Preliminary Proxy Statement
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
PROXY
STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
|
|
|
Filed
by the Registrantx
|
Filed
by a Party other than the Registranto
|
|
Check
the appropriate box:
|
|
x
|
|
Preliminary
Proxy Statement
|
|
|
|
|
o
|
|
Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|
|
|
|
|
o
|
|
Definitive
Proxy Statement
|
|
|
|
|
o
|
|
Definitive
Additional Materials
|
|
|
|
|
o
|
|
Soliciting
Material Pursuant to Rule 14a-11(c) or
Rule 14a-12
|
|
|
|
|
NEPHROS,
INC.
________________________________________________________________________________________________________________________________________
(Name
of
Registrant as Specified in its Charter)
________________________________________________________________________________________________________________________________________
(Name
of
Person(s) Filing Proxy Statement, if other than the Registrant)
|
|
|
Payment
of Filing Fee (Check the appropriate box):
|
x
|
|
No
fee required.
|
o
|
|
Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
|
(1)
|
|
Title
of each class of securities to which transaction
applies:
|
|
|
|
________________________________________________________________________________________________________________________________________
|
(2)
|
|
Aggregate
number of securities to which transaction applies:
|
|
|
|
________________________________________________________________________________________________________________________________________
|
(3)
|
|
Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
|
|
|
|
________________________________________________________________________________________________________________________________________
|
(4)
|
|
Proposed
maximum aggregate value of transaction:
|
|
|
|
________________________________________________________________________________________________________________________________________
|
(5)
|
|
Total
fee paid:
|
|
|
|
________________________________________________________________________________________________________________________________________
|
o
|
|
Fee
paid previously with preliminary materials.
|
|
|
|
________________________________________________________________________________________________________________________________________
|
o
|
|
Check
box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
|
|
|
|
(1)
|
|
Amount
Previously Paid:
|
|
|
|
________________________________________________________________________________________________________________________________________
|
(2)
|
|
Form,
Schedule or Registration Statement No.:
|
|
|
|
________________________________________________________________________________________________________________________________________
|
(3)
|
|
Filing
Party:
|
|
|
|
________________________________________________________________________________________________________________________________________
|
(4)
|
|
Date
Filed:
|
|
|
|
________________________________________________________________________________________________________________________________________
|
Dear
Stockholder:
We
invite
you to attend our annual meeting of stockholders at 9:00 a.m. on May 22, 2007
at
the offices of Kramer Levin Naftalis & Frankel LLP located at 1177 Avenue of
the Americas in New York, New York. At the meeting, you will hear a report
on
our operations and have a chance to meet certain of our directors and executive
officers.
This
booklet includes the formal notice of the meeting and the proxy statement.
The
proxy statement tells you more about the agenda and procedures for the meeting.
It also describes how the Board operates and gives personal information about
our directors and executive officers.
Even
if
you only own a few shares, we want your shares to be represented at the meeting.
I urge you to complete, sign, date, and return your proxy card promptly in
the
enclosed envelope.
We
look
forward to seeing you on the 22nd
of
May.
Sincerely
yours,
_______________________________
Norman
J.
Barta
Chief
Executive
Officer &
President
[May
7,
2007]
NEPHROS,
INC.
3960
BROADWAY
NEW
YORK, NEW YORK 10032
___________________
NOTICE
OF
ANNUAL
MEETING OF STOCKHOLDERS
May
22, 2007
Notice
is
hereby given that the Annual Meeting of Stockholders of Nephros, Inc. will
be
held at 9:00 a.m. on Wednesday, May 22, 2007, at the offices of Kramer Levin
Naftalis & Frankel LLP located at 1177 Avenue of the Americas in New York,
New York, for the following purposes:
1.
|
|
To
elect three directors for a term of three years;
|
2.
|
|
To
ratify the appointment by the Audit Committee of Deloitte & Touche LLP
as the company’s independent registered public accounting firm for our
fiscal year ending December 31, 2007;
|
|
|
3.
|
|
To
approve the potential issuance of the company’s common stock upon
conversion of common notes and exercise of certain
warrants;
|
|
|
4.
|
|
To
approve an amendment to the Fourth Amended and Restated Certificate
of
Incorporation that increases the number of authorized shares of common
stock from 25,000,000 to 40,000,000;
|
|
|
5.
|
|
To
approve an amendment to the Nephros, Inc. 2004 Stock Incentive Plan
that
increases the total number of shares of common stock that may be
granted
pursuant to awards under the Plan from 800,000 to
1,300,000;
|
|
|
6.
|
|
To
approve an amendment to the Fourth Amended and Restated Certificate
of
Incorporation to repeal a restriction on stockholder action without
a
meeting; and
|
|
|
7.
|
|
To
transact such other business as may properly come before the meeting
and
any adjournments thereof. We are currently unaware of any additional
business to be presented at the meeting.
|
|
|
You
must own shares at the close of business on April __, 2007 to vote at the
meeting.
In
order that your shares may be represented at the meeting in case you are not
personally present, please complete, sign and date the enclosed proxy/voting
card and return it as soon as possible in the enclosed addressed envelope.
If
you attend the meeting, you may vote your shares in person, even if you have
signed and returned the proxy card.
|
|
BY
ORDER OF THE BOARD OF DIRECTORS
|
|
|
|
|
|
Sincerely,
|
|
|
|
|
|
______________________________ |
|
|
Norman
J. Barta
|
|
|
President
|
|
|
Chief
Executive Officer,
|
|
|
Corporate
Secretary
|
[May
7, 2007]
|
|
|
TABLE
OF CONTENTS
|
|
|
|
|
|
|
Page
|
GENERAL
INFORMATION
|
|
|
5
|
|
PROPOSAL
1: ELECTION OF DIRECTORS
|
|
|
7
|
|
DIRECTORS,
DIRECTOR NOMINEES AND EXECUTIVE OFFICERS
|
|
|
7
|
|
GOVERNANCE
OF THE COMPANY
|
|
|
10
|
|
PROPOSAL
2: RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
|
|
12
|
|
PROPOSAL
3: APPROVAL OF THE POTENTIAL ISSUANCE OF COMMON STOCK UPON CONVERSION
OF
CERTAIN NOTES AND EXERCISE OF CERTAIN WARRANTS
|
|
|
14
|
|
PROPOSAL
4: APPROVAL OF INCREASE IN AUTHORIZED COMMON SHARES
|
|
|
16
|
|
PROPOSAL
5: APPROVAL OF INCREASE IN SHARES THAT MAY BE GRANTED UNDER THE NEPHROS,
INC. 2004 STOCK INCENTIVE PLAN
|
|
|
17
|
|
PROPOSAL
6: APPROVAL OF REPEAL OF RESTRICTION ON STOCKHOLDER ACTION WITHOUT
A
MEETING
|
|
|
20
|
|
AUDIT
COMMITTEE REPORT
|
|
|
22
|
|
EXECUTIVE
COMPENSATION
|
|
|
23
|
|
Equity
Compensation Plan Information
|
|
|
23
|
|
Section 16(a)
Beneficial Ownership Reporting Compliance
|
|
|
23
|
|
PRINCIPAL
STOCKHOLDERS AND SHAREHOLDINGS OF MANAGEMENT
|
|
|
24
|
|
EXECUTIVE
EMPLOYMENT AGREEMENTS AND OTHER RELATIONSHIPS
|
|
|
26
|
|
Compensation
Committee Interlocks and Insider Participation
|
|
|
26
|
|
Employment
Agreements
|
|
|
26
|
|
CERTAIN
TRANSACTIONS
|
|
|
28
|
|
OTHER
MATTERS
|
|
|
29
|
|
GENERAL
INFORMATION
Stockholders
entitled to vote
Stockholders
of Nephros, Inc. (“Nephros” or the “Company”), as recorded on our stock register
as of the close of business on April __, 2007, may vote at the meeting. As
of
April __, 2007, we had 12,317,992 shares of common stock outstanding. Each
share
of common stock outstanding on the record date is entitled to one vote on each
matter of business considered at the meeting.
Mailing
of proxy statement and form of proxy
This
proxy statement and the accompanying form of proxy are being mailed on or around
[May 7, 2007], in connection with the solicitation of proxies by the Board
of
Directors for use at the annual meeting. This proxy statement contains important
information for you to consider when deciding how to vote on matters brought
before the meeting. Please read it carefully. Our annual report on Form 10-KSB
for fiscal 2006 is being mailed to stockholders together with this proxy
statement.
How
proxies work
Our
Board
of Directors is asking for your proxy. Giving us your proxy means you authorize
us to vote your shares at the meeting in the manner you direct.
You
may
vote for or against each of our director candidates. The election of each
nominee for director requires a plurality of votes cast. Accordingly,
abstentions and broker “non-votes” (that is, proxies from brokers or nominees
indicating that such persons have not received instructions from the beneficial
owner or other persons entitled to vote shares on a particular matter with
respect to which brokers or nominees do not have discretionary power) will
not
affect the outcome of the election.
The
affirmative vote of a majority of the outstanding shares of Common Stock will
be
required to approve the amendment to the Fourth Amended and Restated Certificate
of Incorporation to increase the number of authorized shares of Common Stock.
Abstentions and broker non-votes will have the same effect as votes against
such
proposal.
The
affirmative vote of eighty percent (80%) of the outstanding shares of Common
Stock will be required to approve the amendment to the Fourth Amended and
Restated Certificate of Incorporation to repeal a restriction on stockholder
action without a meeting. Abstentions and broker non-votes will have the same
effect as votes against such proposal.
You
may
vote for, vote against or abstain from voting for each of the proposal to ratify
the appointment by the Audit Committee of our Independent Registered Public
Accounting Firm, the amendment to the Nephros, Inc. 2004 Stock Incentive Plan
and the potential issuance of shares of our common stock upon conversion of
certain notes and exercise of certain warrants. The affirmative vote of a
majority of the shares of Common Stock represented and voted at the Annual
Meeting is required for approval of these matters. On these matters, abstentions
will have the same effect as a negative vote. However, because broker non-votes
will not be treated as shares that are present and entitled to vote with respect
to a specific proposal, broker non-votes will have no effect on the outcome
of
these matters.
If
you
sign and return the enclosed proxy card but do not specify how to vote, we
will
vote your shares IN
FAVOR
of our
director candidates, and IN
FAVOR
of the
ratification of the appointment by the Audit Committee of our Independent
Registered Public Accounting Firm, IN
FAVOR
of the
potential issuance of our common stock upon conversion of certain notes and
exercise of certain warrants, IN
FAVOR
of both the amendments to our Fourth Amended and Restated Certificate
of Incorporation and IN
FAVOR
of the
amendment to the Nephros, Inc. 2004 Stock Incentive Plan and in
our proxies’ discretion
on such
other matters as may properly be raised at the meeting.
You
may
receive more than one proxy or voting card depending on how you hold your
shares. Shares registered in your name are covered by one card. If you hold
shares through someone else, such as a stockbroker, you may get material from
them asking how you want to vote those shares.
Revoking
a proxy
You
may
revoke your proxy by sending in a new proxy card with a later date or by sending
written notice of revocation to our corporate secretary at our principal
executive offices. If you attend the meeting, you may revoke in writing
previously submitted proxies and vote in person.
