<PAGE>
As Filed with the Securities and Exchange Commission on July 22, 1998
REGISTRATION NO.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
NETWORK-1 SECURITY SOLUTIONS, INC.
(Name of small business issuer in its charter)
Delaware 7372 11-3027591
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
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Network-1 Security Solutions, Inc.
70 Walnut Street
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Wellesley Hills, Massachusetts 02481
(781) 239-8280
(Address and Telephone Number of Registrant's Principal Executive Offices)
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AVI A. FOGEL
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President and Chief Executive Officer
Network-1 Security Solutions, Inc.
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70 Walnut Street
Wellesley Hills, Massachusetts 02481
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(781) 239-8280
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(Name, Address and Telephone Number of Agent for Service of Process)
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Copies of Communications to:
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SAM SCHWARTZ, ESQ. ROBERT J. MITTMAN, ESQ.
Bizar Martin & Taub, LLP Tenzer Greenblatt LLP
1350 Avenue of the Americas The Chrysler Building
New York, New York 10019 405 Lexington Avenue
Telephone: (212) 265-8600 New York, New York 10174
Telecopier: (212) 581-8958 Telephone: (212) 885-5000
Telecopier: (212) 885-5001
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Approximate Date of Proposed Sale to the Public: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<PAGE>
-----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities Being Registered Registered Per Share (1) Offering Price (1) Fee
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 2,156,250(2) $ 8.00 $17,250,000 $5,088.75
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Underwriter's Warrants(3), each to purchase
one share of Common Stock.................. 187,500 $ .001 $ 187.50 $ .06
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Common Stock, par value $.01 per share
issuable upon exercise of Underwriter's
Warrants(4)................................ 187,500 $13.20(4) $ 2,475,000 $ 730.13
- ----------------------------------------------------------------------------------------------------------------------
Total...................................... $5,818.94
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</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
(2) Includes 281,250 shares of Common Stock issuable upon exercise of an
option granted to the Underwriter to cover over-allotments of shares, if any.
(3) Pursuant to Rule 416, this Registration Statement also registers such
indeterminate number of shares as may become issuable pursuant to the
anti-dilution provisions of the Underwriter's Warrants.
(4) No fee due pursuant to Rule 457(g).
<PAGE>
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Heading In Prospectus
- --------------------------------- ---------------------
<S> <C>
1. Front of Registration Statement and Outside
Front Cover of Prospectus....................... Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front and Outside Back Cover
3. Summary Information and Risk Factors............ Prospectus Summary; Risk Factors
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. Risk Factors; Underwriting
6. Dilution........................................ Dilution; Risk Factors
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Outside Front Cover Page of Prospectus
9. Legal Proceedings............................... Business
10. Directors, Executive Officers, Promoters
and Control Persons............................. Risk Factors; Management
11. Security Ownership of Certain Beneficial
Owners and Management........................... Principal Stockholders
12. Description of Securities....................... Description of Securities
13. Interest of Named Experts and Counsel........... Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.. Description of Securities
15. Organization Within Last Five Years............. Business; Certain Transactions
16. Description of Business......................... Business
17. Management's Discussion and Analysis or
Plan of operation............................... Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property......................... Prospectus Summary; Risk Factors; Discussion
and Analysis of Financial Results of Operations; Business
19. Certain Relationships and Related Transactions.. Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters............................. Risk Factors; Dilution; Management;
Shares Eligible for Future Sale
21. Executive Compensation.......................... Management
22. Financial Statements............................ Financial Statements
23. Change in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED JULY 22, 1998
SUBJECT TO COMPLETION
1,875,000 Shares
NETWORK-1 SECURITY SOLUTIONS, INC.
Common Stock
Prior to this offering, there has been no public market for the Common Stock
and there can be no assurance that any such market will develop. It is
anticipated that the Common Stock will be quoted on the Nasdaq SmallCap Market
under the symbol "________." For a discussion of the factors considered in
determining the initial public offering price, see "Underwriting."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE
"RISK FACTORS" COMMENCING ON PAGE 7 AND "DILUTION" ON PAGE 22.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Price Underwriting Proceeds
to Discounts and to
Public Commissions (1) Company (2)
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<S> <C> <C> <C>
Per Share........................................... $8.00 $.72 $7.28
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Total (3)........................................... $15,000,000 $1,350,000 $13,650,000
- -----------------------------------------------------------------------------------------------------------------
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</TABLE>
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(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance and to sell to the Underwriter warrants
(the "Underwriter's Warrants") to purchase up to 187,500 shares of Common
Stock. The Company has also agreed to indemnify the Underwriter against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses estimated at $958,000, including the
Underwriter's nonaccountable expense allowance in the amount of $450,000
($517,500 if the Underwriter's over-allotment option is exercised in
full).
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
281,250 shares of Common Stock on the same terms as set forth above,
solely for the purpose of covering over-allotments, if any. If the
Underwriter's over-allotment option is exercised in full, the price to
public, underwriting discounts and commissions, and proceeds to Company
will be $17,250,000, $1,552,500 and $15,697,500, respectively. See
"Underwriting."
The shares of Common Stock are being offered, subject to prior sale, when,
as and if delivered to, and accepted by the Underwriter and subject to approval
of certain legal matters by counsel and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify the offering and to
reject any order in whole or in part. It is expected that delivery of
certificates representing the shares will be made against payment therefor at
the offices of the Underwriter, 650 Fifth Avenue, New York, New York 10019, on
or about , 1998.
----------------------
Whale Securities Co., L.P.
The date of this Prospectus is , 1998
<PAGE>
[PRODUCT PICTURES TO BE INSERTED ON INSIDE COVER PAGE]
FireWall/Plus is a trademark of the Company. All other trademarks or
tradenames referred to in this Prospectus are the property of their respective
owners.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS ON
NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE WHICH STABILIZE, MAINTAIN OR
OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITER
MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE
SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Except as otherwise indicated, all
information in this Prospectus, including per share data and information
relating to the number of shares outstanding, (i) has been adjusted to reflect a
1-for-1.61083 reverse stock split of the Common Stock effected on July 20, 1998,
(ii) gives effect to the conversion of the outstanding shares of Series B
Convertible Preferred Stock into 310,399 shares of Common Stock upon the
consummation of this offering, and the issuance of an aggregate of 48,125 shares
of Common Stock upon the consummation of this offering in connection with the
acquisition of CommHome Systems Corp. (the "CommHome Acquisition") and
satisfaction of certain indebtedness of CommHome, and (iii) assumes no exercise
of the Underwriter's over-allotment option to purchase up to 281,250 additional
shares of Common Stock. See "Business -- CommHome System Corp. Acquisition,"
"Certain Transactions" and Note J to Notes to Financial Statements.
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" including, without
limitation, statements concerning the Company's strategy and growth plans,
contain certain forward-looking statements concerning the Company's operations,
economic performance and financial condition. Because such statements involve
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward looking statements. Factors that could
cause such differences include, but are not limited to, those discussed under
"Risk Factors."
The Company
Network-1 Security Solutions, Inc. (the "Company") develops, markets,
licenses and supports a family of network security software products designed to
provide comprehensive security to computer networks, including Internet based
systems and internal networks and computing resources. The Company's
FireWall/Plus family of security software products enables an organization to
protect its computer networks from internal and external attacks and to secure
organizational communications over such internal networks and the Internet. The
Company also offers its customers a full range of consulting services in network
security and network design and support in order to build, maintain and enhance
customer relationships and increase the demand for its software products.
The FireWall/Plus family of security solutions is designed to protect
against Internet and intranet (internal networks utilizing Internet technology
and applications based upon TCP/IP - the Internet network transport protocol)
based security threats and to address security needs that arise from within
internal networks that often utilize other network transport protocols besides
TCP/IP including, among others, Novell's IPX, Digital Equipment's DECnet and
IBM's SNA. The Company's FireWall/Plus family of firewall products operates on
the Microsoft Windows NT operating system platform. FireWall/Plus's proprietary
Interceptor Shim and filter engine software technology, with its unique ability
to handle and filter all commonly used network transport protocols, provides
organizations with a highly secure and flexible security solution. Additionally,
unlike most other firewall solutions which focus on an enterprise's connection
to the Internet, the FireWall/Plus solution can be deployed throughout the
enterprise; at the perimeter to control access
3
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to and from the Internet, between internal networks and on application servers
and desktop PCs to protect data residing on such servers and PCs. FireWall/Plus
for Windows NT received the 1997 Internet and Electronic Commerce Conference
award for "Best Intranet Solution" and the 1997 ENT Readers Choice Award for
"Best NT Firewall."
As a result of the explosive growth in network computing and Internet use
(as well as use of intranets and extranets), protection of an organization's
network and data has become a significant economic concern for businesses.
According to the 1997 Annual Information Week/Ernst & Young LLP Information
Security Survey of information technology managers and professionals, 42% of the
respondents reported malicious acts from external sources, as compared to 16% in
the prior year, and 43% of the respondents reported malicious acts by employees
as compared to 29% in the prior year. According to FBI estimates, U.S. companies
suffer estimated losses of $5 to $10 billion per year as a result of
unauthorized access to information and data. According to the 1998 Computer
Security Institute/FBI Computer Crime and Security Survey, 44% of the
respondents reported unauthorized access by employees. The Company believes that
securely segmenting internal network areas and computing resources from
unauthorized access will become paramount to insuring the integrity of both the
internal network and an organization's intranet and extranet (intranets which
allow access for one or more users outside of the internal network) resources.
In a Windows NT based environment, it is typical for multiple network
transport protocols to co-exist, as Windows NT comes pre-equipped with TCP/IP,
IPX (Novell), NetBEUI (LAN Manager) and AppleTalk. In addition, certain
applications require the use of non-TCP/IP protocols to operate between
subnetworks within a network. The Company believes that multiple network
transport protocols will remain prevalent in computing environments because of
the large installed base of non-TCP/IP based computer systems and applications.
As a result, the Company believes that its FireWall/Plus technology offers
significant advantages as a security product for computer networks because of
its unique ability to filter all commonly used network transport protocols and
reside in multiple locations throughout an organization's network.
The Company intends to pursue an aggressive growth strategy and to focus its
efforts on marketing its FireWall/Plus family of network security products. Key
elements of the Company's strategy are to:
- Provide comprehensive network security solutions by developing,
marketing and supporting a family of network security products to
address a broad range of security issues confronting computer networks
and computing, including concerns arising from allowing access to the
Internet as well as concerns relating to the security of internal
networks.
- Emphasize internal network security because of the ability of
FireWall/Plus to filter a multitude of network transport protocols
which are common in many organizations. The Company intends to devote a
significant portion of the proceeds of this offering for sales and
marketing toward educating potential end users and third-party
distributors as to the need to protect networks and computing resources
from unauthorized access and attacks from within an internal network
and the capabilities and benefits of the Company's products.
4
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- Implement a marketing plan which includes a multi-channel distribution
strategy which emphasizes establishing and maintaining third-party
distributor relationships with systems integrators, VARs, OEMs and
resellers in the United States and internationally.
- Increase sales of FireWall/Plus by leveraging relationships with
consulting clients.
Since its inception, the Company has incurred significant losses. The future
success of the Company is largely dependent upon its FireWall/Plus family of
software products achieving market acceptance. There can be no assurance that
the Company will be able to successfully implement its marketing strategy,
achieve significant market acceptance of its FireWall/Plus products or achieve
profitable operations.
The Company was incorporated under the laws of the State of Delaware in July
1990. The Company's executive offices are located at 70 Walnut Street, Wellesley
Hills, Massachusetts 02481 and its telephone number at that address is (781)
239-8280. The Company intends to relocate its executive offices to a new
facility in the Boston, Massachusetts area following the consummation of this
offering. The Company's website can be found on the Internet at:
http://www.network-1.com.
The Offering
<TABLE>
<S> <C>
Common Stock offered....................... 1,875,000 shares
Common Stock to be outstanding
after the offering......................... 4,508,369 shares(1)
Use of Proceeds........................... The Company intends to use the
net proceeds of this offering
for sales and marketing;
repayment of indebtedness;
software development; purchase
of computer equipment; payment
of trade payables; establishing
a new office facility; and the
balance for working capital and
general corporate purposes.
Risk Factors.............................. The securities offered hereby
involve a high degree of risk
and immediate substantial
dilution to new investors and
should not be purchased by
investors who cannot afford the
loss of their entire
investment. See "Risk Factors"
and "Dilution."
Proposed Nasdaq SmallCap Market
symbol.................................... / /
</TABLE>
(1) Does not include: (i) 187,500 shares of Common Stock reserved for issuance
upon exercise of the Underwriter's Warrants; (ii) 423,908 shares of Common
Stock reserved for issuance upon exercise of stock options granted under
the Company's 1996 Stock Option Plan (the "Stock Option Plan"); (iii)
326,092 shares of Common Stock reserved for issuance upon exercise of stock
options available for future grant under the Stock Option Plan; and (iv)
630,886 shares of Common Stock reserved for issuance upon exercise of other
outstanding warrants and options. See "Management-Stock Option Plan,"
"Description of Securities-Warrants and Options" and "Underwriting."
5
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Summary Financial Information
The summary financial information set forth below is derived from and should
be read in conjunction with the audited financial statements, including the
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
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1996 1997 1997 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $ 1,027,000 $ 2,369,000 $ 479,000 $ 339,000
Loss from operations (4,239,000) (1,837,000) (559,000) (473,000)
Net loss (4,499,000) (2,390,000) (590,000) (697,000)
Loss per share (1) (2.46) (1.29) (.30) (.41)
Weighted average number of
shares outstanding 1,825,163 1,855,244 1,942,872 1,706,037
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 March 31, 1998
---------------- ----------------------------------------------------
Actual Actual Pro Forma(2) As Adjusted(2)(3)
---------------- ------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 60,000 $ 67,000 $ 1,416,000 $ 10,766,000
Working capital (deficit) (661,000) (2,283,000) (1,518,000) 8,702,000
Total assets 2,404,000 2,094,000 3,443,000 12,718,000
Total liabilities 2,479,000 2,666,000 3,250,000 783,000
Accumulated deficit (7,470,000) (8,167,000) (8,181,000) (9,516,000)
Total stockholders' equity (deficit) (75,000) (572,000) 193,000 11,935,000
</TABLE>
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(1) See Notes A and B to Notes to Financial Statements for an explanation of
shares used in net loss per share calculations.
(2) Gives effect to (i) the conversion of the outstanding shares of Series B
Convertible Preferred Stock into 310,399 shares of Common Stock upon
consummation of this offering, (ii) the issuance of $1,350,000 principal
amount promissory notes and warrants to purchase up to 251,423 shares of
Common Stock in private financings completed from April 1998 through May
1998, (iii) the issuance of 596,741 shares of Common Stock in exchange for
the cancellation of outstanding warrants and options to purchase 789,521
shares of Common Stock on July 8, 1998, (iv) the repurchase and
cancellation of 62,080 shares of Common Stock in connection with a private
financing in May 1998, and (v) the issuance in May 1998 of an aggregate of
34,146 shares of Common Stock for services rendered to the Company
(collectively, the "Pro Forma Adjustments"). See "Certain Transactions" and
"Description of Securities."
(3) Gives effect to (i) the sale of 1,875,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom, (ii)
aggregate non-cash charges estimated to be $870,000 relating to the
amortization of the debt discount on $3,250,000 principal amount promissory
notes upon the repayment of such notes, plus accrued interest thereon, upon
consummation of this offering and (iii) the issuance of an aggregate of
48,125 shares of Common Stock, upon consummation of this offering, in
connection with the CommHome Acquisition and the satisfaction of an
aggregate of $105,000 of indebtedness of CommHome owed to certain officers
of the Company, and a charge related to the CommHome Acquisition for
purchased research and development of $465,000 (such adjustment, together
with the adjustment described in (ii) above, collectively the "Additional
Adjustments"). See "Use of Proceeds,""Business - CommHome Systems Corp.
Acquisition" and "Capitalization."
6
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RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative
and involves a high degree of risk and should not be purchased by anyone who
cannot afford the loss of their entire investment. Each prospective investor
should carefully consider the following risk factors as well as the other
information set forth in this Prospectus in evaluating an investment in the
shares of Common Stock offered hereby. This Prospectus contains forward-looking
statements based upon current expectations that involve risks and uncertainties.
The Company's actual results and the timing of certain events may differ
materially from those discussed in such forward-looking statements as a result
of certain factors, including, but not limited to, those set forth in the
following risk factors and elsewhere in this Prospectus.
Limited Relevant Operating History; Significant and Continuing Losses;
Explanatory Paragraph in Independent Public Accountant's Report. Although the
Company was organized in July 1990, it was engaged primarily in providing
network consulting and training services through 1994 and did not commence
marketing of its first FireWall/Plus product until June 1995. Accordingly, the
Company has a limited relevant operating history as a software developer upon
which an evaluation of its prospects and future performance can be made. Such
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered in the operation and expansion of a new business and the
shift from research and product development to commercialization of products
based on rapidly changing technologies in a highly specialized and emerging
market. Since inception, the Company has incurred significant net losses,
including net losses of $4,499,000, $2,390,000 and $697,000 for the years ended
December 31, 1996, December 31, 1997 and the three months ended March 31, 1998,
respectively. At March 31, 1998, the Company had an accumulated deficit of
$8,167,000 and since March 31, 1998 the Company has continued to incur
significant losses. The Company will also incur aggregate non-cash charges
during the three months ended June 30, 1998 and upon consummation of this
offering of approximately $1,335,000 relating to (i) the amortization of debt
discount with respect to $3,250,000 principal amount promissory notes which will
be repaid in full, together with accrued interest thereon, upon consummation of
this offering and (ii) purchased research and development in connection with the
CommHome Acquisition. In addition, the Company will incur non-cash charges of
$900,000 over a four-year period related to stock options issued in May 1998 to
Avi A. Fogel, President and Chief Executive Officer of the Company. Inasmuch as
the Company intends to increase its level of activities following the
consummation of this offering and will be required to make significant up-front
capital expenditures in connection with its sales and marketing and continuing
research and product development efforts, the Company anticipates that losses
will continue until such time, if ever, as the Company is able to attain sales
levels sufficient to support its operations. There can be no assurance that the
Company will ever achieve profitable operations. The Company's independent
auditors have included an explanatory paragraph in their report on the Company's
financial statements for the years ended December 31, 1996 and December 31,
1997, stating that certain factors raise substantial doubt about the Company's
ability to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Certain
Transactions" and Financial Statements.
Significant Capital Requirements; Working Capital Deficit; Dependence on
Proceeds for Plan of Operation; Continuing Need for Additional Financing. The
Company's capital requirements have been and will continue to be significant,
and its cash requirements have been exceeding its cash flow from operations. At
March 31, 1998, the Company had a working capital deficit of $2,283,000. As
7
<PAGE>
a result, the Company has been substantially dependent on private sales of
equity and debt securities to fund its operations. The Company is dependent on
the proceeds of this offering to implement its business plan and finance its
working capital requirements. The Company anticipates, based on currently
proposed plans and assumptions relating to the implementation of its business
plan (including the timetable of, costs and expenses associated with, and
success of, its marketing efforts), that the net proceeds of this offering,
together with projected revenues from operations, will be sufficient to satisfy
the Company's operations and capital requirements for approximately twelve
months following the consummation of this offering. There can be no assurance,
however, that such funds will not be expended prior thereto due to unanticipated
changes in economic conditions or other unforeseen circumstances. In the event
the Company's plans change or its assumptions change or prove to be inaccurate
(due to unanticipated expenses, difficulties, delays or otherwise) or the net
proceeds of this offering and projected revenues otherwise prove to be
insufficient to fund the implementation of the Company's business plan or
working capital requirements, the Company could be required to seek additional
financing sooner than currently anticipated. The Company has no current
arrangements with respect to any additional financing. Consequently, there can
be no assurance that any additional financing will be available to the Company
when needed, on commercially reasonable terms or at all. Any inability to obtain
additional financing when needed would have a material adverse effect on the
Company, requiring it to curtail and possibly cease its operations. In addition,
any additional equity financing may involve substantial dilution to the
interests of the Company's then existing stockholders. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Uncertainty of Market Acceptance of Products. The future success of the
Company is largely dependent upon market acceptance of its FireWall/Plus family
of software products. The network security market is at an early stage of
development and is rapidly evolving. Accordingly, demand for the Company's
products and market acceptance are subject to a high level of uncertainty. While
the Company believes that its FireWall/Plus family of software products offers
advantages over competing products for network security, sales of FireWall/Plus
products since introduction (June 1995) through March 31, 1998 have been only
$2,437,000. There can be no assurance that FireWall/Plus will gain market
acceptance. Revenues from such products depend on a number of factors, including
the influence of market competition, technological changes in the network
security market, the Company's ability to design, develop and introduce
enhancements on a timely basis, and the ability of the Company to successfully
establish and maintain distribution channels. Moreover, there are commercially
available competitive products, offered by companies with significantly greater
resources than the Company, which have comparable or more favorable price
characteristics and which may be perceived to have performance characteristics
comparable to the Company's products. In addition, the Company anticipates the
introduction of additional competitive products, particularly if the demand for
network security products continues to increase. Existing and future competition
may make it more difficult to achieve market acceptance for FireWall/Plus.
Additionally, potential customers may be reluctant to purchase the Company's
products due to significant investments in other network security products.
Consequently, although the Company intends to utilize a significant portion of
the proceeds of this offering to expand its marketing and sales activities,
there can be no assurance that such funds will be sufficient, that the Company's
increased marketing efforts and expenditures will result in significant levels
of revenue or that the FireWall/Plus family of products will achieve significant
market acceptance. Moreover, a highly publicized breach of network security
involving the Company's products could adversely affect public
8
<PAGE>
perception of, and confidence in, the Company's products. See "Use of Proceeds,"
"Business - Sales and Marketing" and "Business -- Competition."
Limited Marketing Capabilities and Experience; Dependence Upon Third-Party
Marketing Arrangements. The Company has not yet undertaken significant marketing
efforts relating to product commercialization, has limited marketing experience
and has limited financial, personnel and other resources to undertake extensive
marketing activities independently. Accordingly, the Company has relied and
intends to continue to rely to a large extent on arrangements with third parties
for the marketing and distribution of its products, including arrangements with
VARs, systems integrators, resellers, distributors and OEMs. The Company has
only recently entered into marketing arrangements with most of its distributors
and, to date, most of such arrangements have generated limited revenues. For the
year ended December 31, 1997 and the three months ended March 31, 1998, the
Company's five largest distributors accounted for an aggregate of approximately
28% and 40% of the Company's revenues, respectively. Trusted Information
Systems, Inc. (as a result of a non-refundable pre-paid royalty) and Electronic
Data Systems Corporation ("EDS") accounted for 21% and 14%, of the Company's
revenues, respectively, for the year ended December 31, 1997, and The Sabre
Group, Inc. and Omnicon Systems, Inc. accounted for 24% and 13% of the Company's
revenues, respectively, for the three months ended March 31, 1998. The Company's
prospects will be dependent upon its ability to develop and maintain strategic
marketing relationships with additional third parties and upon the marketing and
distribution efforts of its third-party distributors. While the Company believes
that the third parties with which it enters into marketing arrangements have an
economic incentive to commercialize the Company's products, the time and
resources devoted to these activities will be contributed and controlled by such
third parties. Many of the Company's third-party distributors represent various
product lines, including those competing with the Company's products. A decline
in the prospects of key distributors could have an adverse effect on the
Company. There can be no assurance that the Company will be able, for financial
or other reasons, to finalize any additional third-party distribution or
marketing arrangements, maintain its existing marketing and distribution
arrangements or that any such arrangements will result in the successful
commercialization of the Company's products. See "Business - Sales and
Marketing."
Competition. The network security market in general, and the firewall
product market in particular, is characterized by intense competition and
rapidly changing business conditions, customer requirements and technologies.
The Company believes that the principal competitive factors affecting the market
for network security products include security effectiveness, scope of product
offerings, name recognition, product features, distribution channels, price,
ease of use and customer service and support. Currently, the Company's principal
competitors include AXENT Technologies Inc., Bay Networks, Inc., CheckPoint
Software Technologies, Ltd., Cisco Systems, Inc., Compaq Computer Corporation,
Cyberguard Corp., International Business Machines Corporation, ISS Group, Inc.,
Microsoft Corporation, Network Associates, Inc. and Secure Computing
Corporation. Due to the rapid expansion of the network security market, the
Company may face competition from new entrants to the firewall product market.
Most of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases and possess
substantially greater financial, technical and marketing and other competitive
resources than the Company. As a result, the Company's competitors may be able
to adapt more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the promotion and sale of their
products than the Company. While the Company believes that its firewall products
do not compete against manufacturers of other types of security products (such
as encryption
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and authentication products), there can be no assurance that potential customers
will not perceive the products of such other companies as substitutes for the
Company's products. In addition, certain of the Company's competitors may
determine for strategic reasons to consolidate, to substantially lower the price
of their network security products or to bundle their products with other
products, such as hardware or other enterprise software products. Accordingly,
it is possible that new competitors and alliances among competitors may emerge
and rapidly acquire significant market share. There can be no assurance that the
Company's current and potential competitors will not develop products that may
be more effective than the Company's current or future products or that the
Company's products would not be rendered obsolete or less marketable by evolving
technologies or changing consumer demands or that the Company will otherwise be
able to compete successfully. Increased competition for firewall products may
result in price reductions and reduced gross margins and may adversely effect
the Company's ability to gain market share, any of which would adversely affect
the Company's business, operating results and financial condition. See "Business
- - Competition."
Rapid Technological Change; Potential Product Obsolescence. The network
security industry is characterized by rapid technological advances, increasingly
sophisticated and changing customer requirements, frequent new product
introductions and enhancements, new and continuously evolving network security
threats and attack methodologies and evolving industry standards in computer
hardware and software technology. As a result, the Company must continually
change and improve its products in response to such advances and changes in
operating systems, application software, computer and communications hardware,
networking software, programming tools and computer language technology. The
introduction of products embodying new technologies and the emergence of new
industry standards may render existing products obsolete or unmarketable. The
Company's future operating results will depend upon the Company's ability to
enhance its current products and to develop and introduce new products on a
timely basis that address the increasingly sophisticated needs of the
marketplace and that keep pace with technological developments, new competitive
product offerings and emerging industry standards. There can be no assurance
that the Company will be successful in developing and marketing new products or
product enhancements that respond to technological change and evolving industry
standards and customer requirements, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that any new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. In the event that the Company does not respond
adequately to the need to develop and introduce new products or enhancements of
existing products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, operating results and
financial condition will be materially adversely affected. See "Business -
Product Development."
Unproven Market for Internal Network Security Products. Many of the
Company's competitors in the firewall market have largely devoted their
resources to the development and marketing of perimeter firewall products ("IP
Firewalls") designed primarily to protect an internal network from internet
based security threats or threats from within intranets. While TCP/IP is a
dominant network transport protocol, network environments often use other
network transport protocols such as Novell's IPX, Digital Equipment's DECnet and
IBM's SNA. The Company believes that the ability of the FireWall/Plus technology
to filter all commonly used network transport protocols and reside in multiple
locations throughout the enterprise network offers significant advantages as a
security product for internal networks. However, the Company's limited sales to
date have not established that, in fact, this is a significant marketing
advantage. The Company's future
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success depends in large part on the Company's ability to successfully market
its technology and the increased awareness and demand in the market for the need
to address security threats that arise from within internal networks which may
require substantial marketing efforts and the expenditure of significant funds.
Furthermore, firewall vendors and other vendors of network security products
with substantially greater financial, technical and marketing resources than the
Company may modify existing security products or develop new products which
would address the internal network security market. The Company's failure to
successfully implement marketing efforts emphasizing the internal network
security market would have a material adverse effect on its business, financial
condition and results of operations in the future. See "Business - Network-1
Strategy" and "Business - FireWall/Plus Technology."
Significant Fluctuations in Quarterly Operating Results. The Company
anticipates significant quarterly fluctuations in its operating results in the
future. The Company generally ships orders for commercial products as they are
received and, as a result, does not have any material backlog. As a result,
quarterly revenues and operating results depend on the volume and timing of
orders received during the quarter, which are difficult to forecast. Operating
results may also fluctuate on a quarterly basis due to factors such as the
demand for the Company's products, purchasing patterns and budgeting cycles of
customers, the introduction of new products and product enhancements by the
Company or its competitors, market acceptance of new products introduced by the
Company or its competitors and the size, timing, cancellation or delay of
customer orders, including cancellation or delay in anticipation of new product
introduction or enhancement. Therefore, comparisons of quarterly operating
results may not be meaningful and should not be relied upon, nor will they
necessarily reflect the Company's future performance. Because of the foregoing
factors, it is likely that in some future quarters the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Common Stock would likely be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Proposed Expansion; Management of Growth; Need for Qualified Personnel.
Following the consummation of this offering, the Company intends to use a
substantial portion of the proceeds to expand its current level of operations
and expects to significantly increase the number of its employees. This growth
will result in an increase in responsibilities placed upon the Company's
management and will place added pressures on the Company's operating and
financial resources. The Company's success will be dependent in part on its
ability to manage its growth, recruit additional management personnel, expand
its sales and marketing personnel and research and development staff, improve
its operational and financial systems, expand its customer support functions and
train, motivate and manage additional employees, monitor operations and control
costs. Competition with respect to the recruiting of highly qualified personnel
in the software industry is intense and many of the Company's competitors have
significantly greater resources than the Company. The Company's ability to
attract and assimilate new personnel will be critical to the Company's
performance and there can be no assurance that the Company will be successful in
attracting and retaining the personnel it requires to enhance its products,
develop new products and conduct its operations successfully. Moreover, the
Company may seek to expand its operations by acquiring businesses, technologies
or products which it believes are complimentary with its business. Except for
the CommHome Acquisition, the Company has no definitive plans with respect to
and is not currently involved in negotiations relating to any acquisitions. The
consummation of any such
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acquisition would place additional burden on management and financial resources.
See "Business - CommHome Systems Corp. Acquisition."
Limited Protection of Proprietary Rights; Reliance on Trade Secrets. The
Company's success is substantially dependent on its proprietary technologies.
The Company does not hold any patents and relies on copyright and trade secret
laws, non-disclosure agreements with employees, distributors and customers,
including "shrink wrap" license agreements that are not signed by the customer,
and technical measures to protect the ideas, concepts and documentation of its
proprietary technologies and know-how to protect its intellectual property
rights. Such methods may not afford complete protection, and there can be no
assurance that third parties will not independently develop substantially
equivalent or superior technologies or obtain access to the Company's
technologies, ideas, concepts and documentation. In addition, there can be no
assurance that any confidentiality agreements between the Company and its
employees, distributors or customers will provide meaningful protection for the
Company's proprietary information in the event of any unauthorized use or
disclosure. Furthermore, the Company may be subject to additional risk as it
enters into transactions in countries where intellectual property laws are not
well developed or are poorly enforced. Legal protection of the Company's rights
may be ineffective in such countries. The inability of the Company to protect
its proprietary technologies could have a material adverse effect on the
Company. The Company also licenses from a third-party certain proxy technology
which is incorporated into its FireWall/Plus products. The Company is dependent
in part on its ability to continue to license such technology and any inability
of the Company to be able to continue to utilize such technology either as a
result of the Company's breach or the termination of the license agreement or
otherwise, in the absence of similar available technologies, could have a
material adverse effect on the Company.
The Company received a U.S. trademark registration for the FireWall/Plus
name in December 1996. Although the Company is not aware of any challenges to
the Company's rights to use this trademark, there can be no assurance that the
use of this mark would be upheld if challenged. See "Business - Proprietary
Rights."
Potential Infringement on Intellectual Property Rights of Others.
Although the Company believes that its technologies and products have been
developed independently and do not infringe upon the proprietary rights of
others, there can be no assurance that the Company's technologies and
products do not and will not so infringe or that third parties will not
assert infringement claims against the Company in the future. The Company is
not aware of any patent infringement charge or any violation of other
proprietary rights claimed by any third party relating to the Company or the
Company's products. In response to certain public statements made by
CheckPoint Software Technologies, Ltd. related to a patented technology
referred to as "stateful inspection" (the "Checkpoint Patent"), the Company
retained patent counsel in April 1997 to review the Checkpoint Patent as
compared to the Company's intellectual property and associated products.
Based upon the opinion of the Company's intellectual property counsel, the
Company does not believe that the CheckPoint Patent will have a material
adverse effect on the Company. If, however, the Company's technologies or
products were deemed to infringe upon the Checkpoint Patent, or if the
Company's technologies or products were deemed to infringe upon the
proprietary rights of other third parties, the Company could become liable
for damages or be required to modify its products or to obtain a license. As
the number of and variety of security products being offered continue to
increase the functionality of such products may further overlap, which could
result in increased infringement claims by software developers, including
infringement claims against the Company with respect to
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<PAGE>
future products. There can be no assurance that the Company would be able to
modify its products or obtain a license in a timely manner, upon acceptable
terms and conditions, or at all, or that the Company will have the financial or
other resources necessary to defend a patent infringement or other proprietary
rights infringement action. Failure to do any of the foregoing could have a
material adverse effect on the Company, including possibly requiring the Company
to cease marketing its products. See "Business - Proprietary Rights."
Dependence on Sales of Limited Product Line; Non-Recurring Revenues. Since
1996, a substantial portion of the Company's sales have been derived from the
sale of its FireWall/Plus products. For the year ended December 31, 1997 and the
three months ended March 31, 1998, sales of FireWall/Plus products accounted for
approximately 60% and 58% of the Company's revenues, respectively. A decline in
sales of FireWall/Plus products would have a material adverse effect on the
Company. In addition, sales of the Company's products are generally
non-recurring in nature. There can be no assurance that the Company will not
remain dependent upon non-recurring sales of FireWall/Plus products to a limited
number of customers, which sales could constitute a considerable portion of the
Company's revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on Continued Growth of the Internet and Internal Networks. Since
the Company's products are designed to protect internal networks from
unauthorized access and attacks via the Internet and from within internal
networks, the Company's success is substantially dependent upon the widespread
acceptance and use of the Internet, intranets and extranets as effective means
of communication and commerce. Rapid growth in the use of and interest in the
Internet, intranets and extranets is a recent phenomenon, and there can be no
assurance that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt and continue to use the
Internet, intranets and extranets as means of communication and commerce. The
Internet may not be accepted as a viable commercial marketplace for a number of
reasons, including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies and performance
improvements. If use of the Internet does not continue to grow or grows more
slowly than expected, if the infrastructure for the Internet does not
effectively support growth that may occur, or if the Internet and online
services do not become a viable commercial marketplace, market demand for the
Company's products may not develop or be maintained. See "Business -- Industry
Background."
Focus on Windows NT Platform. Currently, the Windows NT operating system is
the principal platform for the Company's FireWall/Plus family of products.
According to a recent International Data Corporation survey, Windows NT
shipments are expected to assume a majority market share by 1999. While the
Windows NT platform is perceived to have security weaknesses, many of the
Company's competitors currently offer Windows NT based firewalls and the Company
believes that the use of Windows NT as the preferred operating system will
continue to grow dramatically over the next five years. In the event that demand
for Windows NT based firewalls declines, or other platforms become the preferred
platforms, and the Company is unable to adapt its products to the preferred
platforms on a timely basis, the Company's business, financial condition and
results of operations may be materially adversely affected. See "Business --
Industry Background" and "Business -- FireWall/Plus Technology."
Potential Liability Exposure. Since the Company's products are network
security products and are used to prevent unauthorized access to and attacks
upon critical enterprise information, the
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<PAGE>
Company may be exposed to potential liability claims for damage caused to a
network as a result of an actual or alleged failure of an installed product.
Although the Company's license agreements typically contain provisions that are
designed to limit the Company's exposure to potential product liability or
related claims, including provisions that limit the Company's liability for
special, consequential or incidental damages, there can be no assurance that
such provisions will be enforceable under the laws of applicable domestic or
foreign jurisdictions. The Company's consulting engagements often involve
development, implementation and maintenance of networking systems that are
critical to the operations of its clients' businesses. The Company's failure or
inability to meet a client's expectations in the performance of its services
could harm the Company's business reputation or result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure or inability. In addition, in the course of
performing services, the Company's personnel often gain access to technologies
and content which include confidential or proprietary client information. Any
unauthorized disclosure or use of such information could result in a claim for
substantial damages. The Company currently maintains product liability insurance
coverage in the amount of $1,000,000 per occurrence ($2,000,000 in the
aggregate) that, subject to customary exclusions, covers claims resulting from
failure of the Company's products or services to perform the function or to
serve the purpose intended. There can be no assurance that the Company's
insurance will be sufficient to cover potential claims or that adequate levels
of coverage will be available in the future at reasonable cost. A partially or
completely uninsured successful claim against the Company could have a material
adverse effect on the Company. See "Business - Proprietary Rights."
Risk of Product Defects. Software products as complex as those offered by
the Company may contain undetected errors or result in failures when first
introduced or when new versions are released. In particular, the personal
computer hardware environment is characterized by a wide variety of non-standard
configurations that make pre-release testing for programming or compatibility
errors very difficult and time-consuming. Despite testing by the Company and by
current and potential customers, there can be no assurance that errors will not
be found in new products or enhancements after commencement of commercial
shipments. The occurrence of these errors could result in adverse publicity,
loss of or delay in market acceptance, claims by customers against the Company,
or could cause the Company to incur additional costs, any of which could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Business - Products" and "Business - Product
Development."
Lengthy Sales Cycle. Licensing of the Company's software products generally
involves a significant commitment of capital by customers, with the attendant
delays frequently associated with large capital expenditures. Accordingly, the
sales cycle for the Company's products can be lengthy and generally commences at
the time a prospective customer demonstrates an interest in purchasing a
FireWall/Plus solution, typically includes a 30-day free evaluation period and
ends upon execution of a purchase order by the customer. The length of the sales
cycle varies depending on the type and sophistication of the customer and the
complexity of the operating system and may extend for periods of six to nine
months. As a result of the Company's lengthy sales cycle, sales of the Company's
products generally require the Company to make expenditures and use significant
resources prior to receipt, if any, of corresponding revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Licensing in Foreign Markets. The Company relies on sales of software
licenses in foreign customers for a portion of its revenues. For the years ended
December 31, 1996 and 1997 and the
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three months ended March 31, 1998, licensing of the Company's software products
to foreign customers accounted for approximately 6.7%, 15.6% and 2.7%,
respectively, of the Company's revenues. The Company is seeking to increase the
licensing of its products in foreign markets, but there can be no assurance that
the Company will be successful or that such markets will prove to be viable. To
the extent that the Company is able to successfully expand its licenses to
foreign markets, the Company will become increasingly subject to risks inherent
in foreign trade, including shipping delays, increased collection risks, trade
restrictions, export duties and tariffs and international political, regulatory
and economic developments, all of which could have an adverse effect on the
Company's operating margins and results of operations and exacerbate the risks
inherent in the Company's business. The Company may seek to limit its exposure
to the risk of currency fluctuations by engaging in foreign currency hedging
transactions that could expose the Company to substantial risk of loss. The
Company is not currently engaged in any currency hedging or other activities
involving derivative financial instruments. The Company has limited experience
in managing international transactions and has not yet formulated a strategy to
protect the Company against currency fluctuations. See "Business - Sales and
Marketing."
Dependence Upon Key Personnel; New Management. The success of the Company
will be largely dependent on the personal efforts of Avi A. Fogel, President and
Chief Executive Officer, William Hancock, Chief Technology Officer, and Robert
P. Olsen, Vice President of Product Management. Although the Company has entered
into employment agreements with each of Messrs. Fogel, Hancock and Olsen, the
loss of the services of any of such officers could have a material adverse
effect on the Company's business and prospects. Prior to the consummation of
this offering, the Company will obtain "key-man" life insurance on each of the
lives of Messrs. Fogel, Hancock and Olsen in the amounts of $2,000,000,
$3,000,000 and $2,000,000, respectively. Messrs. Fogel and Olsen as well as
Murray P. Fish, Chief Financial Officer, only joined the Company in May 1998. In
addition, Joseph A. Donohue, Vice President of Engineering, only joined the
Company in July 1998. There can be no assurance that such officers will become
sufficiently familiar with the Company's operations on a timely basis, or at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Management."
