event of Employee's death during the term of hisemployment, the Company's obligation to pay further compensation hereunder shallcease forthwith, except that Employee's legal representative shall be entitledto receive his fixed compensation for the period up to the last day of the monthin which such death shall have occurred. 2 3 9. All Business to be Property of the Company; Assignment ofIntellectual Property. (a) Employee agrees that any and all presently existing business ofthe Company and all business developed by him or any other employee of theCompany including without limitation all contracts, fees, commissions,compensation, records, customer or client lists, agreements and any otherincident of any business developed, earned or carried on by Employee for theCompany is and shall be the exclusive property of the Company, and (whereapplicable) shall be payable directly to the Company. (b) Employee hereby grants to the Company (without any separateremuneration or compensation other than that received by him from time to timein the course of his employment) his entire right, title and interest throughoutthe world in and to, all research, information, procedures, developments, allinventions and improvements whether patentable or nonpatentable, patents andapplications therefor, trademarks and applications therefor, copyrights andapplications therefor, programs, trade secrets, plans, methods, and all otherdata and know-how (herein sometimes "Intellectual Property") made, conceived,developed and/or acquired by him solely or jointly with others during the periodof his employment with the Company, whether or not made, conceived, developed oracquired during regular business hours or on the premises of, or usingproperties of, the Company or in the regular scope of Employee's employment bythe Company. 10. Confidentiality. Except as necessary in performance of services forthe Company, Employee shall not, either during the period of his employment withthe Company or thereafter, use for his own benefit or disclose to or use for thebenefit of any person outside the Company, any information concerning anyIntellectual Property, or other confidential or proprietary information of theCompany, including without limitation, any of the materials listed in Section9(a), whether Employee has such information in his memory or embodied in writingor other tangible form. All originals and copies of any of the foregoing,however and whenever produced, shall be the sole property of the Company, not tobe removed from the premises or custody of the Company without in each instancefirst obtaining authorization of the Company, which authorization may be revokedby the Company at any time. Upon the termination of Employee's employment in anymanner or for any reason, Employee shall promptly surrender to the Company allcopies of any of the foregoing, together with any documents, materials, data,information and equipment belonging to or relating to the Company's business andin his possession, custody or control, and Employee shall not thereafter retainor deliver to any other person any of the foregoing or any summary ormemorandum thereof. 11. Non-Competition Covenant. As the Employee is being grantedoptions to purchase stock in the Company and as such has a financial interestin the success of the Company's business and as Employee recognizes that theCompany would be substantially injured by Employee competing with the Company,Employee agrees and warrants that within the United States, he will not, unlessacting with the Company's express prior written consent, directly or indirectly,while an employee of the Company and during the Non-Competition Period, asdefined below, own, operate, join, control, participate in, or be connected asan officer, director, employee, partner, stockholder, consultant, or otherwisewith, any business or entity which competes with the business of the Company (orits successors or assigns) as such business is now constituted or as it may beconstituted at any time during the term of this Agreement. The "Non-CompetitionPeriod" shall be a period of 24 months following termination pursuant to Section8(a) or the period during which Employee is receiving compensation pursuant toSection 8(c) and for 24 months thereafter. Employee and the Company are of the belief that the period of time andthe area herein specified are reasonable in view of the nature of the businessin which the Company is engaged and proposes to engage, the state of itsbusiness development and Employee's knowledge of this business. However, if suchperiod or such area should be adjudged unreasonable in any judicial proceeding,then the period of time shall be reduced by such number of months or such areashall 3 4be reduced by elimination of such portion of such area, or both, as are deemedunreasonable, so that this covenant may be enforced in such area and during suchperiod of time as is adjudged to be reasonable. 12. Non-Solicitation Agreement. Employee agrees and covenants that hewill not, unless acting with the Company's express written consent, directly orindirectly, during the term of this Agreement or for a period of 24 monthsthereafter solicit, entice away or interfere with the Company's contractualrelationships with any customer, client, officer or employee of the Company. 