Quorum
A
majority of the voting power of the outstanding shares entitled to vote at
the
meeting shall constitute a quorum, whether present in person or by proxy. If
you
want to vote in person at the annual meeting, and you hold your Nephros stock
through a securities broker (that is, in street name), you must obtain a proxy
from your broker and bring that proxy to the meeting. Abstentions and broker
non-votes count for quorum purposes but not for voting purposes. Broker
non-votes occur when a broker returns a proxy but does not have the authority
to
vote on a particular proposal.
Attending
in person
Only
stockholders, their proxy holders and our guests may attend the
meeting.
PROPOSAL
1: ELECTION OF DIRECTORS
At
the meeting, three directors will each be elected to serve a three-year term
that will expire at the close of our annual meeting to be held during 2010.
The
shares represented by the enclosed proxy will be voted to elect as directors
the
nominees named below, unless a vote is withheld for an individual nominee.
If a
nominee cannot or will not serve as a director (which events are not
anticipated), the shares represented by the enclosed proxy may be voted for
another person as determined by the holder of the proxies.
Board
Structure
Our
Board of Directors currently has nine members. The directors are divided into
three classes. Directors in each class serve a term of three years. At each
annual meeting, the term of one class expires. Our Class III Directors, whose
terms expire at the conclusion of this annual meeting, are Norman J. Barta,
Lawrence J. Centella and Dr. Eric A. Rose.
Board
Nominees
The
Board of Directors has nominated Norman J. Barta, Lawrence J. Centella and
Dr.
Eric A. Rose for re-election as directors. Each director nominee would serve
a
three-year term expiring at the close of our annual meeting to be held during
2010. Biographical information on each of the nominees is furnished below under
“Directors, Director Nominees and Executive Officers.”
Vote
Required
The
three nominees receiving the highest number of votes cast for them at the
meeting will be elected to serve for a term of three years, or until their
successors are duly elected and qualified. Abstentions and broker non-votes
will
not affect the outcome of the election.
Board
Recommendation
THE
BOARD
UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION (ITEM 1 OF THE ENCLOSED PROXY
CARD) OF MR. BARTA, MR. CENTELLA AND DR. ROSE AS DIRECTORS.
The
following information is furnished with regard to the directors, the director
nominees and the executive officers as of April 20, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
Term
|
Name
|
|
Age
|
|
Position
|
|
Since
|
|
Expires
|
William
J. Fox
|
|
|
50
|
|
|
Executive
Chairman of the Board and Class II Director
|
|
|
2004
|
|
|
|
2009
|
|
Norman
J. Barta
|
|
|
50
|
|
|
President,
Chief Executive Officer and Class III Director
|
|
|
2002
|
|
|
|
2007
|
|
Lawrence
J. Centella(1)(2)(3)
|
|
|
66
|
|
|
Class
III Director
|
|
|
2001
|
|
|
|
2007
|
|
Howard
Davis
|
|
|
51
|
|
|
Class
I Director
|
|
|
2004
|
|
|
|
2008
|
|
Donald
G. Drapkin
|
|
|
59
|
|
|
Class
II Director
|
|
|
1997
|
|
|
|
2009
|
|
Eric
A. Rose, M.D
|
|
|
56
|
|
|
Lead
Director of the Board and Class III Director
|
|
|
1997
|
|
|
|
2007
|
|
Bernard
Salick, M.D.(2)
|
|
|
67
|
|
|
Class
I Director
|
|
|
2005
|
|
|
|
2008
|
|
W.
Townsend Ziebold, Jr.(2)(3)
|
|
|
45
|
|
|
Class
I Director
|
|
|
1999
|
|
|
|
2008
|
|
Judy
Slotkin(1)
|
|
|
45
|
|
|
Class
II Director
|
|
|
2006
|
|
|
|
2009
|
|
Mark
W. Lerner
|
|
|
53
|
|
|
Chief
Financial Officer
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
(1)
|
|
Member
of the Audit Committee of the Board
|
|
|
(2)
|
|
Member
of the Compensation Committee of the Board
|
|
|
(3)
|
|
Member
of the Nominating and Corporate Governance Committee of the
Board
|
|
|
William
J. Fox,
since
August 2006, has served as Executive Chairman of the Board and as a director
of
our company since September 2004. Mr. Fox served as President and Chief
Executive Officer and a director of LQ Corporation, Inc. from October 2004
to
May 2006 and as President and Chief Executive Officer and a director of
Dynabazaar Inc. from December 2004 to May 2006. Mr. Fox was also Vice Chairman
of Barington Capital Group and its affiliates until May 2006. From February
1999
until October 2004, Mr. Fox served as chairman, president, chief executive
officer and a director of AKI, Inc. and president, chief executive officer
and a
director of AKI Holdings, Inc., a marketing and interactive advertising company.
Prior to that, Mr. Fox served as president of Strategic and Corporate
Development for Revlon Worldwide and chief executive officer of Revlon
Technologies. From 1994 to April 1999, Mr. Fox served as a director, and from
1997 to 1999, Mr. Fox served as senior executive vice president, of both Revlon
Inc. and Revlon Consumer Products Corporation. For the five years ending 1999,
Mr. Fox was also senior vice president of MacAndrews & Forbes Holdings, Inc.
Mr. Fox served as non-executive co-chairman of the board and a director of
Loehmann’s Holding Inc. from October 2000 through October 2004 and has served as
vice-chairman of the board and a director of Hain Food Group, Inc. Mr. Fox
is a
nominee as a director of Lamson & Sessions Co. Mr. Fox received a B.B.A.,
magna
cum laude,
in
Public Accounting from Pace University and an M.B.A., with
distinction,
from
Pace University Graduate School.
Eric
A. Rose, M.D. has
served as our lead director since August 2006, and as chairman of our Board
of
Directors from 1997 until 2006 and a director since our inception in 1997.
Dr.
Rose served as our president and chief executive officer from May 1999 until
July 2002. Dr. Rose has been Executive Vice President Life Sciences of
MacAndrews & Forbes Holdings Inc. since March 1, 2007 and Chairman &
Chief Executive Officer of SIGA Technologies, Inc. (“SIGA”), a publicly-traded
biotechnology company focused on the design and development of novel products
for the prevention and treatment of serious infectious diseases, since March
1,
2007. Since 1994, Dr. Rose has been the Morris and Rose Millstein/Johnson &
Johnson Professor and Chairman of the Department of Surgery at the Columbia
University College of Physicians and Surgeons, and Surgeon in Chief at the
Columbia Presbyterian Medical Center. Beginning March 1, 2007, Dr. Rose is
on
leave from this position. Dr. Rose is a director of the following corporations
which are required to file reports pursuant to the Exchange Act of 1934, as
amended (the “Exchange Act”): SIGA and Keryx Biopharmaceuticals, Inc. Dr. Rose
is also a director of PharmaCore, Inc., TransTech Pharma, Inc. and a former
director of Nexell Therapeutics Inc. (f/k/a VimRx). Dr. Rose received a B.A.,
summa
cum laude,
in
Psychology from Columbia University and an M.D. from Columbia University College
of Physicians and Surgeons.
Norman
J. Barta
has
served as our president and chief executive officer and as a director since
July
2002, and served as our chief financial officer from October 1998 until July
2004. Mr. Barta has served as our treasurer and secretary since May 1999. Mr.
Barta served as our chief operating officer from October 1999 to July 2002.
From
1994 to 1997, Mr. Barta provided financial planning and management for the
research and development division of National Medical Care (currently a division
of the Fresenius Medical Care AG), which prior to its acquisition by Fresenius
was one of the largest dialysis providers in the world. Prior to that, Mr.
Barta
was a consultant for Corestates Bank, where he restructured and optimized cash
management and treasury areas for the bank’s corporate and public-sector
clients. Mr. Barta received a B.S. in Mathematics and Economics from
Carnegie-Mellon University and an M.B.A. from the University of
Chicago.
Lawrence
J. Centella
has
served as a director of our company since January 2001. Mr. Centella
serves as president of Renal Patient Services, LLC, a company that owns and
operates dialysis centers, and has served in such capacity since June
1998. From 1997 to 1998, Mr. Centella served as executive vice president
and chief operating officer of Gambro Healthcare, Inc., an integrated dialysis
company that manufactured dialysis equipment, supplied dialysis equipment and
operated dialysis clinics. From 1993 to 1997, Mr. Centella served as president
and chief executive officer of Gambro Healthcare Patient Services, Inc.
(formerly REN Corporation). Prior to that, Mr. Centella served as president
of
COBE Renal Care, Inc., Gambro Hospal, Inc.,
LADA International, Inc. and Gambro, Inc. Mr. Centella is also the founder
of
LADA International, Inc. Mr. Centella received a B.S. from DePaul
University.
Howard
Davis
has
served as a director of our company since September 2004. Mr. Davis serves
as
Senior Vice President - Capital Markets with The Shemano Group, which served
as
lead underwriter in our initial public offering. From 1997 to 2003, Mr. Davis
served as the executive vice president of GunnAllen Financial Inc., where he
was
the executive responsible for the investment banking and finance division.
From
1990 to 1997, Mr. Davis served as the president and chief executive officer
of
Kensington Securities, Inc., a National Association of Securities Dealers,
Inc.
broker dealer. Prior to joining Kensington Securities, Inc. in 1990, Mr. Davis
had served as the president, and, prior to that, as chief financial officer,
of
Numero Uno Franchise Corporation, a Los Angeles based franchisor of pizzeria
and
Italian restaurants. Mr. Davis is also a former instructor in franchising at
California State University. Mr. Davis was a former member of the board of
directors and the audit and compensation committees of Intelli-Check, Inc.
Mr.
Davis attended the University of Southern California; California State
University, Northridge; and Kent State University, where he majored in Finance
and Accounting.
Donald
G. Drapkin has
served as a director of our company since our inception in 1997. Mr. Drapkin
served as our interim president, chief executive officer and treasurer from
1997
until May 1999. Mr. Drapkin has been a Director and Vice Chairman of MacAndrews
& Forbes Holdings Inc. and several of its affiliates since 1987. Prior to
joining MacAndrews & Forbes Holdings Inc., Mr. Drapkin was a partner in the
law firm of Skadden, Arps, Slate, Meagher & Flom LLP for more than five
years. Mr. Drapkin is a director of the following corporations which are
required to file reports pursuant to the Exchange Act: SIGA, Anthracite Capital,
Inc., Playboy Enterprises, Inc., Revlon, Inc., Revlon Consumer Products
Corporation. Mr. Drapkin is also a director of PharmaCore, Inc., and TransTech
Pharma, Inc.
Bernard
Salick, M.D., has
served as a director of our company since 2005. Dr. Salick is currently the
Chairman and Chief Executive Officer of Salick Cardiovascular Centers, Inc.,
a
company focused on the development and operation of out-patient cardiovascular
centers. Over the last five years Dr. Salick has served as the CEO of the
following companies: (i) Bentley Health Care, Inc., a company formed to build,
own and operate out-patient cancer centers; (ii) Salick Group Holdings Ltd.,
LLC
a company that conducts investment activities; (iii) Sandstone Horse Sales,
LLC,
a horse sales, breeding and training company; and (iv) Brighton Dialysis
Associates Medical Group, who provides medical services to dialysis patients.
Dr. Salick received a B.S. from Queens College and an M.D. from the University
of Southern California.