Control by Management. Upon consummation of this offering, the Company's
officers and directors, will beneficially own, in the aggregate, approximately
34.8% of the outstanding Common Stock. Accordingly, such persons will continue
to exert significant influence over the outcome of all matters submitted to a
vote of the holders of Common Stock, including the election of directors,
amendments to the Company's Certificate of Incorporation and approval of
significant corporate transactions. Such consolidation of voting power could
also have the effect of delaying, deterring or preventing a change in control of
the Company that might be beneficial to other stockholders. See "Management" and
"Principal Stockholders."
Use of Proceeds to Repay Indebtedness and Trade Payables; Benefits to
Related Parties; Broad Discretion in Application of Proceeds. The Company has
allocated approximately $3,537,000 (27.9%) of the net proceeds of this offering
to repay outstanding indebtedness including $1,900,000 principal amount of
notes, plus accrued interest thereon, payable to Applewood Associates, L.P., a
principal stockholder of the Company, $200,000 principal amount of notes plus
accrued interest thereon, payable to CMH Capital Management Corp., whose sole
stockholder is Corey Horowitz, Chairman of the Board of Directors and a
principal stockholder of the Company, and $50,000 principal amount of a note
plus interest payable to Mr. Horowitz. Furthermore, the Company has allocated
approximately $500,000 to pay past due trade payables upon consummation of this
offering.
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In addition, simultaneously with the consummation of this offering, the Company
is acquiring CommHome Systems Corp. ("CommHome"), of which Avi A. Fogel is
President and Chief Executive Officer and a principal stockholder, in exchange
for 35,000 shares of Common Stock and the assumption of up to $200,000 of
liabilities, of which $55,000 and $50,000 are owed to Mr. Fogel and Robert P.
Olsen, Vice President of Product Management, respectively. Messrs. Fogel and
Olsen have agreed to cancel such obligations in exchange for the issuance of
6,875 and 6,250 shares of Common Stock, respectively, upon the consummation of
this offering. Approximately $1,895,000 (14.9%) of the estimated net proceeds of
this offering has been allocated to working capital and general corporate
purposes. Management will have broad discretion as to the application of such
proceeds. Furthermore, to the extent cash flow from operations is insufficient
for such purposes, a portion of the proceeds allocated to working capital may be
utilized to pay a portion of the salary of the Company's officers (such
aggregate salaries estimated to be approximately $970,000) over the twelve
months following the consummation of this offering. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions."
Immediate and Substantial Dilution. This offering involves an immediate and
substantial dilution of $5.35 per share (or 66.9%) between the adjusted net
tangible book value per share of Common Stock after this offering and the
initial public offering price per share. See "Dilution."
No Dividends. The Company has never paid any dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company currently intends to retain all earnings for use in connection with the
operation and expansion of its business. The declaration and payment of future
dividends, if any, will be at the sole discretion of the Company's Board of
Directors and will depend upon a variety of factors, including future earnings,
if any, operations, capital requirements, the general financial condition of the
Company, the preferences of any series of Preferred Stock which may be
designated in the future, the general business conditions and future contractual
restrictions on payments of dividends, if any. See "Dividend Policy" and
"Description of Securities - Common Stock."
Shares Eligible for Future Sale; Registration Rights. Upon the consummation
of this offering, the Company will have 4,508,369 shares of Common Stock
outstanding, of which the 1,875,000 shares being offered hereby will be freely
tradeable without restriction or further registration under the Securities Act.
All of the remaining 2,633,369 shares of Common Stock outstanding are
"restricted securities," as that term is defined in Rule 144 promulgated under
the Securities Act, and in the future may be sold only pursuant to an effective
registration statement under the Securities Act, in compliance with the
exemption provisions of Rule 144, on various dates commencing 90 days following
the date of this Prospectus, or pursuant to another exemption under the
Securities Act. The Company has granted certain registration rights with respect
to an aggregate of 1,117,435 shares of Common Stock, and the Company has granted
the Underwriter demand and piggyback registration rights with respect to the
shares of Common Stock issuable upon exercise of the Underwriter's Warrants. No
prediction can be made as to the effect, if any, that sales of such securities
or the availability of such securities for sale will have on the market prices
prevailing from time to time. While all of the Company's securityholders,
including the Company's officers and directors, have agreed not to (i) sell or
otherwise dispose of any shares of Common Stock in any public market transaction
(including pursuant to Rule 144) or (ii) exercise any registration rights for a
period of twelve months following the date of this Prospectus without the
Underwriter's prior written consent, the possibility that a substantial number
of the Company's securities may be sold in the public market
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<PAGE>
may adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities. See "Description of Securities" and "Shares Eligible for Future
Sale."
Significant Outstanding Options and Warrants; Potential Adverse Effect on
Market Price of Common Stock. Upon the consummation of this offering, there will
be outstanding options and warrants to purchase an aggregate of 1,242,294 shares
of Common Stock (including 187,500 shares of Common Stock issuable upon exercise
of the Underwriter's Warrants) at exercise prices ranging from $1.61 to $13.20
per share. To the extent that outstanding options and warrants are exercised,
dilution to the percentage ownership of the Company's stockholders will occur
and any sales in the public market of the Common Stock underlying such options
and warrants may adversely affect prevailing market prices for the Common Stock.
Moreover, the terms upon which the Company will be able to obtain additional
equity capital may be adversely effected since the holders of outstanding
options and warrants can be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain any needed capital on terms more
favorable to the Company than those provided in the outstanding options and
warrants. See "Management - Stock Option Plan," "Description of Securities -
"Warrants and Options" and "Underwriting."
No Assurance of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Market Price of Common Stock. Prior to this offering,
there has been no public trading market for the Common Stock. There can be no
assurance that a regular trading market for the Common Stock will develop after
this offering or that, if developed, it will be sustained. The initial public
offering price of the Common Stock has been determined arbitrarily by
negotiation between the Company and the Underwriter and is not necessarily
related to the assets, book value or potential earnings of the Company or any
other recognized criteria of value and may not be indicative of the prices that
may prevail in the public market. In addition, the market price for the Common
Stock following this offering may be highly volatile as has been the case with
the securities of other companies in emerging businesses. Factors such as the
Company's operating results, announcements of the Company or its competitors,
introduction of new products or technologies by the Company or its competitors
and various factors affecting the network security industry generally or the
market for firewall products in particular may have a significant impact on the
market price of the Common Stock. Additionally, in recent years, the stock
market has experienced a high level of price and volume volatility and market
prices for the stock of many companies, particularly of small and emerging
growth companies, the common stock of which trade in the over-the-counter
market, have experienced wide price fluctuations which have not necessarily been
related to the operating performance of such companies. See "Underwriting."
Possible Delisting of Securities from Nasdaq System; Risks Relating to
Low-Priced Stocks. It is currently anticipated that the Common Stock will be
eligible for listing on Nasdaq upon the completion of this offering. In order to
continue to be listed on Nasdaq, however, the Company must maintain $2,000,000
in net tangible assets (total assets, other than goodwill, less total
liabilities), and a $1,000,000 market value of the public float. In addition,
continued inclusion requires two market-makers, a minimum bid price of $1.00 per
share and adherence to certain corporate governance provisions. The failure to
meet these maintenance criteria in the future may result in the delisting of the
Common Stock from Nasdaq, and trading, if any, in the Common Stock would
thereafter be conducted in the non-Nasdaq over-the-counter market. As a result
of such delisting, an investor could find it more difficult to dispose of or to
obtain accurate quotations as to the market value of the Common Stock.
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In addition, if the Common Stock were to become delisted from trading on
Nasdaq and the trading price of the Common Stock were to fall below $5.00 per
share, trading in the Common Stock would also be subject to the requirements of
certain rules promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
defined as an investor with a net worth in excess of $1,000,000 or annual income
exceeding $200,000 individually or $300,000 together with a spouse). For these
types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to the sale. The broker-dealer also must
disclose the commissions payable to the broker-dealer, current bid and offer
quotations for the penny stock and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Such information must be provided to the
customer orally or in writing before or with the written confirmation of trade
sent to the customer. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The additional burdens imposed upon
broker-dealers by such requirements could, in the event the Common Stock were
deemed to be a penny stock, discourage broker-dealers from effecting
transactions in the Common Stock which could severely limit the market liquidity
of the Common Stock and the ability of purchasers in this offering to sell the
Common Stock in the secondary market.
Adverse Effect of the Authorization of Preferred Stock; Anti-Takeover
Provisions Affecting Stockholders. The Company's Certificate of Incorporation
authorizes the Company's Board of Directors to issue 5,000,000 shares of "blank
check" Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares, without further
stockholder approval. The rights of the holders of Common Stock will be subject
to and may be adversely affected by the rights of holders of any Preferred Stock
that may be issued in the future. The ability to issue Preferred Stock without
stockholder approval could have the effect of making it more difficult for a
third party to acquire a majority of the voting stock of the Company thereby
delaying, deferring or preventing a change in control of the Company. Moreover,
following the consummation of this offering, the Company will be subject to the
State of Delaware's "business combination" statute, which prohibits a
publicly-traded Delaware corporation from engaging in various business
combination transactions with any of its 15% stockholders for a period of three
years after the date of the transaction in which the person became an
"interested stockholder," unless certain approvals are obtained or other events
occur. The statute could prohibit or delay mergers or other attempted takeovers
or changes in control with respect to the Company and, accordingly, may
discourage attempts to acquire the Company. See "Description of Securities."
Tax Loss Carryforward. The Company's net operating loss carryforwards
("NOLs") expire in the years 2009 to 2012. Under Section 382 of the Internal
Revenue Code of 1986, as amended, utilization of prior NOLs is limited after an
ownership change, as defined in Section 382, to an annual amount equal to the
value of the corporation's outstanding stock immediately before the date of the
ownership change multiplied by the federal long-term date exempt tax rate. The
additional equity financing obtained by the Company in connection with recent
financings and this offering may result in an ownership change and, thus, in a
limitation on the Company's use of its prior NOLs. In the
18
<PAGE>
event the Company achieves profitable operations, any significant limitation on
the utilization of its NOLs would have the effect of increasing the Company's
tax liability and reducing net income and available cash reserves. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note H to Notes to Financial Statements.
Limitations on Liability of Directors and Officers. The Company's
Certificate of Incorporation includes provisions to eliminate, to the full
extent permitted by Delaware General Corporation Law as in effect from time to
time, the personal liability of directors of the Company for monetary damages
arising from a breach of their fiduciary duties as directors. The Certificate of
Incorporation also includes provisions to the effect that the Company'shall, to
the maximum extent permitted from time to time under the law of the State of
Delaware, indemnify any director or officer to the extent that such
indemnification and advancement of expense is permitted under such law, as it
may from time to time be in effect. In addition, the Company's By-laws require
the Company to indemnify, to the fullest extent permitted by law, any director,
officer, employee or agent of the Company for acts which such person reasonably
believes are not in violation of the Company's corporate purposes as set forth
in the Certificate of Incorporation. See "Management - Limitation of Liability
and Indemnification Matters."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,875,000 shares of
Common Stock offered hereby, (after deducting underwriting discounts and
commissions and other expenses of the offering) are estimated to be
approximately $12,692,000 ($14,672,000 if the Underwriter's over-allotment
option is exercised in full). The Company expects to use the net proceeds
(assuming no exercise of the Underwriter's over-allotment option) during the
twelve months following this offering approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Application of Net Proceeds Dollar Amount Net Proceeds
- --------------------------- ------------- ------------
<S> <C> <C>
Sales and marketing(1) $3,860,000 30.4 %
Repayment of outstanding indebtedness(2) 3,537,000 27.9
Software development(3) 2,100,000 16.6
Computer equipment(4) 500,000 3.9
Payment of trade payables(5) 500,000 3.9
Relocation of offices(6) 300,000 2.4
Working capital and general corporate purposes(7) 1,895,000 14.9
------------ ------
Total $12,692,000 100.0 %
------------ ------
------------ ------
</TABLE>
- ----------
(1) Represents (i) approximately $2,460,000 for sales, marketing and
promotional activities related to the Company's software products and (ii)
approximately $1,400,000 for the salaries and related costs of up to 15
additional sales and marketing personnel. See "Business - Sales and
Marketing."
(2) Represents amounts to repay (i) $3,250,000 principal amount of promissory
notes (the "Notes") issued in private offerings from February 1997 through
May 1998, plus estimated accrued interest thereon at annual rates between
6% and 8%, including $1,900,000, $200,000 and $50,000 principal amount of
Notes held by Applewood Associates, L.P., a principal stockholder of the
Company, CMH Capital Management Corp., a corporation wholly-owned by Corey
M. Horowitz, Chairman of the Board of Directors and a principal stockholder
of the Company, and Mr. Horowitz, respectively, and (ii) approximately
$95,000 of certain liabilities assumed by the Company in connection with
the CommHome Acquisition and paid upon consummation of this offering. The
Company used the net proceeds from the issuance of the Notes for working
capital and general corporate purposes. See "Certain Transactions."
(3) Represents estimated costs associated with software development, including
the salaries of up to 17 additional software engineers and developers. See
"Business - Product Development."
(4) Represents expenditures to purchase hardware and software as well as
servers and test equipment for the Company's operations.
(5) Represents estimated past due trade payables to be paid upon the
consummation of this offering. See Financial Statements.
20
<PAGE>
(6) Represents costs associated with relocating the Company's principal office
location to the Boston, Massachusetts area, including rent and related
costs. See "Business - Facility."
(7) Represents amounts which may be used to pay a portion of the compensation
for executive officers (such aggregate salaries are estimated to be
$970,000 during the twelve months following the consummation of this
offering), rent, trade payables, consulting fees and professional fees.
If the Underwriter's over-allotment option is exercised in full, the Company
will realize additional net proceeds of $1,980,000, which will be allocated to
working capital and general corporate purposes.
The allocation of the net proceeds from this offering set forth above
represents the Company's best estimate based upon its currently proposed plans
and assumptions relating to its operations and certain assumptions regarding
general economic conditions. If any of these factors change, the Company may
find it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portions thereof for other purposes. The
Company may also use a portion of the net proceeds for the acquisition of
businesses, technologies, or products which it believes are complimentary to
those of the Company, although no such acquisitions are planned or being
negotiated as of the date of this Prospectus, except for the acquisition of
CommHome. See "Business - CommHome Systems Corp. Acquisition."
Based on currently proposed plans and assumptions relating to its
operations, and implementation of its business plan (including the timetable of
costs and expenses associated with, and success of, its marketing efforts)
the Company anticipates that the net proceeds of this offering, together with
projected revenues from operations, will be sufficient to fund the Company's
operations and capital requirements for approximately twelve months following
the consummation of this offering. There can be no assurance, however, that such
funds will not be expended prior thereto due to unanticipated changes in
economic conditions or other unforeseen circumstances. In the event the
Company's plans change or its assumptions change or prove to be inaccurate (due
to unanticipated expenses, difficulties, delays or otherwise) or the net
proceeds of this offering and projected revenues otherwise prove to be
insufficient to fund the implementation of the Company's business plan or
working capital requirements, the Company could be required to seek additional
financing sooner than currently anticipated. The Company has no current
arrangements with respect to any additional financing. Consequently, there can
be no assurance that any additional financing will be available to the Company
when needed, on commercially reasonable terms or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, or other similar short-term, interest bearing
investments.
21
<PAGE>
DILUTION
The difference between the initial public offering price per share of Common
Stock and the net tangible book value per share of Common Stock after this
offering constitutes the dilution to investors in this offering. Net tangible
book value per share is determined by dividing the net tangible book value of
the Company (total tangible assets less total liabilities) by the number of
outstanding shares of Common Stock.
At March 31, 1998, the negative net tangible book value of the Company was
($572,000) or $(.34) per share ($.07 per share, on a pro forma basis after
giving effect to the Pro Forma Adjustments(see footnote 2 of "Prospectus
Summary--Summary Financial Information")). After also giving effect to the sale
by the Company of the 1,875,000 shares of Common Stock offered hereby (after
deducting underwriting discounts and commissions and estimated expenses of this
offering) and the Additional Adjustments (see footnote 3 of "Prospectus Summary
- -- Summary Financial Information"), the adjusted net tangible book value of the
Company at March 31, 1998 would have been $11,935,000, or $2.65 per share,
representing an immediate increase in net tangible book value of $2.58 per share
to the existing stockholders and an immediate dilution of $5.35 per share to new
investors. The following table illustrates the foregoing information with
respect to dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price .................................... $ 8.00
Pro forma net tangible book value before offering ................ $ .07
Increase attributable to new investors ........................... 2.58
--------
Adjusted net tangible book value after offering .................. 2.65
--------
Dilution per share to new investors .............................. $ 5.35
--------
--------
</TABLE>
The following table sets forth, with respect to the Company's existing
stockholders (after giving effect to the Pro Forma Adjustments and the
Additional Adjustments) and new investors in this offering, a comparison of the
number of shares of Common Stock acquired from the Company, the percentage
ownership of such shares, the total consideration paid, the percentage of total
consideration paid and the average price per share.
<TABLE>
<CAPTION>
Average
Price per
Shares Purchased Total Consideration Share
---------------------- ----------------------- ----------
Number Percent Amount Percent
--------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders............... 2,633,369 58.4% $ 7,215,000 32.5% $ 2.74
New Investors....................... 1,875,000 41.6 15,000,000 67.5 8.00
--------- ------ ------------ ------
Total............................... 4,508,369 100.0% $22,215,000 100.0%
--------- ------ ------------ ------
--------- ------ ------------ ------
</TABLE>
The above tables assume no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, the new investors will have paid
$17,250,000 for 2,156,250 shares of Common Stock, representing approximately
70.5% of the total consideration, for 45.0% of the total number of shares of
Common Stock outstanding. In addition, the above tables do not give effect to
shares issuable upon exercise of outstanding warrants and options to purchase
1,242,294 shares of Common Stock, including options to purchase 423,908 shares
of Common Stock issued under the Stock Option Plan and 187,500 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Management -- Stock Option Plan," Description of Securities -- Warrants and
Options" and "Underwriting."
22
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay cash or other dividends in the
foreseeable future. The Board of Directors currently expects to retain any
future earnings for use in the operation and expansion of its business. The
declaration and payment of any future dividends will be at the discretion of the
Board of Directors and will depend upon a variety of factors, including future
earnings, if any, operations, capital requirements, the general financial
condition of the Company, the preferences of any series of Preferred Stock which
may be designated in the future, the general business conditions and future
contractual restrictions on payment of dividends, if any.
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
March 31, 1998, (ii) the pro forma capitalization at such date after giving
effect to the Pro Forma Adjustments (see footnote 2 of "Prospectus
Summary--Summary Financial Information"), and (iii) the pro forma capitalization
as adjusted to give effect to the sale of the Common Stock offered hereby, the
anticipated application of the estimated net proceeds therefrom and the
Additional Adjustments (see footnote 3 of "Prospectus Summary -- Summary
Financial Information"). The information set forth below should be read in
conjunction with the Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
March 31, 1998
------------------------------------------------------
Actual Pro Forma As Adjusted
---------------- ---------------- ------------------
<S> <C> <C> <C>
Short-term debt............................................... $ 1,621,000 $ 2,380,000 --
----------- ------------ ------------
----------- ------------ ------------
Stockholders' equity (deficit)(1):
Preferred Stock, $.01 par value, 5,000,000
shares authorized............................................
Series A Preferred Stock, no shares issued or outstanding,
actual, pro forma and as adjusted............................ -- -- --
Series B Preferred Stock, 500,000 shares
issued and outstanding, actual; no shares issued
and outstanding, pro forma and as adjusted................... 5,000 -- --
Common Stock, $.01 par value; 25,000,000 shares
authorized; 1,706,037 shares issued and outstanding,
actual; 2,585,244 shares issued and outstanding, pro forma;
4,508,369 shares issued and outstanding, as adjusted(2)...... 17,000 26,000 45,000
Additional paid-in capital.................................... 7,573,000 8,348,000 21,406,000
Accumulated deficit........................................... (8,167,000) (8,181,000) (9,516,000)
---------------- ---------------- ------------------
Total stockholders' equity (deficit)......................... (572,000) 193,000 11,935,000
---------------- ---------------- ------------------
Total capitalization......................................... $ (572,000) $ 193,000 $ 11,935,000
---------------- ---------------- ------------------
---------------- ---------------- ------------------
</TABLE>
- ----------
(1) See Note F to Notes to Financial Statements.
(2) Does not include (i) 423,908 shares of Common Stock issuable upon exercise
of stock options (of which options to purchase 168,546 shares were granted
as of March 31, 1998) under the Stock Option Plan, (ii) 630,886 shares of
Common Stock issuable upon exercise of other outstanding options and
warrants, and (iii) 187,500 shares of Common Stock reserved for issuance
upon exercise of the Underwriter's Warrants.
23
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1996
and December 31, 1997 and at December 31, 1997 have been derived from the
Company's audited financial statements. The following selected financial data
for the three month periods ended March 31, 1997 and 1998 and at March 31, 1998
have been derived from unaudited financial statements which have been prepared
on the same basis as the audited financial statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the information presented. The results
for the three month period ended March 31, 1998 are not necessarily indicative
of the results to be expected for any other interim period or the fiscal year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Financial Statements.
<TABLE>
<CAPTION>
Statement of Operations Data: Year Ended December 31, Three Months Ended March 31,
--------------------------- ----------------------------
1996 1997 1997 1998
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Revenues:
Licenses ........................ $ 624,000 $ 1,632,000 $ 346,000 $ 195,000
Services ........................ 403,000 737,000 133,000 144,000
------------ ------------ ------------ ------------
Total revenues .................. 1,027,000 2,369,000 479,000 339,000
Cost of revenues ................ 737,000 790,000 181,000 252,000
------------ ------------ ------------ ------------
Gross profit .................... 290,000 1,579,000 298,000 87,000
------------ ------------ ------------ ------------
Operating expenses:
Product development ............. 984,000 917,000 97,000 208,000
Selling and marketing ........... 1,614,000 926,000 326,000 140,000
General and administrative ...... 1,931,000 1,573,000 434,000 212,000
------------ ------------ ------------ ------------
Total operating expenses......... 4,529,000 3,416,000 857,000 560,000
------------ ------------ ------------ ------------
Loss from operations ............ (4,239,000) (1,837,000) (559,000) (473,000)
Interest expense ................ (260,000) (553,000) (31,000) (224,000)
------------ ------------ ------------ ------------
Net loss ........................ $(4,499,000) $(2,390,000) $ (590,000) $ (697,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per share (1) .............. (2.46) (1.29) (.30) (.41)
Weighted average number of shares
outstanding (1) ................ 1,825,163 1,855,244 1,942,872 1,706,037
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: December 31, 1997 March 31, 1998
----------------- ------------------------------------------------
Actual Actual Pro Forma As Adjusted
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents .......... $ 60,000 $ 67,000 $ 1,416,000 $ 10,766,000
Working capital (deficit) .......... (661,000) (2,283,000) (1,518,000) 8,702,000
Total assets ....................... 2,404,000 2,094,000 3,443,000 12,718,000
Total liabilities .................. 2,479,000 2,666,000 3,250,000 783,000
Accumulated deficit ................ (7,470,000) (8,167,000) (8,181,000) (9,516,000)
Total stockholders' equity (deficit) (75,000) (572,000) 193,000 11,935,000
</TABLE>
- ----------
(1) See Notes A and B to Notes to Financial Statements for an explanation of
shares used in pro forma net loss per share calculations.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Financial Statements, including the Notes thereto, included elsewhere
in this Prospectus. Except for the historical information contained herein, this
discussion contains forward-looking statements that involve risks and
uncertainties, including, without limitation, those concerning the Company's
strategy and growth plans. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause such
differences include, but are not limited to, those discussed under "Risk
Factors."
General
The Company develops, markets, licenses and supports a family of network
security software products designed to provide comprehensive security to
computer networks including Internet based systems and internal networks and
computing resources. The Company also offers to its customers a full range of
consulting services in network security, network design and support. From
inception (July 1990) through December 31, 1994, the Company was primarily
engaged in providing consulting and training services. In 1995, the Company
began to shift its focus from consulting and training to the development and
marketing of network security software products. The Company introduced its
first FireWall/Plus software product in June 1995. Accordingly, the Company has
a limited relevant operating history as a software developer upon which an
evaluation of its prospects and future performance can be made. Such prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered in the operation and expansion of a new business and the shift from
research and product development to commercialization of products based on
rapidly changing technologies in a highly specialized and emerging market. The
Company will be required to significantly expand its product and development
capabilities, introduce new products, introduce enhanced features to existing
products, expand its in-house sales force, establish and maintain distribution
channels through third-party vendors, increase marketing expenditures, further
expand its management team and attract additional qualified personnel. In
addition, the Company must adapt to the demands of an emerging and rapidly
changing computer network security market, intense competition and rapidly
changing technology and industry standards. There can be no assurance that the
Company can successfully address such risks, and the failure to do so would have
a material adverse effect on the Company's business, results of operations and
financial condition.
To date, the Company has incurred significant losses and, at March 31, 1998,
had an accumulated deficit of $8,167,000. Inasmuch as the Company intends to
increase its level of activities following the consummation of this offering and
will be required to make significant up-front capital expenditures in connection
with its sales and marketing and continuing research and product development
efforts, the Company anticipates that losses will continue until such time, if
ever, as the Company is able to attain sales levels sufficient to support its
operations. There can be no assurance that the Company will ever achieve
profitable operations. The Company's independent auditors have included an
explanatory paragraph in their report on the Company's financial statements for
the year ended December 31, 1996 and December 31, 1997, stating that certain
factors raise substantial doubt about the Company's ability to continue as a
going concern.
25
<PAGE>
The Company has only recently employed certain members of senior management,
including Avi A. Fogel, President and Chief Executive Officer, Robert P. Olsen,
Vice President of Product Management, Murray P. Fish, Chief Financial Officer,
and Joseph A. Donohue, Vice President of Engineering. In addition, the Company
intends to hire approximately 17 additional software engineers and developers
and 15 additional sales and marketing personnel within twelve months of
consummation of this offering, as well as expand its finance and administrative
staff and increase expenses for employee benefits, facilities, consulting,
insurance, and other general operating expenses. See "Business -- Sales and
Marketing," "Business -- Product Development" and "Management -- Employment
Agreements."
The Company's FireWall/Plus family of software products has not yet achieved
market acceptance. The future success of the Company is largely dependent upon
market acceptance of its FireWall/Plus family of software products. While the
Company believes that its FireWall/Plus family of software products offer
advantages over competing products for network security, license revenue from
FireWall/Plus products since their introduction (June 1995) through March 31,
1998 has only been $2,437,000. There can be no assurance that FireWall/Plus will
gain significant market acceptance. Revenue from such commercial products depend
on a number of factors, including the influence of market competition,
technological changes in the network security market, the Company's ability to
design, develop and introduce enhancements on a timely basis, and the ability of
the Company to successfully establish and maintain distribution channels. The
failure of FireWall/Plus to achieve significant market acceptance, as a result
of competition, technological change or other factors, would have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company's revenues are generated primarily from product license fees for
the use of the Company's software products (license revenues) and service fees
for consulting services, maintenance and training (service revenues). Revenues
from licenses are recognized upon (i) delivery of the software or, if the
customer has evaluation software, delivery of the software key, and (ii)
issuance of the related license, assuming that no significant vendor obligations
or customer acceptance rights exist. In October 1997, the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") No. 97-2,
Software Revenue Recognition, which the Company adopted, effective January 1,
1997. Such adoption had no effect on the Company's methods of recognizing
revenue from its license and maintenance activities. Prior to 1997, the
Company's revenue policy was in accordance with the preceding authoritative
guidance provided by SOP No. 91-1, Software Revenue Recognition.
The Company recognizes service revenue upon delivery of the service or
ratably over the period of service. Consulting and training fees are recognized
as such services are performed. Annual maintenance, which may be purchased in
conjunction with the licensing of a product, is offered for an annual fee
generally equal to 15% of the then current license fee and is recorded as
service revenue ratably over the contract term.
The Company markets and licenses its products and services primarily through
third parties, such as VARs, systems integrators, resellers, distributors and
OEMs, and to a lesser extent, through the Company's limited in-house sales
force. Licenses through distributors typically have a lower gross margin than
in-house generated licenses since distributors usually receive discounts.
Revenues from third-party distributors accounted for approximately 23% and 50%
of the Company's license
26
<PAGE>
revenues for the years ended December 31, 1996 and 1997, respectively. The
Company expects that the percentage of license revenues generated from
third-party distributors to increase in future periods. Pricing is based upon
the number of concurrent connections, the nature of the user's operating system
and whether hardware is needed. Selling and marketing expenses are expected to
increase as a result of proposed expansion of distribution channels and
marketing programs and hiring of additional personnel.
The Company has committed significant product and development resources to
its FireWall/Plus family of products. The Company's anticipated levels of
expenditures for product development are based on its plans for product
enhancements and new product development. The Company capitalizes software
development costs, net of amortization, in accordance with Statement of
Financial Accounting Standards No. 86. These costs consist of salaries,
consulting fees and applicable overhead. The Company intends to use a portion of
the proceeds of this offering to significantly increase its product development
expenditures. See "Business - Product Development."
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues decreased by $140,000 or 29%, from $479,000 for the three months
ended March 31, 1997 to $339,000 for the three months ended March 31, 1998, as a
result of decreased license revenues. License revenues decreased by $151,000 or
44%, from $346,000 for the three months ended March 31, 1997 to $195,000 for the
three months ended March 31, 1998, primarily due to a lack of financial
resources for marketing of its software products during the three months ended
March 31, 1998 and certain initial product licensing payments received from
international resellers during the three months ended March 31, 1997. Service
revenues increased by $11,000 or 8%, from $133,000 for the three months ended
March 31, 1997 to $144,000 for the three months ended March 31, 1998. The
increase in service revenues is attributable to a large consulting project
serviced during the three months ended March 31, 1998.
Cost of licenses consists of the costs of media, documentation, product
packaging, production, product royalties, amortization of software development
costs and the cost of hardware associated with "turn-key" solutions. Cost of
licenses increased by $72,000 or 69%, from $105,000 for the three months ended
March 31, 1997 to $177,000 for the three months ended March 31, 1998,
representing 30% and 91% of license revenues, respectively. The increase in cost
of licenses in dollar amount and as a percentage of license revenues resulted
primarily from increased amortization of software costs and hardware costs
associated with sales of FireWall/Plus Premier Version, which is a turn-key
solution and includes computer hardware and, therefore, has a lower gross
margin. Cost of licenses as a percentage of license revenues may fluctuate from
period to period due to changes in product mix, changes in the number or size of
transactions recorded in a given period or an increase or decrease in licenses
of products which would require the Company to pay royalties to third parties.
27
<PAGE>
Cost of services consist of the costs of salary, fringe benefits and
overhead associated with consulting services. Cost of services decreased by
$1,000 or 1%, from $76,000 for the three months ended March 31, 1997 to $75,000
for the three months ended March 31, 1998, representing 57% and 52% of service
revenues, respectively.
Gross profit decreased from $298,000 for the three months ended March 31,
1997 to $87,000 for the three months ended March 31, 1998, representing 62% and
26% of revenues, respectively. The decrease in gross profit was due to decreased
license revenues and the increase in cost of sales as a result of increased
amortization of software costs and hardware costs associated with sales of
FireWall/Plus Premier Version.
Product development costs consist of salaries, benefits, travel and related
costs of the Company's product development personnel, including consulting fees,
the costs of computer equipment used in product and technology development and
third-party development contracts. Product development costs increased $111,000
or 114%, from $97,000 for the three months ended March 31, 1997 to $208,000 for
the three months ended March 31, 1998, representing 20% and 61% of revenues,
respectively. The increase in product development costs in dollar amount and as
a percentage of revenues was due primarily to the capitalization of $283,333 and
$0 of product development costs associated with the development and enhancement
of its FireWall/Plus family of products during the three months ended March 31,
1997 and the three months ended March 31, 1998, respectively. During the three
months ended March 31, 1998, all product development costs were expensed since
they were incurred after the release of FireWall/Plus Version 4.0. The Company
currently anticipates that product development costs will increase as the
Company hires additional software engineers and developers to support the
Company's growth. See "Business - Product Development."
Sales and marketing expenses consist primarily of salary costs, including
commissions, benefits, bonuses and travel, advertising, public relations,
consultants and trade shows. Selling and marketing expenses decreased by
$186,000 or 57%, from $326,000 for the three months ended March 31, 1997 to
$140,000 for the three months ended March 31, 1998, representing 68% and 41% of
revenues, respectively. The decrease in selling and marketing expenses was due
primarily to a decrease in marketing efforts during such period resulting from
the Company's lack of available funds.
General and administrative expenses include employee costs, including
salary, benefits, bonuses, travel and other related expenses associated with
management, finance and accounting operations, and legal and other professional
services provided to the Company. General and administrative expenses decreased
by $222,000 or 51%, from $434,000 for the three months ended March 31, 1997 to
$212,000 for the three months ended March 31, 1998, representing 91% and 63% of
revenue, respectively. The decrease in general and administrative expenses was
due primarily to reduced professional fees, recruitment fees and travel and
entertainment expenses. The Company currently anticipates that general and
administrative expenses will increase significantly as the Company hires
additional personnel to support its growth in future periods.
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Interest expense increased by $193,000 or 623%, from $31,000 for the three
months ended March 31, 1997 to $224,000 for the three months ended March 31,
1998, representing 6% and 66% of revenues, respectively. The increase in
interest expense was due primarily to an increase in the amortization of debt
discount for the three months ended March 31, 1998 related to private financings
consisting of notes and warrants. Interest expense is expected to be
significantly reduced following consummation of the offering since the Company
intends to use approximately $3,442,000 of the proceeds of this offering to
repay outstanding debt.
No provision for or benefit from federal, state or foreign income taxes was
recorded for the three months ended March 31, 1997 or the three months ended
March 31, 1998 because the Company incurred net operating losses during each
period and fully reserved its deferred tax assets as their future realization
could not be determined.
As a result of the foregoing, the net loss increased by $107,000 or 18%,
from $590,000 for the three months ended March 31, 1997 to $697,000 for the
three months ended March 31, 1998.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues increased by $1,342,000 or 131%, from $1,027,000 for the year ended
December 31, 1996 ("1996") to $2,369,000 for the year ended December 31, 1997
("1997"). License revenues increased by $1,008,000 or 162%, from $624,000 for
1996 to $1,632,000 for 1997, partially due to the receipt of a non-refundable
prepaid royalty of $500,000 from Trusted Information Systems, Inc. relating to
licensing certain of the Company's technology and an increase in software
licenses sold during 1997 as a result of introduction of FireWall/Plus for
Windows NT. Service revenues increased by $334,000 or 83%, from $403,000 for
1996 to $737,000 for 1997 primarily as a result of servicing a large consulting
project and an increase in the customer base which purchased maintenance
contracts during 1997. The Company's two largest customers, Trusted Information
Systems, Inc. and Electronic Data Systems Corporation ("EDS") accounted for 21%
and 14% of the Company's revenues, respectively, in 1997. The Company's revenues
from customers in the United States represented 93% of its revenues in 1996 and
84% of its revenues in 1997.
Cost of licenses increased $58,000 or 13%, from $439,000 for 1996 to
$497,000 for 1997, representing 70% and 30% of license revenues, respectively.
The increase in the cost of licenses resulted primarily from the increased
amortization of capitalized software costs related to the Company's
FireWall/Plus for Windows NT product, hardware costs associated with sales of
FireWall/Plus Premier Version and royalties paid to third parties from product
sales. The decrease in cost of revenues as a percentage of license revenues was
due primarily to the Company's receipt in June 1997 of a $500,000 prepaid
royalty related to the license of its technology and decreased hardware costs
for resale.
Cost of services decreased by $5,000 or 2%, from $298,000 for 1996 to
$293,000 for 1997, representing 74% and 40% of service revenues, respectively.
The decrease in cost of services as a percentage of service revenues was due
primarily to the increase in service revenues which did not require increased
personnel.
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Gross profit increased from $290,000 for 1996 to $1,579,000 for 1997
representing 28% and 67% of revenues, respectively. The increase in gross profit
was due to increased license revenue of $1,008,000, including receipt of a
$500,000 prepaid royalty in June 1997 and a $334,000 increase in revenue from
software licenses.
Product development costs decreased by $67,000 or 7%, from $984,000 for 1996
to $917,000 for 1997, representing 96% and 39% of revenues, respectively. The
decrease in product development costs was due primarily to an increased portion
of time spent by developers on the development of the second release of the
FireWall/Plus Windows NT product and the capitalization of such costs. During
1996 and 1997, the Company capitalized $750,000 and $850,000, respectively, of
product development expenditures associated with the development and enhancement
of its FireWall/Plus family of products.
Sales and marketing expenses decreased by $688,000 or 43%, from $1,614,000
for 1996 to $926,000 for 1997, representing 157% and 39% of revenues,
respectively. The decrease in sales and marketing expenses in dollar amount and
as a percentage of revenues was due primarily to a $526,000 decrease in
advertising expenses and the reduction of trade shows and related travel due to
the Company's lack of funds for sales and marketing, as well as the Company's
receipt of $500,000 of prepaid royalties in June 1997 and a $508,000 increase in
revenues from software licenses.
General and administrative expenses decreased by $358,000 or 19%, from
$1,931,000 for 1996 to $1,573,000 for 1997, representing 188% and 66% of revenue
for 1996 and 1997, respectively. The decrease in general and administrative
expenses in dollar amount and as a percentage of revenue in 1997 was due
primarily to a charge of $683,000 related to the issuance of warrants and shares
of Common Stock to advisory board members and others for services rendered in
March 1996 and reduced professional fees, recruiting fees, office supplies and
stationary, repairs and maintenance contracts, travel and bad debt expenses.
Interest expense increased by $293,000 or 113%, from $260,000 for 1996 to
$553,000 for 1997, representing 25% and 23% of revenue for 1996 and 1997,
respectively. The increase in interest expense was due primarily to increased
amortization of debt discount as a result of the issuance of $1,500,000
principal amount promissory notes and warrants to purchase 210,628 shares of
Common Stock during 1997. Debt discount is amortized over the life of the debt
instrument.
No provision for or benefit from federal, state or foreign income taxes was
recorded for 1996 or 1997 because the Company incurred net operating losses for
each year and fully reserved its deferred tax assets as their future realization
could not be determined.
As a result of the foregoing, the net loss decreased by $2,109,000 or 47%,
from $4,499,000 for 1996 to $2,390,000 for 1997.
Liquidity and Capital Resources
The Company's capital requirements have been and will continue to be
significant, and its cash requirements have been exceeding its cash flow from
operations. At March 31, 1998, the Company had $67,000 of cash and cash
equivalents and a working capital deficit of $2,283,000 due to, among other
things, costs associated with financing its product development efforts. The
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Company has financed its operations primarily through private sales of equity
and debt securities. Net cash used in operating activities was $708,000 and
$383,000 during 1997 and the three months ended March 31, 1998, respectively.
Net cash used in operating activities for 1997 was primarily attributable to a
net loss of $2,390,000 and an increase in accounts receivable of 309,000 which
was partially offset by increases in accounts payable, accrued expenses and
accrued fees of $744,000, and amortization of debt discount of $500,000 and
depreciation and amortization of $481,000. The Company's operating activities
during 1996, 1997 and the three months ended March 31, 1998 were financed
primarily with $3,948,000 of net proceeds from the sale of Common Stock with
respect to a private placement completed in March 1996, $1,500,000 of net
proceeds from the issuance of $1,500,000 principal amount of notes and warrants
to purchase 210,628 shares of Common Stock in 1997 and $400,000 of net proceeds
from the issuance of $400,000 principal amount of notes and warrants to purchase
74,495 shares of Common Stock for the three months ended March 31, 1998. Since
March 31, 1998, the Company has financed its activities with $1,350,000 of net
proceeds from the issuance of $1,350,000 principal amount of notes and warrants
to purchase 251,423 shares of Common Stock. The Company intends to use a portion
of the net proceeds of this offering to repay the entire principal amount of
$3,250,000 and interest accrued on such outstanding notes. The Company does not
currently have a line of credit from a commercial bank or other institution.
