PROPOSAL NO. 3

AMENDMENT OF 2005 STOCK INCENTIVE PLAN

The 2005 Plan was adopted by our Board on February 24, 2005 and approved by Novavax stockholders on May 4, 2005. The number of shares originally authorized for issuance under the 2005 Plan was 2,565,724 shares, 565,724 shares of which were previously held for reserve under the 1995 Stock Option Plan (the “1995 Plan”) but were unused. To the extent that stock options granted under the 1995 Plan expire unexercised, the shares underlying those options become available for grant under the 2005 Plan. The 2005 Plan permits a maximum of 5,746,468 shares of Common Stock subject to stock options outstanding under the 1995 Plan to revert to and become issuable under the 2005 Plan, if such options should expire or otherwise terminate unexercised.

On June 20, 2007, Novavax stockholders voted to approve an amendment to increase the number of shares under the 2005 Plan by an additional 3,000,000 shares (“2007 Amendment”). On June 15, 2011 Novavax, stockholders voted to approve an additional amendment to increase the number of shares under the 2005 Plan by an additional 3,000,000 shares (“2011 Amendment”). On June 11, 2012, Novavax stockholders voted to approve an amendment to increase the number of shares under the 2005 Plan by an additional 4,000,000 shares (“2012 Amendment”). On June 13, 2013, Novavax stockholders voted to approve an amendment to increase the number of shares under the 2005 Plan by an additional 4,000,000 shares (“2013 Amendment”).

As further discussed below, we do not believe that the remaining shares of Common Stock available for issuance under the 2005 Plan are sufficient to continue implementing the Company’s stock incentive program over the next year taking into account our historic burn rate (discussed below) and certain other factors, including the Company’s recent growth and anticipated need to attract new employees with appropriate levels of experience and talent. Accordingly, on March 6, 2014, our Board approved an amendment to the 2005 Plan, subject to stockholder approval, to increase the number of shares reserved for issuance under this plan by 4,000,000 shares (“2014 Amendment”). The 2014 Amendment is being submitted to the Company’s stockholders for approval. The resolutions to be presented to the stockholders approving the proposed 2014 Amendment to the 2005 Plan is attached as Appendix 1 to this Proxy Statement and is incorporated herein by reference.

Existing Equity Plan Information

At present, the 2005 Plan is the only long-term incentive plan of the Company. As of April 16, 2014, our 2005 Plan had 2,479,719 shares available for grant as equity awards. If the 2014 Amendment is approved, the total number of shares that will be available for future awards under the 2005 Plan will be 6,479,719, which is the sum of 4,000,000 shares plus the number of shares currently available under our 2005 Plan. If the stockholders do not approve the 2014 Amendment, additional awards will only be granted from the shares currently available under the 2005 Plan and the 2014 Amendment will not become effective.

Total potential dilution (as a percentage of shares of Common Stock outstanding on a fully diluted basis for this purpose including shares reserved for exercise under the plans and the 2014 Amendment as of April 16, 2014) after giving effect to the 4,000,000 shares of Common Stock that would be authorized under the 2014 Amendment plus the 2,479,719 shares available for grant under the 2005 Plan, plus the 15,544,855 shares subject to outstanding awards under the 2005 Plan and the 18,700 shares subject to outstanding awards under the 1995 Plan, plus the 1,911,176 shares available for future awards under our Employee Stock Purchase Plan (“ESPP”) (as of April 16, 2014) is 10.3%. We manage our long-term stockholder dilution by limiting the number of equity awards granted annually. The Board carefully monitors our annual burn rate, dilution and equity expense to ensure that we maximize stockholders’ value by granting only the appropriate number of equity awards necessary to attract, reward and retain employees and directors.

The following table provides information regarding the number of shares subject to outstanding awards and the number of shares available for future grants under the 2005 Plan as of April 16, 2014 (after giving effect to the 2014 Amendment) and under our ESPP. We grant awards only under the 2005 Plan and under our ESPP.

Historical Equity Awards, Burn Rate and Projected Equity Awards

Upon a review of the remaining shares available for grant under the 2005 Plan, historical amounts of equity awards granted by the Company in the past three years, the Company’s three-year average burn rate and projected equity awards to be made under the 2005 Plan after giving effect to the 2014 Amendment, the Board approved the number of shares authorized for issuance under the 2014 Amendment to ensure that the shares reserve is sufficient to continue to provide our eligible employees, consultants and directors with appropriate equity-based incentives. Traditionally, the Company grants stock options as the primary form of equity compensation, but does, at times, grant restricted stock to attract and retain key executive officers.

The table below sets forth the aggregate number of shares underlying all equity awards made during each of the past three years.