13. Notices. All notices and other communications hereunder shall bein writing and shall be deemed to have been given upon the earlier of actualreceipt or three days after having been mailed by first class mail, postageprepaid, or twenty-four hours after having been sent by Federal Express orsimilar overnight delivery services, as follows: (a) if to Employee, at theaddress shown at the head of this Agreement, or to such other person(s) oraddresses as Employee shall have furnished to the Company in writing; and (b) ifto the Company, at the address shown at the head of this Agreement, Attention:Edward B. Hager, M.D., with a copy to David A. White, Esq., White & McDermott,P.C., 65 William Street, Suite 209, Wellesley, Massachusetts 02181, or to suchother person(s) or addresses as the Company shall have furnished to the Employeein writing. 14. Assignability. In the event that the Company shall be mergedwith, or consolidated into, any other corporation, or in the event that it shallsell and transfer substantially all of its assets to another corporation, theterms of this Agreement shall inure to the benefit of, and be assumed by, thecorporation resulting from such merger or consolidation, or to which theCompany's assets shall be sold and transferred. This Agreement shall not beassignable by Employee, but it shall be binding upon, and to the extent providedin Section 8 shall inure to the benefit of, his heirs, executors, administratorsand legal representatives. 15. Entire Agreement. This Agreement contains the entire agreementbetween the Company and Employee with respect to the subject matter hereof andthere have been no oral or other prior agreements of any kind whatsoever as acondition precedent or inducement to the signing of this Agreement or otherwiseconcerning this Agreement or the subject matter hereof. 16. Equitable Relief. Employee recognizes and agrees that theCompany's remedy at law for any breach of the provisions of Sections 9, 10, 11or 12 hereof would be inadequate, and he agrees that for breach of suchprovisions, the Company shall, in addition to such other remedies as may beavailable to it at law or in equity or as provided in this Agreement, beentitled to injunctive relief and to enforce its rights by an action forspecific performance. Should Employee engage in any activities prohibited bythis Agreement, he agrees to pay over to the Company all compensation,remuneration or monies or property of any sort received in connection with suchactivities; such payment shall not impair any rights or remedies of the Companyor obligations or liabilities of Employee which such parties may have under thisAgreement or applicable law. 17. Amendments. This Agreement may not be amended, nor shall anychange, waiver, modification, consent or discharge be effected except by writteninstrument executed by the Company and Employee. 18. Severability. If any part of any term or provision of thisAgreement shall be held or deemed to be invalid, inoperative or unenforceable toany extent by a court of competent jurisdiction, such circumstances shall in noway affect any other term or provision of this Agreement, the application ofsuch term or provision in any other circumstances, or the validity orenforceability of this Agreement. 4 5 19. Paragraph Headings. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used inconnection with, the interpretation hereof. 20. Governing Law. This Agreement shall be governed by and construedand enforced in accordance with the law of the State of Delaware, without regardto principles of conflict of law. IN WITNESS WHEREOF, the parties have executed or caused to be executedthis Agreement as of the date first above written. NOVAVAX, INC.[SEAL] By: /s/ EDWARD B. HAGER ------------------------------------ Edward B. Hager, Chairman of the Board /s/ RICHARD F. MARADIE ------------------------------------ Richard F. Maradie 5/15/97 5 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT AGREEMENT (the "Employment Agreement" or this "Agreement") dated as ofthe 24 day of July, 1997, between Novavax, Inc., a Delaware corporation havingits principal office at 8320 Guilford Road, Columbia, Maryland 21046 (the"Company") and Brenda Fugagli ("Employee") residing at 988 Stonington Drive,Arnold, Maryland 21012. The Company and Employee hereby agree as follows: 1. Employment. The Company hereby employs Employee and Employee herebyaccepts employment upon the terms and conditions hereinafter set forth. (As usedthroughout this Agreement, "Company" shall mean and include any and all of itspresent and future subsidiaries and any and all subsidiaries of a subsidiary.)Employee warrants that she is free to enter into and perform this Agreement andis not subject to any employment, confidentiality, non-competition or otheragreement which would restrict her performance under this Agreement. 