The Company is dependent on the proceeds of this offering to implement its
business plan and finance its working capital requirement. The Company
anticipates, based on currently proposed plans and assumptions relating to the
implementation of its business plan (including the timetable of, costs and
expenses associated with, and success of, its marketing efforts), that the net
proceeds of this offering, together with projected revenues from operations,
will be sufficient to satisfy the Company's operations and capital requirements
for approximately twelve months following the consummation of this offering.
There can be no assurance, however, that such funds will not be expended prior
thereto due to unanticipated changes in economic conditions or other unforeseen
circumstances. In the event the Company's plans change or its assumptions change
or prove to be inaccurate (due to unanticipated expenses, difficulties, delays
or otherwise) or the net proceeds of this offering and projected revenues
otherwise prove to be insufficient to fund the implementation of the Company's
business plan or working capital requirements, the Company could be required to
seek additional financing sooner than currently anticipated. The Company has no
current arrangements with respect to any additional financing. Consequently,
there can be no assurance that any additional financing will be available to the
Company when needed, on commercially reasonable terms or at all. Any inability
to obtain additional financing when needed would have a material adverse effect
on the Company, requiring it to curtail and possibly cease its operations. In
addition, any additional equity financing may involve substantial dilution to
the interests of the Company's then existing stockholders.
Fluctuations in Operating Results
The Company anticipates significant quarterly fluctuations in its operating
results in the future. The Company generally ships orders for commercial
products as they are received and, as a result, does not have any material
backlog. As a result, quarterly revenues and operating results depend on the
volume and timing of orders received during the quarter, which are difficult to
forecast. Operating results may fluctuate on a quarterly basis due to factors
such as the demand for the Company's products, purchasing patterns and budgeting
cycles of customers, the introduction of new products and product enhancements
by the Company or its competitors, market acceptance of
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new products introduced by the Company or its competitors and the size, timing,
cancellation or delay of customer orders, including cancellation or delay in
anticipation of new product introduction or enhancement. In addition, the
Company's consulting revenues tend to fluctuate as projects, which may continue
over several quarters, are undertaken or completed. Therefore, comparisons of
quarterly operating results may not be meaningful and should not be relied upon,
nor will they necessarily reflect the Company's future performance. Because of
the foregoing factors, it is likely that in some future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Common Stock would likely be
materially adversely affected.
Licensing of the Company's products generally involves a significant
commitment of capital by customers, with the attendant delays frequently
associated with large capital expenditures. Accordingly, the sales cycle for the
Company's products can be lengthy and generally commences at the time a
prospective customer demonstrates an interest in licensing a FireWall/Plus
solution, typically includes a 30-day free evaluation period and ends upon
execution of a purchase order by the customer. The length of the sales cycle
varies depending on the type and sophistication of the customer and the
complexity of the operating system and may extend for periods of six to nine
months. As a result of the Company's lengthy sales cycle, license of the
Company's products generally require the Company to make expenditures and use
significant resources prior to receipt, if any, of corresponding revenues.
Year 2000 Issue
The Company has assessed the potential software issues associated with the
Year 2000 and believes its software products are Year 2000 compliant and,
therefore, does not expect to incur material costs related thereto. With regard
to internal computing resources utilized in its operations, the Company does not
expect to incur material costs to make such resources year 2000 compliant.
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BUSINESS
Overview
The Company develops, markets, licenses and supports a family of network
security software products designed to provide comprehensive security to
computer networks, including Internet based systems and internal networks and
computing resources. The Company's FireWall/Plus family of security software
products enables an organization to protect its computer networks from internal
and external attacks and to secure organizational communications over such
internal networks and the Internet. The Company also offers its customers a full
range of consulting services in network security and network design and support
in order to build, maintain and enhance customer relationships and increase the
demand for its software products.
The FireWall/Plus family of security solutions is designed to protect
against Internet and intranet (internal networks utilizing Internet technology
and applications based upon TCP/IP - the Internet network transport protocol)
based security threats and to address security needs that arise from within
internal networks that often utilize other network transport protocols besides
TCP/IP including, among others, Novell's IPX, Digital Equipment's DECnet and
IBM's SNA. The Company's FireWall/Plus family of firewall products operates on
the Microsoft Windows NT operating system platform. FireWall/Plus's proprietary
Interceptor Shim and filter engine software technology, with its unique ability
to handle and filter all commonly used network transport protocols, provides
organizations with a highly secure and flexible security solution. Additionally,
unlike most other firewall solutions which focus on an enterprise's connection
to the Internet, the FireWall/Plus solution can be deployed throughout the
enterprise; at the perimeter to control access to and from the Internet, between
internal networks and on application servers and desktop PCs to protect data
residing on such servers and PCs. The Company's FireWall/Plus for Windows NT
received the 1997 Internet and Electronic Commerce Conference award for "Best
Intranet Solution" and the 1997 ENT Readers Choice Award for "Best NT Firewall."
Industry Background
A critical resource of every organization is its information and its ability
to distribute and access information throughout the enterprise. Computing has
moved from large centralized mainframes to distributed client/server
architecture consisting of interconnected personal computers dispersed
throughout an organization. Organizations utilize local area networks ("LANs")
to share information and applications internally. Many organizations have
connected LANs, including geographically dispersed networks, into wide area
networks ("WANs"). In addition, the explosive growth in telecommuting has
resulted in LANs and WANs frequently being accessed from remote locations via
traditional modem dial-up, Integrated Services Digital Network ("ISDN") and
recently introduced cable modems and Asymmetric Digital Subscriber Line ("ADSL")
modems. There is a growing use of establishing these remote connections to an
organization's central resources, via Internet links, rather than through
dedicated point-to point connections.
This evolution from mainframe computers supporting a number of terminals,
towards networks of interconnected personal computers has resulted in a wide
range of technologies from a multitude of vendors being used within internal
networks in order to satisfy different enterprise computing requirements. As a
result, heterogeneous networks utilizing a variety of network transport
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protocols are commonplace within LANs and WANs. Although TCP/IP has become a
widely accepted network transport protocol due to the growth of the Internet and
the popularity of TCP/IP applications for use within internal networks, network
transport protocols such as IPX, DECnet, AppleTalk, and SNA among others, are
still utilized throughout networked environments, and the Company believes such
network transport protocols will continue to be utilized due to the large
investments in installed systems and applications using these protocols.
Further, computing environments often run one or more incompatible versions of
the same protocol suite for extended periods of time while converting to new
versions or to support older applications or systems which cannot use the newer
versions of a given protocol suite. In addition, Windows NT is shipped from
Microsoft with four complete network transport protocols (IP, IPX, AppleTalk and
NetBEUI) for use with NT when connected to a corporate network.
The Windows NT server market continues to grow and outpace sales of other
popular non-NT-based servers. According to recent studies by International Data
Corporation and Dataquest, in 1997, Windows NT server shipments exceeded
shipments of any other server.
Network Security
Although open computing environments have many business advantages, their
accessibility makes an organization's critical software applications and
electronically stored data vulnerable to security threats. Open computing
environments are inherently complex, typically involving a variety of hardware,
operating systems, network transport protocols and applications supplied by a
multitude of vendors, making these networks difficult to manage, monitor and
protect from unauthorized access or attack. The security risk associated with
network computing is complicated by the increasing popularity of the Internet,
intranets and extranets (intranets which allow access for one or more users
outside of the internal network). By connecting an internal private network to
the Internet, unauthorized third parties are given a new means by which to
access an organization's private network. The combination of TCP/IP with other
commonly used network transport protocols within internal networks, increases
the network security challenge because of the various avenues of attack
available to both internal and external attackers.
As a result of the explosive growth in network computing and Internet use
(as well as use of intranets and extranets), protection of an organization's
network and data has become a significant economic concern for businesses.
According to the 1997 Annual Information Week/Ernst & Young LLP Information
Security Survey of information technology managers and professionals, 42% of the
respondents reported malicious acts from external sources, as compared to 16% in
the prior year, and 43% of the respondents reported malicious acts by employees
as compared to 29% in the prior year. According to FBI estimates, U.S. companies
suffer estimated losses of $5 to $10 billion per year as a result of
unauthorized access to information and data. According to the 1998 CSI/FBI
Computer Crime and Security Survey, 44% of the respondents reported unauthorized
access by employees. The Company believes that securely segmenting internal
network areas and computing resources from unauthorized access will become
paramount to insuring the integrity of both the internal network and an
organization's intranet and extranet resources.
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Firewalls
A firewall is a security solution that enables an organization to protect
its computer resources from unauthorized access by internal and external users.
Firewalls enforce security access control policies between a trusted network and
an untrusted network. Only authorized traffic as defined by security policies is
allowed access through the firewall. Firewalls are predominantly utilized today
to provide security for a network's perimeter by preventing external breaches of
the internal network (trusted network) from untrusted external sources (the
public network).
Due to the significant growth in Internet connections, a number of companies
have introduced firewall products ("IP Firewalls") designed primarily to protect
an internal network using TCP/IP as the network transport protocol from Internet
based security threats or threats from within Intranets. IP Firewalls can also
filter other network transport protocols used specifically with the IP routing
protocol (such as UDP and ICMP). In addition, a limited number of IP Firewalls
have limited filtering capabilities for a small number of non-IP based network
transport protocols.
Firewalls can also serve to provide access control between individual
subnetworks on an internal network or to control access between an internal
network and a selected outside party authorized to have access to the internal
network for limited purposes. IP Firewalls can accomplish this task to the
extent that TCP/IP is the network transport protocol being used within an
internal network as is the case with intranets and extranets. To the extent
other network transport protocols are utilized within such an internal network,
IP Firewalls will disallow all data utilizing any such transport protocol from
passing through the firewall, thereby denying access entirely to a party which
is intended to have such access. This reduces the effectiveness of IP Firewalls
in a multi-protocol networked environment.
The Company's FireWall/Plus family of security solutions is designed, like
other IP Firewalls, to protect against IP based Internet and intranet security
threats but also addresses security needs that arise from within internal
networks utilizing network transport protocols other than IP, including,
Novell's IPX, Digital Equipment Corporation's DECnet and IBM's SNA. The
Company's FireWall/Plus suite of products consists of a firewall designed to
control access to an organization's internal network from the public networks
(the "Enterprise Version"), a firewall controlling access between the network
and a trusted application server (the "Server Version") and a firewall
controlling access between the network and a trusted client workstation (the
"Desktop Version").
The IP Firewall market is expected to continue to experience dramatic
growth. International Data Corporation estimates that 1996 unit shipments of
firewalls grew by more than 250%, compared with 1995, with 1996 revenues of
approximately $220 million. Unit sales of firewalls are expected to increase
from 36,610 units or approximately $220 million in 1996 to 1.1 million units or
$730 million in 2001. It is anticipated that unit prices of firewalls will
experience a decline in the future because of increased competition. The Company
believes that these projections do not take into account the need for firewalls
to protect computing environments that do not rely exclusively on TCP/IP as the
network transport protocol. While an organization generally requires a small
number of firewalls to restrict vulnerability to TCP/IP-based threats from the
Internet, it may require numerous firewalls to protect internal networks from
attacks from within the organization.
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The Company believes that securely segmenting internal network areas and
computing resources from unauthorized access will become paramount to insuring
the integrity of both the internal network and an organization's intranet and
extranet resources. The Company further believes that multiple network transport
protocols will remain prevalent in computing environments because of the large
installed base of non-IP based computer systems and applications. The
FireWall/Plus security solution is positioned to address the security issues
faced by enterprises with multi-protocol networking environments seeking to
prevent unauthorized access and attacks from the Internet, intranets and
extranets and internal networks using network transport protocols other than
TCP/IP.
Network-1 Strategy
The Company intends to pursue an aggressive growth strategy and to focus its
efforts on marketing its FireWall/Plus family of network security products. Key
elements of the Company's strategy are:
- Provide Comprehensive Network Security Solutions. The Company's
strategy is to develop, market and support a family of network security
products to address a broad range of security issues confronting
computer networks and computing, including concerns arising from
allowing access to the Internet as well as concerns relating to the
security of internal networks. The Company's comprehensive approach to
network security is based on its FireWall/Plus technology, which offers
robust security for data communications utilizing TCP/IP as well as
other network transport protocols. The FireWall/Plus family of firewall
products currently includes the FireWall/Plus Enterprise Version,
FireWall/Plus Server Version and the FireWall/Plus Desktop Solution.
- Emphasis on Internal Network Security. While FireWall/Plus has the
ability to protect an organization's computer network from Internet,
intranet and extranet based security threats, the Company believes that
its ability to filter multiple network transport protocols offers
significant advantages as a security product for internal networks
where multiple protocols are common. Accordingly, the Company will seek
to exploit this advantage by focusing significant marketing resources
on the internal network security market. The Company intends to devote
a significant portion of the proceeds of this offering for sales and
marketing toward educating potential end users and third-party
distributors as to the need to protect networks and computing resources
from unauthorized access and attacks from within an internal network
and the capabilities and benefits of the Company's products.
- Establish and Maintain Successful Third Party Distribution
Relationships. The Company's marketing plan includes a multi-channel
distribution strategy which emphasizes establishing and maintaining
third-party distributor relationships with systems integrators, VARs,
OEMs and resellers in the United States and internationally. The
Company intends to increase its internal sales and support organization
following the consummation of this offering primarily to provide
additional support to its third-party distributors.
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- Leverage Consulting Clients. The Company has designed, planned,
audited and implemented numerous networks worldwide for a broad
spectrum of clients, including Fortune 500 companies, small companies
with modest requirements, federal, state and foreign governments and
utilities, as well as education and research institutions. The Company
believes that its consulting clients provide a base of potential
customers for its products. In addition, the Company's consulting
relationships may facilitate its development and enhancement of
software products as the Company's consultants receive feedback and
guidance directly from network administrators and other technical
personnel regarding products and features needed in the marketplace.
See "Business - Consulting."
FireWall/Plus Technology
The Company's network security solutions are based upon its proprietary
FireWall/Plus technology which provides organizations with enterprise wide
security to protect against unauthorized access from the Internet as well as
security for internal sources of intrusion and breach. The following are key
aspects of the Company's FireWall/Plus solution:
Enterprise-Wide Deployment. Unlike most other firewall solutions which focus
on an enterprise's connection to the Internet, the FireWall/Plus solution, as a
result of its unique architecture, may be used throughout the enterprise; at the
perimeter to control access to and from the Internet, between internal networks
and on application servers, including web servers, and desktop PCs to protect
data residing on such servers and PCs. While competing firewall solutions must
be installed on dedicated computers, FireWall/Plus can operate on a Windows NT
desktop computer or application server without interfering with the normal
operation of such desktop computer or server. As a result, the FireWall/Plus
security solution can be installed on existing strategic computing resources
within the enterprise without incurring the expense of additional computing
hardware.
Multi-layer Security. The architecture of Windows NT includes two operating
modes, the "user" and "kernel" modes. The FireWall/Plus solution is implemented
in kernel mode to maximize performance and to provide maximum security from
network intrusion to the operating system environment. Using proprietary
kernel-level software code developed by the Company, FireWall/Plus's Interceptor
Shim and security filter engine technology introduce a security layer between
the network hardware drivers and the Windows NT operating system. FireWall/Plus
filters all network traffic before it reaches Windows NT. Incoming data packets
enter the network through the network interface card and its associated hardware
driver and are immediately passed to the Interceptor Shim, which directs them to
the FireWall/Plus filter engine. The filter engine, using a proprietary
high-speed, real-time security policy enforcement language, checks the packet
and associated packet history against the security rule policy database to
determine whether the packet should be allowed to enter the system. The Company
believes that FireWall/Plus' multi-layer approach to security strengthens
Windows NT by providing a layer of security that filters packets before entering
the Windows NT operating system.
Advanced Filtering System. The Company's FireWall/Plus family of products
includes an advanced filtering system which currently utilizes stateful
inspection and application level filtering technology to provide security for
IP-related transport protocols and applications. Stateful filtering
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involves the knowledge of states of protocols at specific transaction intervals
during the network connection between two communicating applications between
specific systems. Transaction states occur at routing, transport, session
control and application layers when two programs interoperate with each other
over a computer network connection. When these states are defined to
FireWall/Plus, FireWall/Plus can take actions on conditions that violate the
required or expected stateful actions of one or a simultaneous series of
protocols. Most firewalls have been based upon architectures incorporating
either packet filtering or proxy application gateway filtering. FireWall/Plus
adopts a hybrid approach which incorporates frame, circuit, packet, proxy
application and stateful inspection capabilities in the security management of
network connections. The Company believes that this hybrid approach allows the
Company to offer a firewall product that maximizes security without sacrificing
performance.
Multi-Protocol Capability. A unique aspect of FireWall/Plus is its ability
to provide multi-protocol filtering not available from network security products
offered by other firewall vendors. FireWall/Plus has the advantage of filtering
not only TCP/IP, but also a multitude of other network transport protocols. The
Company believes that the ability of FireWall/Plus to filter multiple network
transport protocols offers significant advantages as a security product for
internal networks where multiple network transport protocols are common.
FireWall/Plus is capable of utilizing stateful inspection technology for
numerous network transport protocols once the various "states" of such protocols
are defined to FireWall/Plus. The states of TCP/IP and several other of the more
commonly used protocols are capable of being defined. For those protocols not
capable of being defined, FireWall/Plus performs frame, packet and application
filtering. In a Windows NT based environment, it is typical for all commonly
used multiple network transport protocols to co-exist, as Windows NT comes
pre-equipped with TCP/IP, IPX (Novell), NetBEUI (LAN Manager) and AppleTalk. In
addition, certain applications require the use of non-IP protocols to operate
between subnetworks on a network. FireWall/Plus' multi-protocol filtering
capability is also critical in the support of web servers on the Internet,
intranets and extranets and other information provision systems that access
information stored on mainframe computers via non-IP protocols. While some
commercially available routers allow basic packet filtering for multiple
protocols, the Company believes its multi-protocol advanced filtering
capabilities offer superior features to routing solutions such as a graphical
user interface, extensive logging, reporting and alarming and security policy
time management.
Transparency. FireWall/Plus may be operated in a transparent mode. In this
mode, FireWall/Plus has no network address (i.e. it is not visible on the
network) and therefore can not be identified for attack. The Company believes
that this feature provides additional security to the operating system because
when a firewall has a network address, it can be located and is more susceptible
to attack. FireWall/Plus provides firewall protection while operating in
transparent mode, except that certain features such as remote management, proxy
support and virtual private networking are not functional.
Centralized Management. FireWall/Plus allows for centralized management and
monitoring that allows a network manager to manage and monitor a system from a
local or remote location. Accordingly, large and geographically dispersed
firewalls may be managed from a single location.
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Customized Security Policies. FireWall/Plus also allows customized security
policies for individual departments, applications and individual systems and
personnel within the network. Network managers may apply security rules to any
version of the FireWall/Plus products so that individual systems, protocols,
applications, frames and many other network entities are either explicitly
denied or authorized access to specific applications and other network entities.
Multi-Protocol Encryption Tunnels. Once firewalls are in place at multiple
sites on a WAN or the Internet, the ability to establish encrypted
communications links over these connections becomes possible, thereby reducing
reliance on more costly dedicated telecommunications alternatives. FireWall/Plus
provides for integrated data encryption to protect communications over the
Internet and other public networks from unauthorized access. Encryption tunnels,
known as virtual private networks ("VPNs"), may be set up for any Windows NT
based protocol to protect communications between different locations of an
organization's internal network or between different locations and selected
customers, suppliers or strategic partners. FireWall/Plus extends this ability
such that VPNs may be formed between locations across the Internet irrespective
of the transport protocol being tunneled. The Company currently resells VPN
client solutions from Aventail Corporation in conjunction with FireWall/Plus.
Proxy Support. Proxy based firewalls filter network traffic by running a
separate software program that acts as a proxy for each application to be
allowed through the firewall. These firewall solutions require the customer to
purchase the proxies supplied by the vendor for the applications supported by
the vendor's architectural model. As a result, the customer may not find all the
required application proxies from a specific firewall vendor for all the
application suites being used or may find that the proxies offered by the
firewall vendor are not sufficient to support all the required security needs.
FireWall/Plus includes several popular proxies in addition to frame,
circuit, packet, application and stateful inspection capabilities. These proxies
implement popular features for specific application types such as HTTP and FTP.
The Company currently licenses HTTP and FTP proxies from Network Associates,
Inc. FireWall/Plus also allows the use of other third-party proxies in
conjunction with or in lieu of proxies offered by the Company. FireWall/Plus'
architecture allows the Company to partner and include external or third-party
proxies quickly and easily to suit a variety of security requirements.
Additionally, custom-written proxies for a client-server architecture at a
customer site may easily be added to the FireWall/Plus system by adjusting
security policy rule sets in the firewall database.
Ease of Use. FireWall/Plus was designed to be easily installed, configured
and managed by a network manager with minimal or no security skills.
FireWall/Plus may be installed and configured by use of the intuitive graphical
user interface ("GUI") by simply pointing and clicking the mouse. To facilitate
implementation, FireWall/Plus comes pre-programmed with a wide variety of
frequently used default security policies which require the customer to simply
select one of the rule-bases and save the selection. FireWall/Plus does not
utilize significant server resources and may therefore co-exist on the same
server with other software applications on Windows NT. Unlike many other
competitive firewall products offered today, FireWall/Plus need not run on a
separate dedicated server.
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Products
The Company's family of FireWall/Plus products offers a broad range of
network security solutions. The FireWall/Plus family of products includes the
FireWall/Plus Enterprise Version, FireWall/Plus Server Version and FireWall/Plus
Desktop Version. The Company is currently shipping FireWall/Plus Version 4.03.
The Company first introduced the FireWall/Plus Enterprise Version for Windows NT
in January 1997. As of June 30, 1998, the Company had licensed one or more of
its FireWall/Plus family of software products to over 150 customers. License
revenue from FireWall/Plus products accounted for 43%, 60% and 58% of the
Company's revenues for the years ended December 31, 1996, 1997 and the three
months ended March 31, 1998, respectively, reflecting the Company's emphasis on
the development and marketing of software products rather than consulting
services.
FireWall/Plus Enterprise Version. The FireWall/Plus Enterprise Version
secures an organization's internal network against unwarranted intrusions from
the Internet and is also used between major internal network components as well
as between general access internal networks and special purpose networks such as
process control, real-time and other sensitive access networks. The
FireWall/Plus Enterprise Version includes extensive centralized and remote
security management facilities, predefined security policy rules, multiprotocol
VPN capabilities, authentication and encryption facilities, real time connection
management and proxy services. The FireWall/Plus Enterprise Version supports
Intel processors and Digital Equipment Corporation Alpha processors that support
Windows NT. The FireWall/Plus Enterprise Version is available in scaleable
models to support varying numbers of simultaneous connections for small to
mid-size companies and in an unlimited session version, as well as a high-speed
version. Additionally, the FireWall/Plus Enterprise Version is also available in
a Premier Version which includes the software installed on a high speed Alpha
server running Windows NT. Based on the number of concurrent connections, the
nature of the user's operating system and whether hardware is needed, the
FireWall/Plus Enterprise Version is currently priced to end users between $3,750
and $20,000 for software only versions and from $27,500 to $30,000 for Premier
Versions, which include hardware and onsite technical support.
FireWall/Plus Server Solution. The FireWall/Plus Server Version is designed
to improve internal security of a LAN or Intranet or to protect highly sensitive
systems such as key escrow facilities, web servers, digital certificate servers,
database servers, authentication servers, etc. As a server firewall, this
solution provides protection against unauthorized access to network resources by
internal users, where security breaches often originate. The FireWall/Plus
Server Version co-exists on the server being protected and resides between the
network users and the protected data. FireWall/Plus Server Version treats all
information on the server as secure and guarded, while treating network
connections to the server as unsecure. FireWall/Plus can then be configured
using the FireWall/Plus GUI to allow access to certain users, to specific
applications, during designated times and under a variety of conditions. The
FireWall/Plus Server Version incorporates all of the major features contained in
the FireWall/Plus Enterprise Version. Any other applications including web, file
and print services, may be run simultaneously on the server with the
FireWall/Plus Server Version installed and operating. The FireWall/Plus Server
Version is currently priced to end users at $1,995.
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FireWall/Plus Desktop Solution. The FireWall/Plus Desktop Version is a full
featured firewall which has been specifically tailored to protect data residing
on Windows NT workstations without disrupting current system operations. These
workstations can run applications while the firewall maintains a high level of
security. When a network attack is detected, it is immediately defeated prior to
the attack being able to access the NT Workstation. The FireWall/Plus Desktop
Version is designed to protect sensitive individual desktop computers (such as a
network control station, a corporate executive's personal computer or the human
resources personnel system) or telecommuter systems where high speed remote
access lines are used (such as cable modems, ADSL and ISDN). The FireWall/Plus
Desktop Version is currently priced to end users at $995.
Customers
The Company's customers represent a wide range of industries, both
commercial and government, which consider networked-data resources to be among
the most important assets within their organizations. As of June 30, 1998, the
Company had licensed one or more of its FireWall/Plus family of products to over
150 customers. Customers for the FireWall/Plus products include The Sabre Group
Inc., Electronic Data Systems Corporation ("EDS"), Trusted Information Systems,
Inc., TRW, Inc., United Technologies, Inc., National Semiconductor Corp.,
Fairchild Semiconductor, ARCO, GTE, Inc., and Continental Airlines. During the
year ended December 31, 1997, Trusted Information Systems, Inc. and EDS
accounted for approximately 21% and 14% of the Company's revenues, respectively.
Examples of the varied uses of the Company's products by customers include:
/ / An industry leading system integrator uses both the Enterprise and
Server Versions of FireWall/Plus to secure access and communications to and
from its facilities management personnel and their customers to manage the
networks of one of the largest telecommunications companies. The
FireWall/Plus Enterprise Versions are used as perimeter defenses on the
company's internal backbone, which supports more than 900 outside clients,
while the FireWall/Plus Server Versions are used to protect key internal
components on the customer's internal network.
/ / A leading travel service company utilizes FireWall/Plus' high speed
Premier Versions to protect one of the busiest websites on the Internet.
Multiple firewalls are also being used internally to securely filter DECnet,
which is the prevalent network transport protocol used in addition to TCP/IP,
between various segments of the internal network. Additionally, this customer
has begun to install multiple FireWall/Plus versions at its customers' sites.
/ / A worldwide petrochemical company currently uses FireWall/Plus
Enterprise Version to secure data at multiple sites from internal and
external breaches. Disparate protocols, including IP and Novell's IPX, are
securely and routinely sent from multiple data centers (each using
FireWall/Plus) throughout the country to a center of operations while
FireWall/Plus insures the integrity of the data.
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The Company believes that the FireWall/Plus security solution is a scaleable
product which satisfies customers' needs to secure the perimeter and internal
resources within their organizations. The Company further believes that
currently available IP Firewalls are not as flexible with respect to both
internal and external security as the FireWall/Plus solution.
During the years ended December 31, 1996 and 1997 and the three months ended
March 31, 1998, license revenue from international customers (licenses to
foreign end users and international distributors) accounted for 6.7%, 15.6% and
2.7% of the Company's revenues, respectively. All of the Company's revenues from
international licenses were denominated in U.S. dollars. The Company anticipates
that revenues from international customers will account for an increasing
percentage of the Company's revenues in the future.
Sales and Marketing
The Company is in the process of implementing a sales and marketing plan
which consists of a multi-channel distribution strategy and a promotion strategy
to create consumer awareness of the Company and its FireWall/Plus products and
to educate the market about the need to implement network security products and
of the capabilities and benefits of the Company's FireWall/Plus products.
Multi-Channel Distribution
In-House Sales Force. The Company's internal sales force consists of three
persons, consisting of a Vice President of Sales of North America and two sales
representatives. The Company's sales representatives are responsible for
soliciting potential customers and providing technical support to customers, as
well as supporting third-party distribution channels. To date, the Company's
internal sales force has not undertaken significant marketing efforts relating
to product commercialization.
Following the consummation of this offering, the Company intends to retain a
Vice-President of International Sales to oversee the Company's international
sales and marketing efforts and a limited number of additional sales
representatives in connection with the expansion of the Company's marketing
efforts. Although the Company's in-house sales force will continue to solicit
potential customers, its primary responsibility is expected to be supporting
third-party distribution channels.
Third-Party Distribution Channels. A key element of the Company's
distribution strategy is to establish and maintain relationships with
third-party distributors within the United States and internationally. By
engaging such third-party distributors, the Company is able to utilize the
end-user sales and support infrastructure of these channels.
The Company currently has relationships with 22 national, regional and local
systems integrators, VARs and resellers in the United States, including EDS,
Wang Laboratories, Inc. and BDM International, Inc. In November 1997, the
Company entered into a Master Software License Agreement with EDS pursuant to
which EDS has the non-exclusive right on a worldwide basis to use, market and
distribute the Company's Fire Wall/Plus family of products including the right
to promote and resell such products in conjunction with providing systems
integration, outsourcing or facilities
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management services to its customers. The Company also currently has
relationships with international system integrators, VARs, resellers and
distributors in 25 countries, including Japan, Germany, Canada, United Kingdom,
Republic of China, Hong Kong, Russia, Taiwan, Korea, Singapore, Malaysia,
Indonesia, Thailand and Turkey.
The Company's agreements with distributors generally grant the distributor
the right to market the Company's products in specified territories on a
non-exclusive basis, are terminable on short notice and do not prohibit the
distributor from selling products that are competitive with the Company's
products.
The Company intends to continue to seek to establish relationships with
additional third-party distributors, principally larger system integrators and
VARs with the necessary resources to successfully distribute the Company's Fire
Wall/Plus products. For the year ended December 31, 1997, Trusted Information
Systems, Inc. ("TIS") and EDS accounted for 21% and 14%, respectively, of the
Company's revenues and for the three months ended March 31, 1998, The Sabre
Group, Inc. and Omnicon Systems, Inc. accounted for 24% and 13%, respectively,
of the Company's revenues. The Company's five largest distributors accounted for
an aggregate of approximately 28% and 40% of the Company's revenues for the year
ended December 31, 1997 and the three months ended March 31, 1998, respectively.
The Company also seeks to enter OEM or licensing arrangements whereby the
Company grants to an OEM or other third party the right to incorporate and/or
bundle a specific technology of the Company with the OEM's or other
third-party's products. In June 1997, the Company entered into a license
agreement with TIS, which was subsequently acquired by Network Associates, Inc.,
pursuant to which the Company licensed to TIS which was on a non-exclusive basis
the right to incorporate and/or bundle the Company's Interceptor Shim software
with TIS' family of Gauntlet(TM) firewall products. The Company receives a
royalty based upon TIS sales, of which $500,000 was paid to the Company as a
non-refundable pre-paid royalty. As a result of such pre-paid royalty, license
revenue from TIS accounted for 21% of the Company's revenues for the year ended
December 31, l997.
The Company expects that its arrangements with third-party distributors and
OEMs will account for an increased percentage of its product sales in the
future.
Advertising and Promotion
Following the consummation of the offering, the Company intends to implement
an advertising and promotion strategy to create consumer awareness of the
Company and its FireWall/Plus products and to educate the market about network
security threats and FireWall/Plus's ability to address customers' needs. To
date, the Company has engaged in limited advertising and promotion of its
products through its website, trade publication and published product reviews.
The Company intends to use a portion of the proceeds of this offering to
advertise and promote its products through print advertising, Internet website
advertising, direct marketing efforts and participation in trade shows and
seminars which target organization security and management information system
administrators and network system integrators.
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The Company's website, www.network-1.com, which includes a description of
the Company's FireWall/Plus family of products and enables visitors to the site
to download a 50-session FireWall/Plus Enterprise Version for a 30-day trial.
The Company intends to use a portion of the proceeds of this offering to add
content to the website, such as product information, including a user guide,
network security industry information and additional content specific to
distributors and end users; improve download capabilities for the trial version;
and enable purchases via the website.
Consulting
The Company has designed, planned, audited and implemented numerous
networks worldwide for a broad spectrum of clients, including Fortune 500
companies, small companies with modest requirements, federal, state and foreign
governments and utilities, as well as education and research institutions. Mr.
William Hancock, the Company's Chief Technology Officer and a director, is an
industry expert who has authored networking and security books and has been a
featured columnist as well as a network and security editor for a number of
industry journals. The Company intends to expand its consulting activities
following the consummation of this offering by utilizing the expertise of Mr.
Hancock to create opportunities for consulting through speaking engagements at
industry conferences, seminars and trade shows.
Historically, the Company has offered a wide range of consulting services
designed to provide solutions to networking and security problems. Such
consulting services have included network surveys, network designs and traffic
modeling, security penetration studies, security breach investigation, network
and computer forensics services, hacker prosecutions (in connection with federal
and local law enforcement agencies) and network security technical audits among
other services. The Company generally provides its consulting clients with a
comprehensive report containing detailed findings and recommendations. The
Company offers its consulting services on a per hour or per project basis.
The Company's consulting clients have included, among others, EDS, MCI
Communications Corp., Kraft General Foods, Inc., Alcoa Aluminum Company of
America, TIA-CREF, Southwestern Bell Telephone Co., Chemical Bank Corp., Hewlett
Packard Co., American Airlines, Inc., Bechtel Corporation, ARINC, ARCO Chemical
Company, United Technologies Sikorsky Aircraft, Bowne, Inc., and the U.S.
Government, including The Environmental Protection Agency.
Consulting services generated 24%, 21% and 27% of the Company's revenues
for the years ended 1996 and 1997 and the three months ended March 31, 1998,
respectively. The Company expects that consulting services will account for a
decreasing percentage of revenue as the Company continues to focus its efforts
on developing and marketing its network security software products.
Customer Service and Support
The Company believes that customer service and support is critical to
retaining customers and attracting prospective customers. The Company provides
customer service and support through its internal technical support staff of 5
persons located at its Grand Prairie, Texas office. Customers receive a 90-day
warranty, which includes technical assistance and product updates. To date, the
Company has not incurred any material warranty expense. Following the expiration
of the 90-day warranty, customers can elect to purchase the Company's annual
maintenance program at an average
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annual cost of 15% of the then current purchase price. The maintenance program
includes technical assistance and support, product updates and general
information relating to product introductions and changes. Technical support is
available 24 hours a day, 7 days a week, by telephone and electronic mail. In
addition, the Company provides customers with fee-based on-site installation,
support and training. The Company provides its resellers with sales and
technical support.
Product Development
The Company believes that development of new products and enhancements to
existing products are essential for the Company to effectively compete in the
network security market. The Company's product development efforts are directed
toward enhancing its FireWall/Plus family of security products, developing new
products and responding to emerging industry standards and other technological
changes. The Company intends to expand its existing product offerings and to
introduce new application products for the network security market. The
Company's new product development efforts are focused on enhancements to the
Company's current suite of products and new network security products, including
products that support Windows 95/98 operating systems. While the Company expects
that certain of its new products will be developed internally, the Company may,
based on timing and cost considerations, expand its product offerings through
acquisitions. In addition, the Company has relied and will continue to rely on
external development resources for the development of certain of its products
and components.
The Company currently has 10 employees devoted to research and product
development. However, historically, a substantial portion of the Company's
research and development activities have been undertaken by engaging third-party
consultants and independent contractors. During the years ended December 31,
1996 and 1997 and three months ended March 31, 1998, the Company's product
development expenses were $984,000, $917,000 and $208,000, respectively.
The Company intends to hire and retain approximately 17 additional software
engineers and developers on a full-time basis within twelve months following the
consummation of this offering and has allocated approximately $2,100,000 of the
net proceeds of this offering to software development.
The network security industry is characterized by rapid technological
change, changes in customer requirements, frequent new product introductions and
enhancements, new and continuously evolving network security threats and attack
methodologies and evolving industry standards in computer hardware and software
technology. As a result, the Company must continually change and improve its
products in response to such advances and changes in operating systems,
application software, computer and communications hardware, networking software,
programming tools and computer language technology. The introduction of products
embodying new technologies and the emergence of new industry standards may
render existing products obsolete or unmarketable.
The Company's future operating results will depend upon the Company's
ability to enhance its current products and to develop and introduce new
products on a timely basis that address the increasingly sophisticated needs of
the marketplace and that keep pace with technological developments, new
competitive product offerings and emerging industry standards. There can be no
assurance that the Company will be successful in developing and marketing new
products or product enhancements that respond to technological change and
evolving industry standards and customer requirements, that the Company will not
experience difficulties that could delay or prevent the
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successful development, introduction and marketing of these products, or that
any new products and product enhancements will adequately meet the requirements
of the marketplace and achieve market acceptance. In the event that the Company
does not respond adequately to the need to develop and introduce new products or
enhancements of existing products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results and financial condition will be materially adversely affected.
Competition
The network security market in general, and the firewall product market in
particular, is characterized by intense competition and rapidly changing
business conditions, customer requirements and technologies. The Company
believes that the principal competitive factors affecting the market for network
security products include security effectiveness, name recognition, scope of
product offerings, product features, distribution channels, price, ease of use
and customer service and support. Currently, the Company's principal competitors
include AXENT Technologies Inc., Bay Networks, Inc., CheckPoint Software
Technologies, Ltd., Cisco Systems, Inc., Compaq Computer Corporation, Cyberguard
Corp., International Business Machines Corporation, ISS Group, Inc., Microsoft
Corporation, Network Associates, Inc. and Secure Computing Corporation. Due to
the rapid expansion of the network security market, the Company may face
competition from new entrants.
Most of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases
and possess substantially greater financial, technical and marketing and other
competitive resources than the Company. As a result, the Company's competitors
may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements or devote greater resources to the promotion and sale of
their products than the Company. While the Company believes that its firewall
products do not compete against manufacturers of other types of security
products (such as encryption and authentication products), there can be no
assurance that potential customers will not perceive the products of such other
companies as substitutes for the Company's products. In addition, certain of the
Company's competitors may determine for strategic reasons to consolidate, to
substantially lower the price of their network security products or to bundle
their products with other products, such as hardware or other enterprise
software products. Accordingly, it is possible that new competitors and
alliances among competitors may emerge and rapidly acquire significant market
share. There can be no assurance that the Company's current and potential
competitors will not develop products that may be more effective than the
Company's current or future products or that the Company's products would not be
rendered obsolete or less marketable by evolving technologies or changing
consumer demands or that the Company will otherwise be able to compete
successfully. Increased competition for firewall products may result in price
reductions, reduced gross margins and adversely effect the Company's ability to
gain market share, any of which would adversely affect the Company's business,
operating results and financial condition.
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Proprietary Rights
The Company's success is substantially dependent on its proprietary
technologies. The Company does not hold any patents and relies on copyright and
trade secret laws, non-disclosure agreements with employees, distributors and
customers, including "shrink wrap" license agreements that are not signed by the
customer, and technical measures to protect the ideas, concepts and
documentation of its proprietary technologies and know-how to protect its
intellectual property rights. Such methods may not afford complete protection,
and there can be no assurance that third parties will not independently develop
substantially equivalent or superior technologies or obtain access to the
Company's technologies, ideas, concepts and documentation. In addition, there
can be no assurance that any confidentiality agreements between the Company and
its employees, distributors or customers will provide meaningful protection for
the Company's proprietary information in the event of any unauthorized use or
disclosure. Any inability to protect its proprietary technologies could have a
material adverse effect on the Company. Furthermore, the Company may be subject
to additional risk as it enters into transactions in countries where
intellectual property laws are not well developed or are poorly enforced. Legal
protection of the Company's rights may be ineffective in such countries.