A summary of the Company’s gross burn rate for the 2011 - 2013 period is set forth below. Gross burn rate includes the sum of all awards granted in a fiscal year divided by the weighted average number of common shares outstanding during that fiscal year.

Summary of 2005 Plan

The following summary describes the material terms of the 2005 Plan and provides a general description of the U.S. federal income tax consequences applicable to certain transactions involving awards under the 2005 Plan. This summary of the 2005 Plan is not a complete description of all provisions of the 2005 Plan and is qualified in its entirety by reference to the 2005 Plan, which is filed as an appendix to this Proxy Statement.

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

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

Initial Stock Subject to 2005 Plan; Transfer of Shares from 1995 Plan . The number of shares of Common Stock that were initially set aside and reserved for issuance under the 2005 Plan was 2,565,724 shares (subject to adjustment as described herein), including 565,724 unused shares transferred from the 1995 Plan. In addition, the 2005 Plan permits a maximum of 5,746,468 shares of Common Stock subject to stock options outstanding under the 1995 Plan to revert to and become issuable under the 2005 Plan, if such options should expire or otherwise terminate unexercised. The 2007 Amendment, 2011 Amendment, 2012 Amendment and 2013 Amendment increased the number of shares of Common Stock available under the 2005 Plan by an additional 3,000,000, 3,000,000, 4,000,000 and 4,000,000 shares, respectively. The proposed 2014 Amendment to the 2005 Plan will increase the number of shares of Common Stock available under the plan by 4,000,000 shares, subject to stockholder approval.

The 1995 Plan continues to exist, and stock options previously granted under the 1995 Plan remain in existence in accordance with their terms. However, no new awards have been under the 1995 Plan since the adoption of the 2005 Plan. There are currently 18,700 shares of Common Stock subject to existing options under the 1995 Plan as of April 16, 2014.

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

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

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

Maximum Number of Shares Issued through Incentive Stock Options . The maximum aggregate number of shares that may be issued under the 2005 Plan through the exercise of ISOs is 26,312,192, subject to stockholder approval of the 2014 Amendment to the 2005 Plan.

Eligible Participants . Subject to certain limitations, awards under the 2005 Plan of NSOs, restricted stock awards, restricted stock units and SARs may be granted to any employee, officer, director, consultant or advisor to the Company. Only employees of the Company may be granted incentive stock options (“ISOs”) under the 2005 Plan. As of April 16, 2014, the Company had 217 full-time employees and six members of the Board of Directors who were not employees of the Company.

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

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

Options

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

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

Exercise Price . The exercise price for any option granted under the 2005 Plan may not be less than the fair market value of the Common Stock on the date of grant. In the case of an ISO granted to an employee who at the time of grant owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its parents or subsidiaries, the exercise price may not be less than 110% of the fair market value on the date of grant.

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

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

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

The consideration to be paid for shares to be issued upon exercise of an option may be made by (a) delivery of cash or a check to the Company; (b) to the extent permitted by the applicable option agreement, delivery to the Company of shares of Common Stock already owned by the recipient having a fair market value on the date of surrender equal to the aggregate exercise price of the shares being purchased; or (c) by any other means approved by the Board.

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

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

Transferability . Options are not assignable or transferable by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the recipient, are exercisable only by the recipient. NSOs may, however, be transferred pursuant to a domestic relations order (within the meaning of   Exchange Act Rule 16a-12)   or as otherwise expressly permitted in the agreement evidencing such NSO.

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

Restricted Stock Awards, Restricted Stock Units and SARs

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

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

Transferability . Rights to purchase or receive shares of Common Stock granted under a restricted stock award are transferable by the recipient only upon such terms and conditions as are set forth in the restricted stock award agreement, as the Board determines in its discretion, and so long as the Common Stock awarded then remains subject to the terms of the restricted stock award agreement. Transferability of other awards will be as determined by the Board.

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

SARs . An SAR entitles the recipient to a payment equal in value to the appreciation in the value of an underlying share of the Company’s Common Stock from the date of grant to the date the SAR is exercised. SARs will be denominated in shares of Common Stock. Payment may be made in shares of Common Stock, cash or any combination of the two, as the Board deems appropriate. The amount payable on the exercise of an SAR may not be greater than the amount equal to the excess of (1) the aggregate fair market value (on the date of the exercise of the SAR) of the number of shares of Common Stock underlying the SAR that are being exercised, over (2) the aggregate fair market value of such shares of Common Stock on the grant date. The Board may impose any restrictions it deems appropriate on the vesting of SARs. If the recipient’s service with the Company terminates for any reason, unvested SARs will be forfeited and the Company will automatically redeem vested SARs.