Judy
S. Slotkin, has
served as a director of our Company since December 2006. Ms. Slotkin was Co-Head
of the Finance Committee of the Modern Africa Fund, a private equity fund,
from
1998 until 2003. Ms. Slotkin was formerly Department Head in the Corporate
Finance Division of Citigroup (Citibank Investment Bank) where she was
responsible for various businesses and the first head of the group’s Capital
Markets Desk. Prior to that, Ms. Slotkin held various positions in the Citigroup
(Citibank) commercial bank. Ms. Slotkin is a director of SIGA. Ms. Slotkin
received her undergraduate degree in accounting from Fairleigh Dickinson
University and she received her MBA in Finance from Fordham University.
W.
Townsend Ziebold, Jr.
has
served as a director of our company since 1999. Since 2000, Mr. Ziebold has
been
president of Wasserstein Levered Venture Partners II, LLC, the venture capital
affiliate of Wasserstein & Co., L.P., where Mr. Ziebold has led several of
Wasserstein & Co., L.P.’s investments. Mr. Ziebold is a former director
and non-executive chairman of Imax Corporation, and is a former director of
Collins & Aikman Corporation and Maybelline, Inc. Mr. Ziebold received a
B.A. in Economics from Trinity College and an M.B.A. from the Stanford School
of
Business.
Mark
W. Lerner
has
served as our chief financial officer since March 2006. Mr. Lerner served as
a
consultant to Pipeline Data Inc., a business services company that offers card
processing services, from September 2003 until his employment by the Company.
From May 2002 through June 2003, Mr. Lerner was Executive Vice President and
Chief Financial Officer of Ramp, Inc., a healthcare information technology
company whose stock was listed on the American Stock Exchange (“AMEX”). From
September 2000 through April 2002, Mr. Lerner was the Chief Financial Officer
and VP Finance and Development of Boardroom Inc., a direct marketer and
publisher. Prior to joining Boardroom, Mr. Lerner had
over
twenty years of experience working in finance. Mr. Lerner received his MBA
in
Finance from Emory University and graduated from Columbia University’s Executive
Program.
There
are
no family relationships between any of our directors and executive
officers.
Key
Employee
Gregory
Collins, Ph.D. has
served as our senior scientist since 1998. From 1993 to 1997, Dr. Collins was
a
research and development program manager at National Medical Care, where he
was
responsible for research and development projects relating to dialyzer
cartridges and bloodlines. From 1990 to 1993, Dr. Collins served as a senior
level research and development engineer at National Medical Care, where he
applied basic scientific theory to practical device development using his
training in solute transport, and gained technical expertise in the spinning
of
hollow fiber semi-permeable membranes, dialyzer cartridge design and assembly
techniques, and novel test method development. Dr. Collins received a B.S.,
summa
cum laude, in
Chemical Engineering from Arizona State University and a Ph.D., magna
cum laude,
in
Bioengineering from U.C. San Diego. Dr. Collins is 47 years
old.
GOVERNANCE
OF THE COMPANY
During
the fiscal year ended December 31, 2004, we adopted a Code of Ethics and
Business Conduct (“Code of Ethics”), amended and restated on April 2, 2007, for
our employees, officers and directors that complies with Securities and Exchange
Commission (“SEC”) regulations and AMEX listing standards. The Code of Ethics is
available free of charge on our website at www.nephros.com,
by
clicking on the Investor Relations link, then the Corporate Governance link.
We
intend
to timely disclose any amendments to, or waivers from, our code of ethics and
business conduct that are required to be publicly disclosed pursuant to rules
of
the SEC and the AMEX by filing such amendment or waiver with the SEC.
Committees
and Meetings
The
Board of Directors has an Audit Committee, a Compensation Committee and a
Nominating and Corporate Governance Committee. The Audit Committee, Compensation
Committee and Nominating and Corporate Governance Committee are each governed
by
a specific charter, each of which is available on our website at www.nephros.com,
and all
members of these committees are independent directors. We comply with the rules
promulgated by the AMEX for determining the independence of directors, as well
as the SEC requirements for independence of directors on the Audit Committee.
Compliance with these requirements is reviewed annually by the Nominating and
Corporate Governance Committee.
The
Board
has at least one regularly scheduled meeting per year. In addition, the Board
holds special meetings whenever requested by either the Chairman of the Board,
the President, the Secretary or by two or more directors. The Audit Committee
has no less than one meeting per quarter. The Compensation Committee meets
at
least twice a year and the Nominating and Corporate Governance Committee meets
at least once a year. In addition, special meetings of the Board or any
Committee may be called from time to time as determined by the needs of the
business.
The
Board of Directors held six meetings during fiscal 2006. During 2006, all
directors attended at least 75% of the combined total of (i) all Board
meetings and (ii) all meetings of committees of the Board of which the director
was a member. The Board of Directors allocates time at each Board meeting to
meet without management present.
Audit
Committee
The
purpose of the Audit Committee of the Board of Directors is to represent and
assist the Board in monitoring (i) accounting, auditing, and financial reporting
processes; (ii) the integrity of our financial statements; (iii) our internal
controls and procedures designed to promote compliance with accounting
standards
and applicable laws and regulations; and (iv) the appointment of and evaluating
the qualifications and independence of our independent registered public
accounting firm. The Audit Committee’s specific responsibilities are set forth
in its charter, a copy of which is attached as Exhibit A to this proxy
statement.
The
Audit
Committee currently consists of Ms. Slotkin (Chairman) and Mr. Centella each
of
whom have been determined by the Board of Directors to be independent under
the
AMEX listing standards. Dr. Rose served on the Audit Committee from February
2,
2006 until February 28, 2007. Mr. Fox, who had served as Chairman of the Audit
Committee since September 24, 2004, resigned from the Audit Committee upon
becoming an employee of the Company in June 2006. The Audit Committee met eight
times in fiscal 2006.
The
Board of Directors has determined that all Audit Committee members are
financially literate under the current listing standards of the AMEX. The Board
also determined that Ms. Slotkin qualifies as an “audit committee financial
expert” as defined by the SEC rules adopted pursuant to the Sarbanes-Oxley Act
of 2002. The Audit Committee also serves as our Qualified Legal Compliance
Committee (“QLCC”). The QLCC is responsible for investigating reports, made by
attorneys appearing and practicing before the SEC in the representation of
us,
of perceived material violations of law, breaches of fiduciary duty or similar
violations by us or any of our agents.
Compensation
Committee
The
purpose of the Compensation Committee of the Board of Directors is to (i) assist
the Board in discharging its responsibilities with respect to compensation
of
our executive officers and directors, (ii) evaluate the performance of our
executive officers, (iii) assist the Board in developing succession plans for
executive officers and (iv) administer our stock and incentive compensation
plans and recommend changes in such plans to the Board as needed. The
Compensation Committee establishes the compensation of senior executives on
an
annual basis. The Compensation Committee currently consists of Mr. Ziebold
(Chairman), Mr. Centella and Dr. Salick, all of whom have been determined by
the
Board of Directors to be independent under the AMEX listing standards. The
Compensation Committee met three times in fiscal 2006.
Nominating
and Corporate Governance Committee
The
purpose of the Nominating and Corporate Governance Committee of the Board of
Directors is to assist the Board in identifying qualified individuals to become
Board members, in determining the composition of the Board and its committees,
in monitoring a process to assess Board effectiveness and in developing and
implementing corporate procedures and policies. The Nominating and Corporate
Governance Committee currently consists of Mr. Centella (Chairman) and Mr.
Ziebold, both of whom have been determined by the Board of Directors to be
independent under the AMEX listing standards. The Nominating and Corporate
Governance Committee met two times in fiscal 2006.
The
entire Board is responsible for nominating members for election to the Board
and
for filling vacancies on the Board that may occur between annual meetings of
the
stockholders. The Nominating and Corporate Governance Committee is responsible
for identifying, screening, and recommending candidates to the entire Board
for
prospective Board membership. When formulating its Board membership
recommendations, the Nominating and Corporate Governance Committee also
considers any qualified candidate for an open board position timely submitted
by
our stockholders in accordance with our established procedures.
The
Nominating and Corporate Governance Committee will consider stockholder
recommendations of candidates when the recommendations are properly submitted.
Stockholder recommendations should be submitted to us under the procedures
discussed in “Procedures
For Security Holder Submission of Nominating Recommendations”
which
is available on our website at www.nephros.com,
by
clicking on the Investor Relations link, then the Corporate Governance link.
Written notice of any nomination must be timely delivered to Nephros, Inc.,
3960
Broadway, New York, New York 10032, Attention: Nominating and Corporate
Governance Committee, c/o Chief Financial Officer.
The
Nominating and Corporate Governance Committee will evaluate and recommend
candidates for membership on the Board of Directors consistent with criteria
established by the Committee. When considering a potential non-incumbent
candidate, the Nominating and Corporate Governance Committee will factor into
its determination the following qualities of a candidate: professional
experience, including
whether
the person is a current or former Chief Executive Officer or Chief Financial
Officer of a public company, integrity, professional reputation, independence
and ability to represent the best interests of our stockholders.
The
Nominating and Corporate Governance Committee uses a variety of methods for
identifying and evaluating non-incumbent candidates for director. The Nominating
and Corporate Governance Committee regularly assesses the appropriate size
and
composition of the Board, the needs of the Board and the respective committees
of the Board and the qualifications of candidates in light of these needs.
The
Committee will solicit recommendations for nominees from persons that the
Committee believes are likely to be familiar with qualified candidates,
including members of the Board, our management or a professional search firm.
The evaluation of these candidates may be based solely upon information provided
to the committee or may also include discussions with persons familiar with
the
candidate, an interview of the candidate or other actions the committee deems
appropriate, including the use of third parties to review candidates.
Stockholders
may communicate with the Board of Directors, members of particular committees
or
to individual directors, by sending a letter to such persons in care of our
Chief Financial Officer at our principal executive offices. The Chief Financial
Officer has the authority to disregard any inappropriate communications or
to
take other appropriate actions with respect to any inappropriate communications.
If deemed an appropriate communication, the Chief Financial Officer will submit
the correspondence to the Chairman of the Board or to any committee or specific
director to whom the correspondence is directed. Procedures for sending
communications to the Board of Directors can be found on our website at
www.nephros.com,
by
clicking on the Investor Relations link, then the Corporate Governance link.
Please note that all such communications must be accompanied by a statement
of
the type and amount of our securities that the person holds; any special
interest, meaning an interest that is not derived from the proponent’s capacity
as a shareholder, of the person in the subject matter of the communication;
and
the address, telephone number and e-mail address, if any, of the person
submitting the communication.
[Director
Compensation - to be included in Definitive Proxy
Statement]
Director
Independence
The
Board
of Directors complies with the AMEX listing standards and reviews all commercial
and other relationships of each director in making its determination as to
the
independence of its directors. After such review, the Board has determined
that
each of Mr. Centella, Mr. Davis, Mr. Drapkin, Dr. Rose, Dr. Salick, Ms. Slotkin
and Mr. Ziebold qualifies as independent under the requirements of the AMEX
listing standards.
Director
Attendance at Annual Meetings
Each
of
our directors is expected to be present at annual meetings of our stockholders
absent exigent circumstances that prevent their attendance. Where a director
is
unable to attend an annual meeting in person but is able to do so by electronic
conferencing, we will arrange for the director’s participation by means where
the director can hear, and be heard by, those present at the meeting. Last
year,
seven of eight directors attended the annual meeting.