The Company also licenses from a third party certain proxy technology which
is incorporated into its FireWall/Plus products. The Company is dependent in
part on its ability to continue to license such technology. Any inability of the
Company to be able to continue to utilize such technology either as a result of
the Company's breach or the termination of a license agreement or otherwise, in
the absence of similar available technologies, could have a material adverse
effect on the Company.
The Company received a U.S. trademark registration for the FireWall/Plus
name in December 1996. Although the Company is not aware of any challenges to
the Company's rights to use this trademark, there can be no assurance that the
use of this mark would be upheld if challenged.
Although the Company believes that its technologies and products have been
developed independently and do not infringe upon the proprietary rights of
others, there can be no assurance that the Company's technologies and products
do not and will not so infringe or that third parties will not assert
infringement claims against the Company in the future. The Company is not aware
of any patent infringement charge or any violation of other proprietary rights
claimed by any third party relating to the Company or the Company's products. In
response to certain public statements made by CheckPoint Software Technologies,
Ltd. related to a patented technology referred to as "stateful inspection" (the
"Checkpoint Patent"), the Company retained patent counsel in April 1997 to
review the Checkpoint Patent as compared to the Company's intellectual property
and associated products. Based upon the opinion of the Company's intellectual
property counsel, the Company does not believe that the CheckPoint Patent will
have a material adverse effect on the Company. If, however, the Company's
technologies or products were deemed to infringe upon the Checkpoint Patent, or
if the Company's technologies or products were deemed to infringe upon the
proprietary rights of other third parties, the Company could become liable for
damages or be required to modify its products or to obtain a license.
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As the number of security products being offered continue to increase the
functionality of such products may further overlap, which could result in
increased infringement claims by software developers, including infringement
claims against the Company with respect to future products. There can be no
assurance that the Company would be able to modify its products or obtain a
license in a timely manner, upon acceptable terms and conditions, or at all, or
that the Company will have the financial or other resources necessary to defend
a patent infringement or other proprietary rights infringement action. Failure
to do any of the foregoing could have a material adverse effect on the Company,
including possibly requiring the Company to cease marketing its products.
CommHome Systems Corp. Acquisition
Prior to the consummation of this offering, the Company will enter into a
merger agreement with CommHome Systems Corp. ("CommHome"), effective upon
consummation of this offering, pursuant to which the CommHome stockholders have
agreed to exchange all of the outstanding common stock of CommHome for 35,000
shares of Common Stock of the Company. Pursuant to the merger agreement, the
Company has agreed to assume up to $200,000 of liabilities of CommHome, which
include $55,000 and $50,000 owed to Avi A. Fogel and Robert P. Olsen,
respectively. Messrs. Fogel and Olsen have agreed to accept 6,875 and 6,250
shares of Common Stock, respectively, in full satisfaction of such indebtedness.
Mr. Fogel, President, Chief Executive Officer and a director of the Company, is
also President, Chief Executive Officer and owns 51% of the outstanding shares
of CommHome. Mr. Olsen, Vice President of Product Management of the Company, is
the former Vice President of Marketing of CommHome. See "Certain Transactions."
CommHome, incorporated in June 1997, is a development stage company engaged
in the design and development of residential networking solutions for high speed
Internet access to the home. CommHome's designs are intended to provide easy
access to the Internet throughout the home. These solutions include secure
connections to high speed networking technologies, such as ADSL and cable modem
technology, and easy distribution at all phone connections. It is currently
expected that CommHome's designs will be incorporated into the Company's future
security products.
Employees
As of June 30, 1998, the Company had 22 full time employees, including 5 in
sales and marketing, 10 in product research and development and technological
support and 7 in administration and finance. None of the Company's employees is
represented by a labor union or is subject to a collective bargaining agreement.
The Company has not experienced any work stoppages and considers its
relationship with its employees to be good.
Competition with respect to the recruiting of highly qualified personnel in
the software industry is intense and many of the Company's competitors have
significantly greater resources than the Company. The Company's ability to
attract and assimilate new personnel will be critical to the Company's
performance and there can be no assurance that the Company will be successful in
attracting or retaining the personnel it requires to enhance its products,
develop new products and conduct its operations successfully.
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Facilities
The Company currently subleases on an interim basis approximately 400
square feet of office space in Wellesley Hills, Massachusetts for its principal
executive offices. Following the consummation of this offering, the Company
intends to lease new principal executive offices in the Boston, Massachusetts
area. The Company's technical support, warehouse and distribution facilities are
located in Grand Prairie, Texas, where the Company leases approximately 7,500
square feet pursuant to a written lease which expires on July 31, 1999. The
Company also leases approximately 4,500 square feet of office space in New York,
New York under a sublease that expires on September 29, 1998 which the Company
does not intend to renew.
Legal Proceedings
The Company is not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Avi A. Fogel ............................... 44 President, Chief Executive Officer and
Director
William Hancock............................. 41 Chief Technology Officer and Director
Robert P. Olsen ............................ 44 Vice President of Product Management
Murray P. Fish.............................. 47 Chief Financial Officer
Peter Mearsheimer........................... 45 Vice President of North American Sales
Joseph A. Donohue........................... 43 Vice President of Engineering
Robert M. Russo............................. 47 Vice President of Business Development
and Secretary
Corey M. Horowitz........................... 43 Chairman of the Board of Directors
Marcus J. Ranum............................. 35 Director
</TABLE>
Avi A. Fogel has served as President, Chief Executive Officer and a
director since May 1998. From March 1998 until May 1998, Mr. Fogel served as a
consultant to the Company. From June 1997 until the consummation of this
offering, Mr. Fogel served as President and Chief Executive Officer of CommHome,
a development stage company engaged in the business of developing residential
networking solutions, which he co-founded in June 1997. From January 1997 to
June 1997, Mr. Fogel was engaged pre-incorporation activities related to
CommHome. Effective upon the consummation of this offering, CommHome will be
acquired by the Company. From October 1995 to December 1996, Mr. Fogel was
employed by Digital Equipment Corp. as Vice President, Global Marketing. From
July 1994 to October 1995, Mr. Fogel was Executive Vice President, Global
Marketing and Business Development of LANNET Data Communications, Ltd., a
manufacturer of LAN switching hubs located in Tel Aviv, Israel. From July 1990
to July 1994, Mr. Fogel served as President and Chief Executive Officer of
LANNET, Inc., the U.S. subsidiary of LANNET Data Communications, Ltd.
William Hancock co-founded the Company and has served as its Chief
Technology Officer since May 1998 and as a director since inception. Since
inception until May 1998, Dr. Hancock served as Executive Vice President and
Secretary. Mr. Hancock is a leading international expert in computer and network
design and security with over 20 years of experience in computer science,
network technologies and electrical engineering. From June 1982 to July 1990,
Mr. Hancock was an independent computer and networking consultant to Fortune 500
companies, including Digital Equipment Corporation, AT&T and IBM. Mr. Hancock
participated in the operating system and network design teams at both Digital
Equipment Corporation and IBM. He was instrumental in the design and selection
of the Integrated System Digital Network plug connector and is the author of
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the implementation of the RSA encryption algorithm for the CCITT X.32 network
standard. Mr. Hancock has been involved in the architecture and writing of the
networking and security standards for the International Organization for
Standardization. Mr. Hancock is a Certified Information Systems Security
Professional.
Robert P. Olsen has served as Vice President of Product Management since
May 1998. From March 1998 until May 1998, Mr. Olsen served as a consultant to
the Company. From July 1997 to December 1997, Mr. Olsen served as Vice President
of Marketing of CommHome. From July 1996 to July 1997, Mr. Olsen was Vice
President of Marketing for Netphone, Inc., a developer of computer servers. From
December 1991 to June 1996, Mr. Olsen was Vice President of Marketing for Agile
Networks, Inc., a company engaged in the design manufacturing, marketing and
support of ethernet and ATM switches, which he co-founded.
Murray P. Fish has served as Chief Financial Officer since May 1998. From
August 1997 to May 1998, Mr. Fish was an independent financial consultant. From
April 1991 to August 1997, Mr. Fish served as President, Chief Executive Officer
and a director of RealWorld Corporation, a manufacturer of accounting software.
From March 1989 to April 1991, Mr. Fish served as Vice President and Controller
of Goldman Financial Group, Inc., a manufacturer of chemical and machine tools.
Peter Mearsheimer has served as Vice President of North American Sales
since May, 1998 and Vice President of Sales from April 1996 to May 1998. Mr.
Mearsheimer was employed by Wall Data Incorporated, a network software company,
as the Eastern Area Sales Manager from April 1993 to March 1996. From January
1991 to March 1993, Mr. Mearsheimer served as a Regional Sales Manager for Eicon
Technology, Inc., a company engaged in the network software business.
Joseph A. Donohue has served as Vice President of Engineering since July
1998. From April 1987 to July 1998, Mr. Donohue was employed by Stratus Computer
Inc., having held the positions of Director - Windows/NT Software Development
from November 1997 to July, 1998, Director - Proprietary OS from July 1994 to
November 1997 and Manager - Kernel Development July 1993 to July 1994. From
April 1987 to July 1993, Mr. Donohue served Status Computer, Inc. in various
engineering positions.
Robert M. Russo co-founded the Company and has served as Vice President of
Business Development and Secretary since May 1998. Mr. Russo served as President
and a director of the Company from inception until May 1998, and as Chief
Operating Officer of the Company from December 1993 to May 1998. From May 1987
to June 1990, Mr. Russo served as Vice President of Sales and Marketing of
Essential Resources, Inc., a computer consulting and training company. From
December 1979 to February 1987, Mr. Russo served as President of the North
American Division of H&M Systems Software, Inc., a software developer.
Corey M. Horowitz became Chairman of the Board of Directors of the Company
in January 1996 and has been a member of the Board of Directors since April
1994. Mr. Horowitz is a private investor and President and sole shareholder of
CMH Capital Management Corp., a New York investment advisory and merchant
banking firm, which he founded in September 1991. From January 1986 to February
1991, Mr. Horowitz was a general partner in charge of mergers and acquisitions
at Plaza Securities Co., a New York investment partnership. From July 1984 to
51
<PAGE>
December 1985, Mr. Horowitz was a general partner at Lafer Amster & Co., an
investment partnership. From August 1980 to June 1984, Mr. Horowitz was an
associate at the New York law firm of Skadden, Arps, Slate, Meagher & Flom.
Marcus J. Ranum has served as a director of the Company since June 1998.
Mr. Ranum currently serves as President and Chief Executive Officer of Network
Flight Recorder, Inc., a development stage networking software company which he
founded in March of 1996. From October 1994 to February 1996, Mr. Ranum has
served as Chief Scientist and Executive Manager of V-One Corporation, a company
engaged in the development and marketing of network security products. From June
1994 to October 1994, he served as a consultant in network security, software
analysis and testing, software development and related matters. From November
1992 to June 1994, he served as Senior Scientist of Trusted Information Systems,
Inc. From August 1991 to November 1993, Mr. Ranum served as a consultant to
Digital Equipment Corporation.
All Directors serve until the next annual meeting of stockholders and the
election and qualification of their successors. Executive officers are elected
by, and serve at the discretion of, the Board of Directors. Corey M. Horowitz
was elected a director pursuant to a stockholders' agreement which provided that
certain principal stockholders agreed to vote their shares to elect Mr. Horowitz
to the Board of Directors. The stockholders' agreement terminates upon the
effective date of the offering. There are no family relationships among any of
the Company's directors or executive officers.
The Company has agreed, for a period of five years from the date of this
Prospectus, if so requested by the Underwriter, to nominate and use its best
efforts to elect a designee of the Underwriter as a director of the Company or,
at the Underwriter's option, as a non-voting advisor to the Company's Board of
Directors. The Company's officers, directors and principal stockholders have
agreed to vote their shares of Common Stock in favor of such designee. The
Underwriter has not yet exercised its right to designate such a person.
Board Committees
Prior to the date of this Prospectus, the Board of Directors intends to
establish an Audit Committee and a Compensation Committee. The Audit Committee
will review the qualifications of the Company's independent auditors, make
recommendations to the Board of Directors regarding the selection of independent
auditors, review the scope, fees and results of any audit, and review non-audit
services and related fees provided by the independent auditors.
The Compensation Committee will be responsible for determining compensation
for the executive officers of the Company, including bonuses and benefits, and
will administer the Company's compensation programs, including the Stock Option
Plan.
The Board of Directors does not have a nominating committee. The selection
of nominees for the Board of Directors is made by the entire Board of Directors.
The Board of Directors may from time to time establish other committees to
facilitate the management of the Company.
52
<PAGE>
Director Compensation
To date, directors of the Company have received no cash compensation for
their services as directors. The Company does not currently compensate directors
who are also employees of the Company for service on the Board of Directors. All
Directors are reimbursed for their expenses incurred in attending meetings of
the Board of Directors and its committees. Each non-employee director first
joining the Board of Directors in the future will be granted an option to
purchase 20,000 shares of Common Stock when such director is first elected or
appointed to the Board of Directors, with the option shares vesting over a one
year period in equal quarterly amounts, under the Stock Option Plan. In
addition, each non-employee director will receive an automatic option grant to
purchase 5,000 shares of Common Stock on each year anniversary that such
director is a member of the Board of Directors with the option shares vesting
over a one year period in equal quarterly amounts, under the Stock Option Plan.
All option grants to non-employee directors will be at a per share exercise
price equal to the fair market value of the Common Stock at the time of grant.
See "Management -- Stock Option Plan."
Advisory Board
In March 1996, the Board of Directors established an advisory board (the
"Advisory Board"). The following persons serve on the Advisory Board:
Irwin Lieber has served as President and Chief Executive Officer of
GeoCapital LLC, a registered investment adviser since 1979. He is also a general
partner of Applewood Associates, L.P., a principal stockholder of the Company,
and 21st Century Communications Partners, L.P., each of which is an investment
partnership. Mr. Lieber is also a member of Wheatley Partners, LLC, the general
partner of Wheatley Partners, L.P. and a general partner of Wheatley Foreign
Partners, both of which are investment partnerships. From June 1985 to February
1994, Mr. Lieber served as a director of Cheyenne Software, Inc. Mr. Lieber
currently serves as a director of Learonal, Inc., a public company, and serves
as a director of several private technology corporations.
Barry Rubenstein, a principal stockholder of the Company, is a general
partner of Applewood Associates, L.P., Seneca Ventures and Woodland Venture
Fund, all of which are investment partnerships and stockholders of the Company.
Mr. Rubenstein is a member of Wheatley Partners LLC, the general partner of
Wheatley Partners, L.P. and a general partner of Wheatley Foreign Partners,
L.P., both of which are investment partnerships. In addition, he is a principal
of a general partner of the 21st Century Communications Partners, L.P., which is
also an investment partnership. Prior to his experience as an investor, Mr.
Rubenstein also served as a co-founder of several technology companies,
including Applied Digital Data Systems, Inc., Cheyenne Software, Inc. and
Novell, Inc. Mr. Rubenstein is a director of Infonautics, Inc., The Milbrook
Press, Inc., Source Media Inc., and USWeb Corporation as well as several private
technology companies.
Eli Oxenhorn was Chairman of the Board of Cheyenne Software, Inc. from
October 1986 to May 1994. He was also President and Chief Executive Officer of
Cheyenne Software, Inc. from October 1986 to October 1993. He is currently a
private investor and consultant.
53
<PAGE>
In consideration of their serving on the Advisory Board, in March 1996, the
Company issued to each of Messrs. Lieber, Oxenhorn and Rubenstein warrants to
purchase 31,040 shares of the Company's Common Stock at an exercise price of
$6.44 per share and 31,040 shares of the Company's Common Stock at an exercise
price of $9.66 per share.
Executive Compensation
The following table sets forth the compensation paid by the Company in all
capacities during the year ended December 31, 1997 to its then President and
Chief Operating Officer and to each of its executive officers whose compensation
for such year exceeded $100,000 (the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------- -----------------
Shares
Year Ended Underlying All Other
Name and Principal Position(4) December 31, Salary ($) Bonus ($) Options (#) Compensation
- ------------------------------ ---------------- -------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Robert Russo,
President and Chief Operating
Officer............................. 1997 $145,000(1) -- -- --
William Hancock,
Executive Vice President............ 1997 160,000(2) -- -- --
Peter Mearsheimer,
Vice President of Sales............. 1997 155,000(3) -- 21,728 --
</TABLE>
- ------------------------------------------
(1) Includes $51,692 of deferred salary.
(2) Includes $6,154 of deferred salary.
(3) Includes $5,962 of deferred salary.
(4) Does not include the following executive officers who were employed by the
Company beginning in 1998 and are receiving annual compensation in excess
of $100,000: Avi A. Fogel, President and Chief Executive Officer, Robert P.
Olsen, Vice President of Product Management, Murray P. Fish, Chief
Financial Officer and Joseph A. Donohue, Vice President of Engineering. See
"Management-- Employment Agreements."
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<PAGE>
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended December 31, 1997.
All such options were awarded under the Stock Option Plan.
<TABLE>
<CAPTION>
Option Grants in 1997
---------------------------------------------------------------------------------------
% of Total Option
Number of Shares Granted to
Underlying Options Employees Exercise Price Expiration
Name Granted in 1997(1) Per Share (2) Date
------- ----------- --------- -----
<S> <C> <C> <C> <C>
Peter Mearsheimer 3,104 2% $6.44 5/12/2006
18,624 15% $4.83 9/15/2007
</TABLE>
(1) The number of options granted to employees during 1997 used to compute
this percentage excludes options to purchase 79,152 shares of Common Stock
due to the termination of such options pursuant to their terms.
(2) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock on the date of grant, as determined by the
Board of Directors.
Employment Agreements
On May 18, 1998, the Company entered into an employment agreement with Avi
A. Fogel, pursuant to which Mr. Fogel serves as the Company's Chief Executive
Officer and President for a four year term at an annual base salary of $150,000
per year subject to annual increases in base salary of up to 20% at the
discretion of the Compensation Committee of the Board of Directors. Mr. Fogel is
eligible to receive an additional cash bonus of up to $50,000 as determined by
the Board of Directors in its discretion. In addition, upon execution of his
employment agreement, Mr. Fogel received five year options to purchase 294,879
shares of the Company's common stock at an exercise price of $2.42 per share.
The options granted to Mr. Fogel vested as to 34% of the shares covered thereby
at the time of execution of his employment agreement and vest as 22% of the
shares covered thereby on each of the first three anniversaries thereafter,
subject to acceleration upon a change of control of the Company. In the event
Mr. Fogel's employment agreement is terminated "other than for cause" (as
defined in the agreement), he shall be entitled to (i) the vesting of all
options in the year of termination and 50% of the options that would have vested
in the year following termination and (ii) the lesser of one year's base salary
or the base salary for the balance of the term of the agreement. Mr. Fogel has
agreed not to disclose any confidential information of the Company during the
term of his employment or at any time thereafter or to compete with the Company
during the term of his agreement and for a period of two years thereafter in the
event of termination for cause.
On June 30, 1998, the Company entered into an employment agreement with Mr.
William Hancock pursuant to which Mr. Hancock agreed to continue to serve as the
Company's Chief Technology Officer for a three year term at an annual salary of
$160,000 per annum, subject to additional bonus compensation as determined by
the Compensation Committee of the Board of Directors in its discretion. In the
event Mr. Hancock's employment is terminated for cause (as defined in the
agreement), the Company will have the right to repurchase 50% of the securities
owned by him at the time at a purchase price of $1.00 per share. In the event
Mr. Hancock's employment agreement is terminated "other than for cause" (as
defined in the agreement), he shall
55
<PAGE>
be entitled to receive the lesser of six months base salary or the base salary
for the balance of the term of the term of the agreement. Mr. Hancock has agreed
not to disclose any confidential information of the Company during the term of
his employment or at anytime thereafter or to compete with the Company during
the term of his agreement and for a period of two years thereafter in the event
of termination for cause.
On May 18, 1998, the Company entered into an employment agreement with
Robert P. Olsen pursuant to which Mr. Olsen agreed to serve as the Company's
Vice President of Product Management for a three year term at an annual salary
of $120,000 per annum, subject to an additional cash bonus of $30,000 as
determined by the Compensation Committee of the Board of Directors in its
discretion. Upon execution of his employment agreement, Mr. Olsen received an
incentive stock option to purchase 58,976 shares of the Company's common stock
at an exercise price of $5.60 per share. The options granted to Mr. Olsen vested
as to 34% of the shares covered thereby upon execution of the agreement and 22%
of the shares covered thereby on each of the first three anniversaries
thereafter, subject to acceleration upon a change of control of the Company. In
the event Mr. Olsen's employment agreement is terminated "other than for cause"
(as defined in the agreement), he shall be entitled to (i) the vesting of all
options in the year of termination and 50% of the options that would have vested
in the year following termination and (ii) the lesser of one year base salary or
the base salary for the balance of the term of the agreement. Mr. Olsen has
agreed not to disclose any confidential information of the Company during the
term of his employment or at anytime thereafter or to compete with the Company
during the term of his agreement and for a period of two years thereafter in the
event of termination for cause.
On May 19, 1998, the Company entered into an employment agreement with
Murray P. Fish pursuant to which Mr. Fish agreed to serve as the Company's Chief
Financial Officer for a three year term at an annual salary of $120,000 per
annum, subject to an additional cash bonus of $30,000 as determined by
Compensation Committee of the Board of Directors in its discretion. Upon
execution of his employment agreement, Mr. Fish received an incentive stock
option to purchase 58,500 shares of the Company's common stock at an exercise
price of $5.60 per share. The options granted to Mr. Fish vested as to 34% of
the shares covered thereby upon execution of the agreement and vest as to 22% on
each of the first three anniversaries thereafter, subject to acceleration upon a
change of control of the Company. In the event Mr. Fish's employment agreement
is terminated "other than for cause" (as defined in the agreement), he shall be
entitled to (i) the vesting of all options in the year of termination and 50% of
the options that would have vested in the year following termination and (ii)
the lesser of six months base salary or the base salary for the balance of the
term of the agreement. Mr. Fish has agreed not to disclose any confidential
information of the Company during the term of his employment or at anytime
thereafter or to compete with the Company during the term of his agreement and
for a period of two years thereafter in the event of termination for cause.
On April 4, 1994, the Company entered into an employment agreement with
Robert M. Russo pursuant to which Mr. Russo agreed to then serve as the
Company's President and Chief Operating Officer for a three year term at a base
salary of $145,000 per annum, subject to an additional cash bonus as determined
by the Compensation Committee of the Board of Directors in its discretion. In
February 1996, the Company and Mr. Russo agreed to extend the term of his
employment agreement, upon the same terms and conditions, for an additional two
year period expiring April 1999. In accordance with his agreement, Mr. Russo has
agreed not to disclose any confidential information of the Company during the
term of his employment or at anytime thereafter or to
56
<PAGE>
compete with the Company during the term of his agreement and for a period of
two years thereafter in the event of termination for cause. In May 1998, Mr.
Russo agreed to serve the Company as its Vice President of Business Development
in accordance with the terms and conditions of his employment agreement.
Stock Option Plan
On March 7, 1996, the Board of Directors and stockholders of the Company
approved the adoption of the Stock Option Plan. The Stock Option Plan, as
amended, is intended to assist the Company in securing and retaining key
employees, directors and consultants by allowing them to participate in the
ownership and growth of the Company through the grant of incentive and
non-qualified options (collectively, the "Options"). Under the Stock Option
Plan, key employees (including officers and employee directors) are eligible to
receive grants of incentive stock options. Employees (including officers),
directors of the Company or any affiliates and consultants are eligible to
receive grants of non-qualified options. Incentive stock options granted under
the Stock Option Plan are intended to be "Incentive Stock Options" as defined by
Section 422 of the Internal Revenue Code of 1986, as amended.
The Stock Option Plan has been administered by the Board of Directors and
following the consummation of this offering will be administered by the
Compensation Committee of the Board of Directors of the Company. The
Compensation Committee of the Board of Directors will consist of members who
have been determined by the Board of Directors to be "disinterested persons"
within the meaning of Rule 16b-3(c)(2)(i) promulgated under the Exchange Act or
any future corresponding rule.
The Compensation Committee will determine who shall receive Options, the
number of shares of Common Stock that may be purchased under the Options, the
time and manner of exercise of Options and exercise prices. The term of Options
granted under the Stock Option Plan may not exceed 10 years (five years in the
case of an incentive stock option granted to an optionee owning more than 10% of
the voting stock of the Company) (a "10% Holder"). The exercise price for
incentive stock options shall not be less than 100% of the "fair market value"
of the shares of Common Stock at the time the Option is granted; provided,
however, that with respect to an incentive stock option, in the case of a 10%
Holder, the purchase price per share shall be at least 110% of such fair market
value. The exercise price for non-qualified options is set by the Compensation
Committee in its discretion. The aggregate fair market value of the shares of
Common Stock as to which an optionee may exercise incentive stock options may
not exceed $100,000 in any calendar year. Payment for shares purchased upon
exercise of Options is to be made in cash, check or other instrument, and at the
discretion of the Committee, may be made by delivery of other shares of Common
Stock of the Company. If any Option granted under the Plan expires or terminates
for any reason without having been exercised in full, then the unpurchased
shares subject to the Option will once again be available for additional Option
grants.
Under certain circumstances involving a change in the number of
outstanding shares of Common Stock including a stock split, consolidation,
merger or payment of stock dividend, the class and aggregate number of shares of
Common Stock in respect of which Options may be granted under the Stock Option
Plan, the class and number of shares subject to each outstanding Option and the
exercise price per share will be proportionately adjusted.
57
<PAGE>
An aggregate of 750,000 shares of Common Stock has been reserved for
issuance upon exercise of the Options to be granted under the Stock Option Plan.
As of the date of this Prospectus, the Company has granted Options to purchase
423,908 shares of Common Stock under the Plan, of which Options to purchase
58,976, 58,500, 62,080, 62,500 and 20,000 shares of Common Stock have been
granted to Messrs. Olsen, Fish, Mearsheimer, Donohue, and Ranum, respectively.
The Options granted to Messrs. Olsen and Fish are exercisable at a price of
$5.60 per share, the Options granted to Mr. Mearsheimer are exercisable at
prices ranging from $4.83 to $6.44 per share, and the Options granted to Messrs.
Donohue and Ranum are exercisable at a price of $7.20 per share.
401(k) Plan
The Company maintains the Network-1 Savings and Investment Plan, a defined
contribution pension plan with a cash or deferred arrangement as described in
Section 401(k) of the Internal Revenue Code of 1986, as amended (the "401(k)
Plan"). The 401(k) Plan is intended to qualify under Section 401(a) of the Code,
so that contributions, and income earned thereon, are not taxable to employees
until withdrawn. All regular full-time Company employees over the age of 21 are
eligible to participate in the 401(k) Plan. The 401(k) Plan provides that each
participant may make elective pre-tax salary deferrals up to 15% of his or her
annual compensation, subject to statutory limits. The Company also may make
discretionary annual matching contributions in amounts determined by the
Compensation Committee of the Board of Directors, subject to statutory limits.
The Company's policy is to base its contributions on Company profitability. The
Trustee of the 401(k) Plan invests each employee's account at the direction of
the employee, who may choose among several investment alternatives, which do not
include shares of the Company's Common Stock. The Company did not make any
contributions to the 401(k) Plan during 1997.
Limitation on Liability and Indemnification Matters
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except for liability
(i) for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
The Company's Bylaws provide that the Company'shall indemnify its
directors, officers, employees and agents to the fullest extent permitted by
law. The Company's Bylaws also permit the Company to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions in such capacity, regardless of whether the Bylaws would
permit indemnification. The Company currently maintains liability insurance for
its officers and directors.
At present, there is no pending material litigation or proceeding involving
any director, officer, employee or agent of the Company where indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a material claim for such
indemnification.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of the date of this
Prospectus (after giving effect to the Pro Forma Adjustments and the CommHome
Acquisition) and as adjusted to reflect the sale by the Company of 1,875,000
shares of Common Stock offered hereby, relating to the beneficial ownership of
shares of Common Stock by: (i) each person or entity who is known by the Company
to own beneficially five percent or more of the outstanding shares of Common
Stock; (ii) each director or person who has agreed to become a director of the
Company; (iii) by the Named Executive Officers; and (iv) by all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number of
Shares of Percent of Shares Beneficially Owned (1)
Name and Address Beneficially
of Beneficial Owner Owned
- --------------------------------------------- ---------------- -------------------------------------------------
Before Offering After Offering
------------------------ ------------------------
<S> <C> <C> <C>
Corey M. Horowitz (2)........................ 897,982 32.6% 19.4%
CMH Capital Management Corp.
Pisces Investors, L.P.
Security Partners, L.P.
Applewood Associates, L.P. (3)............... 571,963 21.7 12.7
Robert Russo................................. 298,319 11.3 6.6
William Hancock ............................. 235,057 8.9 5.2
Barry Rubenstein (4)......................... 145,112 5.4 3.2
Avi A. Fogel (5)............................. 125,054 4.6 2.7
Peter Mearsheimer (6)........................ 62,080 2.3 1.4
Robert P. Olsen (7).......................... 26,252 1.0 *
Joseph A. Donohue (8) ....................... 21,250 * *
Murray P. Fish (9)........................... 19,890 * *
Marcus Ranum (10)............................ 5,000 * *
All directors and executive 1,690,884 56.6 34.8%
officers as group (9 persons)..............
</TABLE>
- -------------------
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of the date of this
Prospectus have been exercised and converted. Assumes a base of 2,633,369
shares of Common Stock outstanding prior to this offering and a base of
4,508,369 shares of Common Stock outstanding immediately after this
offering, before any consideration is given to outstanding options,
warrants or convertible securities.
59
<PAGE>
(2) Includes (i) 374,906 shares of Common Stock held by Mr. Horowitz, (ii)
206,933 shares of Common Stock issuable upon conversion of Series
Convertible B Preferred Stock held by Pisces Investors, L.P., a limited
partnership whose general partner is CMH Capital Management Corp. ("CMH"),
a corporation whose sole stockholder and officer is Mr. Horowitz, (iii)
145,887 shares of Common Stock (including 62,080 shares of Common Stock
issuable upon conversion of Series B Convertible Preferred Stock) owned by
Security Partners, L.P. CMH is a general and a limited partner of Security
Partners, L.P., (iv) 45,320 shares of Common Stock held by CMH; and (v)
124,936 shares of Common Stock subject to currently exercisable warrants
held by CMH. Mr. Horowitz disclaims beneficial ownership of the shares held
by Pisces Investors, L.P. and Security Partners, L.P. except to the extent
of his equity interest therein. The address of CMH Capital Management Corp.
is 909 Third Avenue, New York, New York 10022 and the address of Pisces
Investors, L.P. and Security Partners, L.P. is c/o CMH Capital Management
Corp., 909 Third Avenue, New York, New York 10022.
(3) Does not include (i) 31,040, 23,280, 31,040, 4,656 and 3,104 shares of
Common Stock held by Barry Rubenstein, Irwin Lieber, Barry Fingerhut, Seth
Lieber and Jonathan Lieber, respectively, each of which is a general
partner of Applewood Associates L.P., (ii) an aggregate of 99,328 shares of
Common Stock subject to currently exercisable warrants held by Barry
Rubenstein (49,664 shares) and Irwin Lieber (49,664 shares). Each of
Messrs. Rubenstein, I. Lieber, Fingerhut, S. Lieber and J. Lieber disclaim
beneficial ownership of the shares held by Applewood Associates, L.P.,
except to the extent of their equity interest therein. Applewood
Associates, L.P.'s business address is 80 Cuttermill Road, Great Neck, New
York 11021.
(4) Includes (i) 49,664 shares of Common Stock subject to currently exercisable
warrants owned by Mr. Rubenstein, (ii) 41,128 and 23,280 shares of Common
Stock held by Woodland Venture Fund and Seneca Ventures, respectively.
Barry Rubenstein and Woodland Services Corp. are the general partners of
Woodland Venture Fund and Seneca Ventures. Barry Rubenstein is also
President and sole director of Woodland Services Corp. Does not include
571,963 shares held by Applewood Associates, L.P., of which Mr. Rubenstein
is a general partner. Mr. Rubenstein disclaims beneficial ownership of the
shares of Common Stock held by Applewood Associates, L.P., except the
extent of his equity interest therein. The address of Woodland Venture Fund
and Seneca Ventures is c/o Barry Rubenstein, 68 Wheatley Road, Brookville,
New York 11545.
(5) Includes (i) 100,259 shares of Common Stock subject to currently
exercisable stock options, (ii) 17,920 shares of Common Stock to be issued
to Mr. Fogel in connection with the CommHome Acquisition and (iii) 6,875
shares of Common Stock to be issued to Mr. Fogel in satisfaction of
indebtedness owed to Mr. Fogel by CommHome. Does not include 194,620 shares
subject to stock options which are not currently exercisable.
(6) Includes an aggregate of 62,080 shares of Common Stock subject to currently
exercisable stock options issued to Mr. Mearsheimer pursuant to the Stock
Option Plan.
(7) Includes (i) 20,052 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Olsen pursuant to the Stock Option Plan, (ii)
6,200 shares of Common Stock to be issued to Mr. Olsen in satisfaction of
indebtedness owed to Mr. Olsen by CommHome. Does not include 38,924 shares
of Common Stock subject to stock options which are not currently
exercisable.
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<PAGE>
(8) Includes 21,250 shares of Common Stock subject to stock options issued to
Mr. Donohue pursuant to the Stock Option Plan. Does not include 41,250
shares of Common Stock subject to stock options which are not currently
exercisable.
(9) Includes 19,890 shares of Common Stock subject to stock options issued to
Mr. Fish pursuant to the Stock Option Plan. Does not include 38,610 shares
of Common Stock subject to stock options which are not currently
exercisable.
(10) Includes 5,000 shares of Common Stock subject to stock options issued to
Mr. Ranum pursuant to the Stock Option Plan. Does not include 15,000 shares
of Common Stock subject to stock options which are not currently
exercisable.
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CERTAIN TRANSACTIONS
In February and April 1997, the Company issued an aggregate principal
amount of $1,000,000 of notes bearing interest at the rate of 6% per annum, and
warrants to purchase an aggregate of 139,679 shares of the Company's Common
Stock at an exercise price of $6.44 per share in private financings (the
"February and April 1997 Private Financings"). The principal amount of the notes
issued in connection with the February and April 1997 Private Financings, plus
accrued interest thereon, will be repaid from the proceeds of this offering. In
connection with the February and April 1997 Private Financings, the Company
issued a note in the principal amount of $250,000 and warrants to purchase
34,920 shares of Common Stock to Applewood Associates, L.P. ("Applewood"), a
principal stockholder of the Company, and a note in the principal amount of
$50,000 and warrants to purchase 6,984 shares of Common Stock to Herb Karlitz.
Barry Rubenstein, a principal stockholder of the Company, is a general partner
of Applewood. Herb Karlitz is the brother-in-law of Corey M. Horowitz, Chairman
of the Board of Directors and a principal stockholder of the Company. In
connection with the February and April 1997 Private Financings, Robert Russo,
Vice President of Business Development and Secretary of the Company, delivered
to the Company for cancellation 39,110 shares of Common Stock in consideration
of $630, and William H. Hancock, Chief Technology Officer and a director of the
Company, delivered to the Company for cancellation 54,009 shares of Common Stock
in consideration of $870.
On August 30, 1996 the Company entered into an agreement (the "CMH Advisory
Agreement"), as amended, with CMH Capital Management Corp. ("CMH"), a
corporation wholly-owned by Corey M. Horowitz, Chairman of the Board of
Directors and a principal stockholder of the Company, pursuant to which CMH
agreed to render advisory services to the Company in consideration of fees of
$12,500 per month for a period of two years and the issuance of warrants to
purchase 31,040 shares of the Company's Common Stock at an exercise price of
$8.05 per share and 31,040 shares of the Company's Common Stock at an exercise
price of $6.44 per share (collectively, the "CMH Advisory Warrants"). In
addition, the Company agreed that in the event it completes a merger or sale of
substantially all of its assets prior to January 15, 1999, CMH would be entitled
to a cash fee equal to 2% of the value of the total consideration received in
connection with such transaction. CMH agreed that the monthly fee of $12,500
would accrue until the Company completed a financing of a minimum of $5,000,000.
On May 14, 1998, CMH agreed with the Company to convert accrued fees of $200,000
into 31,250 shares of Common Stock of the Company in full satisfaction of
Company's fee obligation to CMH under the CMH Advisory Agreement.
On August 8, 1997, CMH loaned the Company $100,000 at an interest rate of
8% per annum. As further consideration for such loan, the Company agreed to
reduce the exercise price of all of the CMH Advisory Warrants to $3.22 per
share. In addition, the Company agreed to reduce the exercise price of warrants
to purchase 124,159 shares of Common Stock at an exercise price of $3.22 per
share previously issued to Corey M. Horowitz on November 29, 1995 to $1.61 per
share.
On September 26, 1997, the Company issued to Applewood and CMH, principal
stockholders of the Company, notes in the principal amounts of $350,000 and
$50,000, respectively, bearing interest at the rate of 8% per annum, which,
together with accrued and unpaid interest thereon, will be repaid from the
proceeds of this offering and warrants to purchase 62,080 and 8,869 shares of
Common Stock, respectively (the "September 1997 Private Financing"). In
connection with the September 1997 Private Financing, Robert Russo, Vice
President of Business Development and Secretary of the Company, William Hancock,
Chief Technology Officer and a director of the
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Company, and Kenneth Conquest, then Vice President of Engineering of the
Company, delivered to the Company for cancellation 112,373, 86,112 and 10,103
shares of Common Stock, respectively, for an aggregate consideration of $3,360.
On November 21, 1997, CMH loaned the Company $50,000 at an interest rate of
8% per annum pending the Company's receipt of a certain accounts receivable. As
additional consideration for the loan, the Company agreed to further reduce the
exercise price of the CMH Advisory Warrants to $1.61 per share from $3.22 per
share. The aforementioned loan was repaid in full by the Company on December 12,
1997.
From March 2, 1998 through May 14, 1998, the Company issued an aggregate
principal amount of $1,750,000 of notes, bearing interest at the rate of 8% per
annum, and warrants to purchase up to 325,919 shares of Common Stock at an
exercise price of $4.83 per share (the "1998 Private Financing"). In connection
with the 1998 Private Financing, Applewood purchased a $1,300,000 principal
amount note and warrants to purchase 242,111 shares of Common Stock, CMH
purchased a $50,000 note and warrants to purchase 9,312 shares of Common Stock,
Mr. Horowitz purchased a $50,000 principal amount note and warrants to purchase
9,312 shares of Common Stock and Herb Karlitz purchased a $25,000 principal
amount note and warrants to purchase 4,656 shares of Common Stock, at purchase
prices of $1,900,000, $50,000, $50,000, and $25,000, respectively. In
connection with the 1998 Private Financing, Messrs. Russo and Hancock delivered
to the Company for cancellation 38,800 and 23,280 shares of Common Stock,
respectively, for an aggregate consideration of $1,000.
As part of the 1998 Private Financing, in consideration of Applewood's
investment of $1,000,000 in May 1998, the Company, CMH and Applewood entered
into an advisory agreement, which amended the CMH Advisory Agreement, pursuant
to which the Company agreed to increase the cash fee payable to CMH, if the
Company completes a merger or sale of all or substantially all its assets at any
time up to January 15, 2001, from 2% to 3% of the value of the total
consideration received by the Company, and CMH agreed to share such
consideration with Applewood. As further consideration for Applewood's
$1,000,000 investment in May 1998, each of CMH, Mr. Horowitz, Security Partners,
L.P., Messrs. Russo, Hancock and Conquest agreed that for a period of 24 months
from the consummation of this offering, they would not sell in the public market
any securities of the Company owned by them without the consent of Applewood,
unless 60% of the securities owned by Applewood and affiliated parties have been
sold.