2. Duties. Employee shall devote her full business time to theperformance of services as Vice President, Treasurer and Chief Financial Officeror such other senior management services as may from time to time be designatedby the Company's Chief Executive Officer or the Board of Directors. During theterm of this Agreement, Employee's services shall be completely exclusive to theCompany and she shall devote her entire business time, attention and energies tothe business of the Company and the duties to which the Company shall assign herfrom time to time. Employee agrees to perform her services faithfully and to thebest of her ability and to carry out the policies and directives of the Company.Employee agrees to take no action which is in bad faith and prejudicial to theinterests of the Company during her employment hereunder. Employee shall bebased in Columbia, Maryland but she may be required from time to time to performduties hereunder for reasonably short periods of time outside said area. 3. Term. The term of this Agreement shall begin on July 21, 1997 andshall end on July 20, 1998 (the "Term"). Employee's performance will be reviewedby the Chief Executive Officer and the Compensation Committee of the Board ofDirectors after six months of employment for the purposes of evaluation andpossible extension. 4. Compensation. (a) Base Compensation. For all Employee's services and covenantsunder this Agreement, the Company shall pay Employee a base annual salary of$135,000, payable in accordance with the Company's payroll policy as constitutedfrom time to time. (b) Stock Options. Employee shall be entitled to receive stockoptions to purchase 100,000 shares of the Company's Common Stock, $.01 parvalue, at an exercise price equal to the closing price of the Company's CommonStock on the date of grant. The options will be subject to a Incentive StockOption Agreement (and, to the extent required by the Internal Revenue Code, aNon-Statutory Stock Option Agreement) which shall include an option vestingschedule as follows: one-third of the shares on the six-month anniversary of thedate of grant, one-third of the shares on the eighteen-month anniversary of thedate of grant and one-third of the shares on the thirty-month anniversary of thedate of grant. Employee will also be eligible to receive additional stockoptions annually, based on job performance, in an amount to be determined by theCompensation and Stock Option Committee of the Board of Directors at theDecember Board meetings. (c) Bonus Program. During the Term, the Employee shall be entitledto participate in a bonus program, if any, maintained from time to time by theCompany for the benefit of senior executives and other employees of the Companyunder which award payments, if any, are based on performance criteria mutuallydetermined by the Employee and the Company. 2 5. Expenses. Employee shall be entitled to reimbursement for reasonable expenses incurred by Employee in connection with the performance ofher duties hereunder upon receipt of vouchers therefor in accordance with suchprocedures as the Company has heretofore or may hereafter establish. 6. Employee Benefits. (a) Employee shall be entitled to two weeks of vacation time duringthe first year, calculated on a calendar year basis in accordance with Companypolicies in effect from time to time. Thereafter, Employee shall be entitled totwo weeks of vacation plus one day for each year of Employee's employment afterthe first year, up to a maximum of four weeks per year. (b) Employee shall be entitled to the use of a Company automobileduring the Term in accordance with Company policies in effect from time to time. (c) Employee shall be entitled to participate in all groupinsurance programs, stock option plans or other fringe benefit plans which theCompany may now or hereafter in its sole and absolute discretion make availablegenerally to its employees, but the Company shall not be required to establishany such program or plan. 7. Termination of Employment. Notwithstanding any other provision of this Agreement, Employee's employment may be terminated: (a) By the Company, in the event of Employee's willful failure orrefusal to perform in all material respects the services required of her hereby,after a specific written warning with regard thereto, which shall include astatement of corrective actions and a 30 day period for the Employee to respondand implement such actions, has been given to Employee by the Board ofDirectors, her willful failure or refusal to carry out any proper direction bythe Chief Executive Officer or the Board of Directors with respect to theservices to be rendered by her hereunder or the manner of rendering suchservices, her willful misconduct in the performance of her duties hereunder orher commission of a felony involving moral turpitude; (b) By the Company, upon 30 days' notice to Employee, if she shouldbe prevented by illness, accident or other disability (mental or physical) fromdischarging her duties hereunder for one or more periods totalling three monthsduring any twelve-month period; (c) By the Company, without cause, or by Employee with "GoodReason" (as hereinafter defined) provided that if Employee's employment isterminated pursuant to this Section 7(c), Employee shall be entitled to receiveher salary, but not a performance bonus, for one month from the date oftermination, payable in a lump sum together with any accrued vacation pay and inthe amounts set forth in Section 4(a) above. The Employee shall be entitled toterminate her employment for "Good Reason" if her responsibilities and authorityare reduced or diluted in any material way (other than for cause) without herconsent or if she is relocated to another Company office or facility more than50 miles from Columbia, Maryland without her consent. (d) In the event of Employee's death during the term of heremployment, the Company's obligation to pay further compensation hereunder shallcease forthwith, except that Employee's legal representative shall be entitledto receive her fixed compensation for the period up to the last day of the monthin which such death shall have occurred. 