PROPOSAL
2: RATIFICATION OF THE APPOINTMENT BY THE AUDIT COMMITTEE OF THE COMPANY’S
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (“RPAF”)
The
Audit Committee of the Board of Directors has selected and appointed Deloitte
& Touche LLP, independent registered public accounting firm, to audit the
accounts of us and our subsidiary for the fiscal
year
ending December 31, 2007. A representative of Deloitte & Touche LLP is
expected to be present at the annual meeting and will have an opportunity to
make a statement should he or she desire to do so, and is expected to be
available to respond to appropriate questions.
Vote
Required
The
proposal to ratify the appointment by the Audit Committee of Deloitte &
Touche LLP as our independent RPAF requires an affirmative vote of a majority
of
the voting power of the common stock present at the meeting in person or
represented by proxy. Abstentions will have the same effect as votes against
Proposal Two. However, because broker non-votes will not be treated as shares
that are present and entitled to vote with respect to a specific proposal,
broker non-votes will have no effect on the outcome of this matter.
Notwithstanding ratification of the appointment of Deloitte & Touche LLP as
our independent RPAF for the fiscal year ending December 31, 2007, the Audit
Committee may select another independent RPAF for such year without
any vote of the stockholders. If the stockholders do not ratify the appointment,
the matter of the appointment of independent RPAF will be considered by the
Audit Committee.
Board
Recommendation
THE
BOARD
UNANIMOUSLY RECOMMENDS A VOTE “FOR” RATIFICATION (ITEM 2 OF THE
ENCLOSED
PROXY CARD) OF THE APPOINTMENT BY THE AUDIT COMMITTEE OF
DELOITTE
& TOUCHE LLP AS THE COMPANY’S INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING
FIRM.
Auditor
Fees and Services
Audit
Fees
Fees
billed for audit services by Deloitte & Touche totaled approximately
$170,000
and
[$270,000] for the fiscal years ended December 31, 2005 and 2006. Such fees
include fees associated with the annual audit.
Audit-Related
Fees
There
were no audit-related services performed by Deloitte & Touche for the fiscal
years ended December 31, 2005 and 2006.
Tax
Fees
There
were no tax services provided by Deloitte & Touche LLP for the fiscal years
ended December 31, 2005 and 2006.
Fees
for
tax services provided by a firm other than our RPAF
totaled
approximately $17,500 for each of the fiscal years ended December 31, 2005
and 2006. Tax services generally include fees for tax preparation and tax
consultations.
All
Other Fees
We
did not engage Deloitte & Touche LLP to provide any information technology
services or any other services during the fiscal years ended December 31, 2005
and 2006.
Pre-Approval
Policies and Procedures
In
accordance with its charter, the Audit Committee approves in advance all audit
and non-audit services to be provided by Deloitte & Touche LLP. During
fiscal year 2006, all services were pre-approved by the Audit Committee in
accordance with this policy.
PROPOSAL
3: APPROVAL
OF THE POTENTIAL ISSUANCE OF THE COMPANY’S
COMMON
STOCK UPON CONVERSION OF CERTAIN NOTES AND EXERCISE OF
CERTAIN
WARRANTS
Introduction
In
June
2006, we entered into subscription agreements with certain investors who
purchased an aggregate of $5,200,000 principal amount of our Secured Convertible
Notes due 2012 (the “Notes”) for the face value thereof. We closed on the sale
of the first tranche of Notes, in an aggregate principal amount of $5,000,000,
on June 1, 2006 (the “First Tranche”) and closed on the sale of the second
tranche of Notes, in an aggregate principal amount of $200,000, on June 30,
2006
(the “Second Tranche”). The Notes also provided that, upon any prepayment of the
Notes occurring on or before June 1, 2008, we must issue the holder of such
Notes warrants (“Prepayment Warrants”) to purchase shares of our common stock.
The
Notes
are convertible into shares of common stock at an initial conversion price
of
$2.10 per share (subject to anti-dilution adjustments upon the occurrence of
certain events) (the “Conversion Price”). Upon issuance, the Prepayment Warrants
would permit the holder thereof to purchase a quantity of our common stock
equal
to three shares for every $20 principal amount of Notes prepaid at an exercise
price of $0.01 per share (subject to adjustment) (the “Exercise Price”). The
terms of the Notes and Prepayment Warrants are described in greater detail
below
in the section entitled “Terms of the Transaction.”
As
of
April 1, 2007, principal and interest on the Notes was convertible into
2,599,525 shares of common stock,
and,
if
still outstanding on June 1, 2012, the principal and accrued interest on the
Notes will be convertible into 3,421,998 shares of common stock; provided
that no
event occurs that causes adjustment to the conversion price in accordance with
the terms of the Notes. If we were to repay the Notes in full prior to June
1, 2008, then we would be obligated to issue Prepayment Warrants
exercisable for an aggregate of 780,000 shares of common stock for $0.01 per
share.
Unless
and until our stockholders approve the issuance of shares of common stock in
excess of such amount, the number of shares of common stock issuable upon
conversion of the First Tranche of Notes and exercise of the Prepayment Warrants
related thereto, in the aggregate, is limited to 2,451,280 shares, which equals
approximately 19.9% of the number of shares of common stock outstanding
immediately prior to the issuance of the First Tranche of Notes. We will not
issue any shares of common stock upon conversion of the Second Tranche of Notes
or exercise of any Prepayment Warrants that may be issued pursuant to such
Notes
until our stockholders approve the issuance of shares of common stock upon
conversion of the Second Tranche of Notes and exercise of the Prepayment
Warrants as required by the applicable rules and regulations of the AMEX, as
further described below.
Why
We Need Stockholder Approval
We
are
seeking stockholder approval in order to comply with the AMEX rules.
Section 713 of the AMEX Company Guide requires stockholder approval for the
issuance of securities other than in a public offering at a price per share
less
than the greater of the book or market value of a company’s stock, where the
amount of securities being issued represents 20% or more of an issuer’s
outstanding common stock. The issuance of our common stock pursuant to the
conversion of the Notes and the issuance of common stock pursuant to any
Prepayment Warrants that may be issued in accordance with the terms of the
Notes
may constitute such issuances.
Terms
of the Transaction
In
June
2006, we entered into subscription agreements with certain investors who
purchased an aggregate of $5,200,000 principal amount of the Notes for the
face
value thereof. The Notes are secured by substantially all of our
assets.
The
Notes
accrue interest at a rate of 6% per annum, compounded annually and payable
in
arrears at maturity. Subject to certain restrictions, principal and accrued
interest on the Notes are convertible at any time at the holder’s option into
shares of our common stock, at an initial conversion price of $2.10
per
share
(subject to anti-dilution adjustments upon the occurrence of certain events,
as
further described below). There is no cap on any increases to the conversion
price. The conversion price may not be adjusted to an amount less than $0.001
per share, the current par value of our common stock. We may cause the Notes
to
be converted at their then effective conversion price, if the common stock
achieves average last sales prices of at least 240% of the then effective
conversion price and average daily volume of at least 35,000 shares (subject
to
adjustment) over a prescribed time period. In the case of an optional conversion
by the holder or a compelled conversion by us, we have 15 days from the date
of
conversion to deliver certificates for the shares of common stock issuable
upon
such conversion. As described above, conversion of the Notes is restricted,
pending stockholder approval.
If
we
issue or sell any shares of common stock (excluding certain issuances or sales
described below) for a consideration per share less than the Conversion Price
in
effect on the date of such sale or issuance (a “Dilutive Issuance”), then, and
thereafter upon each further Dilutive Issuance, the Conversion Price then in
effect prior to such Dilutive Issuance shall be changed to a price equal to
the
consideration per share received by us in respect of the shares issued in such
Dilutive Issuance (rounded to the nearest cent). Such adjustment shall be made
successively whenever such an issuance is made. The anti-dilution provision
does
not apply to certain “excluded securities,” including, among other things,
securities issued in connection with employee benefit plans, upon conversion
of
the Notes or the exercise of the Prepayment Warrants and pursuant to certain
underwritten public offerings and pursuant to certain acquisitions by
us.
We
may
prepay outstanding principal and interest on the Notes at any time. Any
prepayment requires us to pay each holder a premium equal to 15% of the
principal amount of the Notes held by such holder receiving the prepayment
if
such prepayment is made on or before June 1, 2008, and 5% of the principal
amount of the Notes held by such holder receiving prepayment in connection
with
prepayments made thereafter. In addition to the applicable prepayment premium,
upon any prepayment of the Notes occurring on or before June 1, 2008, we must
issue the holder of such Notes warrants (“Prepayment Warrants”) to purchase a
quantity of common stock equal to three shares for every $20 principal amount
of
Notes prepaid at an exercise price of $0.01 per share (subject to adjustment).
Upon issuance, the Prepayment Warrants would expire on June 1,
2012.
In
connection with the sale of the Notes, we have entered into a registration
rights agreement with the investors pursuant to which we granted the investors
two demand registration rights and unlimited piggy-back and short-form
registration rights with respect to the shares of common stock issuable upon
conversion of the Notes or exercise of Prepayment Warrants, if any.
Subject
to terms and conditions set forth in the Notes, the outstanding principal of
and
accrued interest on the Notes may become immediately due and payable upon the
occurrence of any of the following events of default: our failure to pay
principal or interest on the Notes when due; certain bankruptcy-related events
with respect to us; material breach of any representation, warranty or
certification made by us in or pursuant to the Notes, or under the registration
rights agreement or the subscription agreements; our incurrence of Senior Debt
(as defined in the Notes); the acceleration of certain of our other debt; or
the
rendering of certain judgments against us.
The
terms
of the transaction and the Notes, Prepayment Warrants and other transaction
documents are complex and only briefly summarized above. For further information
on the transaction and the rights of the holders of the Notes, please refer
to
the descriptions contained in the Current Reports on Form 8-K filed with
the SEC on June 2, 2006 and July 7, 2006, and the transaction documents filed
as
exhibits to such reports.
Increased
Dilution
The
number of shares of our outstanding common stock would be significantly
increased upon the conversion of the Notes, particularly if this Proposal Three
is approved, and exercise of any Prepayment Warrants. If such conversion and/or
exercise occurs, there will be a substantial pro rata dilution to our current
stockholders.
Increased
Number of Shares Available for Public Sale
Similarly,
upon the conversion of the Notes and exercise of any Prepayment Warrants, there
will be a greater number of shares of common stock becoming eligible for sale
in
the public market, subject to certain volume limitations, after expiration
of
the one year holding period required under Rule 144 of the Securities Act of
1933, and all of the shares could be eligible for sale in the public markets
after two years pursuant to Rule 144(k), without any volume limitations. These
shares could become eligible for resale in the public markets earlier if, in
connection with the sale of such shares, we file a registration statement with
the Securities and Exchange Commission covering the resale of the shares. Any
such sales, or the anticipation of the possibility of such sales, represents
an
overhang on the market and could depress the market price of our common
stock.
Vote
Required
The
proposal to approve the potential issuance of our common stock pursuant to
conversion of the Notes and exercise of any Prepayment Warrants that may be
issued pursuant to the Notes requires the affirmative vote of a majority of
the
shares of common stock represented and voted at the Annual Meeting. Abstentions
will have the same effect as votes against Proposal Three. However, because
broker non-votes will not be treated as shares that are present and entitled
to
vote with respect to a specific proposal, broker non-votes will have no effect
on the outcome of Proposal Three.