On July 8, 1998, the Company entered into an exchange agreement with
certain holders of outstanding warrants and options to which the Company issued
an aggregate of 596,741 shares of its Common Stock in exchange for cancellation
of outstanding warrants and options to purchase 789,521 shares of the Company's
Common Stock. Pursuant to such agreement, Applewood exchanged warrants to
purchase 339,111 shares of Common Stock, at exercise prices of $4.83 and $6.44
per share, for 261,565 shares of Common Stock, Mr. Horowitz and CMH, exchanged
warrants to purchase an aggregate of 151,652 shares of Common Stock, at exercise
prices ranging from $1.61 to $4.83, for 131,267 shares of Common Stock and Herb
Karlitz exchanged warrants to purchase 11,640 shares of Common Stock, at
exercise prices of $4.83 and $6.44 per share, for 8,572 shares of Common Stock.
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Prior to the consummation of this offering, the Company will enter into a
merger agreement with CommHome Systems Corp. ("CommHome"), effective upon
consummation of this offering, pursuant to which the CommHome stockholders have
agreed to exchange all of the outstanding common stock of CommHome for 35,000
shares of Common Stock of the Company. The Company will assume liabilities of
CommHome on the effective date of the merger not in excess of $200,000, which
include $55,000 and $50,000 owed to Avi A. Fogel and Robert P. Olsen,
respectively. Messrs. Fogel and Olsen have agreed to accept 6,875 and 6,200
shares, respectively, of the Company's Common Stock in full satisfaction of such
indebtedness. Avi A. Fogel, President, Chief Executive Officer and a director of
the Company, is also President and Chief Executive Officer of CommHome and owns
51% of the outstanding shares of CommHome.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, par value $0.01 per share, and 5,000,000 shares of Preferred
Stock, par value $.01 per share. As of the date of this Prospectus (after giving
effect to the Pro Forma Adjustments and the Additional Adjustments), Company has
outstanding 2,633,369 shares of Common Stock, held of record by 79 stockholders.
Upon consummation of this offering, there will be 4,508,369 shares of Common
Stock and no shares of Preferred Stock outstanding.
Common Stock
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. There are no cumulative voting rights for
the election of directors, which means that the holders of more than 50% of such
outstanding shares voting for the election of directors can elect all of the
directors of the Company'standing for election. Subject to the rights of any
outstanding class or series of Preferred Stock created by the authority of the
Board of Directors, holders of Common Stock are entitled to received dividends
as and when declared by the Board of Directors out of funds legally available
therefor. Subject to the rights of any outstanding class or series of Preferred
Stock created by the authority of the Board of Directors, in the event of the
liquidation, dissolution or winding up of the Company, the holder of each share
of Common Stock is entitled to share equally in the balance of any of the
Company's assets available for distribution to stockholders. Outstanding shares
of Common Stock do not have subscription or conversion rights and there are no
redemption or sinking fund provisions applicable thereto. Holders of Common
Stock have no preemptive rights to purchase pro-rata portions of new issues of
Common Stock or Preferred Stock of the Company. The outstanding shares of Common
Stock are, and the shares of Common Stock offered by the Company hereby will be,
when issued and sold hereunder, fully paid and non-assessable.
Preferred Stock
Upon the consummation of this Offering, all 500,000 shares of Series B
Preferred Stock outstanding will be converted into 310,399 shares of Common
Stock (See Note F(1) to Notes to Financial Statements for a description of the
Series B Convertible Preferred Stock). The Board is authorized, subject to any
limitations prescribed by Delaware law, to provide for the issuance of
additional shares of Preferred Stock in one or more series, to establish from
time to time the number
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of shares to be included in each such series, to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any qualifications,
limitations or restrictions thereon, and to increase or decrease the number of
shares of any such series (but not below the number of shares of such series
then outstanding), without any further vote or action by the stockholders. The
Board may authorize the issuance of Preferred Stock with voting or conversion
rights that could adversely affect the voting power or other rights of the
holders of Common Stock. Thus, the issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company has no current plan to issue any shares of Preferred Stock.
Warrants and Options
As of the date of this Prospectus, the Company has outstanding warrants
to purchase 336,007 shares of Common Stock (excluding the Underwriter's Warrants
to purchase 187,500 shares of Common Stock) and options to purchase 294,879
shares of Common Stock (excluding options to purchase 423,908 shares of Common
Stock issued pursuant to the Company's Stock Option Plan). All outstanding
warrants are currently exercisable and outstanding options are currently
exercisable to purchase 100,259 shares of Common Stock. The outstanding warrants
are exercisable at prices ranging from $1.61 to $9.66 and expire between
February 2002, and May 2008. The outstanding options are exercisable at $2.42
per share and expire May 2003.
The warrants also entitle the holder to certain registration rights
with respect to the shares of Common Stock issuable upon exercise of such
warrants. No warrantholder has any stockholder rights with respect to the shares
issuable upon exercise of warrants held by such holder until such warrants are
exercised and the purchase price is paid for the shares. Each of the warrants
and options also provides, among other things, for the adjustment of the price
per share and number of shares issuable upon exercise of such warrants and
options upon a merger or consolidation of the Company, reclassification of the
Company's securities, a stock split, subdivision or combination of the Company's
securities, the payment of a dividend in Common Stock of the Company or of
certain other dividends or distributions with respect to the Common Stock of the
Company.
Registration Rights of Certain Holders
The holders of 1,040,612 shares of Common Stock (including warrants
exercisable to purchase 62,856 shares of Common Stock) have been granted certain
demand registration rights, including the right to request on up to two
occasions that the Company file a registration statement with respect to such
shares under the Securities Act and use its best efforts to effect any such
registration. In addition, the holders of 1,453,442 shares of Common Stock
(including warrants exercisable to purchase 336,007 shares) are entitled to
piggyback registration rights with respect to such shares. If the Company
proposes to register any of its securities, either for its own account or for
the account of other stockholders, the Company is required to notify these
holders and, subject to certain conditions and limitations, to include in such
registration all of the shares of Common Stock requested to be included by such
holders. All holders of registration rights have agreed to waive such rights in
connection with this offering and not to exercise any such rights for one year
from the date of this Prospectus, without the Underwriter's prior written
consent.
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In connection with this offering, the Company has agreed to grant the
Underwriter certain demand and piggyback registration rights with respect to the
shares of Common Stock issuable upon exercise of the Underwriter's Warrants. See
"Underwriting."
Delaware Anti-Takeover Law
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on the Nasdaq SmallCap Market from
engaging, under certain circumstances, in a "business combination" (which
includes a merger or sale of more than 10% of the corporation's assets) with any
"interested stockholder" (a stockholder who owns 15% or more of the
corporation's outstanding voting stock) for three years following the date that
such stockholder became an "interested stockholder" unless the business
combination is approved in a prescribed manner. A Delaware corporation may "opt
out" of the Anti-Takeover Law with an express provision in its original or
amended certificate of incorporation or an express provision in its Bylaws
resulting from a stockholders' amendment approved by at least a majority of the
outstanding voting shares. The Company has not "opted out" of the provisions of
the Anti-Takeover Law.
Transfer Agent
The Transfer Agent for the Company's Common Stock is American Stock
Transfer and Trust Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 4,508,369
shares of Common Stock outstanding, of which the 1,875,000 shares being offered
hereby will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate of
the Company" (in general, a person who has a controlling position with regard to
the Company), which will be subject to the resale limitations of Rule 144
promulgated under the Securities Act.
All of the remaining 2,633,369 shares of Common Stock currently outstanding
are "restricted securities" or owned by "affiliates" (as those terms are defined
in Rule 144) and thus may not be sold publicly unless they are registered under
the Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. Of the 2,633,369 restricted shares, an aggregate of 1,977,124
shares will be eligible for sale, without registration, under Rule 144 (subject
to certain volume limitations prescribed by such rule and to the contractual
restrictions described below), commencing 90 days following the date of this
Prospectus and the balance of such shares will become eligible for sale at
various times commencing February 1999. Holders of all of the 2,633,369
outstanding shares of Common Stock have agreed not to (i) sell or otherwise
dispose of any shares of Common Stock or (ii) exercise any rights held by such
holders to cause the Company to register any shares of Common Stock for sale
pursuant to the Securities Act, in each case, for a period of 12 months
following the date of this Prospectus, without the Underwriter's prior written
consent.
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In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least one year
(including the holding period of any prior owner except an affiliate of the
Company) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) 1% of the number of shares of
Common Stock then outstanding (which will equal approximately 45,083 shares
immediately following the consummation of this offering); or (ii) the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any prior owner except an affiliate of the Company), is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Unless otherwise restricted,
"144(k) shares" may therefore be sold immediately upon the consummation of this
offering.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or consultant to the Company
who purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. In both cases, a holder of Rule 701
shares is required to wait until 90 days after the date of this Prospectus
before selling such shares.
Prior to this offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that market sales of shares
of Common Stock or the availability of such shares for sale will have on the
market prices of the Common Stock prevailing from time to time. Nevertheless,
the possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect prevailing market prices for the Common Stock
and could impair the Company's ability to raise capital through the sale of its
equity securities.
UNDERWRITING
Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase the
1,875,000 shares of Common Stock offered hereby from the Company. The
Underwriter is committed to purchase and pay for all of the shares of Common
Stock offered hereby if any of such securities are purchased. The shares of
Common Stock are being offered by the Underwriter, subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to certain
legal matters by counsel and to certain other conditions.
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The Underwriter has advised the Company that it proposes to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus. The Underwriter may allow certain dealers who
are member of the National Association of Securities Dealers, Inc. (the "NASD")
concessions, not in excess of $ per share, of which not in excess of $ per share
may be reallowed to other dealers who are members of the NASD.
The Company has granted to Underwriter an option, exercisable for 45 days
following the date of this Prospectus, to purchase up to 281,250 shares at the
public offering price set forth on the cover page of this Prospectus, less
underwriting discounts and commissions. The Underwriter may exercise this option
in whole or, from time to time, in part, solely for the purpose of covering
over-allotments, if any, made in connection with the sale of the shares offered
hereby.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds derived from the sale of the shares
offered hereby, including any securities sold prior to the Underwriter's
over-allotment option, $50,000 of which has been paid as of the date of this
Prospectus. The Company has also agreed to pay all expenses in connection with
qualifying the shares offered under the laws of such states as the Underwriter
may designate, including expenses of counsel retained for such purpose by the
Underwriter.
The Company has agreed to sell to the Underwriter and its designees, for an
aggregate of $100 (the "Underwriter's Warrants") to purchase up to 187,500
shares of Common stock at an exercise price of $13.20 per share (165% of the
public offering price per share). The Underwriter's Warrants may not be assigned
or hypothecated for one year following the date of this Prospectus, except to
the officers and partners of the Underwriter and members of the selling group,
and are exercisable at any time, in whole or in part, during the four-year
period commencing one year from the date of this Prospectus (the "Warrant
Exercise Term"). During the Warrant Exercise Term, the holders of the
Underwriter's Warrants are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Common Stock. To the extent that the
Warrants are exercised, dilution to the interests of the Company's stockholders
will occur. Further, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected, since the holders of the
Underwriter's Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than in the Underwriter's Warrants. Any profit
realized by the Underwriter on the sale of the Underwriter's Warrants, the
underlying shares of Common Stock or the underlying warrants may be deemed
additional underwriting compensation. The Underwriter's Warrants contain a
cashless exercise provision. Subject to certain limitations and exclusions, the
Company has agreed that, upon the request of the holders of the majority of the
Underwriter's Warrants, the Company will (at its own expense), on one occasion
during the Warrant Exercise term, register the Underwriter's Warrants and the
securities underlying the Underwriter's Warrants under the Securities Act and
that it will include the Underwriter's Warrants and all such underlying
securities in any appropriate registration statement which is filed by the
Company under the Securities Act during the seven years following the date of
this Prospectus.
The Company has agreed, for a period of five years from the date of
this Prospectus, if so requested by the Underwriter, to recommend and use its
best efforts to elect a designee of the Underwriter as a director of the
Company. The Company's officers, directors and principal
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stockholders have agreed to vote their shares of Common Stock in favor of such
designee. The Underwriter has not yet exercised its right to designate such a
person.
All of the Company's officers, directors and securityholders have agreed
not to sell or otherwise dispose any of their securities in the public markets
for a period of twelve months from the date of this Prospectus without the
Underwriter's prior written consent.
The Underwriter has informed the Company that it does not expect sales of
the securities offered discretionary accounts to exceed 1% of the shares offered
hereby.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Prior to this offering there has been no public market for the Common
Stock. Accordingly, the initial public offering price of the Common Stock will
be determined by negotiation between the Company and the Underwriter and may not
necessarily be related to the Company's asset value, net worth or other
established criteria of value. Factors to be considered in determining such
price include the Company's financial condition and prospects, an assessment of
the Company's management, market prices of similar securities of comparable
publicly-traded companies, certain financial and operating information of
companies engaged in activities similar to those of the Company and the general
condition of the securities market.
In order to facilitate the offering, the Underwriter may engage in
transactions that stabilize, maintain, otherwise affect the price of the Common
Stock. Specifically, the Underwriter may over-allotment in connection with the
offering, creating a short position in the Common Stock for its own account. In
addition, to cover over-allotments or to stabilize the price of the Common
Stock, the Underwriter may bid for, and purchase, shares of Common Stock in the
open market. The Underwriter may also reclaim selling concessions allowed to a
dealer for distributing the Common Stock in the offering, if the Underwriter
repurchases previously distributed Common Stock in transactions to cover short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriter is not required to engage in these activities,
and may end any of these activities at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Bizar Martin & Taub, LLP. Certain legal matters in connection with
this offering will be passed upon for the Underwriter by Tenzer Greenblatt LLP.
Bizar Martin & Taub, LLP owns currently exercisable warrants to purchase 9,312
shares of the Company's Common Stock at an exercise price of $6.44 per share.
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EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996
and for each of the years then ended appearing in this Prospectus and
Registration Statement have been audited by Richard A. Eisner & Company, LLP,
independent auditors, as set forth in their report thereon (which contains an
explanatory paragraph with respect to the Company's ability to continue as a
going concern) appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to are not necessarily complete. In each instance, reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, and each such statement is qualified in all respects by
such reference. The Registration Statement, including exhibits and schedules
thereto, may be inspected and copied at the principal office of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained at
prescribed rates from the Public Reference Section of the Commission, at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, registration statements
and certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") systems are publicly available
through the Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
Upon consummation of this offering, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934 and in accordance
therewith will file reports, proxy statements and other information with the
Commission. The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as the Company
deems appropriate or as may be required by law.
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NETWORK-1 SECURITY SOLUTIONS, INC.
<TABLE>
<CAPTION>
Page
<S> <C>
Index to Financial Statements
Independent auditors' report F-2
Balance sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited) F-3
Statements of operations for the years ended December 31, 1996 and 1997 and
for the three months ended March 31, 1997 and 1998 (unaudited) F-4
Statements of stockholders' equity for the years ended December 31, 1996 and 1997 and
for the three months ended March 31, 1998 (unaudited) F-5
Statements of cash flows for the years ended December 31, 1996 and 1997 and
for the three months ended March 31, 1997 and 1998 (unaudited) F-6
Notes to financial statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Network-1 Security Solutions, Inc.
Wellesley, Massachusetts
We have audited the accompanying balance sheets of Network-1 Security Solutions,
Inc. (the "Company") as of December 31, 1996 and 1997 and the related statements
of operations, stockholders' equity and cash flows for each of the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Network-1 Security Solutions, Inc.
as of December 31, 1996 and 1997 and the results of its operations and its cash
flows for each of the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has incurred substantial losses from
operations, and as of December 31, 1997 has a working capital deficiency of
$661,000 and a stockholders' deficiency of $75,000. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
June 17, 1998
With respect to Note J[1]
July 8, 1998
With respect to the third paragraph of Note A
July 17, 1998
F-2
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997 1998
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 217,000 $ 60,000 $ 67,000
Accounts receivable - net of allowance for doubtful accounts
of $5,000, $70,000 and $60,000, respectively 191,000 435,000 286,000
Prepaid expenses and other current assets 30,000 30,000 30,000
--------------- --------------- ---------------
Total current assets 438,000 525,000 383,000
Equipment and fixtures 518,000 400,000 364,000
Capitalized software costs - net 729,000 1,258,000 1,125,000
Security deposits 193,000 131,000 132,000
Deferred offering costs 90,000 90,000
--------------- --------------- ---------------
$ 1,878,000 $ 2,404,000 $ 2,094,000
--------------- --------------- ---------------
--------------- --------------- ---------------
LIABILITIES
Current liabilities:
Accounts payable $ 275,000 $ 776,000 $ 519,000
Accrued fee - related party 138,000 175,000
Accrued expenses and other current liabilities 155,000 201,000 186,000
Notes payable - related parties, net of discount 856,000
Notes payable - others, net of discount 765,000
Interest payable - related parties 40,000
Interest payable - other 47,000
Current portion of capital lease obligations 24,000 8,000 2,000
Deferred revenue 25,000 63,000 76,000
--------------- --------------- ---------------
Total current liabilities 479,000 1,186,000 2,666,000
Capital lease obligations - less current portion 8,000
Notes payable - related parties, net of discount 564,000
Notes payable - others, net of discount 670,000
Interest payable - related parties 24,000
Interest payable - others 35,000
--------------- --------------- ---------------
487,000 2,479,000 2,666,000
--------------- --------------- ---------------
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock - $.01 par value; authorized 5,000,000 shares;
Series A -10% cumulative, none issued and outstanding
Series B - 500,000 shares issued and outstanding 5,000 5,000 5,000
Common stock - $.01 par value; authorized 25,000,000 shares;
2,004,951, 1,706,037 and 1,706,037 shares issued and
outstanding 20,000 17,000 17,000
Additional paid-in capital 6,446,000 7,373,000 7,573,000
Accumulated deficit (5,080,000) (7,470,000) (8,167,000)
--------------- --------------- ---------------
1,391,000 (75,000) (572,000)
--------------- --------------- ---------------
$ 1,878,000 $ 2,404,000 $ 2,094,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
See notes to financial statements
F-3
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
1996 1997 1997 1998
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 624,000 $ 1,632,000 $ 346,000 $ 195,000
Services 403,000 737,000 133,000 144,000
------------- ------------- ------------- -------------
Total revenues 1,027,000 2,369,000 479,000 339,000
------------- ------------- ------------- -------------
Cost of revenues:
Cost of licenses 439,000 497,000 105,000 177,000
Cost of services 298,000 293,000 76,000 75,000
------------- ------------- ------------- -------------
Total cost of revenues 737,000 790,000 181,000 252,000
------------- ------------- ------------- -------------
Gross profit 290,000 1,579,000 298,000 87,000
------------- ------------- ------------- -------------
Operating expenses:
Product development costs 984,000 917,000 97,000 208,000
Selling and marketing 1,614,000 926,000 326,000 140,000
General and administrative 1,931,000 1,573,000 434,000 212,000
------------- ------------- ------------- -------------
Total operating expenses 4,529,000 3,416,000 857,000 560,000
------------- ------------- ------------- -------------
Loss from operations (4,239,000) (1,837,000) (559,000) (473,000)
Interest expense - net (260,000) (553,000) (31,000) (224,000)
------------- ------------- ------------- -------------
Net loss $ (4,499,000) $ (2,390,000) $ (590,000) $ (697,000)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Loss per share - basic and diluted $(2.46) $(1.29) $(.30) $(.41)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of shares
outstanding - basic and diluted 1,825,163 1,855,244 1,942,872 1,706,037
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements
F-4
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance - December 31, 1995 1,164,133 $ 12,000 750,000 $ 7,000
Issuance of common stock for cash - net 698,397 7,000
Issuance of common stock and warrants for
services rendered 18,262
Conversion of notes payable into common stock 108,639 1,000
Redemption of preferred stock (250,000) (2,000)
Exercise of warrants 15,520
Net loss
------------- ---------- ----------- ---------
Balance - December 31, 1996 2,004,951 20,000 500,000 5,000
Issuance of common stock and warrants for
services rendered 2,794
Warrants issued in connection with debt financing
Repurchase and retirement of common shares (301,708) (3,000)
Net loss
------------- ---------- ----------- ---------
Balance - December 31, 1997 1,706,037 17,000 500,000 5,000
Issuance of warrants for services rendered
Warrants issued in connection with debt financing
Net loss
------------- ---------- ----------- ---------
Balance - March 31, 1998 (Unaudited) 1,706,037 $ 17,000 500,000 $ 5,000
------------- ---------- ----------- ---------
------------- ---------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
<S> <C> <C> <C>
Balance - December 31, 1995 $ 1,146,000 (581,000) $ 584,000
Issuance of common stock for cash - net 4,141,000 4,148,000
Issuance of common stock and warrants for
services rendered 683,000 683,000
Conversion of notes payable into common stock 699,000 700,000
Redemption of preferred stock (248,000) (250,000)
Exercise of warrants 25,000 25,000
Net loss (4,499,000) (4,499,000)
------------- -------------- -------------
Balance - December 31, 1996 6,446,000 (5,080,000) 1,391,000
Issuance of common stock and warrants for
services rendered 163,000 163,000
Warrants issued in connection with debt financing 766,000 766,000
Repurchase and retirement of common shares (2,000) (5,000)
Net loss (2,390,000) (2,390,000)
------------- -------------- -------------
Balance - December 31, 1997 7,373,000 (7,470,000) (75,000)
Issuance of warrants for services rendered 25,000 25,000
Warrants issued in connection with debt financing 175,000 175,000
Net loss (697,000) (697,000)
------------- -------------- -------------
Balance - March 31, 1998 (Unaudited) $ 7,573,000 $ (8,167,000) $ (572,000)
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
See notes to financial statement
F-5
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
December 31, March 31,
1996 1997 1997 1998
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,499,000) $ (2,390,000) $ (590,000) $ (697,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 306,000 500,000 28,000 164,000
Issuance of common stock and warrants for
services rendered 683,000 163,000 61,000 25,000
Provision for doubtful accounts (15,000) 65,000 55,000 (10,000)
Depreciation and amortization 368,000 481,000 112,000 171,000
Changes in:
Accounts receivable 131,000 (309,000) (129,000) 159,000
Prepaid expenses and other current assets (15,000)
Accounts payable, accrued expenses and
other current liabilities 196,000 744,000 65,000 (208,000)
Deferred revenue 25,000 38,000 (21,000) 13,000
------------- ------------- ------------- -------------
Net cash used in operating activities (2,820,000) (708,000) (419,000) (383,000)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Acquisitions of equipment and fixtures (235,000) (42,000) (30,000) (3,000)
Capitalized software costs (750,000) (850,000) (283,000)
Security deposit (164,000) 62,000 (1,000) (1,000)
------------- ------------- ------------- -------------
Net cash used in investing activities (1,149,000) (830,000) (314,000) (4,000)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable and
warrants 700,000 1,550,000 650,000 400,000
Repayment of notes payable (400,000) (50,000)
Proceeds from exercise of options and warrants 25,000
Net proceeds from sale of common stock 4,148,000
Repayment of capital lease obligations (23,000) (24,000) (6,000)
Purchase of treasury shares (5,000)
Repayment of line of credit (62,000)
Repayment of stockholder's loan (48,000)
Redemption of preferred stock (250,000)
Deferred offering costs (90,000)
------------- ------------- ------------- -------------
Net cash provided by financing activities 4,090,000 1,381,000 650,000 394,000
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 121,000 (157,000) (83,000) 7,000
Cash and cash equivalents - beginning of period 96,000 217,000 217,000 60,000
------------- ------------- ------------- -------------
Cash and cash equivalents - end of period $ 217,000 $ 60,000 $ 134,000 $ 67,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 32,000 $ 1,000
Noncash transaction:
Issuance of stock in connection with repayment of
debt $ 700,000
</TABLE>
F-6
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
Network-1 Security Solutions, Inc. (the "Company"), formerly known as Network-1
Software & Technology, Inc., develops, markets, licenses and supports its
proprietary network security software products designed to provide comprehensive
security to computer networks. The Company also provides maintenance and network
consulting and training services.
The accompanying financial statements have been prepared on a going concern
basis. As reflected in the accompanying financial statements, the Company has
incurred substantial losses from operations and as of December 31, 1997 has a
working capital deficiency of $661,000 and a stockholders' deficiency of
$75,000. Subsequent to December 31, 1997 through May 14, 1998, the Company
received $1,750,000 in short-term debt financing, a significant portion of which
was from principal stockholders of the Company. However, the Company will
require additional financing to satisfy its obligations and fund its operations
through December 31, 1998. Also, in May 1998, the Company'signed a letter of
intent with an underwriter for the sale of its securities in an initial public
offering (the "Offering"). There is no assurance, however, that the Offering
will be consummated or that the Company will be able to obtain alternative
financing. The above factors give rise to substantial doubt as to the ability of
the Company to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
On July 17, 1998, the stockholders approved a 1 for 1.610831 reverse split of
the outstanding shares of the Company's common stock. The accompanying financial
statements have been retroactively adjusted to reflect the split and all
references to numbers of common shares, options, warrants and per share amounts
have been restated to give effect to the split.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
[1] Cash equivalents:
The Company considers all highly liquid short-term investments purchased
with a maturity of three months or less to be cash equivalents.
[2] Revenue recognition:
In October 1997, the AICPA issued Statement of Position ("SOP") No. 97-2,
"Software Revenue Recognition," which the Company adopted, effective
January 1, 1997. Such adoption had no effect on the Company's methods of
recognizing revenue from its license and service activities. Prior to 1997,
the Company's revenue recognition policy was in accordance with SOP No.
91-1, "Software Revenue Recognition."
License revenue is recognized upon delivery of software or delivery of a
required software key. Service revenues consist of maintenance, consulting
and training services. Annual renewable maintenance fees are a separate
component of each contract, and are recognized ratably over the contract
term. Consulting and training revenues are recognized as such services are
performed.
[3] Equipment and fixtures:
Equipment and fixtures are stated at cost and are depreciated using the
straight-line method over their estimated useful lives of five years.
F-7
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[4] Software development costs:
Costs to maintain developed programs and development costs incurred to
establish the technological feasibility of computer software are expensed
as incurred. The Company capitalizes costs incurred in producing computer
software after technological feasibility of the software has been
established. Such costs are amortized based on current and estimated future
revenue of each product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of the product. The
Company estimates the economic life of its software to be three years. At
each balance sheet date, the unamortized capitalized software costs of each
product are compared with the net realizable value of that product and any
excess capitalized costs are written off.
[5] Income taxes:
The Company utilizes the liability method of accounting for income taxes.
Under such method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect at the balance sheet date. The
resulting asset or liability is adjusted to reflect enacted changes in tax
law.
[6] Loss per share:
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
requires the reporting of basic and diluted earnings/loss per share. Basic
loss per share is calculated by dividing net loss by the weighted average
number of outstanding common shares during the year. Diluted per share data
includes the dilutive effects of options, warrants and convertible
securities. As all potential common shares are anti-dilutive, they are not
included in the calculation of diluted loss per share. Loss per share for
1996 has been presented to conform to SFAS No. 128.
[7] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
[8] Financial instruments:
The carrying amounts of accounts receivable, accounts payable, accrued
expenses, capitalized lease obligations and notes payable approximate their
fair value as the interest rates on the Company's indebtedness approximate
current market rates and due to the short period to maturity of these
instruments.
F-8
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for the three-month
periods ended March 31, 1997 and 1998)
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[9] Stock-based compensation:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation". SFAS No. 123 encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has elected to continue to account for its
employee stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"),
Accounting for Stock Issued to Employees" and to disclose the pro forma
effect on net loss per share had the fair value of options been expensed.
Under the provisions of APB No. 25, compensation cost for stock options is
measured as the excess, if any, of the estimated market value of the
Company's common stock at the date of the grant over the amount an employee
must pay to acquire the stock.
[10] Interim financial statements:
The accompanying balance sheet as of March 31, 1998, the statement of
changes in stockholders' equity for the three-month period then ended and
the statements of operations and cash flows for the three-month periods
ended March 31, 1997 and 1998 are unaudited. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of
operations for the three-month period ended March 31, 1998 are not
necessarily indicative of the results to be expected for the year ended
December 31, 1998.
NOTE C - EQUIPMENT AND FIXTURES
Equipment and fixtures are summarized as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997 1998
(Unaudited)
<S> <C> <C> <C>
Office and computer equipment $ 669,000 $ 661,000 $ 663,000
Furniture and fixtures 59,000 59,000 59,000
Leasehold improvements 46,000 46,000 46,000
------------- ------------- -------------
774,000 766,000 768,000
Less accumulated depreciation (256,000) (366,000) (404,000)
------------- ------------- -------------
$ 518,000 $ 400,000 $ 364,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-9
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE D - CAPITALIZED SOFTWARE COSTS
<TABLE>
<CAPTION>
Three
Months
Year Ended Ended
December 31, March 31,
1996 1997 1998
(Unaudited)
<S> <C> <C> <C>
Balance, beginning of period (net of accumulated
amortization) $ 225,000 $ 729,000 $ 1,258,000
Additions 750,000 850,000
Amortization (246,000) (321,000) (133,000)
------------- ------------- -------------
Balance, end of period (net of accumulated
amortization) $ 729,000 $ 1,258,000 $ 1,125,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Amortization of capitalized software costs is included in cost of licenses in
the accompanying statements of operations.
NOTE E - NOTES PAYABLE
Notes payable is summarized as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
<S> <C> <C>
Notes payable on the earlier of a) January 1, 1999 b) the date
upon which the Company receives $6,000,000 net proceeds
of equity or debt financing from one or a series of transactions
c) a sale of all of the Company's assets or d) a merger or
consolidation of the Company:
Notes bearing interest at 6%, including $250,000 payable
to a related party (1) $ 650,000 $ 650,000
Notes bearing interest at 6% (2) 350,000 350,000
Note bearing interest at 8%, payable to a related party (3) 100,000 100,000
Notes bearing interest at 8%, payable to related parties (4) 400,000 400,000
Notes payable to related parties on the earlier of a) March 2, 1999
b) the date upon which the Company receives $6,000,000 net
proceeds of equity or debt financing from one or a series of
transactions c) a sale of all of the Company's assets or
d) a merger or consolidation of the Company; bearing
interest at 8% (5) 400,000
---------------- -------------
1,500,000 1,900,000
Less unamortized debt discount (266,000) (279,000)
---------------- -------------
$ 1,234,000 $ 1,621,000
---------------- -------------
---------------- -------------
</TABLE>
F-10
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE E - NOTES PAYABLE (CONTINUED)
(1) In connection with the issuance of the notes, including $250,000 issued to
an entity which is a principal stockholder of the Company, the Company
issued ten-year warrants valued at $290,000 to purchase 90,791 shares of
the Company's common stock at an exercise price of $6.44 per share,
increasing the effective interest rate on the notes to 91%.
(2) In connection with the issuance of the notes, the Company issued ten-year
warrants valued at $159,000 to purchase 48,888 shares of the Company's
common stock at an exercise price of $6.44 per share, increasing the
effective interest rate to 94%.
(3) In connection with the issuance of the note to a corporation wholly owned
by the Chairman of the Board and a principal stockholder of the Company,
the Company agreed to reduce the exercise price of previously issued
warrants to the noteholder from $6.44 per share (31,040 shares) and $8.05
per share (31,040 shares) to $3.22 per share (see Note G[5]). In addition,
the Company agreed to reduce the exercise price of warrants to purchase
124,159 shares of common stock at an exercise price of $3.22 per share
previously issued to the noteholder to $1.61 per share. The Company valued
the modified warrants at $45,000 in excess of the value ascribed to the
original warrants, increasing the effective interest rate to 96%. The
warrants exercisable at $3.22 per share were further reduced to $1.61 per
share in connection with the issuance in November 1997 of a note for
$50,000 to the same corporation referred to above which was repaid in
December 1997. This modification was valued at $22,000 in excess of the
value ascribed to the warrants as previously modified.
(4) In connection with the issuance of the notes to an entity which is a
principal stockholder of the Company and to the corporation referred to in
(3) above, the Company issued ten-year warrants valued at $168,000 to
purchase 70,949 shares of the Company's common stock at an exercise price
of $4.83 per share, increasing the effective interest rate to 86%.
(5) In connection with the issuance of the notes, $350,000 of which are payable
to the entities referred to in (4) above, the Company issued ten-year
warrants valued at $175,000 to purchase 74,496 shares of the Company's
common stock at an exercise price of $4.83 per share, increasing the
effective interest rate to 92%.
The proceeds from the issuance of the notes were allocated to the debt and the
warrants based on their estimated fair values. The Company estimated the fair
value of these warrants using the Black-Scholes pricing model and has accounted
for this amount as a debt discount to be amortized over the life of the debt.
Interest expense for the years ended December 31, 1996, 1997 and for the three
months ended March 31, 1997 and 1998 includes $325,000, $268,000, $10,000 and
$117,000, respectively, of interest and amortization of debt discount on notes
to related parties.
In April and May 1998, the Company borrowed an additional $1,350,000. The notes
bear interest at 8% per annum and are payable on the earlier of a) one year b)
the date upon which the Company receives $6,000,000 net proceeds of equity or
debt financing from one or a series of transactions c) a sale of all of the
Company's assets or d) a merger or consolidation of the Company. In connection
therewith, the Company issued ten-year warrants valued at $591,000 to purchase
251,423 shares of the Company's common stock at an exercise price of $4.83 per
share increasing the effective interest rate to 92%.
F-11
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE F - STOCKHOLDERS' EQUITY
[1] Preferred stock:
The Company has outstanding 500,000 shares of Series B convertible
preferred stock. Such stock is convertible on a 1.610831-to-1 basis into
common shares and automatically converts into common shares upon the
completion of an initial public offering of the Company's securities which
results in gross proceeds to the Company of a minimum of $4,000,000. The
preferred stock has identical voting rights as the Company's common stock
and has a liquidation preference of $1.00 per share.
[2] Stock options and warrants:
During 1996, the Board of Directors and stockholders approved the adoption
of the 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan, as amended,
provides for the granting of both incentive and non-qualified options to
purchase up to 750,000 shares of common stock of the Company.
The term of options granted under the 1996 Plan may not exceed ten years
(five years in the case of an incentive stock option granted to an optionee
owning more than 10% of the voting stock of the Company). The option price
for incentive stock options can not be less than 100% of the fair market
value of the shares of common stock at the time the option is granted (110%
for a 10% stockholder). The exercise price for non-qualified options is set
by the Compensation Committee in its discretion.
The following table summarizes the activity under the 1996 Plan:
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended
1996 1997 March 31, 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period 104,139 $6.44 184,687 $5.72
Granted 107,398 $6.44 159,700 $5.54 103,984 $4.83
Cancelled (3,259) $6.44 (79,152) $6.30 (62,080) $5.51
----------- ----------- -----------
Options outstanding at end of
period 104,139 $6.44 184,687 $5.72 226,591 $5.38
----------- ----------- -----------
----------- ----------- -----------
Options exercisable at end of
period 84,118 $6.44 184,687 $5.72 226,591 $5.38
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-12
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
[2] Stock options and warrants: (continued)
The following table presents information relating to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
Weighted
Weighted Average
Average Remaining
Exercise Life in
Shares Price Years
<S> <C> <C>
82,876 $4.83 9.75
101,811 $6.44 9.03
-------
184,687 $5.72 9.35
-------
-------
</TABLE>
The following table presents information relating to stock options
outstanding at March 31, 1998 (unaudited):
Options Outstanding and Exercisable
<TABLE>
<CAPTION>
Weighted
Weighted Average
Average Remaining
Exercise Life in
Shares Price Years
<S> <C> <C>
150,543 $4.83 9.79
76,048 $6.44 8.79
-------
226,591 $5.38 9.45
-------
-------
</TABLE>
The weighted average fair value at date of grant for options granted during
the year ended December 31, 1996 and 1997 and the three months ended March
31, 1998 were $3.19, $2.77 and $2.32 per option, respectively. There were
no options granted during the three months ended March 31, 1997. The fair
value of options at date of grant was estimated using the Black-Scholes
option pricing model utilizing the following weighted average assumptions:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997 1998
(Unaudited)
<S> <C> <C> <C>
Risk-free interest rates 6.43% 6.50% 5.50%
Expected option life in years 6 6 6
Expected stock price volatility 40% 40% 40%
Expected dividend yield 0% 0% 0%
</TABLE>
F-13
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
[2] Stock options and warrants: (continued)
Had the Company elected to recognize compensation cost based on the fair
value of the options at the date of grant as prescribed by SFAS 123, net
loss for the years ended December 31, 1996 and 1997 and for the three-month
period ended March 31, 1998 would have been $(4,842,000), $(2,832,000) and
$(938,000) or $(2.65) per share, $(1.53) per share and $(.55) per share,
respectively.
[3] The Company has the following warrants; and options referred to in [4]
below to purchase common stock outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Number
of Exercise
Shares Price
<S> <C>
186,239 $1.61
62,856 2.42
62,080 3.22
70,949 4.83
318,159 6.44
93,120 9.66
-----------
793,403
-------------
-------------
</TABLE>
Subsequent to December 31, 1997 in connection with the issuance of notes,
the Company issued warrants to purchase 325,919 shares of the Company's
common stock at an exercise price of $4.83. The Company also issued a
warrant to purchase 6,208 shares of the Company's common stock at an
exercise price of $6.04 for services rendered.
[4] Private placement:
During March 1996, the Company completed a private placement of its
securities. The Company issued 667,357 shares of its common stock for $6.44
a share, yielding gross proceeds of $4,300,000. In connection with the
private placement the Company incurred costs aggregating $352,000 including
$279,000 in commissions and expense allowance paid to the placement agent.
The Company also issued options to purchase 66,736 shares of common stock
at an exercise price of $6.44 per share expiring in March 2001 to the
placement agents in connection with the private placement. The investors in
the private placement were granted certain demand and piggyback
registration rights. The Company also sold 31,040 shares of stock in 1996
receiving proceeds of $200,000.
F-14
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE G - COMMITMENTS AND CONTINGENCIES
[1] Operating leases:
The Company leases office facilities in Florida, New York and Texas under
operating leases expiring through 1999. Rental commitments for the
remaining term of the Company's noncancellable leases relating to office
space expiring at various dates through 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1998 $ 120,000
1999 31,000
-----------
$ 151,000
-----------
-----------
</TABLE>
Rental expense for the years December 31, 1996 and 1997 and for the
three-month periods ended March 31, 1997 and 1998 aggregated $142,000,
$146,000, $37,000 and $36,000, respectively.
[2] Software distribution agreements:
[a] In June 1997, the Company entered into a software distribution
agreement pursuant to which the Company licensed, on a nonexclusive
basis, the right to incorporate and/or bundle certain technology of the
Company, with the customer's products. In connection therewith, the
Company, which is entitled to royalties based on the customer's sales,
received a $500,000, nonrefundable prepaid royalty, which is included
in license revenue for the year ended December 31, 1997.
[b] In September 1997, the Company entered into a software distribution
agreement, pursuant to which the Company has the right to incorporate
certain technology into its software. The Company is required to make
certain royalty payments based on unit sales as defined. The Company is
obligated to pay a minimum of $100,000 in royalties pursuant to the
agreement for the period September 1997 to March 30, 1999. As of
December 31, 1997 and March 31, 1998, accrued royalty payable was
approximately $29,000 and $37,000, respectively.
[c] In July 1996, the Company entered into an agreement pursuant to which
certain technology was developed for the Company. The Company is
required to make certain royalty payments based on unit sales as
defined, up to a maximum royalty payment of $100,000. For the year
ended December 31, 1997 and the three months ended March 31, 1998,
royalties owed pursuant to such agreement were de minimus.
[3] Employment agreements:
In May 1998, the Company entered into an employment agreement with its
President and Chief Executive Officer which provides for a base salary of
$150,000, subject to annual increases of up to 20% by the Board of
Directors at their discretion. The agreement also provides for an annual
bonus of up to $50,000 as determined by the Board of Directors in its
discretion. The agreement expires in May 2002. In connection therewith, the
Company granted the President a five-year option to purchase 294,879 shares
of the Company's common stock at an exercise price of $2.42 per share. The
option vests 34% immediately and then 22% per year thereafter. As the
estimated fair value of the Company's common stock at the date of grant of
the option ($5.60 per share) was in excess of the exercise price the
Company will incur aggregate compensation expense of approximately $900,000
over the four-year service period.