8. All Business to be Property of the Company; Assignment of Intellectual Property. (a) Employee agrees that any and all presently existing business ofthe Company and all business developed by her or any other employee of theCompany including without limitation all 2 3contracts, fees, commissions, compensation, records, customer or client lists,agreements and any other incident of any business developed, earned or carriedon by Employee for the Company is and shall be the exclusive property of theCompany, and (where applicable) shall be payable directly to the Company. (b) Employee hereby grants to the Company (without any separateremuneration or compensation other than that received by her from time to timein the course of her employment) her entire right, title and interest throughoutthe world in and to, all research, information, procedures, developments, allinventions and improvements whether patentable or nonpatentable, patents andapplications therefor, trademarks and applications therefor, copyrights andapplications therefor, programs, trade secrets, plans, methods, and all otherdata and know-how (herein sometimes "Intellectual Property") made, conceived,developed and/or acquired by her solely or jointly with others during the periodof her employment with the Company, which are either (i) made, conceived,developed or acquired during regular business hours or on the premises of, orusing properties of, the Company or in the regular scope of Employee'semployment by the Company or (ii) if related to the Company's business, whetheror not made, conceived, developed or acquired during regular business hours oron the premises of, or using properties of, the Company or in the regular scopeof Employee's employment by the Company. 9. Confidentiality. Except as necessary in performance of services forthe Company or if required by law and except for such information that becomesgenerally available to the public through no fault of Employee, Employee shallnot, either during the period of her employment with the Company or thereafter,use for her own benefit or disclose to or use for the benefit of any personoutside the Company, any information concerning any Intellectual Property, orother confidential or proprietary information of the Company, including withoutlimitation, any of the materials listed in Section 8(a), whether Employee hassuch information in her memory or embodied in writing or other tangible form.All originals and copies of any of the foregoing, however and whenever produced,shall be the sole property of the Company, not to be removed from the premisesor custody of the Company without in each instance first obtaining authorizationof the Company, which authorization may be revoked by the Company at any time.Upon the termination of Employee's employment in any manner or for any reason,Employee shall promptly surrender to the Company all copies of any of theforegoing, together with any documents, materials, data, information andequipment belonging to or relating to the Company's business and in herpossession, custody or control, and Employee shall not thereafter retain ordeliver to any other person any of the foregoing or any summary or memorandumthereof. 10. Non-Competition Covenant. As the Employee is being granted optionsto purchase stock in the Company and as such has a financial interest in thesuccess of the Company's business and as Employee recognizes that the Companywould be substantially injured by Employee competing with the Company, Employeeagrees and warrants that within the United States, she will not, unless actingwith the Company's express prior written consent, directly or indirectly, whilean employee of the Company and during the Non-Competition Period, as definedbelow, own, operate, join, control, participate in, or be connected as anofficer, director, employee, partner, stockholder, consultant, or otherwisewith, any business or entity which competes with the business of the Company(or its successors or assigns) as such business is now constituted or as it maybe constituted at any time during the term of this Agreement. The"Non-Competition Period" shall be a period of one month following terminationof employment. Employee and the Company are of the belief that the period of time andthe area herein specified are reasonable in view of the nature of the businessin which the Company is engaged and proposes to engage, the state of itsbusiness development and Employee's knowledge of this business. However, if suchperiod or such area should be adjudged unreasonable in any judicial proceeding,then the period of time shall be reduced by such number of months or such areashall be reduced by elimination of such portion of such area, or both, as aredeemed unreasonable, so 3 4that this covenant may be enforced in such area and during such period of timeas is adjudged to be reasonable. 