In
the
event that this Proposal Three is not approved by the stockholders, the
Company may be limited in its ability to obtain future financing in that it
could not issue or sell securities of the Company at a per share price which
would cause the Conversion Price of the Notes to be adjusted to the price that
is less than the greater of the book or market value of our common
stock.
THE
BOARD
UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL (ITEM 3 OF THE
ENCLOSED
PROXY CARD) OF THE
POTENTIAL ISSUANCE OF THE COMPANY’S
COMMON
STOCK UPON CONVERSION OF THE NOTES AND EXERCISE OF ANY
PREPAYMENT
WARRANTS THAT MAY BE ISSUED PURSUANT TO THE NOTES.
PROPOSAL
4: APPROVAL OF AMENDMENT TO FOURTH AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION TO
INCREASE NUMBER OF AUTHORIZED SHARES
OF
COMMON STOCK
Our
Board
of Directors has approved and adopted, subject to stockholder approval, an
amendment to our Fourth Amended and Restated Certificate of Incorporation (the
“Capital Amendment”), and has directed that it be considered by our stockholders
at this annual meeting. The Capital Amendment increases the number of authorized
shares of common stock, par value $.001 per share, from 25,000,000 to
40,000,000.
The
Capital Amendment, as it is proposed to be adopted, is attached to this proxy
statement as Exhibit B. Other than the increase in authorized capital
discussed above, the Capital Amendment does not modify our Fourth Amended and
Restated Certificate of Incorporation.
On
the
record date, there were issued and outstanding 12,317,992 shares of common
stock
and no shares of preferred stock. On such date, we had reserved an additional
2,703,474 shares of common stock for issuance upon the exercise of currently
outstanding options and warrants, 2,610,515 shares of common stock for issuance
upon conversion of outstanding convertible notes and 71,725 shares of common
stock for issuance pursuant to awards under our stock option
plans.
The
Board
believes that,
by
increasing
the authorized
number
of
shares
of our
common
stock,
we
will
make
available a reasonable number of shares for future financing transactions,
stock
issuances pursuant to employee benefit plans and other appropriate corporate
opportunities and purposes. We are currently actively pursuing potential
financing and/or other strategic transactions pursuant to which we
may
need
to
issue shares of our capital stock. However, we have not yet reached agreement
with respect to any such transaction. Having a sufficient number of shares
authorized will facilitate our consummating such a transaction without the
additional delay of seeking stockholder approval. Once authorized, the Board
would establish the terms on which any authorized shares may be
issued.
For
the
reasons stated above, the Board believes it is in our best interests
and in
the best interests of our stockholders
to
approve the Capital Amendment.
Vote
Required
The
proposal to approve the amendment to our Fourth Amended and Restated Certificate
of Incorporation to increase number of authorized shares of common stock
requires the affirmative vote of a majority of the outstanding shares of common
stock. Abstentions and broker non-votes will have the same effect as votes
against Proposal Four.
Board
Recommendation
THE
BOARD
UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL
(ITEM
4
OF THE ENCLOSED PROXY CARD) OF THE AMENDMENT TO OUR
FOURTH
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO
INCREASE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.
PROPOSAL
5: AMENDMENT TO THE NEPHROS, INC. 2004 STOCK INCENTIVE
PLAN
In
June
2004, our Board of Directors retired our Amended and Restated Nephros 2000
Equity Incentive Plan (the “2000 Plan”). In July, 2004, our Board of Directors
adopted and our stockholders approved the Nephros, Inc. 2004 Stock Incentive
Plan (the “2004 Plan” and together with the 2000 Plan, the “Stock Option
Plans”), pursuant to which awards are made to certain officers, other employees,
consultants and directors of us or our subsidiary from time to time. The maximum
number of shares of common stock reserved for the grant of awards under the
2004
Plan was initially 486,237. In June 2005, with stockholder approval, the 2004
Plan was amended to increase the maximum number of shares of common stock
reserved for the grant of awards thereunder to 800,000. As of December 31,
2006,
there were 71,725 shares of common stock available for future grants under
the
2004 Plan.
The
Board
of Directors, upon recommendation of the Compensation Committee, has approved
and has determined to ask the stockholders to approve the amendment to the
2004
Plan that would increase the total number of shares of common stock reserved
for
issuance under the 2004 Plan from 800,000 shares to 1,300,000 shares.
Our
business depends upon recruiting and retaining employees that can perform at
the
highest levels. It is critical that we continue to motivate our key employees
by
providing them with compensation that gives them a stake in our future growth.
The Board of Directors believes that providing directors, officers and employees
with equity incentives such as stock options will contribute substantially
to
our future success by further aligning the interests of such key employees
with
those of our stockholders. Additionally, our overall compensation philosophy
places significant emphasis on equity compensation to reward, incentivize and
retain management and key employees while conserving cash.
For
the
reasons stated above, the Board believes it is in our best interests to approve
the amendment to the 2004 Plan.
A
description of the 2004 Plan is set forth below. This description is qualified
in its entirety by reference to the full text of the 2004 Plan. Any stockholder
who wishes to obtain a copy of the 2004 Plan can call us to receive a copy
free
of charge.
Administration
and Duration
The
2004
Plan is administered by our Compensation Committee. Each member of the
Compensation Committee must be a “non-employee Director” within the meaning of
Rule 16b-3 under the Exchange Act, and an “outside director” within the meaning
of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).
The Compensation Committee currently consists of Mr. Ziebold (Chairman), Mr.
Centella and Dr. Salick, each of whom has been determined by the Board of
Directors to be independent under the AMEX listing standards. Nevertheless,
if
the Compensation Committee is not so composed it will not invalidate any award.
The Board of Directors also may act in place of the Compensation Committee.
The
Compensation Committee has the authority to interpret the 2004 Plan, to
establish and revise rules and regulations relating to the 2004 Plan, and to
make any other determinations that it believes necessary or advisable for the
administration of the 2004 Plan.
Limit
On Awards Under the 2004 Plan
Awards
may be granted under the 2004 Plan with respect to a maximum of 800,000 shares
of our common stock. No individual may be granted awards with respect to more
than 485,000 shares in any calendar year. The shares to be delivered under
the
2004 Plan will be made available from authorized but unissued shares, from
treasury shares, or from shares purchased in the open market or otherwise.
Shares that are subject to awards under the 2004 Plan but are not actually
issued (for example because the award lapsed or was cancelled), shares acquired
on option exercise that are returned to us as payment of the exercise price
of
an option and shares of unvested restricted stock that are forfeited, will
be
available for further awards and options.
Eligibility
for Awards
Any
employees of, and consultant to, us and any of our non-employee directors that
are designated by the Compensation Committee as a “key person” will be eligible
to participate in the 2004 Plan. As of April 15, 2007, we had approximately
33
such employees, consultants or non-employee directors that our Compensation
Committee could determine are eligible to participate in the 2004 Plan.
Designation as a key person reflects a determination that the individual can
contribute to our growth and profitability or otherwise is entitled to an award
in connection with the individual’s extraordinary performance, promotion,
retention, or recruitment. From time to time, the Compensation Committee will
determine who will be granted awards and the number of shares subject to such
awards. The Compensation Committee may delegate to one or more officers the
authority to designate the employees eligible to receive awards (other than
the
key officers) and the size of each such award. An individual who receives an
award under the 2004 Plan is referred to as a “Participant.”
Change
in Control
The
2004
Plan provides that if there is a change in control, unless the agreement
granting an award provides otherwise, all awards under the 2004 Plan will become
vested and exercisable as of the effective date of the change in control. As
defined in the 2004 Plan, a change in control means the occurrence of any of
the
following events: (i) any “person,” including a “group,” as such terms are
defined in sections 13(d) and 14(d) of the Exchange Act and the rules
promulgated thereunder, becomes the beneficial owner, directly or indirectly,
whether by purchase or acquisition or agreement to act in concert or otherwise,
of more than 50% of the outstanding shares of our common stock; (ii) our
complete liquidation; (iii) the sale of all or substantially all of our assets;
or (iv) a majority of the members of our Board of Directors are elected to
the
Board without having previously been nominated and approved by a majority of
the
members of the Board incumbent on the day immediately preceding such election.
Stock
Options
Options
granted under the 2004 Plan may be either non-qualified stock options or
incentive stock options qualifying under Section 422 of the Code. The exercise
price of an incentive stock option may not be less than the fair market value
of
the stock on the date the option is granted. The option price is payable
in
cash
or, with the consent of the Compensation Committee, in shares of our common
stock or by means of a brokered cashless exercise.
The
Compensation Committee determines the terms of each stock option grant at the
time of grant. Unless the option agreement granting an option specifies
otherwise, options to employees will be exercisable as to one-quarter of the
shares on each of the first four anniversaries of the option grant and will
remain exercisable until the tenth anniversary of the date of the grant. In
no
event can an incentive stock option be exercised after the tenth anniversary
of
the date of grant.
Stock
Appreciation Rights
A
stock
appreciation right (“SAR”) entitles the Participant to receive - in cash or
shares of stock, at the Compensation Committee’s discretion - the excess of the
fair market value of a share of stock on the date of exercise over the fair
market value on the date of grant. A SAR may, but need not, relate to an option.
The Compensation Committee determines the terms of each SAR at the time of
the
grant.
Restricted
Stock
The
Compensation Committee, in its discretion, may grant awards of restricted stock.
A share of restricted stock is a share of our common stock that may not be
transferred before it is vested and may be subject to such other conditions
as
the Compensation Committee sets forth in the agreement evidencing the award.
In
addition, if the Participant terminates employment, he or she will forfeit
any
unvested shares. The grant or vesting of a restricted stock award may be made
contingent on achievement of performance goals established by the Compensation
Committee.
Amendment
or Termination
The
Board
of Directors may amend, alter or terminate the 2004 Plan without stockholder
approval, except that stockholder approval is required for amendments to the
2004 Plan to the extent necessary under applicable stock exchange rules, or
to
ensure that options can continue to qualify as incentive stock options or that
awards will be exempt from the Code section 162(m) deduction limitation.
Consequently, the Board of Directors may not, without stockholder approval,
increase the total number of shares reserved for issuance under the 2004 Plan
or
make any other material changes to the 2004 Plan. In addition, no amendment,
alteration or termination by the Board of Directors may adversely affect the
rights of a holder of a stock incentive award without the holder’s consent.
Unless terminated earlier, no new awards may be granted under the 2004 Plan
after the tenth anniversary of the date it was adopted by the Board. However,
outstanding awards made before the tenth anniversary will continue in accordance
with their terms.
Federal
Income Tax Consequences
The
following discussion outlines generally the current federal income tax
consequences of the 2004 Plan. Applicable tax laws and their interpretations
are
subject to change at any time and application of such laws may vary in
individual circumstances.
Incentive
Stock Options
A
Participant who is granted an incentive stock option does not recognize taxable
income upon the grant or exercise of the option. However, the difference between
the fair market value of our common stock on the date of exercise and the option
exercise price is a tax preference item that may subject the Participant to
alternative minimum tax. A Participant generally will receive long-term capital
gain or loss treatment on the disposition of shares acquired upon exercise
of
the option, provided that the disposition occurs more than two years from the
date the option is granted, and the Participant holds the stock acquired for
more than one year. A Participant who disposes of shares acquired by exercise
prior to the expiration of the forgoing holding periods realizes ordinary income
upon the disposition equal to the difference between the option price and the
lesser of the fair market value of the shares on the date of exercise and the
disposition price. Any appreciation between the fair market value of the shares
on the date of exercise and the disposition price is taxed to the Participant
as
long or short-term capital gain, depending on the length of the holding period.