Corporate Changes

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

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

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

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

Tax Matters

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

Nonstatutory Stock Options . As with ISOs, the grant of NSOs with an exercise price per share that is at least equal to the fair market value of a share of Common Stock on the date of grant does not result in the recognition of taxable income to the recipient. The exercise of an NSO results in the recognition of ordinary income to the recipient in the amount by which the fair market value of the Common Stock acquired through the exercise of the NSO (“NSO Stock”) on the exercise date exceeds the exercise price and the recipient’s tax basis in the NSO Stock will be equal to the exercise price plus any income recognized upon the exercise of the option. The sale of NSO Stock generally will result in the recognition of a capital gain or loss in an amount equal to the excess of the sale price of the NSO Stock over the recipient’s tax basis in the NSO Stock. This capital gain or loss will be a long-term capital gain or loss if the recipient has held the NSO Stock for more than one year prior to the date of the sale.

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

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

Upon acquisition of stock that is not subject to a substantial risk of forfeiture, the recipient generally will recognize taxable ordinary income equal to the excess, if any, of the stock’s fair market value on the acquisition date over the purchase price. However, to the extent the stock is subject to a substantial risk of forfeiture, including certain types of vesting restrictions, the taxable event will be delayed until the vesting restrictions lapse, unless the recipient elects to be taxed on receipt of the stock by making an election under Section 83(b) of the Code. An 83(b) election must be made not later than 30 days after the transfer of the shares to the participant and must satisfy certain other requirements. A recipient who makes an effective 83(b) election will realize ordinary income equal to the fair market value of the shares as of the time of the acquisition, less any price paid for the shares. If a recipient makes an effective 83(b) election, no additional income results by reason of the lapsing of the restrictions. With respect to employees, the Company is generally required to withhold from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax-reporting obligation, the Company will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the recipient.

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

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

Restricted Stock Units . A recipient does not have taxable ordinary income upon the grant of a restricted stock unit. Ordinary income arises on the actual or constructive receipt of the stock underlying the units (or upon receipt of cash, if the restricted stock unit is settled in cash), which generally occurs when the restricted stock units vest, unless delivery of shares or cash is deferred under Section 409A of the Code. If shares delivered are restricted for tax purposes, the recipient will be subject to the rules described above applicable to restricted stock.

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

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

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

Awards to purchase restricted stock and stock bonus awards will qualify as performance-based compensation under the Treasury Regulations only if (i) the award is granted by a compensation committee comprised solely of “outside directors,” (ii) the award is granted (or exercisable) only upon the achievement of an objective performance goal established in writing by the compensation committee while the outcome is substantially uncertain, (iii) the compensation committee certifies in writing prior to the granting (or exercisability) of the award that the performance goal has been satisfied and (iv) prior to the granting (or exercisability) of the award, stockholders have approved the material terms of the award (including the class of employees eligible for such award, the business criteria on which the performance goal is based, and the maximum amount — or formula used to calculate the amount — payable upon attainment of the performance goal).

The foregoing is only a summary of the material federal income tax consequences associated with the grant, exercise and disposition of the shares of Common Stock subject to awards granted under the 2005 Plan. It does not purport to be complete and does not discuss the tax consequences arising in the event of a recipient’s death or the income tax laws of the municipality, state or foreign country under which the recipient’s income may be taxable.

2005 Plan Benefits

Awards of stock options, restricted stock, restricted stock units and SARs made to eligible participants under the 2005 Plan are subject to the discretion of the Board, upon recommendation by the Compensation Committee and, therefore, are not determinable at this time.

Each option granted under the 2005 Plan will have an exercise price that is no less than the fair market value of a share of Common Stock on the date of grant. Prices and consideration for restricted stock awards, restricted stock units and SARs under the 2005 Plan will be as determined by the Board. The value of each such grant and award may depend on the market value of the Company’s Common Stock on the day of exercise and therefore cannot be determined or estimated at this time. The closing market value of the Company’s Common Stock on April 16, 2014 was $4.05 per share.

Approval of the 2014 Amendment to the 2005 Plan to increase the number of shares reserved for issuance under such plan by 4,000,000 shares requires the affirmative vote of the holders of a majority of the shares of Common Stock present in person or represented by proxy and voting on the matter. Abstentions and broker non-votes will not be counted as shares voting on such matter and accordingly will have no effect on the approval of this Proposal 3.

FOR PROPOSAL 3, THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE “ FOR” ADOPTION OF THE 2014 AMENDMENT TO INCREASE THE NUMBER OF SHARES BY 4,000,000 UNDER THE 2005 PLAN.