11. Non-Solicitation Agreement. Employee agrees and covenants thatshe will not, unless acting with the Company's express written consent, directlyor indirectly, during the term of this Agreement or for a period of 24 monthsthereafter solicit, entice away or interfere with the Company's contractualrelationships with any customer, officer or employee of the Company. 12. Notices. All notices and other communications hereunder shall bein writing and shall be deemed to have been given upon the earlier of actualreceipt or three days after having been mailed by first class mail, postageprepaid, or twenty-four hours after having been sent by Federal Express orsimilar overnight delivery services, as follows: (a) if to Employee, at theaddress shown at the head of this Agreement, or to such other person(s) oraddress(es) as Employee shall have furnished to the Company in writing; and (b)if to the Company, at the address shown at the head of this Agreement,Attention: Richard F. Maradie, with a copy to David A. White, Esq., White &McDermott, P.C., 65 William Street, Suite 209, Wellesley, Massachusetts 02181,or to such other person(s) or address(es) as the Company shall have furnished tothe Employee in writing. 13. Assignability. In the event that the Company shall be merged with,or consolidated into, any other corporation, or in the event that it shall selland transfer substantially all of its assets to another corporation, the termsof this Agreement shall inure to the benefit of, and be assumed by, thecorporation resulting from such merger or consolidation, or to which theCompany's assets shall be sold and transferred. This Agreement shall not beassignable by Employee, but it shall be binding upon, and to the extent providedin Section 7 shall inure to the benefit of, her heirs, executors, administratorsand legal representatives. 14. Entire Agreement. This Agreement contains the entire agreementbetween the Company and Employee with respect to the subject matter hereof andthere have been no oral or other prior agreements of any kind whatsoever as acondition precedent or inducement to the signing of this Agreement or otherwiseconcerning this Agreement or the subject matter hereof. 15. Equitable Relief. Employee recognizes and agrees that theCompany's remedy at law for any breach of the provisions of Sections 8, 9, 10 or11 hereof would be inadequate, and she agrees that for breach of suchprovisions, the Company shall, in addition to such other remedies as may beavailable to it at law or in equity or as provided in this Agreement, beentitled to injunctive relief and to enforce its rights by an action forspecific performance. Should Employee engage in any activities prohibited bythis Agreement, she agrees to pay over to the Company all compensation,remuneration or monies or property of any sort received in connection with suchactivities; such payment shall not impair any rights or remedies of the Companyor obligations or liabilities of Employee which such parties may have under thisAgreement or applicable law. 16. Amendments. This Agreement may not be amended, nor shall anychange, waiver, modification, consent or discharge be effected except by writteninstrument executed by the Company and Employee. 17. Severability. If any part of any term or provision of thisAgreement shall be held or deemed to be invalid, inoperative or unenforceable toany extent by a court of competent jurisdiction, such circumstances shall in noway affect any other term or provision of this Agreement, the application ofsuch term or provision in any other circumstances, or the validity orenforceability of this Agreement. 18. Paragraph Headings. The paragraph headings used in this Agreementare included solely for convenience and shall not affect, or be used inconnection with, the interpretation hereof 4 5 19. Governing Law. This Agreement shall be governed by and construedand enforced in accordance with the law of the State of Delaware, without regardto the principles of conflict of law thereof. 20. Resolution of Disputes. With the exception of proceedings forequitable relief brought pursuant to Section 15 of this Agreement or any stockoption agreement, any disputes arising under or in connection with thisAgreement or any stock option agreement including, without limitation, anyassertion by any party hereto that the other party has breached any provision ofthis Agreement, shall be resolved by arbitration, to be held in Baltimore,Maryland, in accordance with the rules and procedures of the AmericanArbitration Association. All costs, fees and expenses, including reasonableattorney fees, of any arbitration or equitable relief proceeding in connectionwith this Agreement shall be borne by, and be the obligation of, the Company. Inno event shall the Employee be required to reimburse the Company for any of thecosts and expenses incurred by the Company relating to any arbitration. Theobligation of the Company under this Section 20 shall survive the terminationfor any reason of the Term (whether such termination is by the Company, by theEmployee or upon the expiration of the Term). 