To the extent the Participant recognizes ordinary income, we receive a
corresponding tax compensation deduction.
Nonqualified
Stock Options
A
Participant will not recognize income upon the grant of a nonqualified option.
Upon exercise, the Participant will recognize ordinary income equal to the
excess of the fair market value of the stock on
the
date
of exercise over the price paid for the stock. We are entitled to a tax
compensation deduction equal to the ordinary income recognized by the
Participant. Any taxable income recognized by a Participant in connection with
an option exercise is subject to income and employment tax withholding. When
the
Participant disposes of shares acquired by the exercise of a nonqualified
option, any amount received in excess of the fair market value of the shares
on
the date of exercise will be treated as capital gain. Dispositions made after
one year from the exercise date will be treated as long-term capital gain.
Dispositions made less than one year from the exercise date will be treated
as
short-term capital gain.
Stock
Appreciation Rights
A
Participant will not recognize income upon the grant of a SAR. Upon exercise,
the Participant will recognize ordinary income equal to the cash or fair market
value of the shares of common stock received from the exercise, which will
be
subject to income and employment tax withholding. We will receive a tax
compensation deduction equal to the ordinary income recognized by the
Participant.
Restricted
Stock
Generally,
a Participant will not recognize income upon the grant of restricted stock.
When
the shares of restricted stock vest, the Participant will recognize ordinary
income equal to the fair market value of the stock and also will be subject
to
income and employment tax withholding. We will receive a tax compensation
deduction equal to the amount of ordinary income recognized by the Participant.
A Participant who receives a restricted stock award may elect to accelerate
his
or her tax obligation by submitting a Code Section 83(b) election within 30
days
after the grant date, pursuant to which the Participant will be taxed on the
fair market value of the restricted stock as of the grant date, and we will
receive a tax compensation deduction as of the grant date equal to the ordinary
income recognized by the Participant. Any gain or loss upon a subsequent
disposition of the shares will be long-term capital gain or loss if the shares
are held for more than one year and otherwise will be short-term capital gain
or
loss. If, after making the Section 83(b) election, the shares are forfeited,
the
Participant will not be entitled to a loss deduction.
Code
Section 162(m)
Code
Section 162(m) denies a federal income tax deduction for certain compensation
in
excess of $1 million per year paid to the chief executive officer and the four
other most highly paid executive officers of a publicly traded corporation.
Under a special transition rule, awards made within the first three years after
our initial public offering will not be subject to the Section 162(m)
limitation. In addition, to the extent that payment or exercise of an award
would not be deductible to us as a result of Section 162(m), the 2004 Plan
permits the Compensation Committee to defer that payment or exercise until
the
Participant no longer is subject to Section 162(m).
Vote
Required
The
proposal to approve the adoption of the amendment to the 2004 Plan requires
an
affirmative vote of a majority of the common stock present at the meeting in
person or represented by proxy. Abstentions will have the same effect as votes
against Proposal Five. However, because broker non-votes will not be treated
as
shares that are present and entitled to vote with respect to a specific
proposal, broker non-votes will have no effect on the outcome of this
matter.
Board
Recommendation
THE
BOARD
UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL (ITEM 5 OF THE
ENCLOSED
PROXY CARD) OF THE AMENDMENT TO THE 2004 PLAN.
PROPOSAL
6: APPROVAL OF AMENDMENT TO FOURTH AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION TO
REPEAL A RESTRICTION ON STOCKHOLDER
ACTION
WITHOUT A MEETING
Our
Board
of Directors has approved and adopted, subject to stockholder approval, an
amendment to our Fourth Amended and Restated Certificate of Incorporation (the
“Stockholder Consent Amendment”), and has directed that it be considered by our
stockholders at this annual meeting. The Stockholder Consent Amendment repeals
Section 5 of Article VII of our Fourth Amended and Restated Certificate of
Incorporation, which reads as follows:
Section
5. Notwithstanding
any other provisions of this Certificate of Incorporation or the By-laws of
the
Corporation, any action by the Corporation’s stockholders may only be effected
at an annual or special meeting of the Corporation’s stockholders called in
compliance with Section
6
below,
or pursuant to an unanimous written consent of the Corporation’s stockholders in
compliance with §228 of the DGCL (or any successor section of the
DGCL).
Among
other things, such section requires that any stockholder action taken outside
of
an actual meeting be unanimous. Delaware corporation law provides that, unless
otherwise provided in the certificate of incorporation, any action that may
be
taken at a stockholders meeting, may instead be taken by written consents signed
by the holders of outstanding stock having not less than the minimum number
of
votes that would be necessary to take such action at a meeting at which all
shares entitled to vote were present and voted. The Stockholder Consent
Amendment, by eliminating the specific requirement in our Fourth Amended and
Restated Certificate of Incorporation of unanimity for stockholder action taken
without a meeting, will have the effect of restoring the default rule provided
by Delaware corporation law and set forth above.
We
are
currently actively pursuing potential financing and/or other strategic
transactions, the consummation of which is critical to our ability to continue
our planned operations. However, we have not yet reached agreement with respect
to any such transaction. It is likely that one or more of these potential
transactions will be dependent upon the approval of our stockholders, either
due
to applicable law or the rules of the AMEX. For example, Section 713
of the AMEX Company Guide requires stockholder approval for the issuance of
securities other than in a public offering at a price per share less than the
greater of the book or market value of a company’s stock, where the amount of
securities being issued represents 20% or more of an issuer’s outstanding common
stock.
Eliminating the prohibition on non-unanimous stockholder action by written
consent will facilitate our consummating such a transaction without the
additional delay and expense of calling a meeting.
The
Board
believes that,
by
repealing the requirement that stockholder action without a meeting be
unanimous, we will
enable
our stockholders to act more quickly with respect to any matters on which
stockholder approval may be necessary or appropriate, particularly in connection
with future financing activities or other strategic transactions and corporate
opportunities.
For
the
reasons stated above, the Board believes it is in our best interests
and in the best interests of our stockholders
to
approve the Stockholder Consent Amendment.
Vote
Required
The
proposal to approve the amendment to our Fourth Amended and Restated Certificate
of Incorporation to repeal
a
restriction on stockholder action without a meeting
requires
the affirmative vote of eighty percent (80%) of the outstanding shares of common
stock. Abstentions and broker non-votes will have the same effect as votes
against Proposal Four.
Board
Recommendation
THE
BOARD
UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL
(ITEM
6
OF THE ENCLOSED PROXY CARD) OF THE AMENDMENT TO OUR
FOURTH
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO
REPEAL
SECTION 5 OF ARTICLE VII THEREOF.
AUDIT
COMMITTEE REPORT
The
Audit Committee is responsible for the oversight of the Company’s financial
reporting process on behalf of the Board of Directors and such other matters
as
specified in the Committee’s charter or as directed by the Board. The Committee
also has the sole authority and responsibility to select, evaluate and, where
appropriate, replace the independent registered public accounting firm (or
to
nominate the independent registered
public accounting firm
for
stockholder approval) and to pre-approve all auditing services and any permitted
non-audit services performed by the Company’s independent registered public
accounting firm, including fees and other terms.
Management
has the primary responsibility for the financial statements and the reporting
process including maintaining the system of internal controls, and for the
preparation of the Company’s financial statements in accordance with generally
accepted accounting principals, as well as the objectivity and integrity of
such
statements. The Company’s independent registered public accounting firm is
responsible for expressing an opinion based on its audit of those financial
statements as to the statements’ conformity with generally accepted accounting
principles, its judgments as to the quality, not just the acceptability, of
the
Company’s accounting principles and such other matters as are required to be
discussed with the Committee under generally accepted auditing standards. The
Committee actively monitors and reviews these processes and financial
statements. In carrying out its duties, the Committee relies in part on the
information provided to it, and on the representations made to it, by management
and the independent registered public accounting firm.
In
this
context, the Committee met with the independent registered public accounting
firm, with and without management present, to discuss the results of its
examinations, its evaluations of the Company’s internal controls, and the
overall quality of the Company’s financial reporting. The Committee reviewed
with the independent registered public accounting firm its judgments as to
the
quality, not just the acceptability, of the Company’s accounting principles and
such other matters as are required to be discussed with the Committee under
generally accepted auditing standards. In addition, the Committee has discussed
with the independent registered public accounting firm the firm’s independence
from management and the Company, including the matters in the written
disclosures and the letter required by the Independence Standards Board Standard
No. 1, as amended (Independence Discussions with Audit Committee), and
considered the compatibility of non-audit services with the independent
registered
public accounting firm’s
independence. The Committee discussed with the independent registered public
accounting firm the overall scope and plans for its audits, including the
matters required to be discussed with audit committees under Statement on
Auditing Standards No. 61, as amended (Communication with Audit Committees).
The
Committee reviewed the audited financial statements for the fiscal year ended
December 31, 2006 with management, including a discussion of the quality and
acceptability of the financial reporting, the reasonableness of significant
accounting judgments and estimates, and the clarity of disclosures in the
financial statements.
In
reliance on the reviews, discussions and assurances referred to above, and
subject to the limitations on the Committee’s role and responsibilities referred
to above and in the Committee’s charter, the Committee recommended to the Board
of Directors (and the Board has approved) that the Company’s audited financial
statements be included in the Annual Report on Form 10-KSB for the year ended
December 31, 2006 for filing with the SEC.
|
|
|
April
__, 2007
|
|
Audit
Committee
|
|
|
|
|
|
Judy
Slotkin, Chairman
|
|
|
Lawrence
J. Centella
|
|
|
|
[EXECUTIVE
COMPENSATION -- to be included in Definitive Proxy
Statement]
The
following table provides information as of December 31, 2006 about compensation
plans under which shares of our common stock may be issued to employees,
consultants or members of our Board of Directors upon exercise of options,
warrants or rights under all of our existing equity compensation plans each
of
which was approved by our shareholders. Our existing equity compensation plans
consist of our Amended and Restated Nephros 2000 Equity Incentive Plan and
our
Nephros, Inc. 2004 Stock Incentive Plan (together, our “Stock Option Plans”) in
which all of our employees and directors are eligible to participate.
|
|
(a)
|
|
(b)
|
|
(c)
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected in Column
(a))
|
Plan
Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by stockholders
|
|
2,314,548
|
|
$1.74
|
|
71,725
|
Equity
compensation plans not approved by stockholders
|
|
0
|
|
|
|
0
|
All
plans
|
|
2,314,548
|
|
$1.74
|
|
|
Section 16(a)
of the Exchange Act requires our directors and executive officers, and persons
who own more than 10% of a registered class of our securities, to file with
the
SEC initial reports of ownership and reports of changes in ownership of our
common stock and our other equity securities. A copy of each report is furnished
to us.
SEC
rules require us to identify anyone who failed to file a required report, or
filed a required report late, during the most recent fiscal year. Based solely
on a review of reports furnished to us and written representations that no
other
reports were required, we believe that during the year ended December 31, 2006,
all Section 16(a) filing requirements were complied with on a timely basis.