F-15
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE G - COMMITMENTS AND CONTINGENCIES
[3] Employment agreements: (continued)
The Company has employment agreements with five other officers providing
for aggregate annual salaries of $218,000 through April 1999 with respect
to two officers and aggregate annual salaries of $400,000 through May and
June 2001 with respect to three officers. Certain of the agreements provide
for the granting of bonuses at the discretion of the Board of Directors, as
well as options to purchase shares of common stock.
Aggregate salary commitments pursuant to employment agreements are
$526,000, $622,000, $550,000, $330,000 and $62,000 for 1998, 1999, 2000,
2001 and 2002, respectively.
[4] Savings and investment plan:
The Company has a Savings and Investment Plan which allows participants to
make contributions by salary reduction pursuant to Section 401(k) of the
Internal Revenue Code of 1986. The Company also may make discretionary
annual matching contributions in amounts determined by the Board of
Directors, subject to statutory limits. The Company did not make any
contributions to the 401(k) Plan during the years ended December 31, 1996,
1997 and the three months ended March 31, 1998.
[5] Financial advisory agreement:
In September 1996, as amended in January 1997, the Company entered into a
financial advisory agreement with a corporation owned by the Chairman of
the Board and a principal stockholder, which expires in January 1999.
Pursuant to such agreement, monthly fees of $12,500 were to be paid to such
corporation, and the Company issued two 7-year warrants, each to purchase
up to 31,040 shares of common stock at an exercise price of $6.44 and
$8.05, respectively. Such exercise prices were subsequently reduced to an
exercise price of $1.61 per share (see Note E[3]). The Company also agreed
to pay such corporation and another corporation which is a principal
stockholder of the Company, a cash fee equal to 3% of the total proceeds or
other consideration received in connection with a merger or sale of
substantially all of the Company's assets completed by January 2001.
Expenses under the agreement, including amortization of the value ascribed
to the warrants, included in general and administrative expenses, for the
year ended December 31, 1997 and the three-month periods ended March 31,
1997 and 1998 amounted to $253,000, $58,000 and $50,000, respectively.
On May 14, 1998, the Company issued 31,250 shares of common stock to this
entity in satisfaction of amounts owed pursuant the financial advisory
agreement.
F-16
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE H - INCOME TAXES
The principal components of deferred tax assets and valuation allowance are as
follows:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1996 1997 1998
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,464,000 $ 2,122,000 $ 2,780,000
Common stock and warrants issued for
compensation and debt discount, not yet
deductible 266,000 525,000 599,000
Other 240,000 261,000 275,000
--------------- --------------- ---------------
1,970,000 2,908,000 3,654,000
Valuation allowance (1,970,000) (2,908,000) (3,654,000)
--------------- --------------- ---------------
Net deferred tax asset $ 0 $ 0 $ 0
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The Company has recorded a valuation allowance for the full amount of its
deferred tax assets as the likelihood of its future realization cannot be
presently determined.
The difference between the tax benefit and the amount that would be computed by
applying the statutory federal income tax rate to loss before taxes is
attributable to the following:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
1996 1997 1997 1998
<S> <C> <C> <C> <C>
Income tax benefit - statutory rate (34.0)% (34.0)% (34.0)% (34.0)%
Increase in valuation allowance on deferred
tax assets 34.0% 34.0% 34.0% 34.0%
---------- ---------- ---------- -----------
0% 0% 0% 0%
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
At December 31, 1997, the Company has available net operating loss carryforwards
to reduce future federal taxable income of approximately $5,500,000 for tax
reporting purposes which expire from 2009 through 2012. Pursuant to the
provisions of the Internal Revenue Code, future utilization of these past losses
is subject to certain limitations based on changes in the ownership of the
Company's stock that have occurred or may occur.
NOTE I - OTHER MATTERS
[1] For the year ended December 31, 1997, approximately $500,000 (21%) and
$331,000 (14%) of the Company's revenues were from two customers. For the
three months ended March 31, 1998, approximately $80,000 (24%) and $45,000
(13%) of the Company's revenues were from two different customers. No
customer accounted for 10% or more of the Company's revenue for the year
ended December 31, 1996 or for the three months ended March 31, 1997.
[2] For the years ended December 31, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998, export sales of the Company's products
amounted to approximately $69,000, $370,000, $144,000 and $9,000,
respectively.
F-17
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
Notes to Financial Statements
(unaudited with respect to data as of March 31, 1998 and for
the three-month periods ended March 31, 1997 and 1998)
NOTE J - SUBSEQUENT EVENTS
[1] On July 8, 1998, the Company entered into an agreement with certain of its
option and warrant holders pursuant to which the Company issued 596,741
shares of its common stock in exchange for cancellation of outstanding
warrants to purchase 789,521 shares of the Company's common stock.
[2] The Company has agreed in principle to acquire for 35,000 shares of its
common stock and the assumption of liabilities of up to $200,000 all of the
outstanding common stock of CommHome Systems Corp. ("CommHome") effective
upon the consummation of the offering. The Company's President is also the
President of CommHome and owns 51% of its outstanding common stock. Of the
assumed liabilities, $105,000 is owed to two officers of the Company and
will be satisfied by the issuance of 13,125 shares of common stock. The
Company will incur a charge of approximately $465,000 for purchased
research and development upon the acquisition. CommHome is a development
stage company and has had no revenues. The principal activity has been the
design of residential networking solutions. The Company intends to
incorporate CommHome's designs into its future security products.
F-18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been
authorized to give any information or to make any
representations other than those contained in this
Prospectus in connection with this offering and, if given
or made, such information or representations must not
be relied upon as having been authorized by the
Company or the Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer
to buy any security other than the securities offered by this
Prospectus, or an offer to sell or a solicitation of an offer
to buy any securities by anyone in any jurisdiction in
which such offer or solicitation is not authorized or is
unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances,
create any implication that the information contained
herein is correct as of any time subsequent to the date
hereof.
TABLE OF CONTENTS
Page
----
Prospectus Summary.............................. 3
Risk Factors ................................... 7
Use of Proceeds................................. 20
Dilution ....................................... 22
Dividend Policy ................................ 23
Capitalization.................................. 23
Selected Financial Data......................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 25
Business........................................ 33
Management...................................... 50
Principal Stockholders.......................... 59
Certain Transactions............................ 62
Description of Securities....................... 64
Shares Eligible for Future Sale................. 66
Underwriting.................................... 67
Legal Matters................................... 69
Experts......................................... 70
Additional Information.......................... 70
Index to Financial Statements...................F-1
Until _______________, 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
[NETWORK-1 LOGO]
1,875,000 Shares
NETWORK-1 SECURITY
SOLUTIONS, INC.
Common Stock
---------------------
Prospectus
---------------------
Whale Securities Co., L.P.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
As permitted by Section 102(b)(7) of the Delaware General Corporation Law
(the "GCL"), Article VI of the Company's Amended and Restated Certificate of
Incorporation, filed as Exhibit 3.1 hereto, includes a provision that eliminates
any director's personal liability to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director. Such elimination of
personal liability does not apply to the following: (i) breach of the duty of
loyalty to the Company or its stockholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law;
(iii) payment of an illegal dividend or an illegal redemption or purchase of the
Company's stock, pursuant to Section 174 of the GCL; or (iv) any transaction
from which the director derived an improper benefit. If the GCL is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Company'shall be
eliminated or limited to the fullest extent permitted by the GCL, as so amended.
Any repeal or modification of this Article by the stockholders of the Company
shall not adversely affect any right or protection of a director of the Company
with respect to events occurring prior to the time of such repeal or
modification.
As permitted by Section 145 of the GCL, pursuant to Article VII of the
Company's Amended and Restated Certificate of Incorporation, the Company, to the
fullest extent permitted by the provisions of the GCL, as now or hereafter in
effect, indemnifies any director, officer, employee or agent of the Company and
certain other persons serving at the request of the Company in related
capacities against amounts paid and expenses incurred in connection with an
action or proceeding to which that person is or is threatened to be made a party
by reasons of such position, if such person shall have acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Company and, in any criminal proceeding, if such person had no reasonable
cause to believe his conduct was unlawful; provided that, in the case of actions
brought by or in the right of the Company, no indemnification shall be made with
respect to any matter as to which such person shall have been adjudged to be
liable to the Company unless and only to the extent that the adjudicating court
determines that such indemnification is proper under the circumstances. The
indemnification provided by Article VII of the Company's Amended and Restated
Certificate of Incorporation does not limit or exclude any rights, indemnities
or limitations of liability to which any person may be entitled, whether as a
matter of law, under the Bylaws of the Company, by agreement, vote of the
stockholders or vote of disinterested directors of the Company or otherwise.
The Company believes that the indemnification provisions contained in
Article VI and Article VII of the Company's Amended and Restated Certificate of
Incorporation have assisted and will assist the Company in attracting and
retaining qualified individuals to serve as directors and officers.
The Underwriting Agreement, filed as Exhibit 1.1 hereto, provides for
indemnification by the Underwriter of the Company, its directors and officers,
and by the Company of the Underwriter, for certain liabilities, including
liabilities under the Act, and affords certain rights of contribution with
respect thereto.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the securities being registered.
The foregoing, except for the SEC Registration Fee and NASD Filing Fee are
estimates.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee.......................................................................................$ 5,818.94
NASD Filing Fee............................................................................................$ 2,472.52
NASDAQ SmallCap Listing Fee................................................................................$ 10,000
Boston Stock Exchange Listing Fee..........................................................................$ 7,500
Accounting Fees and Expenses...............................................................................$ 80,000
Legal Fees and Expenses (other than Blue Sky)..............................................................$ 180,000
Blue Sky Fees and Expenses (including legal and filing fees)...............................................$ 50,000
Printing and Engraving Expenses............................................................................$ 100,000
Directors' and Officers' Liability Insurance...............................................................$ 50,000
Transfer Agent Fees and Expenses...........................................................................$ 2,500
Miscellaneous..............................................................................................$ 19,708.54
-----------------
Total......................................................................................................$ 508,000
</TABLE>
Item 26. Recent Sales of Unregistered Securities
During the past three years, the Company has issued unregistered securities
to the persons described below. No underwriting discounts or commissions were
paid in connection with such issuance of securities, except in connection with
the Company's issuance of an aggregate 667,357 shares of Common Stock on March
14, 1996 and March 21, 1996 (the "March 1996 Private Offering," as further
described below under paragraph 5). In issuing the securities described below,
the Company relied upon the exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), by reason of Section
4(2) thereof and Regulation D promulgated thereunder, based on the fact that
each investor was either an "accredited investor" as such term is defined in
Rule 501 of Regulation D promulgated under the Securities Act or such investor
had such knowledge and experience in financial and business matters that such
person was capable of evaluating the merits and risks of the investment. The
share amounts below reflect a stock split at the rate of 12,836.97-to-1 on March
2, 1994, and a reverse stock split at the rate of 1-for-1.61083 on July 20,
1998.
(1) On November 29, 1995, the Company issued to Corey M. Horowitz warrants to
purchase 124,160 shares of Common Stock at an exercise price of $3.22 per
share, expiring November 29, 2005, in consideration for a loan of $150,000.
II-2
<PAGE>
(2) On November 29, 1995, the Company issued to the CAPCOR Employee Pension
Plan warrants to purchase 62,080 shares of Common Stock at an exercise
price of $3.22 per share, expiring November 29, 2005, in consideration for
a loan of $75,000.
(3) On March 14, 1996, the Company issued to each of Irwin Lieber, Barry
Rubenstein and Eli Oxenhorn warrants to purchase 31,040 shares of Common
Stock at an exercise price of $6.44 per share, expiring March 14, 2006, and
warrants to purchase 31,040 shares of Common Stock at an exercise price of
$9.67 per share, expiring March 14, 2006, in consideration for their
agreement to serve on the Company's advisory board.
(4) On March 14, 1996, the Company issued to Bizar Martin & Taub, LLP warrants
to purchase 9,312 shares of Common Stock at an exercise price of $6.44 per
share, expiring March 14, 2006, in consideration for services rendered.
(5) On March 14, 1996 and March 21, 1996, in connection with the March 1996
Private Offering, the Company issued to 34 investors an aggregate 667,357
shares of Common Stock, in consideration for payment of $6.44 per share,
for an aggregate consideration of $4.3 million. GKN Securities Corp. served
as Placement Agent for the March 1996 Private Offering, and received a 4.5%
sales commission (or $193,500). The Company also issued to GKN Securities
Corp., related parties and Barington Capital Group, L.P. options to
purchase an aggregate 66,736 shares of Common Stock at an exercise price of
$6.44 per share, expiring March 14, 2001, in consideration of $100.
(6) On March 14, 1996, the Company issued to Corey M. Horowitz 24,832 shares of
Common Stock and 83,808 shares of Common Stock to Security Partners, L.P.
in consideration for conversion of outstanding debt in the aggregate
principal amount of $700,000.
(7) On March 21, 1996, the Company issued to J. Robert Scott, Inc. 6,467 shares
of Common Stock in consideration for services rendered.
(8) On April 26, 1996, the Company issued to Michael Stansky and Jill Stansky
as Tenants of the Entirety, w/r/o/s, 3,880 shares of Common Stock, in
consideration for payment of $6.44 per share or aggregate consideration of
$25,000.
(9) On April 28, 1996, the Company issued to James J. Pallotta 7,760 shares of
Common Stock, in consideration for payment of $6.44 per share or aggregate
consideration of $50,000.
(10) On April 29, 1996, the Company issued to Robert Russo 2,483 shares of
Common Stock in consideration for services rendered as the Company's
President.
(11) On June 3, 1996, the Company issued to Navigator Fund, L.P. 17,615 shares
of Common Stock in consideration for payment of $6.44 per share or
aggregate consideration of $113,500.
(12) On June 3, 1996, the Company issued to Navigator Global Fund 1,785 shares
of Common Stock in consideration for payment of $6.44 per share or
aggregate consideration of $11,500.
II-3
<PAGE>
(13) On October 3, 1996, the Company issued to each of Craig Bandes and Mona
Geller 7,760 shares of Common Stock, upon the exercise of stock options by
Bandes and Geller at an exercise price of $1.61 per share or aggregate
consideration of $25,000. The stock options had been issued pursuant to
Stock Option Agreements, dated April 4, 1994, in consideration for
financial advisory services rendered to the Company.
(14) On October 11, 1996, the Company issued to CMH Capital Management Corp.
("CMH") warrants to purchase 31,040 shares of Common Stock at an exercise
price of $8.05 per share, expiring October 11, 2003, in consideration for
financial advisory services.
(15) On October 22, 1996, the Company issued to Communica, Inc. and related
parties 9,312 shares of Common Stock in consideration for services
rendered.
(16) The Company's Stock Option Plan provides for the grant of stock options to
key employees, directors, and consultants of the Company (the "Stock Option
Plan"). Under the Stock Option Plan, employees (including officers and
employee directors) are eligible to receive grants of incentive stock
options, which are intended to be "Incentive Stock Options" as defined by
Section 422 of the Internal Revenue Code of 1986, as amended. Employees
(including officers), directors of the Company or any affiliates or
consultants are eligible to receive grants of non-qualified options. An
aggregate of 465,598 shares of Common Stock has been reserved for issuance
upon exercise of outstanding options issued under the Stock Option Plan.
The Company believes that the Employee Stock Option grants described in
this paragraph are exempt from the registration requirements of the
Securities Act by reason of Rule 701 promulgated thereunder, because such
options were granted pursuant to a written compensatory benefit plan of the
Company, copies of which were provided to each participant, and the
aggregate offering price did not exceed the limit prescribed by Rule 701 in
connection with any such grant. As of July 15, 1998, pursuant to the Stock
Option Plan, options to purchase an aggregate of 423,908 shares of Common
Stock were outstanding, including options to purchase 36,316 shares of
Common Stock at an exercise price of $6.44 per share, options to purchase
127,264 shares of Common Stock at an exercise price of $4.83 per share,
options to purchase 177,828 shares of Common Stock at an exercise price of
$5.60 per share, and options to purchase 82,500 shares of Common Stock at
an exercise price of $7.20 per share. No such outstanding options had been
exercised.
(17) On January 15, 1997, the Company issued to CMH warrants to purchase 31,040
shares of Common Stock at an exercise price of $6.44 per share, expiring
January 15, 2004, in consideration for financial advisory services to the
Company.
(18) In February and April of 1997, the Company borrowed $1 million through the
issuance to ten (10) investors of unsecured promissory notes, bearing 6%
interest (the "February and April 1997 Private Financing"), and due at the
earlier of (i) one year from the date of issuance, (ii) the date upon which
the Company receives $4,000,000 net proceeds (after deduction of all
related offering expenses) of equity or debt financing from one transaction
or a series of transactions, (iii) a sale of all or substantially all of
the Company's assets or (iv) a merger or consolidation of the Company. In
addition, as part of the February and April 1997 Private Financing,
investors received receive ten (10) year warrants to purchase an aggregate
of 139,679 shares of Common Stock at an exercise price of $6.44 per share
(the "Warrants"), as follows:
II-4
<PAGE>
(a) On February 24, 1997, the Company issued to Charles P.
Stevenson, Jr. warrants to purchase 13,968 shares of Common Stock in
consideration for a loan of $100,000;
(b) On February 24, 1997, the Company issued to Albert Kalimian
warrants to purchase 6,984 shares of Common Stock in consideration for
a loan of $50,000;
(c) On February 24, 1997, the Company issued to Raptur Management
Co. warrants to purchase 13,968 shares of Common Stock in
consideration for a loan of $100,000;
(d) On February 24, 1997, the Company issued to Douglas Lipton
warrants to purchase 6,984 shares of Common Stock in consideration for
a loan of $50,000;
(e) On February 24, 1997, the Company issued to Applewood
Associates, L.P. warrants to purchase 34,920 shares of Common Stock in
consideration for a loan of $250,000;
(f) On February 24, 1997, the Company issued to Lawrence Wein
warrants to purchase 3,492 shares of Common Stock in consideration for
a loan of $25,000;
(g) On February 24, 1997, the Company issued to Steven Heineman
warrants to purchase 3,492 shares of Common Stock in consideration for
a loan of $25,000;
(h) On February 24, 1997, the Company issued to Herb Karlitz
warrants to purchase 6,984 shares of Common Stock in consideration for
a loan of $50,000;
(i) On April 29, 1997, the Company issued to Navigator Fund, L.P.
warrants to purchase 42,882 shares of Common Stock in consideration
for a loan of $307,000; and
(j) On April 29, 1997, the Company issued to Navigator Global
Fund warrants to purchase 6,006 shares of Common Stock in
consideration for a loan of $43,000.
(19) On February 24, 1997, the Company issued to Alan Kaufman warrants to
purchase 9,312 shares of Common Stock at an exercise price of $6.44 per
share, expiring February 24, 2007, in consideration for services rendered.
(20) On August 8, 1997, the Company agreed to reduce the exercise prices of
warrants to purchase 31,040 shares of Common Stock, at an exercise price of
$8.05 per share, issued to CMH on October 11, 1996 and warrants to purchase
31,040 shares of Common Stock, at an exercise price of $6.44 per share,
issued to CMH on January 15, 1997, to an exercise price of $3.22 per share,
in consideration for a loan $100,000 made by CMH. In addition, the
II-5
<PAGE>
Company agreed to reduce the exercise price of warrants to purchase 124,160
shares of Common Stock, at an exercise price of $3.22 per share, issued to
Corey M. Horowitz on November 29, 1995, to an exercise price of $1.61 per
share, in consideration for that same loan.
(21) On September 26, 1997, the Company issued to Applewood Associates, L.P.
warrants to purchase 62,080 shares of Common Stock at an exercise price of
$4.83 per share, expiring September 26, 2007, in consideration for a loan
of $350,000.
(22) On September 26, 1997, the Company issued to CMH warrants to purchase 8,869
shares of Common Stock at an exercise price of $4.83 per share, expiring
September 26, 2007, in consideration for a loan of $50,000.
(23) On November 12, 1997, the Company issued to Progressive Strategies, Inc.
2,794 shares of Common Stock in consideration for services rendered.
(24) On November 21, 1997, in consideration of a loan of $50,000, the Company
agreed to reduce the exercise prices to $1.61 of warrants to purchase
31,040 shares of Common Stock, originally issued to CMH at an exercise
price of $8.05 per share on October 11, 1996 and warrants to purchase
31,040 shares of Common Stock, originally issued to CMH at an exercise
price of $6.44 per share on January 15, 1997.
(25) On February 17, 1998, the Company issued to Venture Strategies, Inc.
warrants to purchase 6,208 shares of Common Stock at an exercise price of
$6.04 per share, expiring February 17, 2002, in consideration for services
rendered.
(26) On March 2, 1998, the Company issued an aggregate of $400,000 of promissory
notes and ten year warrants to purchase up to 74,496 shares of Common Stock
at an exercise price of $4.83 per share to four (4) investors including
Applewood Associates, L.P. ($300,000 note and warrants to purchase 55,871
shares of common stock), CMH Capital Management Corp.($50,000 note and
warrants to purchase 9,312 shares of common stock), Robert Graifman
($25,000 note and warrants to purchase 4,656 shares of common stock) and
Herb Karlitz ($25,000 note and warrants to purchase 4,656 shares of common
stock).
(27) On April 24, 1998, the Company issued to each of Corey Horowitz and MBF
Capital Corp. ten (10) year warrants to purchase 9,312 shares of Common
Stock at an exercise price of $4.83 per share in consideration for a loan
of $50,000 by each party.
(28) On May 10, 1998, the Company issued 2,897 shares of Common Stock to High
Tech Ventures in consideration for services rendered.
(29) On May 14, 1998, the Company issued an aggregate of $1,250,000 of
promissory notes and ten (10) year warrants to purchase up to 232,799
shares of Common Stock at an exercise price of $4.83 per share to Applewood
Associates, L.P. ($1,000,000 note and warrants to purchase 186,239 shares)
and Bentley One, Ltd. ($250,000 note and warrants to purchase 46,560
shares).
II-6
<PAGE>
(30) On May 18, 1998, the Company issued a five (5) year option to Avi A. Fogel
to purchase up to 294,879 shares of the Common Stock at an exercise price
of $2.42 per share, in consideration for Mr. Fogel's execution of his
employment agreement. The shares underlying the option vest as follows: 34%
on the date of issuance of the option and 22% per year for each year
thereafter.
(31) On May 14, 1998, the Company issued 50,399 shares of Common Stock to CMH in
connection with advisory services rendered to the Company.
(32) On July 8, 1998, the Company issued an aggregate of 596,741 shares of its
Common Stock in exchange for the cancellation of outstanding warrants and
options to purchase an aggregate of 789,521 shares of Common Stock, as
follows:
(a) 261,565 shares of its Common Stock to Applewood Associates, L.P.
in exchange for warrants to purchase 339,111 shares of Common
Stock;
(b) 14,070 shares of its Common Stock to CMH Capital Management Corp.
in exchange for warrants to purchase 18,181 shares of Common
Stock;
(c) 117,138 shares of its Common Stock to Corey M. Horowitz in
exchange for warrants to purchase 133,471 shares of Common Stock;
(d) 49,381 shares of its Common Stock to CAPCOR Employee Pension Plan
in exchange for warrants to purchase 62,080 shares of Common
Stock;
(e) 9,824 shares of its Common Stock to Raptur Management Co. in
exchange for warrants to purchase 13,968 shares of Common Stock;
(f) 4,912 shares of its Common Stock to Douglas Lipton in exchange
for warrants to purchase 6,984 shares of Common Stock;
(g) 2,456 shares of its Common Stock to Lawrence Wein in exchange for
warrants to purchase 3,492 shares of Common Stock;
(h) 2,456 shares of its Common Stock to Steven Heineman in exchange
for warrants to purchase 3,492 shares of Common Stock;
(i) 8,572 shares of its Common Stock to Herb Karlitz in exchange for
warrants to purchase 11,640 shares of Common Stock;
(j) 9,824 shares of its Common Stock to Charles P. Stevenson, Jr. in
exchange for warrants to purchase 13,968 shares of Common Stock;
(k) 4,912 shares of its Common Stock to Albert Kalimian in exchange
for warrants to purchase 6,984 shares of Common Stock;
(l) 30,374 shares of its Common Stock to Navigator Fund, L.P. in
exchange for warrants to purchase 42,882 shares of Common Stock;
II-7
<PAGE>
(m) 4,254 shares of its Common Stock to Navigator Global Fund in
exchange for warrants to purchase 6,006 shares of Common Stock;
(n) 3,625 shares of its Common Stock to Robert Graifman in exchange
for warrants to purchase 4,656 shares of Common Stock;
(o) 7,278 shares of its Common Stock to MBF Capital Corp. in exchange
for warrants to purchase 9,312 shares of Common Stock;
(p) 36,441 shares of its Common Stock to Bentley One, Ltd. in
exchange for warrants to purchase 46,560 shares of Common Stock;
(q) 6,897 shares of its Common Stock to Barington Capital Group, L.P.
in exchange for options to purchase 15,520 shares of Common
Stock;
(r) 9,560 shares of its Common Stock to GKN Securities Corp. in
exchange for options to purchase 21,510 shares of Common Stock;
(s) 3,869 shares of its Common Stock to David M. Nussbaum in exchange
for options to purchase 8,707 shares of Common Stock;
(t) 3,869 shares of its Common Stock to Robert Gladstone in exchange
for options to purchase 8,707 shares of Common Stock;
(u) 3,869 shares of its Common Stock to Roger Gladstone in exchange
for options to purchase 8,707 shares of Common Stock;
(v) 593 shares of its Common Stock to Deborah L. Schondorf in
exchange for options to purchase 1,335 shares of Common Stock;
(w) 104 shares of its Common Stock to Neil Betoff in exchange for
options to purchase 233 shares of Common Stock;
(x) 455 shares of its Common Stock to Richard Buonocore in exchange
for options to purchase 1,024 shares of Common Stock;
(y) 166 shares of its Common Stock to Brian K. Coventry in exchange
for options to purchase 372 shares of Common Stock;
(z) 276 shares of its Common Stock to Andrew G. Lazarus in exchange
for options to purchase 621 shares of Common Stock;
II-8
<PAGE>
Item 27. Exhibits
The following is a list of all Exhibits filed as part of this
Registration Statement.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Underwriter's Warrant
2.1 Merger Agreement, dated , 1998, between the Company and CommHome Systems Corp.*
-----
3.1 Certificate of Incorporation of the Company, as amended
3.2 By-laws of the Company, as amended
4.1 Form of Common Stock Certificate*
4.2 Company's Stock Option Plan, as amended
5.1 Opinion of Bizar Martin & Taub, LLP *
10.1 Employment Agreement, dated May 18, 1998, between the Company and Avi A. Fogel, and amendment,
dated May 30, 1998
10.2 Employment Agreement, dated May 18, 1998, between the Company and Robert P. Olsen
10.3 Employment Agreement, dated May 19, 1998, between the Company and Murray P. Fish
10.4 Employment Agreement, dated June 30, 1998, between the Company and William Hancock
10.5 Employment Agreement, dated April 4, 1994, between the Company and Robert Russo, and amendment,
dated February 16, 1996
10.6 Waiver, dated June 30, 1998, of salary increases by William Hancock and Robert Russo
10.7 Lease and Service Agreement, dated June 5, 1998, between the Company and Alliance Wellesley
L.P.*
10.8 Lease, dated June 29, 1994, between the Company and Greenview Limited Partnership
10.9 Agreement, dated August 30, 1996, between the Company and CMH Capital Management Corp. ("CMH"),
with respect to advisory services, and amendments, dated January 15, 1997, and
January 30, 1997
10.10 Agreement, dated May 14, 1998, between the Company, CMH and Applewood Associates, L.P. with
respect to advisory services
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
<S> <C>
10.11 Master Software License Agreement, dated November 10, 1997, between the Company and Electronic
Data System Corporation, and amendment, dated May 29, 1998**
10.12 Software Distribution Agreement, dated June 5, 1997, between the Company and Trusted
Information Systems, Inc.**
10.13 Software Distribution Agreement, dated September 26, 1997, between the Company and Trusted
Information Systems, Inc.**
10.14 Reseller Agreement, dated April 17, 1998, between the Company and Aventail Software Corporation **
10.15 Agreement, dated January 31, 1997, among the Company, Robert Russo and William Hancock, in
which Messrs. Russo and Hancock surrendered shares of Common Stock
10.16 Agreement, dated September 26, 1997, between the Company, Robert Russo, William Hancock, and
Kenneth Conquest, in which Messrs. Russo, Hancock, and Conquest surrendered shares of Common Stock
10.17 Agreement, dated May 14, 1998, among the Company, Robert Russo and William Hancock, in which
Messrs. Russo and Hancock surrendered shares of Common Stock
10.18 Agreement, dated May 14, 1998, between the Company and CMH, in connection with the issuance of
shares for advisory fees
10.19 Exchange Agreement, dated July 8, 1998, between the Company and certain of its holders of
outstanding warrants and options
23.1 Consent of Richard A. Eisner & Company, LLP
23.2 Consent of Bizar Martin & Taub, LLP (included in Exhibit 5.1)*
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
</TABLE>
---------------------------------------
* To be filed by amendment.
** Confidential treatment requested for certain provisions.
Item 28. Undertakings
The Registrant will provide to the Underwriter specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
II-10
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim from indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
For purpose of determining any liability under the Securities of 1933, each
post-effective amendment that contains a Form of Prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
For purposes of determining any liability under the Securities Act, the
information omitted from the Form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the Form of
Prospectus filed by Company pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
II-11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the Township of
Wellesley, Commonwealth of Massachusetts on the 22nd day of July, 1998
Network-1 Security Solutions, Inc.
By: /s/ Avi A. Fogel
------------------------------------------
Avi A. Fogel, President and
Chief Executive Officer
POWER OF ATTORNEY
Network-1 Security Solutions, Inc., a Delaware corporation, and each person
whose signature appears below constitutes and appoints Avi A. Fogel and Corey M.
Horowitz, and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
file the same, with exhibits and schedules thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact, full power and authority to do and perform each and every
act and thing necessary or desirable to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, thereby
ratifying and confirming all that said attorney-in-fact, or substitute, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated:
Name Title Date
/s/ Avi A. Fogel President, Chief Executive Officer July 22, 1998
- ----------------------- and Director (principal executive
Avi A. Fogel officer) and Director (principal
executive officer)
/s/ William H. Hancock Chief Technology Officer and July 22, 1998
- ----------------------- Director
William H. Hancock
/s/ Murray P. Fish Chief Financial Officer July 22, 1998
- ----------------------- (principal financial officer
Murray P. Fish and principal accounting officer)
/s/ Robert Russo Vice President of Business July 22, 1998
- ----------------------- Development
Robert Russo
/s/ Corey M. Horowitz Chairman of the Board of Directors July 22, 1998
- -----------------------
Corey M. Horowitz
<PAGE>
Registration No. 333
_______________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
EXHIBITS
FILED WITH
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________
NETWORK-1 SECURITY SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
Volume 1
_____________________________________________________________________________
<PAGE>
EXHIBIT INDEX
Exhibit Exhibit Page
Number
________________________________________________________________________
1.1 Form of Underwriting Agreement
1.2 Form of Underwriter's Warrant
2.1 Merger Agreement, dated July , 1998, between the Company
and CommHome Systems Corp.*
3.1 Certificate of Incorporation of the Company, as amended
3.2 By-laws of the Company, as amended
4.1 Form of Common Stock Certificate*
4.2 Company's 1996 Stock Option Plan, as amended
5.1 Opinion of Bizar Martin & Taub, LLP*
10.1 Employment Agreement, dated May 18, 1998, between the
Company and Avi A. Fogel, and amendment, dated May 30, 1998
10.2 Employment Agreement, dated May 18, 1998, between the
Company and Robert P. Olsen
10.3 Employment Agreement, dated May 19, 1998, between the
Company and Murray P. Fish
10.4 Employment Agreement, dated June 30, 1998, between the
Company and William Hancock
10.5 Employment Agreement, dated April 4, 1994, between the
Company and Robert Russo, and amendment, dated February 16,
1996
10.6 Waiver, dated June 30, 1998, of salary increases by William
Hancock and Robert Russo
10.7 Lease and Service Agreement, dated June 5, 1998, between the
Company and Alliance Wellesley L.P.*
10.8 Lease, dated June 29, 1994, between the Company and Greenview
Limited Partnership
10.9 Agreement, dated August 30, 1996, between the Company and CMH
Capital Management Corp. ("CMH"), with respect to advisory
services, and amendments, dated January 15, 1997, and January
30, 1997
<PAGE>
Exhibit Exhibit Page
Number
_________________________________________________________________________
10.10 Agreement, dated May 14, 1998, between the Company, CMH
and Applewood Associates, L.P. with respect to advisory
services
10.11 Master Software License Agreement, dated November 10, 1997,
between the Company and Electronic Data Systems Corporation,
and amendment, dated May 29, 1998**
10.12 Software Distribution Agreement, dated June 5, 1997, between
the Company and Trusted Information Systems, Inc.**
10.13 Software Distribution Agreement, dated September 26, 1997,
between the Company and Trusted Information Systems, Inc.**
10.14 Reseller Agreement, dated April 17, 1998, between the Company
and Aventail Software Corporation**
10.15 Agreement, dated January 31, 1997, among the Company, Robert
Russo and William Hancock, in which Russo and Hancock
surrendered shares of Common Stock
10.16 Agreement, dated September 26, 1997, between the Company,
Robert Russo, William Hancock, and Kenneth Conquest, in which
Messrs. Russo, Hancock, and Conquest surrendered shares of
Common Stock
10.17 Agreement, dated May 14, 1998, among the Company, Robert
Russo and William Hancock, in which Messrs. Russo and Hancock
surrendered shares of Common Stock
10.18 Agreement, dated May 14, 1998, between the Company and CMH, in
connection with the issuance of shares for advisory fees
10.19 Exchange Agreement, dated July 8, 1998, between the Company
and certain of its holders of outstanding warrants and options
23.1 Consent of Richard A. Eisner & Company, LLP
23.2 Consent of Bizar Martin & Taub, LLP (included in Exhibit 5.1)*
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
_______________________
*To be filed by amendment.
**Confidential treatment requested for certain provisions.
<PAGE>
Exhibit 1.1
Network-1 Security Solutions, Inc.
1,875,000 Shares of Common Stock
(Par Value $.01 Per Share)
UNDERWRITING AGREEMENT
Whale Securities Co., L.P. New York, New York
650 Fifth Avenue August __, 1998
New York, New York 10019
Dear Sirs:
Network-1 Security Solutions, Inc, a Delaware corporation
(the "Company"), proposes to issue and sell to Whale Securities Co., L.P.
(the "Underwriter") 1,875,000 shares of common stock, par value $.01 per
share (the "Offered Shares"), which Offered Shares are presently authorized
but unissued shares of the common stock, par value $.01 per share
(individually, a "Common Share" and collectively the "Common Shares"), of the
Company. In addition, the Underwriter, in order to cover over-allotments in
the sale of the Offered Shares, may purchase up to an aggregate of 281,250
Common Shares (the "Optional Shares"; the Offered Shares and the Optional
Shares are hereinafter sometimes collectively referred to as the "Shares").
The Shares are described in the Registration Statement, as defined below. The
Company also proposes to issue and sell to the Underwriter for its own
account and the accounts of its designees, warrants to purchase an aggregate
of 187,500 Common Shares at an exercise price of $13.20 per share (the
"Underwriter's Warrants"), which sale will be consummated in accordance with
the terms and conditions of the form of Underwriter's Warrant filed as an
exhibit to the Registration Statement (as hereinafter defined).
The Company hereby confirms its agreement with the
Underwriter as follows:
1. Purchase and Sale of Offered Shares. On the basis of the representations
and warranties herein contained, but subject to the terms and conditions
herein set forth, the Company hereby agrees to sell the Offered Shares to the
Underwriter, and the Underwriter agrees to purchase the Offered Shares from
the Com pany, at a purchase price of $____ per share. The Underwriter plans
to offer the Shares to the public at a public offering price of $8.00 per
Offered Share.
<PAGE>
2. Payment and Delivery.
(a) Payment for the Offered Shares will be
made to the Company by wire transfer or certified or official bank check or
checks payable to its order in New York Clearing House funds, at the offices
of the Underwriter, 650 Fifth Avenue, New York, New York 10019, against
delivery of the Offered Shares to the Underwriter. Such payment and delivery
will be made at ______, New York City time, on the third business day
following the Effective Date (the fourth business day following the Effective
Date in the event that trading of the Offered Shares commences on the day
following the Effective Date), the date and time of such payment and delivery
being herein called the "Closing Date." The certificates representing the
Offered Shares to be delivered will be in such denominations and registered
in such names as the Underwriter may request not less than two full business
days prior to the Closing Date, and will be made avail able to the
Underwriter for inspection, checking and packaging at the office of the
Company's transfer agent or correspondent in New York City, American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005, not less
than one full business day prior to the Closing Date.
(b) On the Closing Date, the Company will
sell the Underwriter's Warrants to the Underwriter or to the designees of the
Underwriter limited to officers and partners of the Underwriter, members of
the selling group and/or their officers or partners (collectively, the
"Underwriter's Designees"). The Underwriter's Warrants will be in the form
of, and in accordance with, the provisions of the Underwriter's Warrant
attached as an exhibit to the Registration Statement. The aggregate purchase
price for the Underwriter's Warrants is $187.50. The Underwriter's Warrants
will be restricted from sale, transfer, assignment or hypothecation for a
period of one year from the Effective Date, except to the Underwriter's
Designees. Payment for the Underwriter's Warrant Agreement will be made to
the Company by check or checks payable to its order on the Closing Date
against delivery of the certificates representing the Underwriter's Warrants.
The certificates representing the Underwriter's Warrants will be in such
denominations and such names as the Underwriter may request prior to the
Closing Date.
3. Option to Purchase Optional Shares.
(a) For the purposes of covering any over
allotments in connection with the distribution and sale of the Offered Shares
as contemplated by the Prospectus, the Underwriter is hereby granted an
option to purchase all or any part of the Optional Shares from the Company.
The purchase price to be paid for the Optional Shares will be the same price
per Optional Share
-2-
<PAGE>
as the price per Offered Share set forth in Section 1 hereof. The option granted
hereby may be exercised by the Underwriter as to all or any part of the Optional
Shares at any time within 45 days after the Effective Date. The Underwriter will
not be under any obligation to purchase any Optional Shares prior to the
exercise of such option.
(b) The option granted hereby may be exercised by
the Underwriter by giving oral notice to the Company, which must be confirmed
by a letter, telex or telegraph setting forth the number of Optional Shares
to be purchased, the date and time for delivery of and payment for the
Optional Shares to be purchased and stating that the Optional Shares referred
to therein are to be used for the purpose of covering over-allotments in
connection with the distribution and sale of the Offered Shares. If such
notice is given prior to the Closing Date, the date set forth therein for
such delivery and payment will not be earlier than either two full business
days thereafter or the Closing Date, whichever occurs later. If such notice
is given on or after the Closing Date, the date set forth therein for such
delivery and payment will not be earlier than two full business days
thereafter. In either event, the date so set forth will not be more than 15
full business days after the date of such notice. The date and time set forth
in such notice is herein called the "Option Closing Date." Upon exercise of
such option, the Company will become obligated to convey to the Underwriter,
and, subject to the terms and conditions set forth in Section 3(d) hereof,
the Underwriter will become obligated to purchase, the number of Optional
Shares specified in such notice.
(c) Payment for any Optional Shares purchased will
be made to the Company by wire transfer or certified or official bank check
or checks payable to its order in New York Clearing House funds, at the
office of the Underwriter, against delivery of the Optional Shares purchased
to the Underwriter. The certificates representing the Optional Shares to be
delivered will be in such denominations and registered in such names as the
Underwriter requests not less than two full business days prior to the Option
Closing Date, and will be made available to the Underwriter for inspection,
checking and packaging at the aforesaid office of the Company's transfer
agent or correspondent not less than one full business day prior to the
Option Closing Date.