21. Indemnification. The Employee shall be entitled to liability andexpense indemnification to the fullest extent permitted by the Company's currentBy-laws and Certificate of Incorporation, whether or not the same aresubsequently amended. 22. Survivorship. The respective rights and obligations of the partiesto this Agreement shall survive any termination of this Agreement or theEmployee's employment hereunder for any reason to the extent necessary to theintended preservation of such rights and obligations. IN WITNESS WHEREOF, the parties have executed or caused to be executedthis Agreement as of the date first above written. NOVAVAX, INC.[SEAL] By: /s/ RICHARD F. MARADIE ------------------------------------------- Richard F. Maradie, Chief Executive Officer /s/ BRENDA FUGAGLI ---------------------------------------------- Brenda Fugagli 5 1 EXHIBIT 10.12 NOVAVAX, INC. 8320 Guilford Road Columbia, Maryland 21046 February 19, 1998Dr. Richard J. Harwood3219 Adams Court NorthBensalem, Pennsylvania 19020Dear Rich: On behalf of Novavax, Inc. (the "Company"), I am pleased to offer you theposition of Vice President, Pharmaceutical Development of the Company, subjectto satisfactory reference checks. We are greatly looking forward to yourjoining the Company's team. Job Title: Vice President, Pharmaceutical Development. Start Date: March 5, 1998. Salary: At least $140,000 per year payable in accordance with theCompany's payroll policies in effect from time to time. Bonus Program: You will be entitled to participate in a bonus program ifthe Company hereafter establishes one for the benefit of senior executives andother employees of the Company, under which award payments, if any, will bebased on performance criteria and milestones to be mutually determined by theCompany and you. Stock Options: The Company will grant you stock options to purchase100,000 shares of the Company's Common Stock ($.01 par value) at an exerciseprice equal to the closing price of the Company's Common Stock on the date ofgrant. The options will vest as to one-third of the shares on the six-monthanniversary of the date of grant, as to an additional one-third of the shareson the eighteenth-month anniversary of the date of grant and as to the finalone-third of the shares on the thirty-month anniversary of the date of grant.You will be eligible to be granted additional options from time to time,based on your job performance. Benefits: The Company will provide medical and dental benefits, lifeinsurance, and disability insurance in accordance with the Company's policiesin effect from time to time. As of the date of this letter, the Companycurrently pays 100% of family coverage as provided by the Company's groupmedical insurer, 100% of the premium for $140,000 of life insurance under theCompany's group life insurance plan and 100% of the premium for the Company'slong-term disability insurance. The Company will also reimburse you for actualmoving expenses in connection with your relocation to the Columbia, Marylandarea in an amount not to exceed $30,000. Vacation: You will be entitled to three weeks of vacation time per year,calculated on a calendar year basis in accordance with the Company's policies ineffect from time to time. Employment Requirements and Term: You will be required by the Company tosign the Company's standard form of Non-Disclosure Agreement and sign andacknowledge certain Company policies as a condition to your employment by theCompany. In addition, it is a requirement that the Company and you negotiate andsign an Employment Agreement which, among other things, will provide for a oneyear term of employment, a six month noncompetition 2Dr. Richard J. HarwoodFebruary 19, 1998Page 2period following termination of employment, 90 days' prior written notice ofdate of termination from the Company, and severance pay of six months' salaryin the event of an early termination of employment without cause. TheEmployment Agreement will also provide for 90 days' prior written notice fromyou in the event of voluntary termination of employment. Entire Agreement: This agreement sets forth the entire agreement andunderstanding between you and the Company regarding all subjects coveredherein, the terms of which may not be changed or modified except by agreementin writing signed by you and the Company. Severability: Should any provision of this agreement, or portion thereof,be found invalid and unenforceable, the remaining provisions shall continue infull force and effect. Governing Law: This agreement shall be governed, construed and enforcedin accordance with the laws of Delaware, without regard to principles ofconflict of law. Conflict: You hereby acknowledge that you are not a party to anyagreement that in any way prohibits or imposes any restriction on your employment with the Company, and your acceptance hereof will not breach anyagreement to which you are a party. Please acknowledge your