PRINCIPAL
STOCKHOLDERS AND SHAREHOLDINGS OF MANAGEMENT
The
following table sets forth the beneficial ownership of our common stock as
of
April 15, 2007, by (i) each person known to us to own beneficially more
than five percent (5%) of our common stock; (ii) each director, director
nominee and executive officer; and (iii) all directors,
director nominees and executive officers as a group:
Name
and Address of Beneficial Owner
|
Amount
and
Nature
of
Beneficial
Ownership
|
|
Percentage
of
class
|
|
|
|
|
Ronald
O. Perelman (1)
|
3,540,438
|
|
28.7%
|
Wasserstein
Entities (2)
|
1,928,564
|
|
15.7%
|
Wasserstein
SBIC Ventures II, L.P. (3)
|
829,104
|
|
6.7%
|
WPPN,
LP (4)
|
918,801
|
|
7.5%
|
Norman
J. Barta (5)
|
449,445
|
|
3.6%
|
Eric
A. Rose, M.D. (6)
|
908,526
|
|
7.4%
|
Lawrence
J. Centella (7)
|
50,076
|
|
*
|
Howard
Davis (8)
|
53,840
|
|
*
|
Donald
G. Drapkin (9)
|
659,092
|
|
5.4%
|
William
J. Fox (10)
|
319,503
|
|
2.6%
|
Mark
W. Lerner (11)
|
20,000
|
|
*
|
Bernie
Salick, M.D. (12)
|
21,666
|
|
*
|
Judy
Slotkin (13)
|
73,142
|
|
*
|
W.
Townsend Ziebold (14)
|
856,452
|
|
7.0%
|
_____________________
(1) |
Based
on information provided in Schedule 13G filed on January 31, 2005.
Mr.
Perelman’s address is 35 East 62nd Street, New York, New York 10021. Mr.
Perelman is the sole stockholder of MacAndrews & Forbes Holdings
Inc.
|
(2) |
Based
on information provided in Schedule 13G filed on February 11, 2005.
The
Wasserstein entities include WPPN, LP, Wasserstein SBIC Ventures
II, L.P.,
WV II Employee Partners, LLC, and BW Employee Holdings, LLC. The
address
of the Wasserstein entities is 1301 Avenue of the Americas, 44th
Floor,
New York, New York 10019. Bruce Wasserstein may be deemed to have
beneficial ownership of the shares owned by the Wasserstein entities.
However, Mr. Wasserstein disclaims beneficial ownership of these
shares
except for his pecuniary interest in 29,446 shares. The Wasserstein
entities’ ownership is as follows: (i) 918,801 shares of our common stock
which are owned by WPPN, LP, the general partner of which is Cypress
Management Partners, LLC, the sole member of which is Cypress Capital
Assets, LP, the general partner of which is Cypress Capital Advisors,
LLC,
an entity that may be deemed controlled by Bruce Wasserstein; (ii)
829,104
shares of our common stock which are owned by Wasserstein SBIC Ventures
II, L.P., the general partner of which is Wasserstein Levered Venture
Partners II, LLC, the sole member of which is Wasserstein Investments
LLC,
the sole member of which is Wasserstein Holdings, LLC, an entity
that may
be deemed controlled by Mr. Wasserstein; (iii) 5,388 shares of our
common
|
stock
which are owned by WV II Employee Partners, LLC, the managing member of which
is
Wasserstein & Co., L.P., an entity controlled by Wasserstein Investments,
LLC, the sole member of which is Wasserstein Holdings, LLC, an entity that
may
be deemed controlled by Mr. Wasserstein; and (iv) 175,271 shares of our common
stock which are owned by BW Employee Holdings, LLC, an entity that may be deemed
controlled by Mr. Wasserstein.
(3) |
The
same shares listed as beneficially owned by Wasserstein SBIC Ventures
II,
L.P. are also included in the shares listed as beneficially owned
by the
Wasserstein entities (See Note 2
above).
|
(4) |
The
same shares listed as beneficially owned by WPPN, LP are also included
in
the shares listed as beneficially owned by the Wasserstein entities
(See
Note 2 above).
|
(5) |
Mr.
Barta’s address is c/o Nephros, Inc., 3960 Broadway New York, New York
10032. The shares identified as being beneficially owned by Mr. Barta
include 421,035 shares issuable upon exercise of options granted
under the
2000 and 2004 Plans. Does not include 88,582 shares issuable upon
the
exercise of options which have been granted under our Stock Option
Plans
but have not yet vested.
|
(6) |
Dr.
Rose’s address is c/o Nephros, Inc., 3960 Broadway New York, New York
10032.
The shares identified as being beneficially owned by Dr. Rose include
163,375 shares issuable upon exercise of options granted under the
2000
and 2004 Plans. Does not include 36,460 shares issuable upon the
exercise
of options which have been granted under our Stock Option Plans but
have
not yet vested.
|
(7) |
Mr.
Centella’s address is 3331 N. Ridge Ave, Arlington Heights, IL 60004.
The
shares identified as being beneficially owned by Mr. Centella include
21,666 shares issuable upon exercise of options granted under the
2004
Plan. Does not include 3,334 shares issuable upon the exercise of
options
which have been granted under our Stock Option Plans but have not
yet
vested.
|
(8) |
Mr.
Davis’ address is 5850 Canoga Ave, #315, Woodland Hills, CA
91367.
The shares identified as being beneficially owned by Mr. Davis include
35,508 shares issuable upon exercise of warrants originally issued
to The
Shemano Group, Inc. in connection with our initial public offering
and
transferred to Mr. Davis; and 18,332 shares issuable upon exercise
of
options granted under the 2004 Plan. Does not include 6,668 shares
issuable upon the exercise of options which have been granted under
our
Stock Option Plans but have not yet
vested.
|
(9) |
Mr.
Drapkin’s address is 35 East 62nd Street, New York, New York
10021.
The shares identified as being beneficially owned by Mr. Drapkin
include
509,922 shares owned by a charitable foundation which Mr. Drapkin
serves
as a director and 149,170 shares issuable upon exercise of options
granted
under the 2000 and 2004 Plans. Does not include 36,460 shares issuable
upon the exercise of options which have been granted under our Stock
Option Plans but have not yet
vested.
|
(10) |
Mr.
Fox’s address is c/o Nephros, Inc., 3960 Broadway New York, New York
10032. The shares identified as being beneficially owned by Mr. Fox
include 250,332 shares issuable upon exercise of options granted
under the
2004 Plan. Does not include 344,168 shares issuable upon the exercise
of
options which have been granted under our Stock Option Plans but
have not
yet vested.
|
(11) |
Mr.
Lerner’s address is c/o Nephros, Inc., 3960 Broadway New York, New York
10032. The shares identified as being beneficially owned by Mr. Lerner’s
include 20,000 shares issuable upon exercise of options granted under
the
2004 Plan. Does not include 20,000 shares issuable upon the exercise
of
options which have been granted under our Stock Option Plans but
have not
yet vested.
|
(12) |
Dr.
Salick’s address is 8900 Wilshire Boulevard Beverly Hills, CA 90211. The
shares identified as being beneficially owned by Dr. Salick include
21,166
shares issuable upon the exercise of options granted under the 2004
Plan.
Does not include 3,334 shares issuable upon the exercise of options
which
have been granted under our Stock Option Plans but have not yet vested.
|
(13) |
Ms. Slotkin’s address is c/o Nephros, Inc.,
3960 Broadway New York, New York 10032. The shares identified as being
beneficially owned by Ms. Slotkin include 68,142 shares owned by her
husband and include 5,000 shares issuable upon exercise of options
granted
under the 2004 Plan. Does not include 10,000 shares issuable upon the
exercise of options which have been granted under our Stock Option
Plans
but have not yet vested. |
(14) |
Mr.
Ziebold’s address is 1301 Avenue of the Americas, 44th Floor, New York,
New York 10019. The shares identified as being beneficially owned
by Mr.
Ziebold include 829,104 shares that Mr. Ziebold, as president
of
Wasserstein Levered Venture Partners II, LLC, the general partner
of
Wasserstein SBIC Ventures II, L.P., may be deemed to beneficially
own and
as to which Mr. Ziebold disclaims beneficial ownership; and 27,348
shares
issuable upon exercise of options granted under the 2000 and
2004 Plans.
The shares identified as being beneficially owned by Mr. Ziebold
do not
include 5,388 shares owned by WV II Employee Partners, LLC, an
employee
investment vehicle in which Mr. Ziebold is a participant and
as to which
Mr. Ziebold disclaims beneficial ownership. Does not include
3,334 shares
issuable upon the exercise of options which have been granted
under our
Stock Option Plans but have not yet
vested.
|
EXECUTIVE
EMPLOYMENT AGREEMENTS AND OTHER RELATIONSHIPS
As
of December 31, 2006, the Compensation Committee of the Board of Directors
consisted of W. Townsend Ziebold, Jr. (Chairman), Bernard Salick, M.D. and
Lawrence J. Centella, each of whom is a non-employee director. No member of
the
Compensation Committee has a relationship that would constitute an interlocking
relationship with executive officers or directors of another entity.
Agreement
with Mr. William J. Fox
William
J. Fox is serving as our executive chairman under a written employment agreement
with us effective
as of July 1, 2006, for a term of two years ending on June 30, 2008 (the
“Initial Term”). After the Initial Term, the Employment Agreement will
automatically be extended for one or more additional annual periods unless
Mr.
Fox or the Company gives the other party written notice at least 60 days prior
to the end of the Initial Term or any extension thereof (the “Term”) of such
party’s election not to renew the Employment Agreement. The Employment Agreement
provides that Mr. Fox will receive a starting
base
salary of $277,500 per year (subject to annual adjustment beginning with July
1,
2007, based on the New York area Consumer Price Index), and will be eligible
to
receive an annual bonus based on the extent to which individual and Company-wide
performance goals established by the Board of Directors for each year have
been
met. The Employment Agreement also provides that the Company grant Mr. Fox
an
option to purchase 450,000 shares of the Company’s common stock at an exercise
price equal to the closing share price of the common stock on the AMEX as of
the
date of grant pursuant to the Company’s 2004 Stock Incentive Plan and a
Non-Qualified Stock Option Agreement (the “Option Agreement”). Pursuant to the
Option Agreement, the option vests in equal quarterly installments of 56,250
shares each beginning on September 30, 2006 until the option fully vests on
June
30, 2008, subject to certain conditions.
Mr.
Fox’s
Employment Agreement provides, among other things, that if his employment is
terminated by him or the Company prior to the end of the Term for any reason
or
upon nonrenewal of the Employment Agreement by either party, he is entitled
to
(i) any accrued but unpaid base salary; (ii) any performance bonus not yet
paid
for the year of termination; (iii) any vacation accrued to the date of
termination; (iv) any accrued but unpaid business expenses or monthly cash
payments; and (v) any benefits he may be entitled to receive under the Option
Agreement or any other plans or programs referred to in the Employment
Agreement. If Mr. Fox is terminated by the Company “without cause” or Mr. Fox
leaves the Company for “good reason” (in each case as defined in the Employment
Agreement) or the Company gives written notice of its election not to renew
the
Employment Agreement, then, among other things, he would be entitled to receive
(i) a prorated portion of the performance bonus, if any, for the year of
termination; and (ii) his base salary for a period of twelve months after
termination.
Agreement
with Mr. Norman J. Barta
Norman
J.
Barta is serving as our president and chief executive officer under a written
employment agreement with us. This agreement, as amended to date, has a term
that expires on June 30, 2007. This
agreement provides Mr. Barta with an annual base salary since July 31, 2004
of
$285,000. During each year that Mr. Barta is employed with us, our compensation
committee will review Mr. Barta’s performance and determine, in its sole
discretion, whether to further increase Mr. Barta’s annual base
salary.