(d) The obligation of the Underwriter to purchase
and pay for any of the Optional Shares is subject to the accuracy and
completeness (as of the date hereof and as of the Option Closing Date) of and
compliance in all material respects with the representations and warranties
of the Company herein, to the accuracy and completeness of the statements of
the Company or its
-3-
<PAGE>
officers made in any certificate or other document to be delivered by the
Company pursuant to this Agreement, to the performance in all material
respects by the Company of its obligations hereunder, to the satisfaction by
the Company of the conditions, as of the date hereof and as of the Option
Closing Date, set forth in Section 3(b) hereof, and to the delivery to the
Underwriter of opinions, certificates and letters dated the Option Closing
Date substantially similar in scope to those specified in Section 5, 6(b),
(c), (d), (e) and (f) hereof, but with each reference to "Offered Shares" and
"Closing Date" to be, respectively, to the Optional Shares and the Option
Closing Date.
4. Representations and Warranties of the Company. The
Company represents and warrants to, and agrees with, the Underwriter that:
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware, with full power and authority, corporate and other, to own or lease
and operate, as the case may be, its properties, whether tangible or
intangible, and to conduct its business as described in the Registration
Statement and to execute, deliver and perform this Agreement and the
Underwriter's Warrant Agreement and to consummate the transactions
contemplated hereby and thereby. The Company is duly qualified to do business
as a foreign corporation and is in good standing in all jurisdictions wherein
such qualification is necessary and failure so to qualify could have a
material adverse effect on the financial condition, results of operations,
business or properties of the Company. The Company has no subsidiaries.
(b) This Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding obligation of
the Company, and the Underwriter's Warrant Agreement, when executed and
delivered by the Company on the Closing Date, will be the valid and binding
obligations of the Company, enforceable against the Company in accordance
with their respective terms. The execution, delivery and performance of this
Agreement and the Underwriter's Warrant Agreement by the Company, the
consummation by the Company of the transactions herein and therein
contemplated and the compliance by the Company with the terms of this
Agreement and the Underwriter's Warrant Agreement have been duly authorized
by all necessary corporate action and do not and will not, with or without
the giving of notice or the lapse of time, or both, (i) result in any
violation of the Certificate of Incorporation or By-Laws, each as amended, of
the Company; (ii) result in a breach of or conflict with any of the terms or
provisions of, or constitute a default under, or result in the modification
or termination of, or result in the creation or imposition of any lien,
security interest, charge or
-4-
<PAGE>
encumbrance upon any of the properties or assets of the Company pursuant to
any indenture, mortgage, note, contract, commitment or other agreement or
instrument to which the Company is a party or by which the Company or or any
of its properties or assets is or may be bound or affected; (iii) violate any
existing applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over
the Company or any of its properties or business; or (iv) have any effect on
any permit, certification, registration, approval, consent order, license,
franchise or other authorization (collectively, the "Permits") necessary for
the Company to own or lease and operate its properties and to conduct its
business or the ability of the Company to make use thereof.
(c) No Permits of any court or governmental agency
or body, other than under the Securities Act of 1933, as amended (the "Act"),
the Regulations (as hereinafter defined) and applicable state securities or
Blue Sky laws, are required (i) for the valid authorization, issuance, sale
and delivery of the Shares to the Underwriter, and (ii) the consummation by
the Company of the transactions contemplated by this Agreement or the
Underwriter's Warrant Agreement.
(d) The conditions for use of a registration
statement on Form SB-2 set forth in the General Instructions to Form SB-2
have been satisfied with respect to the Company, the transactions
contemplated herein and in the Registration Statement. The Company has
prepared in conformity with the requirements of the Act and the rules and
regulations (the "Regulations") of the Securities and Exchange Commission
(the "Commission") and filed with the Commission a registration statement
(File No. 333- ) on Form SB-2 and has filed one or more amendments thereto,
covering the registration of the Shares under the Act, including the related
preliminary prospectus or preliminary prospectuses (each thereof being herein
called a "Preliminary Prospectus") and a proposed final prospectus. Each
Preliminary Prospectus was endorsed with the legend required by Item
501(a)(5) of Regulation S-B of the Regulations and, if applicable, Rule 430A
of the Regulations. Such registration statement including any documents
incorporated by reference therein and all financial schedules and exhibits
thereto, as amended at the time it becomes effective, and the final
prospectus included therein are herein, respectively, called the
"Registration Statement" and the "Prospectus," except that, (i) if the
prospectus filed by the Company pursuant to Rule 424(b) of the Regulations
differs from the Prospectus, the term "Prospectus" will also include the
prospectus filed pursuant to Rule 424(b), and (ii) if the Registration
Statement is amended or such Prospectus is supplemented after the date the
Registration
-5-
<PAGE>
Statement is declared effective by the Commission (the "Effective Date") and
prior to the Option Closing Date, the terms "Registration Statement" and
"Prospectus" shall include the Registration Statement as amended or
supplemented.
(e) Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has
instituted or, to the best of the Company's knowledge, threatened to
institute any proceedings with respect to such an order.
(f) The Registration Statement when it becomes
effective, the Prospectus (and any amendment or supplement thereto) when it
is filed with the Commission pursuant to Rule 424(b), and both documents as
of the Closing Date and the Option Closing Date, referred to below, will
contain all statements which are required to be stated therein in accordance
with the Act and the Regulations and will in all material respects conform to
the requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, on
such dates, will contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that this representation and warranty does not
apply to statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company in connection with the
Registration Statement or Prospectus or any amendment or supplement thereto
by the Underwriter expressly for use therein.
(g) The Company had at the date or dates indicated
in the Prospectus a duly authorized and outstanding capitalization as set
forth in the Registration Statement and the Prospectus. Based on the
assumptions stated in the Registration Statement and the Prospectus, the
Company will have on the Closing Date the adjusted stock capitalization set
forth therein. Except as set forth in the Registration Statement or the
Prospectus, on the Effective Date and on the Closing Date, there will be no
options to purchase, warrants or other rights to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments
to issue or sell shares of the Company's capital stock or any such warrants,
convertible securities or obligations. Except as set forth in the Prospectus,
no holders of any of the Company's securities has any rights, "demand,"
"piggyback" or otherwise, to have such securities registered under the Act.
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(h) The descriptions in the Registration Statement
and the Prospectus of contracts and other documents are accurate and present
fairly the information required to be disclosed, and there are no contracts
or other documents required to be described in the Registration Statement or
the Prospectus or to be filed as exhibits to the Registration Statement under
the Act or the Regulations which have not been so described or filed as
required.
(i) Richard A. Eisner & Company, LLP, the
accountants who have certified certain of the financial statements filed and
to be filed with the Commission as part of the Registration Statement and the
Prospectus, are independent public accountants within the meaning of the Act
and Regulations. The financial statements and schedules and the notes thereto
filed as part of the Registration Statement and included in the Prospectus
are complete, correct and present fairly the financial position of the
Company as of the dates thereof, and the results of operations and changes in
financial position of the Company for the periods indicated therein, all in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved except as otherwise stated
in the Registration Statement and the Prospectus. The selected financial data
set forth in the Registration Statement and the Prospectus present fairly the
information shown therein and have been compiled on a basis consistent with
that of the audited and unaudited financial statements included in the
Registration Statement and the Prospectus.
(j) The Company has filed with the appropriate
federal, state and local governmental agencies, and all appropriate foreign
countries and political subdivisions thereof, all tax returns, including
franchise tax returns, which are required to be filed or has duly obtained
extensions of time for the filing thereof and has paid all taxes shown on
such returns and all assessments received by it to the extent that the same
have become due; and the provisions for income taxes payable, if any, shown
on the financial statements filed with or as part of the Registration
Statement are sufficient for all accrued and unpaid foreign and domestic
taxes, whether or not disputed, and for all periods to and including the
dates of such financial statements. Except as disclosed in writing to the
Underwriter, the Company has not executed or filed with any taxing authority,
foreign or domestic, any agreement extending the period for assessment or
collection of any income taxes and is not a party to any pending action or
proceeding by any foreign or domestic governmental agency for assessment or
collection of taxes; and no claims for assessment or collection of taxes have
been asserted against the Company.
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(k) The outstanding Common Shares, the outstanding
shares of Series B Preferred Stock, par value $.01 per share of the Company
(the "Preferred Shares") and outstanding options and warrants to purchase
Common Shares have been duly authorized and validly issued. The outstanding
Common Shares and Preferred Shares are fully paid and nonassessable. The
outstanding options and warrants to purchase Common Shares constitute the
valid and binding obligations of the Company, enforceable in accordance with
their terms. None of the outstanding Common Shares or Preferred Shares or
options or warrants to purchase Common Shares has been issued in violation of
the preemptive rights of any shareholder of the Company. None of the holders
of the outstanding Common Shares or Preferred Shares is subject to personal
liability solely by reason of being such a holder. Upon conversion of the
outstanding Preferred Shares into Common Shares on the Closing Date, such
shares will be duly authorized, validly issued, fully paid and
non-assessable, and none of the holders thereof will be subject to personal
liability solely by reason of being such a holder. The offers and sales of
the outstanding Common Shares and Preferred Shares and outstanding options
and warrants to purchase Common Shares were at all relevant times either
registered under the Act and the applicable state securities or Blue Sky laws
or exempt from such registration requirements. The authorized Common Shares
and Preferred Shares and outstanding options and warrants to purchase Common
Shares conform to the descriptions thereof contained in the Registration
Statement and Prospectus. Except as set forth in the Registration Statement
and the Prospectus, on the Effective Date and the Closing Date, there will be
no outstanding options or warrants for the purchase of, or other outstanding
rights to purchase, Common Shares or securities convertible into Common
Shares.
(l) No securities of the Company have been sold by
the Company or by or on behalf of, or for the benefit of, any person or
persons controlling, controlled by, or under common control with the Company
within the three years prior to the date hereof, except as disclosed in the
Registration Statement.
(m) The issuance and sale of the Shares have been
duly authorized and, when the Shares have been issued and duly delivered
against payment therefor as contemplated by this Agreement, the Shares will
be validly issued, fully paid and nonassessable, and the holders thereof will
not be subject to personal liability solely by reason of being such holders.
The Shares will not be subject to preemptive rights of any shareholder of the
Company.
(n) The issuance and sale of the Common Shares
issuable upon exercise of the Underwriter's Warrants have been
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duly authorized and, when such Common Shares have been duly delivered against
payment therefor, as contemplated by the Underwriter's Warrant Agreement,
such Common Shares will be validly issued, fully paid and nonassessable.
Holders of Common Shares issuable upon the exercise of the Underwriter's
Warrants will not be subject to personal liability solely by reason of being
such holders. Neither the Underwriter's Warrants nor the Common Shares
issuable upon exercise thereof will be subject to preemptive rights of any
shareholder of the Company. The Common Shares issuable upon exercise of the
Underwriter's Warrants have been duly reserved for issuance upon exercise of
the Underwriter's Warrants in accordance with the provisions of the
Underwriter's Warrant Agreement. The Underwriter's Warrants conform to the
descriptions thereof contained in the Registration Statement and the
Prospectus.
(o) The Company is not in violation of, or in
default under, (i) any term or provision of its Certificate of Incorporation
or By-Laws, each as amended; (ii) any material term or provision or any
financial covenants of any indenture, mortgage, contract, commitment or other
agreement or instrument to which it is a party or by which it or any of its
property or business is or may be bound or affected; or (iii) any existing
applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over
the Company or any of the Company's properties or business. The Company owns,
possesses or has obtained all governmental and other (including those
obtainable from third parties) Permits, necessary to own or lease, as the
case may be, and to operate its properties, whether tangible or intangible,
and to conduct the business and operations of the Company as presently
conducted and all such Permits are outstanding and in good standing, and
there are no proceedings pending or, to the best of the Company's knowledge,
threatened, or any basis therefor, seeking to cancel, terminate or limit such
Permits.
(p) Except as set forth in the Prospectus, there
are no claims, actions, suits, proceedings, arbitrations, investigations or
inquiries before any governmental agency, court or tribunal, domestic or
foreign, or before any private arbitration tribunal, pending, or, to the best
of the Company's knowledge, threatened against the Company or involving the
Company's properties or business which, if determined adversely to the
Company, would, individually or in the aggregate, result in any material
adverse change in the financial position, shareholders' equity, results of
operations, properties, business, management or affairs or business prospects
of the Company or which question the validity of the capital stock of the
Company or this Agreement or of any action taken or to be taken by the
Company pursuant to, or in connection with, this
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Agreement; nor, to the best of the Company's knowledge, is there any basis
for any such claim, action, suit, proceeding, arbitration, investigation or
inquiry. There are no outstanding orders, judgments or decrees of any court,
governmental agency or other tribunal naming the Company and enjoining the
Company from taking, or requiring the Company to take, any action, or to
which the Company or the Company's properties or business is bound or subject.
(q) Neither the Company nor any of its affiliates
has incurred any liability for any finder's fees or similar payments in
connection with the transactions herein contemplated.
(r) The Company owns or possesses adequate and
enforceable rights to use all patents, patent applications, trademarks,
service marks, copyrights, rights, trade secrets, confidential information,
processes and formulations used or proposed to be used in the conduct of its
business as described in the Prospectus (collectively the "Intangibles"); to
the best of the Company's knowledge, the Company has not infringed and is not
infringing upon the rights of others with respect to the Intangibles; and the
Company has not received any notice of conflict with the asserted rights of
others with respect to the Intangibles which could, singly or in the
aggregate, materially adversely affect its business as presently conducted or
the prospects, financial condition or results of operations of the Company,
and the Company knows of no basis therefor; and, to the best of the Company's
knowledge, no others have infringed upon the Intangibles of the Company.
(s) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus and the
Company's latest financial statements, the Company has not incurred any
material liability or obligation, direct or contingent, or entered into any
material transaction, whether or not incurred in the ordinary course of
business, and has not sustained any material loss or interference with its
business from fire, storm, explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree; and since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
have not been, and prior to the Closing Date referred to below there will not
be, any changes in the capital stock or any material increases in the
long-term debt of the Company or any material adverse change in or affecting
the general affairs, management, financial condi tion, shareholders' equity,
results of operations or prospects of the Company, otherwise than as set
forth or contemplated in the Prospectus.
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(t) The Company does not own any real property and
has good title to all personal property (tangible and intangible) owned by
it, free and clear of all security interests, charges, mortgages, liens,
encumbrances and defects, except such as are described in the Registration
Statement and Prospectus or such as do not materially affect the value or
transferability of such property and do not interfere with the use of such
property made, or proposed to be made, by the Company. The leases, licenses
or other contracts or instruments under which the Company leases, holds or is
entitled to use any property, real or personal, are valid, subsisting and
enforceable only with such exceptions as are not material and do not
interfere with the use of such property made, or proposed to be made, by the
Company, and all rentals, royalties or other payments accruing thereunder
which became due prior to the date of this Agreement have been duly paid, and
neither the Company nor, to the best of the Company's knowledge, any other
party is in default thereunder and, to the best of the Company's knowledge,
no event has occurred which, with the passage of time or the giving of
notice, or both, would constitute a default thereunder. The Company has not
received notice of any violation of any applicable law, ordinance,
regulation, order or requirement relating to its owned or leased properties.
The Company has adequately insured its properties against loss or damage by
fire or other casualty and maintains, in adequate amounts, such other
insurance as is usually maintained by companies engaged in the same or
similar businesses located in its geographic area.
(u) Each contract or other instrument (however
characterized or described) to which the Company is a party or by which its
property or business is or may be bound or affected and to which reference is
made in the Prospectus has been duly and validly executed, is in full force
and effect in all material respects and is enforceable against the parties
thereto in accordance with its terms, and none of such contracts or
instruments has been assigned by the Company, and neither the Company, nor,
to the best of the Company's knowledge, any other party, is in default
thereunder and, to the best of the Company's knowledge, no event has occurred
which, with the lapse of time or the giving of notice, or both, would
constitute a default thereunder.
None of the material provisions of such contracts
or instruments violates any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court having
jurisdiction over the Company or any of its assets or businesses.
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<PAGE>
(v) The employment, consulting, confidentiality
and non-competition agreements between the Company and its officers,
employees and consultants, described in the Registration Statement, are
binding and enforceable obligations upon the respective parties thereto in
accordance with their respective terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, moratorium or other similar
laws or arrangements affecting creditors' rights generally and subject to
principles of equity.
(w) Except as set forth in the Prospectus, the
Company has no employee benefit plans (including, without limita tion, profit
sharing and welfare benefit plans) or deferred compensation arrangements that
are subject to the provisions of the Employee Retirement Income Security Act
of 1974.
(x) To the best of the Company's knowledge, no
labor problem exists with any of the Company's employees or is imminent which
could adversely affect the Company.
(y) The Company has not, directly or indirectly,
at any time (i) made any contributions to any candidate for political office,
or failed to disclose fully any such contribution in violation of law or (ii)
made any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments or contributions required or allowed by applicable law.
The Company's internal accounting controls and procedures are sufficient to
cause the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(z) The Shares have been approved for listing on
the Nasdaq SmallCap Market.
(aa) The Company has provided to Tenzer Greenblatt
LLP, counsel to the Underwriter ("Underwriter's Counsel"), all agreements,
certificates, correspondence and other items, documents and information
requested pursuant to the Due Diligence List of Bizar Martin & Taub, LLP,
counsel for the Company ("Company Counsel"), and the supplemental requests of
Underwriter's Counsel dated , 1998 and , 1998.
Any certificate signed by an officer of the
Company and delivered to the Underwriter or to Underwriter's Counsel shall be
deemed to be a representation and warranty by the Company to the Underwriter
as to the matters covered thereby.
5. Certain Covenants of the Company. The Company covenants
with the Underwriter as follows:
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(a) The Company will not at any time, whether
before the Effective Date or thereafter during such period as the Prospectus
is required by law to be delivered in connection with the sales of the Shares
by the Underwriter or a dealer, file or publish any amendment or supplement
to the Registration Statement or Prospectus of which the Underwriter has not
been previously advised and furnished a copy, or to which the Underwriter
shall object in writing.
(b) The Company will use its best efforts to cause
the Registration Statement to become effective and will advise the
Underwriter immediately, and, if requested by the Underwriter, confirm such
advice in writing, (i) when the Registration Statement, or any post-effective
amendment to the Registration Statement or any supplemented Prospectus is
filed with the Commission; (ii) of the receipt of any comments from the
Commission; (iii) of any request of the Commission for amendment or
supplementation of the Registration Statement or Prospectus or for additional
information; and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any Preliminary Prospectus, or of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the initiation of any proceedings for any of such
purposes. The Company will use its best efforts to prevent the issuance of
any such stop order or of any order preventing or suspending such use and to
obtain as soon as possible the lifting thereof, if any such order is issued.
(c) The Company will deliver to the Underwriter,
without charge, from time to time until the Effective Date, as many copies of
each Preliminary Prospectus as the Underwriter may reasonably request, and
the Company hereby consents to the use of such copies for purposes permitted
by the Act. The Company will deliver to the Underwriter, without charge, as
soon as the Registration Statement becomes effective, and thereafter from
time to time as requested, such number of copies of the Prospectus (as
supplemented, if the Company makes any supplements to the Prospectus) as the
Underwriter may reasonably request. The Company has furnished or will furnish
to the Underwriter two signed copies of the Registration Statement as
originally filed and of all amendments thereto, whether filed before or after
the Registration Statement becomes effective, two copies of all exhibits
filed therewith and two signed copies of all consents and certificates of
experts.
(d) The Company will comply with the Act, the
Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder so as to permit the
continuance of sales of and dealings in the Offered
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<PAGE>
Shares and in any Optional Shares which may be issued and sold. If, at any
time when a prospectus relating to the Shares is required to be delivered
under the Act, any event occurs as a result of which the Registration
Statement and Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or if it shall be necessary to amend or
supplement the Registration Statement and Prospectus to comply with the Act
or the regulations thereunder, the Company will promptly file with the
Commission, subject to Section 5(a) hereof, an amendment or supplement which
will correct such statement or omission or which will effect such compliance.
(e) The Company will furnish such proper
information as may be required and otherwise cooperate in qualifying the
Shares for offering and sale under the securities or Blue Sky laws relating
to the offering in such jurisdictions as the Underwriter may reasonably
designate, provided that no such qualification will be required in any
jurisdiction where, solely as a result thereof, the Company would be subject
to service of general process or to taxation or qualification as a foreign
corporation doing business in such jurisdiction.
(f) The Company will make generally available to
its security holders, in the manner specified in Rule 158(b) under the Act,
and deliver to the Underwriter and Underwriter's Counsel as soon as
practicable and in any event not later than 45 days after the end of its
fiscal quarter in which the first anniversary date of the effective date of
the Registration Statement occurs, an earning statement meeting the
requirements of Rule 158(a) under the Act covering a period of at least 12
consecutive months beginning after the effective date of the Registration
Statement.
(g) For a period of five years from the Effective
Date, the Company will deliver to the Underwriter and to Underwriter's
Counsel on a timely basis (i) a copy of each report or document, including,
without limitation, reports on Forms 8-K, 10-C, 10-K (or 10-K SB), 10-Q (or
10-Q SB) and 10-C and exhibits thereto, filed or furnished to the Commission,
any securities exchange or the National Association of Securities Dealers,
Inc. (the "NASD") on the date each such report or document is so filed or
furnished; (ii) as soon as practicable, copies of any reports or
communications (financial or other) of the Company mailed to its security
holders; (iii) as soon as practicable, a copy of any Schedule 13D, 13G, 14D-1
or 13E-3 received or prepared by the Company from time to time; (iv) monthly
statements setting forth such information regarding the Company's results of
operations and financial position (including balance sheet, profit and loss
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<PAGE>
statements and data regarding outstanding purchase orders) as is regularly
prepared by management of the Company; and (v) such additional information
concerning the business and financial condition of the Company as the
Underwriter may from time to time reasonably request and which can be
prepared or obtained by the Company without unreasonable effort or expense.
The Company will furnish to its shareholders annual reports containing
audited financial statements and such other periodic reports as it may
determine to be appropriate or as may be required by law.
(h) Neither the Company nor any person that
controls, is controlled by or is under common control with the Company will
take any action designed to or which might be reasonably expected to cause or
result in the stabilization or manipulation of the price of the Common Shares.
(i) If the transactions contemplated by this
Agreement are consummated, the Underwriter shall retain the $50,000
previously paid to it, and the Company will pay or cause to be paid the
following: all costs and expenses incident to the performance of the
obligations of the Company under this Agreement, including, but not limited
to, the fees and expenses of accountants and counsel for the Company; the
preparation, printing, mailing and filing of the Registration Statement
(including financial statements and exhibits), Preliminary Prospectuses and
the Prospectus, and any amendments or supplements thereto; the printing and
mailing of the Selected Dealer Agreement, the issuance and delivery of the
Shares to the Underwriter; all taxes, if any, on the issuance of the Shares;
the fees, expenses and other costs of qualifying the Shares for sale under
the Blue Sky or securities laws of those states in which the Shares are to be
offered or sold, including fees and disbursements of counsel in connection
therewith, and including those of such local counsel as may have been
retained for such purpose; the filing fees incident to securing any required
review by the NASD and either the Boston Stock Exchange or Pacific Stock
Exchange; the cost of printing and mailing the "Blue Sky Survey," the cost of
furnishing to the Underwriter copies of the Registration Statement,
Preliminary Prospectuses and the Prospectus as herein provided; the costs (up
to $12,000) of placing "tombstone advertisements" in any publications which
may be selected by the Underwriter; and all other costs and expenses incident
to the performance of the Company's obligations hereunder which are not
otherwise specifically provided for in this Section 5(i).
In addition, at the Closing Date or the Option
Closing Date, as the case may be, the Underwriter will deduct from the
payment for the Offered Shares or any Optional Shares three percent (3%) of
the gross proceeds of the offering (less
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the sum of $50,000 previously paid to the Underwriter), as payment for the
Underwriter's nonaccountable expense allowance relating to the transactions
contemplated hereby, which amount will include the fees and expenses of
Underwriter's Counsel (other than the fees and expenses of Underwriter's
Counsel relating to Blue Sky qualifications and registrations, which, as
provided for above, shall be in addition to the three percent (3%)
nonaccountable expense allowance and shall be payable directly by the Company
to Underwriter's Counsel on or prior to the Closing Date).
(j) If the transactions contemplated by this
Agreement or related hereto are not consummated because the Company decides
not to proceed with the offering for any reason or because the Underwriter
decides not to proceed with the offering as a result of a breach by the
Company of its representations, warranties or covenants in the Agreement or
as a result of material adverse changes in the affairs of the Company, then
the Company will be obligated to reimburse the Underwriter for its
accountable out-of-pocket expenses up to the sum of $75,000, inclusive of
amounts theretofore paid to the Underwriter by the Company. In all cases
other than those set forth in the preceding sentence, if the Company or the
Underwriter decides not to proceed with the offering for any other reason,
the Company will only be obligated to reimburse the Underwriter for its
accountable expenses up to $50,000, inclusive of amounts theretofore paid to
the Underwriter by the Company. In no event, however, will the Underwriter,
in the event the offering is terminated, be entitled to retain or receive
more than an amount equal to its actual accountable out-of-pocket expenses.
(k) The Company intends to apply the net proceeds
from the sale of the Shares for the purposes set forth in the Prospectus. No
portion of the net proceeds from the sale of the Shares will be used to repay
any indebtedness other than (i) $3,250,00 principal amount of indebtedness
plus accrued interest thereon and (ii) up to $95,000 of indebtedness to be
assumed by the Company in connection with the acquisition of CommHome Systems
Corp., provided that none of such amounts will be repaid to any person or
entity that is, or will be prior to the Closing Date, an officer, director or
securityholder beneficially owning five percent (5%) or more of the Common
Shares (a "Principal Securityholder"), or any affiliate of any such person or
entity. The Company will file with the Commission all required reports in
accordance with the provisions of Rule 463 promulgated under the Act and will
provide a copy of each such report to the Underwriter and its counsel.
(l) During the period of twelve (12) months from
the Effective Date (the "Initial Lock-up Period"), neither the
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Company nor any of its officers, directors or security holders will offer for
sale or sell or otherwise dispose of, directly or indirectly, any securities
of the Company, in any manner whatsoever, whether pursuant to Rule 144 of the
Regulations or otherwise, and no holders of registration rights relating to
securities of the Company will exercise any such registration rights, in
either case, without the prior written consent of the Underwriter. In
addition, during the twelve (12) month period following the Initial Lock-up
Period, no officer, director or Principal Securityholder will sell, transfer
or otherwise dispose of any of its Common Shares during any three-month
period in excess of the amount that such person would be allowed to sell if
it were deemed an "affiliate" of the Company and its shares were deemed
"restricted," as those terms are defined in Rule 144 promulgated under the
Act, other than by a private sale or gift in connection with which the
transferee agrees to be bound by the terms of this agreement, without the
prior written consent of the Underwriter.
(m) The Company will not file any registration
statement relating to the offer or sale of any of the Company's securities,
including any registration statement on Form S-8, during the twelve (12)
months from the Effective Date, without the Underwriter's prior written
consent.
(n) The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authoriza tion; (ii) transactions are
recorded as necessary in order to permit preparation of financial statements
in accordance with generally accepted accounting principles and to maintain
account ability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(o) The Company will use its best efforts to
maintain the listing of the Shares on the Nasdaq SmallCap Market and will, if
so qualified, list the Shares, and maintain such listing for so long as
qualified, on the Nasdaq National Market System.
(p) The Company will, concurrently with the
Effective Date, register the class of equity securities of which the Shares
are a part under Section 12(g) of the Exchange Act and the Company will
maintain such registration for a minimum of five (5) years from the Effective
Date.
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<PAGE>
(q) Subject to the sale of the Offered Shares, the
Underwriter and its successors will have the right to designate a nominee for
election, at its or their option, either as a member of or a non-voting
advisor to the Board of Directors of the Company (which Board, during such
period, shall be comprised of at least five (5) persons, a majority of the
members of which Board must, during such period, be persons not otherwise
affiliated with the Company, its management or its founders), and the Company
will use its best efforts to cause such nominee to be elected and continued
in office as a director of the Company or as such advisor until the
expiration of five (5) years from the Effective Date. Each of the Company's
current officers, directors and shareholders agrees to vote all of the Common
Shares owned by such person or entity so as to elect and continue in office
such nominee of the Underwriter. Following the election of such nominee as a
director or advisor, such person shall receive no more or less compensation
than is paid to other non-officer directors of the Company for attendance at
meetings of the Board of Directors of the Company and shall be entitled to
receive reimbursement for all reasonable costs incurred in attending such
meetings including, but not limited to, food, lodging and transportation. The
Company agrees to indemnify and hold such director or advisor harmless, to
the maximum extent permitted by law, against any and all claims, actions,
awards and judgments arising out of his service as a director or advisor and
to maintain a liability insurance policy affording coverage for the acts of
its officers and directors, to include such director or advisor as an insured
under such policy. The rights and bene fits of such indemnification and the
benefits of such insurance shall, to the extent possible, extend to the
Underwriter insofar as it may be or may be alleged to be responsible for such
director or advisor.
If the Underwriter does not exercise its
option to designate a member of or advisor to the Company's Board of
Directors, the Underwriter shall nonetheless have the right to send a
representative (who need not be the same individual from meeting to meeting)
to observe each meeting of the Board of Directors. The Company agrees to give
the Underwriter notice of each such meeting and to provide the Underwriter
with an agenda and minutes of the meeting no later than it gives such notice
and provides such items to the directors.
(r) The Company shall retain a transfer agent for
the Common Shares, reasonably acceptable to the Underwriter, for a period of
five (5) years from the Effective Date. In addition, for a period of five (5)
years from the Effective Date, the Company, at its own expense, shall cause
such transfer agent to provide the Underwriter, if so requested in writing,
with copies of the Company's daily transfer sheets, and, when requested by
the Underwriter, a current list of the Company's securityholders,
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including a list of the beneficial owners of securities held by a depository
trust company and other nominees.
(s) The Company hereby agrees, at its sole cost
and expense, to supply and deliver to the Underwriter and Underwriter's
Counsel, within a reasonable period from the date hereof, four bound volumes,
including the Registration Statement, as amended or supplemented, all
exhibits to the Registration Statement, the Prospectus and all other
underwriting documents.
(t) The Company shall, as of the date hereof, have
applied for listing in Standard & Poor's Corporation Records Service
(including annual report information) or Moody's Industrial Manual (Moody's
OTC Industrial Manual not being sufficient for these purposes) and shall use
its best efforts to have the Company listed in such manual and shall maintain
such listing for a period of five years from the Effective Date.
(u) For a period of five (5) years from the
Effective Date, the Company shall provide the Underwriter, on a not less than
annual basis, with internal forecasts setting forth projected results of
operations for each quarterly and annual period in the two (2) fiscal years
following the respective dates of such forecasts. Such forecasts shall be
provided to the Underwriter more frequently than annually if prepared more
frequently by management, and revised forecasts shall be prepared and
provided to the Underwriter when required to reflect more current
information, revised assumptions or actual results that differ materially
from those set forth in the forecasts.
(v) For a period of five (5) years from the
Effective Date, or until such earlier time as the Common Shares are listed on
the New York Stock Exchange or the American Stock Exchange, the Company shall
cause its legal counsel to provide the Underwriter with a list, to be updated
at least annually, of those states in which the Common Shares may be traded
in non- issuer transactions under the Blue Sky laws of the 50 states.
(w) For a period of five (5) years from the
Effective Date, the Company shall continue to retain Richard A. Eisner &
Company, LLP (or such other nationally recognized accounting firm acceptable
to the Underwriter) as the Company's independent public accountants.
(x) For a period of five (5) years from the
Effective Date, the Company, at its expense, shall cause its then independent
certified public accountants, as described in Section 5(w) above, to review
(but not audit) the Company's financial statements for each of the first
three fiscal quarters prior to the announcement of quarterly financial
information, the filing
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of the Company's 10-Q (or 10-QSB) quarterly report (or other equivalent
report) and the mailing of quarterly financial information to shareholders.
(y) For a period of twenty-five (25) days from the
Effective Date, the Company will not issue press releases or engage in any
other publicity without the Underwriter's prior written consent, other than
normal and customary releases issued in the ordinary course of the Company's
business or those releases required by law.
(z) The Company will not increase or authorize an
increase in the compensation of its five (5) most highly paid employees in
excess of the compensation paid to such employees as of the Effective Date,
without the prior written consent of the Underwriter, for a period of three
(3) years from the Effective Date.
(aa) For a period of five (5) years from the
Effective Date, the Company will promptly submit to the Underwriter copies of
accountant's management reports and similar correspondence between the
Company's accountants and the Company.
(ab) For a period of three (3) years from the
Effective Date, the Company will not offer or sell any of its securities (i)
pursuant to Regulation S promulgated under the Act or which are convertible
or exercisable into Common Shares at a price which may be adjusted from time
to time based on the future market price of the Common Shares, without the
prior written consent of the Underwriter, or (ii) at a discount to market or
in a discounted transaction (other than as described in clause (i) above),
without the prior written consent of the Underwriter, which shall not be
unreasonably withheld.
(ac) For a period of three (3) years from the
Effective Date, the Company will provide to the Underwriter ten day's written
notice prior to any issuance by the Company or its subsidiaries of any equity
securities or securities exchangeable for or convertible into equity
securities of the Company, except for (i) Common Shares issuable upon
exercise of currently outstanding options and warrants or conversion of
currently outstanding convertible securities and (ii) options (and shares
issuable upon exercise of such options) available for future grant pursuant
to any stock option plan in effect on the Effective Date or a future plan
approved by the Company's shareholders.
(ad) Prior to the Effective Date and for a period
of three (3) years thereafter, the Company will retain a
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financial public relations firm reasonably acceptable to the Underwriter.
(ae) For a period of five (5) years from the
Effective Date, the Company will cause its Board of Directors to meet, either
in person or telephonically, a minimum of four (4) times per year and will
hold a shareholder's meeting at least once per annum.
(af) Prior to the Effective Date, the Company
shall have obtained directors' and officers' insurance naming the Underwriter
as an additional insured party, in an amount equal to twenty-five percent
(25%) of the gross proceeds of the offering, and the Company will maintain
such insurance for a period of at least three (3) years from the Closing Date.
6. Conditions of the Underwriter's Obligation to Purchase
Shares from the Company. The obligation of the Underwriter to purchase and
pay for the Offered Shares which it has agreed to purchase from the Company
is subject (as of the date hereof and the Closing Date) to the accuracy of
and compliance in all material respects with the representations and
warranties of the Company herein, to the accuracy of the statements of the
Company or its officers made pursuant hereto, to the performance in all
material respects by the Company of its obligations hereunder, and to the
following additional conditions:
(a) The Registration Statement will have become
effective not later than _______.M., New York City time, on the date hereof,
or at such later time or on such later date as the Underwriter may agree to
in writing; prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement will have been issued and no
proceedings for that purpose will have been initiated or will be pending or,
to the best of the Underwriter's or the Company's knowledge, will be
contemplated by the Commission; and any request on the part of the Commission
for additional information will have been complied with to the satisfaction
of Underwriter's Counsel.
(b) At the time that this Agreement is executed
and at the Closing Date, there will have been delivered to the Underwriter a
signed opinion of Company Counsel, dated as of the date hereof or the Closing
Date, as the case may be (and any other opinions of counsel referred to in
such opinion of Company Counsel or relied upon by Company Counsel in
rendering their opinion), reasonably satisfactory to Underwriter's Counsel,
to the effect that:
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(i) The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware, with full power and authority, corporate and other, and with all
Permits necessary to own or lease, as the case may be, and operate its
properties, whether tangible or intangible, and to conduct its business as
described in the Registration Statement. The Company is duly qualified to do
business as a foreign corporation and is in good standing in all
jurisdictions wherein such qualification is necessary and failure so to
qualify could have a material adverse effect on the financial condition,
results of operations, business or proper ties of the Company. To the best of
Company Counsel's knowledge, the Company has no subsidiaries.
(ii) The Company has full power and
authority, corporate and other, to execute, deliver and perform this
Agreement and the Underwriter's Warrant Agreement and to consummate the
transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and the Underwriter's Warrant Agreement by the
Company, the consummation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms of this
Agreement and the Underwriter's Warrant Agreement have been duly authorized
by all necessary corporate action, and this Agreement has been duly executed
and delivered by the Company. This Agreement is (assuming for the purposes of
this opinion that it is valid and binding upon the other party thereto) and,
when executed and delivered by the Company on the Closing Date, the
Underwriter's Warrant Agreement will be, valid and binding obligations of the
Company, enforceable in accordance with their respective terms, subject, as
to enforcement of remedies, to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws affecting the rights of creditors
generally and the discretion of courts in granting equitable remedies and
except that enforceability of the indemnification provisions set forth in
Section 7 hereof and the contribution provisions set forth in Section 8
hereof may be limited by the federal securities laws or public policy
underlying such laws.
(iii) The execution, delivery and
performance of this Agreement and the Underwriter's Warrant Agreement by the
Company, the consummation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms of this
Agreement and the Underwriter's Warrant Agreement do not, and will not, with
or without the giving of notice or the lapse of time, or both, (A) result in
a violation of the Certificate of Incorporation or ByLaws, each as amended,
of the Company, (B) result in a breach of or conflict with any terms or
provisions of, or constitute a default under, or result in the modification
or termination of,
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or result in the creation or imposition of any lien, security interest,
charge or encumbrance upon any of the properties or assets of the Company
pursuant to any indenture, mortgage, note, contract, commitment or other
material agreement or instrument to which the Company is a party or by which
the Company or any of the Company's properties or assets are or may be bound
or affected; (C) violate any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court, domestic or
foreign, having jurisdiction over the Company or any of the Company's
properties or business; or (D) have any effect on any Permit necessary for
the Company to own or lease and operate its properties or conduct its
business or the ability of the Company to make use thereof.
(iv) To the best of Company Counsel's
knowledge, no Permits of any court or governmental agency or body (other than
under the Act, the Regulations and applicable state securities or Blue Sky
laws) are required for the valid authorization, issuance, sale and delivery
of the Shares or the Underwriter's Warrants to the Underwriter, and the
consummation by the Company of the transactions contemplated by this
Agreement or the Underwriter's Warrant Agreement.
(v) The Registration Statement has become
effective under the Act; to the best of Company Counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has been
issued, and no proceedings for that purpose have been instituted or are
pending, threatened or contemplated under the Act or applicable state
securities laws.
(vi) The Registration Statement and the
Prospectus, as of the Effective Date, and each amendment or supplement
thereto as of its effective or issue date (except for the financial
statements and other financial data included therein or omitted therefrom, as
to which Company Counsel need not express an opinion) comply as to form in
all material respects with the requirements of the Act and Regulations and
the conditions for use of a registration statement on Form SB-2 have been
satisfied by the Company.
(vii) The descriptions in the
Registration Statement and the Prospectus of statutes, regulations,
government classifications, contracts and other documents (including opinions
of such counsel); and the response to Item 13 of Form SB-2 have been reviewed
by Company Counsel, and, based upon such review, are accurate in all material
respects and present fairly the information required to be disclosed, and
there are no material statutes, regulations or government classifications,
or, to the best of Company Counsel's knowledge, material contracts or
documents, of a character
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<PAGE>
required to be described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement, which are not so
described or filed as required.
None of the material provisions of the
contracts or instruments described above violates any existing applicable
law, rule, regulation, judgment, order or decree of any governmental agency
or court having jurisdiction over the Company or any of its assets or
business.