acceptance of this offer by signing the copy ofthis letter and returning it to me. Very truly yours, /s/ RICHARD F. MARADIE Richard F. Maradie, President and Chief Executive OfficerACCEPTED: (as annotated)/s/ RICHARD J. HARWOOD- ----------------------Richard J. Harwood 1 EXHIBIT 10.13 NOVAVAX, INC. 8320 Guilford Road Columbia, Maryland 21046 February 19, 1998Dr. Thomas G. Tachovsky39 Riverside TerraceNorth Easton, MA 02356Dear Tom: On behalf of Novavax, Inc. (the "Company"), I am pleased to offer you theposition of Vice President, Business Development of the Company, effectiveFebruary 23, 1998. We are greatly looking forward to your joining the Company's team. Job Title: Vice President, Business Development. Salary: $130,000 per year payable in accordance with the Company's payroll policies in effect from time to time. Bonus Program: You will be entitled to participate in a bonus program ifthe Company hereafter establishes one for the benefit of senior executives andother employees of the Company, under which award payments, if any, will bebased on performance criteria and milestones to be mutually determined by theCompany and you. Stock Options: The Company will grant you stock options to purchase75,000 shares of the Company's Common Stock ($.01 par value) at an exerciseprice equal to the closing price of the Company's Common Stock on the date ofgrant, February 11, 1998. The options will vest as to one-third of the shares on the six-month anniversary of the date of grant, as to an additionalone-third of the shares on the eighteenth-month anniversary of the date ofgrant and as to the final one-third of the shares on the thirty-monthanniversary of the date of grant. You will be eligible to be granted additionaloptions from time to time, based on your job performance. Benefits: The Company will provide medical and dental benefits, lifeinsurance, and disability insurance in accordance with the Company's policiesin effect from time to time. As of the date of this letter, the Companycurrently pays 100% of family coverage as provided by the Company's groupmedical insurer, 100% of the premium for $130,000 of life insurance under theCompany's group life insurance plan and 100% of the premium for the Company'slong-term disability insurance. Vacation: You will be entitled to three weeks of vacation time per year,calculated on a calendar year basis in accordance with the Company's policies ineffect from time to time. Employment Requirements and Term: You will be required by the Company tosign the Company's standard form of Non-Disclosure Agreement and sign andacknowledge certain Company policies as a condition to your employment by theCompany. In addition, it is a requirement that the Company and you negotiate andsign an Employment Agreement which, among other things, will provide for a oneyear term of employment, a six month noncompetition period followingtermination of employment and severance pay of six months' salary in the eventof an early termination of employment without cause. 2Dr. Thomas G. TachovskyFebruary 19, 1998Page 2 Entire Agreement: This agreement sets forth the entire agreement andunderstanding between you and the Company regarding all subjects coveredherein, the terms of which may not be changed or modified except by agreementin writing signed by you and the Company. Severability: Should any provision of this agreement, or portion thereof,be found invalid and unenforceable, the remaining provisions shall continue infull force and effect. Governing Law: This agreement shall be governed, construed and enforcedin accordance with the laws of Delaware, without regard to principles ofconflict of law. Conflict: You hereby acknowledge that you are not a party to anyagreement that in any way prohibits or imposes any restriction on your employment with the Company, and your acceptance hereof will not breach anyagreement to which you are a party. Please acknowledge your acceptance of this offer by signing the copy ofthis letter and returning it to me. Very truly yours, /s/ RICHARD F. MARADIE Richard F. Maradie, President and Chief Executive OfficerACCEPTED: (as annotated)/s/ THOMAS G. TACHOVSKY- ----------------------Thomas G. Tachovsky 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTSWe consent to the incorporation by reference in the Registration Statements ofNovavax, Inc. on Form S-8 (Nos.33-80277, 33-80279 and 333-3384) andRegistration Statements of Novavax, Inc. on Form S-3 (Nos. 333-14305, 333-5367,333-22685 and 333-46409) of our report dated March 13, 1998 on our audits ofthe consolidated financial statements of Novavax, Inc. and subsidiaries as ofDecember 31, 1997 and 1996, and for each of the three years in the period endedDecember 31, 1997 which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P.McLean, VirginiaMarch 31, 1998

5 12-MOS DEC-31-1997 DEC-31-1997 3,847,107 0 217,150 0 0 4,235,377 1,428,638 (539,463) 6,823,271 288,638 0 0 0 120,318 0 6,823,271 519,714 519,714 0 0 5,311,295 0 0 (4,546,617) 0 (4,546,617) 0 0 0 (4,546,617) (.39) (.39)

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Novavax Annual Report 1997

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Novavax
Annual Report 1997