We
have
agreed to pay Mr. Barta a bonus equal to 10% of his salary at the time each
of
the following six milestones is achieved: (1) the OLpûr MD190 hemodiafiltration
device or a related device is deemed ready
to
enter a clinical trial by the FDA or an analogous body outside of the United
States in a region where there exists significant market opportunity for the
sale of the device; (2) the completion of a clinical trial of the device in
such
a region; (3) the first regulatory approval of the device in such a region;
(4)
a second hemodiafiltration device is deemed ready to enter a clinical trial
by
the FDA or an analogous body outside of the United States in a region where
there exists significant market opportunity for the sale of such device; (5)
the
completion of the clinical trial of the second device in such a region; and
(6)
the first regulatory approval of the second device in such region. To date,
milestones (1) through (3) have been achieved. The agreement provides that
after
July 2004, additional realistic milestones will be set for each year, with
the
total potential payment for these additional milestones, if achieved, each
year
equaling at least 20% of Mr. Barta’s annual base salary as of the date the
milestones are set.
Pursuant
to the employment agreement, our Compensation Committee established the
following two additional milestones during 2005, the achievement of each of
which will trigger a bonus equal to 10% of Mr. Barta’s current base salary: (a)
achieving certain levels of Net Revenues for the six months ending June 30,
2005; and (b) maintaining a certain level of contribution margins over the
same
time period. We have also agreed to pay to Mr. Barta a bonus of one percent
of
the license fee or technology access fee not tied directly to sales or expressed
as a percentage of receipts or by reference to units produced which is paid
to
us with respect to any consummated licensing agreement of the ESRD therapy
machines or dialyzer technology devices, subject to a maximum bonus of $500,000
per license agreement (including renewals and amendments) and to an aggregate
maximum of $2,000,000. Also, pursuant to such agreement, the Company’s
Compensation Committee has established the following milestones for the year
ending June 30, 2006. Mr. Barta may earn a cash bonus of up to $28,500 (plus
up
to $14,240, payable in common stock of the Company) upon achieving certain
sales
and EBITDA targets. In addition, Mr. Barta may earn a cash bonus of up to
$28,500 for successful achievement, as determined by the Board, of the following
goals, in part or in full: acquisition/licensing of mid-dilution filter,
H2H
or
similar; development of water filtration business; development of other
products; new intellectual property filings; sales leadership improvements;
and
completion of UK clinical trials. As of April 20, 2007, our Compensation
Committee has not set any additional milestones for 2007.
Mr.
Barta’s employment agreement provides that upon termination by us for cause, as
defined in the agreement, death or disability, we will pay to him only the
base
salary and any milestone bonuses due and payable under the terms of the
agreement through the date of termination and those that become due and payable
within 90 days of that date. If we terminate Mr. Barta for any other reason,
Mr.
Barta will be entitled to (1) any accrued but unpaid base salary for services
rendered through the date of termination; (2) any unpaid milestone bonuses
due and payable on or prior to the date of termination or within 90 days
thereafter; (3) any unpaid licensing bonuses due and payable on or prior to
the
date of termination or in respect of licenses consummated during the 90 days
following the date of termination; and (4) the continued payment of the base
salary (in the amount as of the date of termination) for the remainder of the
term (to be paid at the times such base salary would have been paid had his
employment not been terminated).
Agreement
with Mr. Mark W. Lerner
Mr.
Lerner began serving as our chief financial officer on March 6, 2006, pursuant
to a letter agreement dated as of March 3, 2006. Mr. Lerner’s initial
annual base salary is $175,000. Mr.
Lerner also received an option to purchase 40,000 shares of our common stock
under our 2004 Equity Incentive Plan. One-quarter of the option vested on the
grant date and the remainder of the option will vest in three equal annual
installments of 10,000 shares beginning on the anniversary of the grant date.
In
addition, Mr. Lerner may be awarded a bonus based on performance. Mr.
Lerner’s agreement provides that upon termination by us for cause (as defined in
the agreement), death or disability or by his voluntary resignation or
retirement, we shall pay him only his accrued but unpaid base salary for
services rendered through the date of termination. If we terminate
Mr. Lerner’s employment for any other reason, then he shall be entitled to:
(1) any accrued but unpaid base salary for services rendered through the date
of
termination; and (2) the continued payment of his base salary, in the amount
as
of the date of termination, for ninety (90) days subsequent to the termination
date, such payments to be made at the times such base salary would have been
paid had his employment not been terminated.
CERTAIN
TRANSACTIONS
Columbia
University
The
Lead
Director of our Board is currently on leave from his position as the Chairman
of
Columbia University’s Department of Surgery. We license the right to use
approximately 2,788 square feet of office space from the Trustees of Columbia
University. The term of the license agreement is for one year through September
25, 2007 at a monthly cost of $11,965, including monthly internet access. We
do
not currently have any other material relationship with Columbia
University.
OTHER
MATTERS
We
can
provide reasonable assistance to help you participate in the meeting if you
tell
us about your disability and your plan to attend the meeting. Please call or
write the Chief Financial Officer at least two weeks before the meeting at
our
principal executive offices.
How
we solicit proxies
In
addition to mailing, our employees may solicit proxies personally,
electronically, or by telephone. We will pay the costs of soliciting this
proxy.
Stockholder
Proposals
The
deadline for submitting stockholder proposals for inclusion in our proxy
statement and form of proxy for our next annual meeting is January 1, 2008.
Such
proposals must comply with our By-Laws and the requirements of Regulation 14A
of
the Exchange Act. To be properly submitted, the proposal must be received at
our
principal executive offices, 3960 Broadway, New York, New York 10032, no later
than the deadline. In order to avoid controversy, stockholders should submit
any
proposals by means, including electronic means, which permit them to prove
the
date of delivery.
In
addition, Rule 14a-4 of the Exchange Act governs the use of our discretionary
proxy voting authority with respect to a stockholder proposal that is not
addressed in this proxy statement. With respect to our next annual meeting
of
stockholders, if we are not provided notice of a stockholder proposal prior
to
March 24, 2008, we will be allowed to use our discretionary voting authority
when the proposal is raised at the meeting, without any discussion of the matter
in the proxy statement.
If
the
Board changes the date of next year’s annual meeting by more than 30 days, the
Board will, in a timely manner, inform the stockholders of such a change and
the
effect of such a change on the deadlines given above by including a notice
under
Item 5 in our earliest possible quarterly report on Form 10-QSB, or if that
is
impracticable, then by any means reasonably calculated to inform the
stockholders.
The
Board of Directors does not know of any other matters that are to be presented
for action at the annual meeting. If any other matters come before the meeting,
the persons named in the enclosed proxy will have the discretionary authority
to
vote all proxies received with regard to those matters in accordance with their
best judgment.
Questions?
If
you
have questions or need more information about the annual meeting, write
to:
Investor
Relations
Nephros,
Inc.
3960
Broadway
New
York, NY 10032
Attn:
Chief Financial Officer
or
call
us at:
(212)
781-5113
WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, THE BOARD URGES
YOU
TO
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
IN
THE
ENCLOSED POSTAGE-PAID ENVELOPE.
PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR
2006 ANNUAL MEETING OF STOCKHOLDERS
TO
BE HELD ON MAY 22, 2007
The
undersigned hereby constitutes and appoints Norman J. Barta and Mark W. Lerner,
and each of them, proxies and attorneys-in-fact, with full power to each of
substitution, on behalf and in the name of the undersigned, to represent the
undersigned at the 2006 Annual Meeting of Stockholders of NEPHROS, INC.
(“Nephros”), to be held on May 22, 2007, and at any adjournment or postponement
thereof. This proxy, when properly executed and returned in a timely manner,
will be voted at this annual meeting and any adjournment or postponement thereof
in the manner described herein. If no contrary indication is made, the proxy
will be voted: FOR Proposal 1, the election of the director nominees named
herein; FOR Proposal 2, ratification of the appointment by the Audit Committee
of Deloitte & Touche LLP as Nephros’ independent registered public
accounting firm for the fiscal year ending December 31, 2007; FOR Proposal
3,
approval of the potential issuance of common shares upon conversion of certain
notes and exercise of certain warrants; FOR Proposal 4, approval of the
amendment to Fourth Amended and Restated Certificate of Incorporation to
increase the number
of
authorized shares of common stock; FOR Proposal 5, approval of an amendment
to
the Nephros, Inc. 2004 Stock Incentive Plan; FOR Proposal 6, approval
of the amendment to Fourth Amended and Restated Certificate of Incorporation
to
repeal a restriction on stockholder action without a meeting; and
as to
all other matters which may come before the meeting, in accordance with the
judgment of the persons named as proxies herein.
PLEASE
MARK, SIGN, DATE AND MAIL THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
(Continued,
and to be signed and dated, on reverse side.)
The
undersigned hereby directs this proxy to be voted as follows:
PLEASE
MARK YOUR VOTES IN THE
FOLLOWING
MANNER, USING DARK INK
ONLY:
x
|
|
|
|
FOR
ALL
|
|
WITHHOLD
|
|
|
|
|
NOMINEES
|
|
ALL
|
|
|
|
|
(except
as written to
|
|
NOMINEES
|
|
|
|
|
the
contrary below)
|
|
|
Proposal
1: Election of Directors.
|
|
|
|
|
Nominees:
Norman Barta
|
|
o
|
|
o
|
Lawrence
J. Centella
|
|
|
|
|
Eric
A. Rose
|
|
|
|
|
|
|
FOR,
except vote withheld from the following
nominee(s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTAIN
|
|
|
|
|
|
|
|
Proposal
2: To ratify the appointment by the Audit Committee of Deloitte &
Touche LLP as independent registered public accounting
firm.
|
|
o
|
|
o
|
|
o
|
|
|
|
|
|
|
|
Proposal
3: To approve the potential issuance of the Company’s common stock upon
conversion of certain Notes and exercise of certain
Warrants.
|
|
o
|
|
o
|
|
o
|
|
|
|
|
|
|
|
Proposal
4: To
approve an amendment to the Fourth Amended and Restated Certificate
of
Incorporation to increase the number of authorized shares of Common
Stock.
|
|
o
|
|
o
|
|
o
|
|
|
|
|
|
|
|
Proposal
5: To
approve an amendment to the Nephros, Inc. 2004 Stock Incentive
Plan.
|
|
o
|
|
o
|
|
o
|
|
|
|
|
|
|
|
Proposal
6: To approve an amendment to the Fourth Amended and Restated Certificate
of Incorporation repeal a restriction on stockholder action without
a
meeting
|
|
o
|
|
o
|
|
o
|
|
|
|
|
|
|
|
At
the proxies’ discretion on any other matters which may properly come
before the meeting or any adjournment or postponement
thereof.
|
|
|
|
|
|
|
I
plan to
attend the meeting o
I
do not
plan to attend the meeting o
Dated:
,
2007.
|
|
|
Signature(s):
|
|
|
|
|
_________________________________
|
This
proxy should be dated, signed by the stockholder(s) exactly as his or her name
appears herein, and returned promptly in the enclosed envelope. Persons signing
in a fiduciary capacity should so indicate; if shares are held by joint tenants
or as community property, both stockholders should sign. If a corporation,
please sign in full corporate name by President or other authorized officer.
If
a partnership, please sign in partnership name by authorized
person.