(viii) The outstanding Common Shares and
outstanding options and warrants to purchase Common Shares have been duly
authorized and validly issued. The outstanding Common Shares are fully paid
and nonassessable. The outstanding options and warrants to purchase Common
Shares constitute the valid and binding obligations of the Company,
enforceable in accordance with their terms. None of the outstanding Common
Shares or options or warrants to purchase Common Shares has been issued in
violation of the preemptive rights of any shareholder of the Company. None of
the holders of the outstanding Common Shares is subject to personal liability
solely by reason of being such a holder. The offers and sales of the
outstanding Common Shares and outstanding options and warrants to purchase
Common Shares were at all relevant times either registered under the Act and
the applicable state securities or Blue Sky laws or exempt from such
registration requirements. The authorized Common Shares and outstanding
options and warrants to purchase Common Shares conform to the descriptions
thereof contained in the Registration Statement and Prospectus. To the best
of Company Counsel's knowledge, except as set forth in the Prospectus, no
holders of any of the Company's securities has any rights, "demand,"
"piggyback" or otherwise, to have such securities registered under the Act.
(ix) The issuance and sale of the Shares
have been duly authorized and, when the Shares have been issued and duly
delivered against payment therefor as contemplated by this Agreement, the
Shares will be validly issued, fully paid and nonassessable, and the holders
thereof will not be subject to personal liability solely by reason of being
such holders. The Shares are not subject to preemptive rights of any
shareholder of the Company. The certificates representing the Shares are in
proper legal form.
(x) The issuance and sale of the Common
Shares issuable upon exercise of the Underwriter's Warrants have been duly
authorized and, when such Common Shares have been duly delivered against
payment therefor, as contemplated by the Underwriter's Warrant Agreement,
such Common Shares will be validly issued, fully paid and nonassessable.
Holders of Common
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Shares issuable upon exercise of the Underwriter's Warrants will not be
subject to personal liability solely by reason of being such holders. Neither
the Underwriter's Warrants nor the Common Shares issuable upon exercise
thereof will be subject to preemptive rights of any shareholder of the
Company. The Warrant Shares issuable upon exercise of the Underwriter's
Warrants have been duly reserved for issuance upon exercise of the
Underwriter's Warrants in accordance with the provisions of the Underwriter's
Warrant Agreement. The Underwriter's Warrants conform to the descriptions
thereof in the Registration Statement and Prospectus.
(xi) Upon delivery of the Offered Shares
to the Underwriter against payment therefor as provided in this Agreement,
the Underwriter (assuming it is a bona fide purchaser within the meaning of
the Uniform Commercial Code) will acquire good title to the Offered Shares,
free and clear of all liens, encumbrances, equities, security interests and
claims.
(xii) Assuming that the Underwriter
exercises the over-allotment option to purchase any of the Optional Shares
and makes payment therefor in accordance with the terms of this Agreement,
upon delivery of the Optional Shares to the Underwriter hereunder, the
Underwriter (assuming it is a bona fide purchaser within the meaning of the
Uniform Commercial Code) will acquire good title to such Optional Shares,
free and clear of any liens, encumbrances, equities, security interests and
claims.
(xiii) To the best of Company Counsel's
knowledge, there are no claims, actions, suits, proceedings, arbitrations,
investigations or inquiries before any governmental agency, court or
tribunal, foreign or domestic, or before any private arbitration tribunal,
pending or threatened against the Company or involving the Company's
properties or business, other than as described in the Prospectus, such
description being accurate, and other than litigation incident to the kind of
business conducted by the Company which, individually and in the aggregate,
is not material.
(xiv) Company Counsel has participated in
reviews and discussions in connection with the preparation of the
Registration Statement and the Prospectus, and in the course of such reviews
and discussions and such other investigation as Company Counsel deemed
necessary, no facts came to its attention which lead it to believe that (A)
the Registration Statement (except as to the financial statements and other
financial data contained therein, as to which Company Counsel need not
express an opinion), on the Effective Date, contained any untrue state ment
of a material fact required to be stated therein or omitted
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<PAGE>
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, or that (B) the Prospectus (except as to the financial
statements and other financial data contained therein, as to which Company
Counsel need not express an opinion) contains any untrue state ment of a
material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering its opinion pursuant to this
Section 6(b), Company Counsel may rely upon the certificates of government
officials and officers of the Company as to matters of fact, provided that
Company Counsel shall state that they have no reason to believe, and do not
believe, that they are not justified in relying upon such opinions or such
certificates of government officials and officers of the Company as to
matters of fact, as the case may be.
The opinion letter delivered pursuant to
this Section 6(b) shall state that any opinion given therein qualified by the
phrase "to the best of our knowledge" is being given by Company Counsel after
due investigation of the matters therein discussed.
(c) At the time that this Agreement is executed
and at the Closing Date, there will have been delivered to the Underwriter a
signed opinion of Cobrin, Gittes & Samuel, special intellectual property
counsel for the Company ("IP Counsel"), dated as of the date hereof or the
Closing Date, as the case may be, reasonably satisfactory to Underwriter's
Counsel, to the effect that:
(i) To the best of IP Counsel's
knowledge, the Company owns or possesses adequate and enforceable rights to
use, and has not infringed and is not infringing upon the rights of others
with respect to, all patents, patent applications, trademarks, service marks,
copyrights, rights, trade secrets, confidential information, processes and
formulations used or proposed to be used in the conduct of its business as
described in the Prospectus (collectively the "Intangibles"); and, to the
best of IP Counsel's knowledge, the Company has not received any notice that
it has or may have infringed, is infringing upon or is conflicting with the
asserted rights of others with respect to the Intangibles which might, singly
or in the aggregate, materially adversely affect its business, results of
operations or financial condition and such counsel is not aware of any
licenses with respect to the Intangibles which are required to be obtained by
the Company.
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<PAGE>
(ii) IP Counsel confirms the opinion of
IP Counsel dated June 23, 1997 and addressed to the Company in all material
respects as if such opinion was given on the date hereof (IP Counsel may
restate such opinion in its entirety).
(iii) IP Counsel has participated in
reviews and discussions in connection with the preparation of the
Registration Statement and the Prospectus, and in the course of such reviews
and discussions and such other investigation as IP Counsel deemed necessary,
no facts came to its attention which lead it to believe that (A) the
Registration Statement (except as to the financial statements and other
financial data contained therein, as to which IP Counsel need not express an
opinion), on the Effective Date, contained any untrue statement of a material
fact required to be stated therein or omitted to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or
that (B) the Prospectus (except as to the financial statements and other
financial data contained therein, as to which IP Counsel need not express an
opinion) contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
In rendering its opinion pursuant to this
Section 6(c), IP Counsel may rely upon the certificates of government
officials and officers of the Company as to matters of fact, provided that IP
Counsel shall state that they have no reason to believe, and do not believe,
that they are not justified in relying upon such opinions or such
certificates of government officials and officers of the Company as to
matters of fact, as the case may be.
The opinion letter delivered pursuant to
this Section 6(c) shall state that any opinion given therein qualified by the
phrase "to the best of our knowledge" is being given by IP Counsel after due
investigation of the matters therein discussed.
(d) At the Closing Date, there will have been
delivered to the Underwriter a signed opinion of Underwriter's Counsel, dated
as of the Closing Date, to the effect that the opinions delivered pursuant to
Sections 6(b) and 6(c) hereof appear on their face to be appropriately
responsive to the requirements of this Agreement, except to the extent waived
by the Underwriter, specifying the same, and with respect to such related
matters as the Underwriter may require.
(e) At the Closing Date (i) the Registration
Statement and the Prospectus and any amendments or supplements
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thereto will contain all material statements which are required to be stated
therein in accordance with the Act and the Regulations and will conform in
all material respects to the requirements of the Act and the Regulations, and
neither the Registration Statement nor the Prospectus nor any amendment or
supplement thereto will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; (ii) since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
will not have been any material adverse change in the financial condition,
results of operations or general affairs of the Company from that set forth
or contemplated in the Registration Statement and the Prospectus, except
changes which the Registration Statement and the Prospectus indicate might
occur after the Effective Date; (iii) since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
shall have been no material transaction, contract or agreement entered into
by the Company, other than in the ordinary course of business, which would be
required to be set forth in the Registration Statement and the Prospectus,
other than as set forth therein; and (iv) no action, suit or proceeding at
law or in equity will be pending or, to the best of the Company's knowledge,
threatened against the Company which is required to be set forth in the
Registration Statement and the Prospectus, other than as set forth therein,
and no proceedings will be pending or, to the best of the Company's
knowledge, threatened against the Company before or by any federal, state or
other commission, board or administrative agency wherein an unfavorable
decision, ruling or finding would materially adversely affect the business,
property, financial condition or results of operations of the Company, other
than as set forth in the Registration Statement and the Prospectus. At the
Closing Date, there will be delivered to the Underwriter a certificate signed
by the Chairman of the Board or the President or a Vice President of the
Company, dated the Closing Date, evidencing compliance with the provisions of
this Section 6(e) and stating that the representations and warranties of the
Company set forth in Section 4 hereof were accurate and complete in all
material respects when made on the date hereof and are accurate and complete
in all material respects on the Closing Date as if then made; that the
Company has performed all covenants and complied with all conditions required
by this Agreement to be performed or complied with by the Company prior to or
as of the Closing Date; and that, as of the Closing Date, no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been initiated or, to the best of
his knowledge, are contemplated or threatened. In addition, the Underwriter
will
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have received such other and further certificates of officers of the Company
as the Underwriter or Underwriter's Counsel may reasonably request.
(f) At the time that this Agreement is executed
and at the Closing Date, the Underwriter will have received a signed letter
from Richard A. Eisner & Company, LLP, dated the date such letter is to be
received by the Underwriter and addressed to it, confirming that it is a firm
of independent public accountants within the meaning of the Act and
Regulations and stating that: (i) insofar as reported on by them, in their
opinion, the financial statements of the Company included in the Prospectus
comply as to form in all material respects with the applicable accounting
requirements of the Act and the applicable Regulations; (ii) on the basis of
procedures and inquiries (not constituting an examination in accordance with
generally accepted auditing standards) consisting of a reading of the
unaudited interim financial statements of the Company, if any, appearing in
the Registration Statement and the Prospectus and the latest available
unaudited interim financial statements of the Company, if more recent than
that appearing in the Registration Statement and Prospectus, inquiries of
officers of the Company responsible for financial and accounting matters as
to the transactions and events subsequent to the date of the latest audited
financial statements of the Company, and a reading of the minutes of meet
ings of the shareholders, the Board of Directors of the Company and any
committees of the Board of Directors, as set forth in the minute books of the
Company, nothing has come to their attention which, in their judgment, would
indicate that (A) during the period from the date of the latest financial
statements of the Company appearing in the Registration Statement and
Prospectus to a specified date not more than three business days prior to the
date of such letter, there have been any decreases in net current assets or
net assets as compared with amounts shown in such financial statements or
decreases in net sales or decreases [increases] in total or per share net
income [loss] compared with the corresponding period in the preceding year or
any change in the capitalization or long-term debt of the Company, except in
all cases as set forth in or contemplated by the Registration Statement and
the Prospectus, and (B) the unaudited interim financial statements of the
Company, if any, appearing in the Registration Statement and the Prospectus,
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Regulations or are not fairly
presented in conformity with generally accepted accounting principles and
practices on a basis substantially consistent with the audited financial
statements included in the Registration Statement or the Prospectus; and
(iii) they have compared specific dollar amounts, numbers of shares,
numerical data, percentages of revenues and earnings, and other financial
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information pertaining to the Company set forth in the Prospectus (with
respect to all dollar amounts, numbers of shares, percent ages and other
financial information contained in the Prospectus, to the extent that such
amounts, numbers, percentages and infor mation may be derived from the
general accounting records of the Company, and excluding any questions
requiring an interpretation by legal counsel) with the results obtained from
the application of specified readings, inquiries and other appropriate
procedures (which procedures do not constitute an examination in accordance
with generally accepted auditing standards) set forth in the letter, and
found them to be in agreement.
(g) There shall have been duly tendered to the
Underwriter certificates representing the Offered Shares to be sold on the
Closing Date.
(h) The NASD shall have indicated that it has no
objection to the underwriting arrangements pertaining to the sale of the
Shares by the Underwriter.
(i) No action shall have been taken by the
Commission or the NASD the effect of which would make it improper, at any
time prior to the Closing Date or the Option Closing Date, as the case may
be, for any member firm of the NASD to execute transactions (as principal or
as agent) in the Shares, and no proceedings for the purpose of taking such
action shall have been instituted or shall be pending, or, to the best of the
Underwriter's or the Company's knowledge, shall be contemplated by the
Commission or the NASD. The Company represents at the date hereof, and shall
represent as of the Closing Date or Option Closing Date, as the case may be,
that it has no knowledge that any such action is in fact contemplated by the
Commission or the NASD.
(j) The Company meets the current and any existing
and proposed criteria for inclusion of the Shares on the Nasdaq SmallCap
Market.
(k) All proceedings taken at or prior to the
Closing Date or the Option Closing Date, as the case may be, in connection
with the authorization, issuance and sale of the Shares shall be reasonably
satisfactory in form and substance to the Underwriter and to Underwriter's
Counsel, and such counsel shall have been furnished with all such documents,
certificates and opinions as they may request for the purpose of enabling
them to pass upon the matters referred to in Section 6(d) hereof and in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements of the Company, the performance of any covenants of
the Company, or the compliance by the Company with any of the conditions
herein contained.
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<PAGE>
(k) As of the date hereof, the Company will have
delivered to the Underwriter the written undertakings of its officers,
directors and securityholders and/or registration rights holders, as the case
may be, to the effect of the matters set forth in Sections 5 (l) and (q).
If any of the conditions specified in this Section
6 have not been fulfilled, this Agreement may be terminated by the
Underwriter on notice to the Company.
7. Indemnification.
(a) The Company agrees to indemnify and hold
harmless the Underwriter, each officer, director, partner, employee and agent
of the Underwriter, and each person, if any, who controls the Underwriter
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions in respect thereof), to which they
or any of them may become subject under the Act or under any other statute or
at common law or otherwise, and, except as hereinafter provided, will
reimburse the Underwriter and each such person, if any, for any legal or
other expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions, whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained (i) in the Registration Statement, in
any Preliminary Prospectus or in the Prospectus (or the Registration
Statement or Prospectus as from time to time amended or supplemented) or (ii)
in any application or other document executed by the Company, or based upon
written information furnished by or on behalf of the Company, filed in any
jurisdiction in order to qualify the Shares under the securities laws thereof
(hereinafter "application"), or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein not misleading,
in light of the circumstances under which they were made, unless such untrue
statement or omission was made in such Registration Statement, Preliminary
Prospectus, Prospectus or application in reliance upon and in conformity with
information furnished in writing to the Company in connection therewith by
the Underwriter or any such person through the Underwriter expressly for use
therein; provided, however, that the indemnity agreement contained in this
Section 7(a) with respect to any Preliminary Prospectus will not inure to the
benefit of the Underwriter (or to the benefit of any other person that may be
indemnified pursuant to this Section 7(a)) if (A) the person asserting any
such losses, claims, damages, expenses or liabilities purchased
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the Shares which are the subject thereof from the Underwriter or other
indemnified person; (B) the Underwriter or other indemnified person failed to
send or give a copy of the Prospectus to such person at or prior to the
written confirmation of the sale of such Shares to such person; and (C) the
Prospectus did not contain any untrue statement or alleged untrue statement
or omission or alleged omission giving rise to such cause, claim, damage,
expense or liability.
(b) The Underwriter agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, from and against any and all losses, claims, damages, expenses
or liabilities, joint or several (and actions in respect thereof), to which
they or any of them may become subject under the Act or under any other
statute or at common law or otherwise, and, except as hereinafter provided,
will reimburse the Company and each such director, officer or controlling
person for any legal or other expenses reasonably incurred by them or any of
them in connection with investigating or defending any actions, whether or
not resulting in any liability, insofar as such losses, claims, damages,
expenses, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained (i) in the
Registration Statement, in any Preliminary Prospectus or in the Prospectus
(or the Registration Statement or Prospectus as from time to time amended or
supplemented) or (ii) in any application (including any application for
registration of the Shares under state securities or Blue Sky laws), or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, in light of the circumstances under which
they were made, but only insofar as any such statement or omission was made
in reliance upon and in conformity with information furnished in writing to
the Company in connection therewith by the Underwriter expressly for use
therein.
(c) Promptly after receipt of notice of the
commencement of any action in respect of which indemnity may be sought
against any indemnifying party under this Section 7, the indemnified party
will notify the indemnifying party in writing of the commencement thereof,
and the indemnifying party will, subject to the provisions hereinafter
stated, assume the defense of such action (including the employment of
counsel satisfactory to the indemnified party and the payment of expenses)
insofar as such action relates to an alleged liability in respect of which
indemnity may be sought against the indemnifying party. After notice from the
indemnifying party of its election to assume the
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<PAGE>
defense of such claim or action, the indemnifying party shall no longer be
liable to the indemnified party under this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party in connection with
the defense thereof other than reasonable costs of investigation; provided,
however, that if, in the reasonable judgment of the indemnified party or
parties, it is advisable for the indemnified party or parties to be
represented by separate counsel, the indemnified party or parties shall have
the right to employ a single counsel to represent the indemnified parties who
may be subject to liability arising out of any claim in respect of which
indemnity may be sought by the indemnified parties thereof against the
indemnifying party, in which event the fees and expenses of such separate
counsel shall be borne by the indemnifying party. Any party against whom
indemnification may be sought under this Section 7 shall not be liable to
indemnify any person that might otherwise be indemnified pursuant hereto for
any settlement of any action effected without such indemnifying party's
consent, which consent shall not be unreasonably withheld.
8. Contribution. To provide for just and equitable
contribution, if (i) an indemnified party makes a claim for indemnification
pursuant to Section 7 hereof (subject to the limitations thereof) and it is
finally determined, by a judgment, order or decree not subject to further
appeal, that such claim for indemnification may not be enforced, even though
this Agreement expressly provides for indemnification in such case; or (ii)
any indemnified or indemnifying party seeks contribution under the Act, the
Exchange Act, or otherwise, then the Company (including, for this purpose,
any contribution made by or on behalf of any director of the Company, any
officer of the Company who signed the Registration Statement and any
controlling person of the Company) as one entity and the Underwriter
(including, for this purpose, any contribution by or on behalf of each
person, if any, who controls the Underwriter within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act and each officer, director,
partner, employee and agent of the Underwriter) as a second entity, shall
contribute to the losses, liabilities, claims, damages and expenses
whatsoever to which any of them may be subject, so that the Underwriter is
responsible for the proportion thereof equal to the percentage which the
underwriting discount per Share set forth on the cover page of the Prospectus
represents of the initial public offering price per Share set forth on the
cover page of the Prospectus and the Company is responsible for the remaining
portion; provided, however, that if applicable law does not permit such
allocation, then, if applicable law permits, other relevant equitable
considerations such as the relative fault of the Company and the Underwriter
in connection with the facts which resulted in such losses, liabilities,
claims, damages and expenses shall also be
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considered. The relative fault, in the case of an untrue statement, alleged
untrue statement, omission or alleged omission, shall be determined by, among
other things, whether such statement, alleged statement, omission or alleged
omission relates to information supplied by the Company or by the
Underwriter, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement, alleged
statement, omission or alleged omission. The Company and the Underwriter
agree that it would be unjust and inequitable if the respective obligations
of the Company and the Underwriter for contribution were determined by pro
rata or per capita allocation of the aggregate losses, liabilities, claims,
damages and expenses or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 8. No person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f)
of the Act) will be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this Section 8,
each person, if any, who controls the Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act and each officer,
director, partner, employee and agent of the Underwriter will have the same
rights to contribution as the Underwriter, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who has signed the
Registration Statement and each director of the Company will have the same
rights to contribution as the Company, subject in each case to the provisions
of this Section 8. Anything in this Section 8 to the contrary
notwithstanding, no party will be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
Section 8 is intended to supersede, to the extent permitted by law, any right
to contribution under the Act or the Exchange Act or otherwise available.
9. Survival of Indemnities, Contribution, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 7 and 8 hereof, and the
representations and warranties of the Company contained herein shall remain
operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of
the Underwriter, the Company or any of its directors and officers, or any
controlling person referred to in said Sections, and shall survive the
delivery of, and payment for, the Shares.
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10. Termination of Agreement.
(a) The Company, by written or telegraphic notice
to the Underwriter, or the Underwriter, by written or telegraphic notice to
the Company, may terminate this Agreement prior to the earlier of (i) 11:00
A.M., New York City time, on the first full business day after the Effective
Date; or (ii) the time when the Underwriter, after the Registration Statement
becomes effective, releases the Offered Shares for public offering. The time
when the Underwriter "releases the Offered Shares for public offering" for
the purposes of this Section 10 means the time when the Underwriter releases
for publication the first newspaper advertisement, which is subsequently
published, relating to the Offered Shares, or the time when the Underwriter
releases for delivery to members of a selling group copies of the Prospectus
and an offering letter or an offering telegram relating to the Offered
Shares, whichever will first occur.
(b) This Agreement, including without limitation,
the obligation to purchase the Shares and the obligation to purchase the
Optional Shares after exercise of the option referred to in Section 3 hereof,
are subject to termination in the absolute discretion of the Underwriter, by
notice given to the Company prior to delivery of and payment for all the
Offered Shares or such Optional Shares, as the case may be, if, prior to such
time, any of the following shall have occurred: (i) the Company withdraws the
Registration Statement from the Commission or the Company does not or cannot
expeditiously proceed with the public offering; (ii) the representations and
warranties in Sec tion 4 hereof are not materially correct or cannot be
complied with; (iii) trading in securities generally on the New York Stock
Exchange or the American Stock Exchange will have been suspended; (iv)
limited or minimum prices will have been established on either such Exchange;
(v) a banking moratorium will have been declared either by federal or New
York State authorities; (vi) any other restrictions on transactions in
securities materially affecting the free market for securities or the payment
for such securities, including the Offered Shares or the Optional Shares,
will be established by either of such Exchanges, by the Commission, by any
other federal or state agency, by action of the Congress or by Executive
Order; (vii) trading in any securities of the Company shall have been
suspended or halted by any national securities exchange, the NASD or the
Commission; (viii) there has been a materially adverse change in the
condition (financial or otherwise), prospects or obligations of the Company;
(ix) the Company will have sustained a material loss, whether or not insured,
by reason of fire, flood, accident or other calamity; (x) any action has been
taken by the government of the United States or any department or agency
thereof which, in the judgment of the Underwriter, has had a
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material adverse effect upon the market or potential market for securities in
general; or (xi) the market for securities in general or political, financial
or economic conditions will have so materially adversely changed that, in the
judgment of the Underwriter, it will be impracticable to offer for sale, or
to enforce contracts made by the Underwriter for the resale of, the Offered
Shares or the Optional Shares, as the case may be.
(c) If this Agreement is terminated pursuant to
Section 6 hereof or this Section 10 or if the purchases provided for herein
are not consummated because any condition of the Underwriter's obligations
hereunder is not satisfied or because of any refusal, inability or failure on
the part of the Company to comply with any of the terms or to fulfill any of
the conditions of this Agreement, or if for any reason the Company shall be
unable to or does not perform all of its obligations under this Agreement,
the Company will not be liable to the Underwriter for damages on account of
loss of anticipated profits arising out of the transactions covered by this
Agreement, but the Company will remain liable to the extent provided in
Sections 5(j), 7, 8 and 9 of this Agreement.
11. Information Furnished by the Underwriter to the
Company. It is hereby acknowledged and agreed by the parties hereto that for
the purposes of this Agreement, including, without limitation, Sections 4(f),
7(a), 7(b) and 8 hereof, the only information given by the Underwriter to the
Company for use in the Prospectus are the statements set forth in the last
sentence of the last paragraph on the cover page, the statement appearing in
the last paragraph on page with respect to stabilizing the market price of
Shares, the information in the paragraph on page with respect to
concessions and reallowances, and the information in the paragraph on
page with respect to the determination of the public offering price, as
such information appears in any Preliminary Prospectus and in the Prospectus.
12. Notices and Governing Law. All communications hereunder
will be in writing and, except as otherwise provided, will be delivered at,
or mailed by certified mail, return receipt requested, or telegraphed to, the
following addresses: if to the Underwriter, to Whale Securities Co., L.P.,
Attention: William G. Walters, 650 Fifth Avenue, New York, New York 10019,
with a copy to Tenzer Greenblatt LLP, Attention: Robert J. Mittman, Esq., 405
Lexington Avenue, New York, New York 10174; if to the Com pany, addressed to
it at 909 Third Avenue, 9th Floor, New York, New York 10022, with a copy to
Bizar Martin & Taub, LLP, Attention: Sam Schwartz, Esq., 1350 Avenue of the
Americas, 29th Floor, New York, New York 10019.
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<PAGE>
This Agreement shall be deemed to have been made
and delivered in New York City and shall be governed as to validity,
interpretation, construction, effect and in all other respects by the
internal laws of the State of New York. The Company (1) agrees that any legal
suit, action or proceeding arising out of or relating to this Agreement shall
be instituted exclusively in New York State Supreme Court, County of New
York, or in the United States District Court for the Southern District of New
York, (2) waives any objection which the Company may have now or hereafter to
the venue of any such suit, action or proceeding, and (3) irrevocably
consents to the jurisdiction of the New York State Supreme Court, County of
New York, and the United States District Court for the Southern District of
New York in any such suit, action or proceeding. The Company further agrees
to accept and acknowledge service of any and all process which may be served
in any such suit, action or proceeding in the New York State Supreme Court,
County of New York, or in the United States District Court for the Southern
District of New York and agrees that service of process upon the Company
mailed by certified mail to the Company's address shall be deemed in every
respect effective service of process upon the Company, in any such suit,
action or proceeding.
13. Parties in Interest. This Agreement is made solely for
the benefit of the Underwriter, the Company and, to the extent expressed, any
person controlling the Company or the Underwriter, each officer, director,
partner, employee and agent of the Underwriter, the directors of the Company,
its officers who have signed the Registration Statement, and their respective
executors, administrators, successors and assigns, and, no other person will
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" will not include any purchaser of the Shares from
the Underwriter, as such purchaser.
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<PAGE>
If the foregoing is in accordance with your understanding
of our agreement, kindly sign and return to us the enclosed duplicates
hereof, whereupon it will become a binding agreement between the Company and
the Underwriter in accordance with its terms.
Very truly yours,
NETWORK-1 SECURITY SOLUTIONS, INC.
By---------------------------------
Name:
Title:
Confirmed and accepted in
New York, N.Y., as of the
date first above written:
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By
---------------------------------
Name:
Title:
<PAGE>
Exhibit 1.2
WARRANT AGREEMENT dated as of _________, 1998 between Network-1
Security Solutions, Inc., a Delaware corporation (the "Company"), and Whale
Securities Co., L.P. (hereinafter referred to as the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter warrants
(the "Warrants") to purchase up to 187,500 (as such number may be adjusted from
time to time pursuant to Article 8 of this Agreement) shares (the "Shares") of
common stock, par value $.01 per share (the "Common Stock"), of the Company; and
WHEREAS, the Underwriter has agreed, pursuant to the underwriting
agreement (the "Underwriting Agreement") dated _________, 1998 between the
Underwriter and the Company, to act as the underwriter in connection with the
Company's proposed public offering (the "Public Offering") of 1,875,000 shares
of Common Stock (the "Public Shares") at an initial public offering price of
$8.00 per Public Share; and
WHEREAS, the Warrants issued pursuant to this Agreement are being
issued by the Company to the Underwriter or to its designees who are officers
and partners of the Underwriter or to members of the selling group participating
in the distribution of the Public Shares to the public in the Public Offering
and/or their respective directors, officers or partners (collectively, the
"Designees"), in consideration for, and as part of the Underwriter's
compensation in connection with, the Underwriter acting as the Underwriter
pursuant to the Underwriting Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the premises, the payment by the
Underwriter to the Company of ONE HUNDRED EIGHTY SEVEN DOLLARS AND FIFTY CENTS
($187.50), the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
1. Grant.
The Underwriter, and/or the Designees are hereby granted the
right to purchase, at any time from __________, 1999 until 5:00 P.M., New
York time, on _______, 2003 (the "Warrant Exercise Term"), up to 187,500
fully-paid and non-assessable Shares at an initial exercise price (subject to
adjustment as provided in Article 8 hereof) of $13.20 per Share.
2. Warrant Certificates.
The warrant certificates delivered and to be delivered pursuant to
this Agreement (the "Warrant Certificates") shall be in the form set forth in
Exhibit A attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.
3. Exercise of Warrant.
3.1. Cash Exercise. The Warrants initially are exercisable at a
price of $13.20 per Share, payable in cash or by check to the order of the
Company, or any combination thereof, subject to adjustment as provided in
Article 8 hereof. Upon surrender of the Warrant Certificate with the annexed
Form of
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<PAGE>
Election to Purchase duly executed, together with payment of the Exercise Price
(as hereinafter defined) for the Shares purchased, at the Company's principal
offices (currently located at 909 Third Avenue, 9th Floor, New York, New York
10022) the registered holder of a Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the Shares so
purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional Shares). In the case of the purchase of less than all the Shares
purchasable under any Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the Shares purchasable
thereunder.
3.2. Cashless Exercise. At any time during the Warrant Exercise
Term, the Holder may, at the Holder's option, exchange, in whole or in part, the
Warrants represented by such Holder's Warrant Certificate (a "Warrant
Exchange"), into the number of Shares determined in accordance with this Section
3.2, by surrendering such Warrant Certificate at the principal office of the
Company or at the office of its transfer agent, accompanied by a notice stating
such Holder's intent to effect such exchange, the number of Warrants to be so
exchanged and the date on which the Holder requests that such Warrant Exchange
occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the
date specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company
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(the "Exchange Date"). Certificates for the Shares issuable upon such Warrant
Exchange and, if applicable, a new Warrant Certificate of like tenor
representing the Warrants which were subject to the surrendered Warrant
Certificate and not included in the Warrant Exchange, shall be issued as of the
Exchange Date and delivered to the Holder within three (3) days following the
Exchange Date. In connection with any Warrant Exchange, the Holder shall be
entitled to subscribe for and acquire (i) the number of Shares (rounded to the
next highest integer) which would, but for the Warrant Exchange, then be
issuable pursuant to the provision of Section 3.1 above upon the exercise of the
Warrants specified by the Holder in its Notice of Exchange (the "Total Number")
less (ii) the number of Shares equal to the quotient obtained by dividing (a)
the product of the Total Number and the existing Exercise Price (as hereinafter
defined) by (b) the Market Price (as hereinafter defined) of a Public Share on
the day preceding the Warrant Exchange. "Market Price" at any date shall be
deemed to be the last reported sale price, or, in case no such reported sales
takes place on such day, the average of the last reported sale prices for the
last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading or as reported in the NASDAQ National market System, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted on the NASDAQ National Market System, the closing bid price as
furnished by (i) the National Association of Securities Dealers, Inc.
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through NASDAQ or (ii) a similar organization if NASDAQ is no longer reporting
such information.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of certificates for
the Shares purchased shall be made forthwith (and in any event within three (3)
business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Article 5
hereof) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the Shares
shall be executed on behalf of the Company by the manual or facsimile signature
of the present or any future Chairman or Vice Chairman of the Board of
Directors, Chief Executive Officer or President or Vice President of the Company
under its corporate seal reproduced thereon, attested to by the manual or
facsimile signature of the present or any future Secretary or Assistant
Secretary of the Company. Warrant
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<PAGE>
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants, certificates
representing the Shares shall bear a legend substantially similar to the
following:
"The securities represented by this certificate have not been
registered for purposes of public distribution under the Securities
Act of 1933, as amended (the "Act"), and may not be offered or sold
except (i) pursuant to an effective registration statement under the
Act, (ii) to the extent applicable, pursuant to Rule 144 under the Act
(or any similar rule under such Act relating to the disposition of
securities), or (iii) upon the delivery by the holder to the Company
of an opinion of counsel, reasonably satisfactory to counsel to the
Company, stating that an exemption from registration under such Act is
available."
5. Restriction on Transfer of Warrants.
The Holder of a Warrant Certificate, by the Holder's acceptance
thereof, covenants and agrees that the Warrants are being acquired as an
investment and not with a view to the distribution thereof, and that the
Warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one (1) year from the date
hereof, except to the Designees.
6. Price.
6.1. Initial and Adjusted Exercise Price. The initial exercise
price of each Warrant shall be $13.20 per Share. The adjusted exercise price
per Share shall be the price which shall result from time to time from any and
all adjustments of
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the initial exercise price per Share in accordance with the provisions of
Article 8 hereof.
6.2. Exercise Price. The term "Exercise Price" herein shall mean
the initial exercise price or the adjusted exercise price, depending upon the
context.
7. Registration Rights.
7.1. Registration Under the Securities Act of 1933. None of the
Warrants or Shares have been registered for purposes of public distribution
under the Securities Act of 1933, as amended (the "Act").
7.2. Registrable Securities. As used herein the term
"Registrable Security" means each of the Warrants, the Shares and any shares of
Common Stock issued upon any stock split or stock dividend in respect of such
Shares; provided, however, that with respect to any particular Registrable
Security, such security shall cease to be a Registrable Security when, as of the
date of determination, (i) it has been effectively registered under the Act and
disposed of pursuant thereto, (ii) registration under the Act is no longer
required for the subsequent public distribution of such security or (iii) it has
ceased to be outstanding. The term "Registrable Securities" means any and/or
all of the securities falling within the foregoing definition of a "Registrable
Security." In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock, such adjustment shall be made in the definition of "Registrable
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Security" as is appropriate in order to prevent any dilution or enlargement of
the rights granted pursuant to this Article 7.
7.3. Piggyback Registration. If, at any time during the seven
years following the effective date of the Public Offering, the Company proposes
to prepare and file one or more post-effective amendments to the registration
statement filed in connection with the Public Offering or any new registration
statement or post-effective amendments thereto covering equity or debt
securities of the Company, or any such securities of the Company held by its
shareholders (in any such case, other than in connection with a merger,
acquisition or pursuant to Form S-8 or successor form), (for purposes of this
Article 7, collectively, the "Registration Statement"), it will give written
notice of its intention to do so by registered mail ("Notice"), at least thirty
(30) business days prior to the filing of each such Registration Statement, to
all holders of the Registrable Securities. Upon the written request of such a
holder (a "Requesting Holder"), made within twenty (20) business days after
receipt of the Notice, that the Company include any of the Requesting Holder's
Registrable Securities in the proposed Registration Statement, the Company
shall, as to each such Requesting Holder, use its best efforts to effect the
registration under the Act of the Registrable Securities which it has been so
requested to register ("Piggyback Registration"), at the Company's sole cost and
expense and at no cost or expense to the Requesting Holders. Notwithstanding
the provisions of this Section 7.3, the Company shall have the right at any time
after it shall have given
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<PAGE>
written notice pursuant to this Section 7.3 (irrespective of whether any written
request for inclusion of Registrable Securities shall have already been made) to
elect not to file any such proposed Registration Statement, or to withdraw the
same after the filing but prior to the effective date thereof.
7.4. Demand Registration.
(a) At any time during the Warrant Exercise Term, any
"Majority Holder" (as such term is defined in Section 7.4(c) below) of the
Registrable Securities shall have the right (which right is in addition to the
piggyback registration rights provided for under Section 7.3 hereof),
exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission"), on one occasion, at the sole expense of the
Company (except as provided in Section 7.5(b) hereof), a Registration Statement
and such other documents, including a prospectus, as may be necessary (in the
opinion of both counsel for the Company and counsel for such Majority Holder),
in order to comply with the provisions of the Act, so as to permit a public
offering and sale of the Registrable Securities by the holders thereof. The
Company shall use its best efforts to cause the Registration Statement to become
effective under the Act, so as to permit a public offering and sale of the
Registrable Securities by the holders thereof. Once effective, the Company will
use its best efforts to maintain the effectiveness of the Registration Statement
until the earlier of (i) the date that all of the Registrable Securities have
been
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<PAGE>
sold or (ii) the date that the holders of the Registrable Securities receive an
opinion of counsel to the Company that all of the Registrable Securities may be
freely traded (without limitation or restriction as to quantity or timing and
without registration under the Act) under Rule 144(k) promulgated under the Act
or otherwise.
(b) The Company covenants and agrees to give written notice
of any Demand Registration Request to all holders of the Registrable Securities
within ten (10) business days from the date of the Company's receipt of any such
Demand Registration Request. After receiving notice from the Company as
provided in this Section 7.4(b), holders of Registrable Securities may request
the Company to include their Registrable Securities in the Registration
Statement to be filed pursuant to Section 7.4(a) hereof by notifying the Company
of their decision to have such securities included within ten (10) days of their
receipt of the Company's notice.
(c) The term "Majority Holder" as used in Section 7.4
hereof shall mean any holder or any combination of holders of Registrable
Securities, if included in such holders' Registrable Securities are that
aggregate number of shares of Common Stock (including Shares already issued and
Shares issuable pursuant to the exercise of outstanding Warrants) as would
constitute a majority of the aggregate number of Shares (including Shares
already issued and Shares issuable pursuant to the exercise of outstanding
Warrants) included in all the Registrable Securities.
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<PAGE>
7.5. Covenants of the Company With Respect to Registration. The
Company covenants and agrees as follows:
(a) In connection with any registration under Section 7.4
hereof, the Company shall file the Registration Statement as expeditiously as
possible, but in any event no later than twenty (20) days following receipt of
any demand therefor, shall use its best efforts to have any such Registration
Statement declared effective at the earliest possible time, and shall furnish
each holder of Registrable Securities such number of prospectuses as shall
reasonably be requested.
(b) The Company shall pay all costs, fees and expenses
(other than underwriting fees, discounts and nonaccountable expense allowance
applicable to the Registrable Securities and the fees and expenses of counsel
retained by the holders of Registrable Securities) in connection with all
Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, and blue sky fees and expenses.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Registrable Securities included in the
Registration Statement for offering and sale under the securities or blue sky
laws of such states as are reasonably requested by the holders of such
securities.
(d) The Company shall indemnify any holder of the
Registrable Securities to be sold pursuant to any Regis-
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<PAGE>
tration Statement and any underwriter or person deemed to be an underwriter
under the Act and each person, if any, who controls such holder or underwriter
or person deemed to be an underwriter within the meaning of Section 15 of the
Act or Section 20(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from such registration
statement to the same extent and with the same effect as the provisions pursuant
to which the Company has agreed to indemnify the Underwriter as set forth in
Section 7 of the Underwriting Agreement and to provide for just and equitable
contribution as set forth in Section 8 of the Underwriting Agreement.
(e) Any holder of Registrable Securities to be sold
pursuant to a registration statement, and such Holder's successors and assigns,
shall severally, and not jointly, indemnify, the Company, its officers and
directors and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss,
claim, damage or expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which they may become subject under the Act, the Exchange Act or otherwise,
arising from information furnished by or on behalf of such holder, or such
Holder's successors or assigns, for specific inclusion in such
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<PAGE>
Registration Statement to the same extent and with the same effect as the
provisions pursuant to which the Underwriter has agreed to indemnify the Company
as set forth in Section 7 of the Underwriting Agreement and to provide for just
and equitable contribution as set forth in Section 8 of the Underwriting
Agreement.
(f) Nothing contained in this Agreement shall be construed
as requiring any Holder to exercise the Warrants held by such Holder prior to
the initial filing of any registration statement or the effectiveness thereof.
(g) If the Company shall fail to comply with the provisions
of this Article 7, the Company shall, in addition to any other equitable or
other relief available to the holders of Registrable Securities, be liable for
any or all incidental, special and consequential damages sustained by the
holders of Registrable Securities, requesting registration of their Registrable
Securities.
(h) The Company shall promptly deliver copies of all
correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff with
respect to the Registration Statement to each holder of Registrable Securities
included for such registration in such Registration Statement pursuant to
Section 7.3 hereof or Section 7.4 hereof requesting such correspondence and
memoranda and to the managing underwriter, if any, of the offering in connection
with which such Holder's Registrable Securities are being registered and
-13-
<PAGE>
shall permit each holder of Registrable Securities and such underwriter to do
such reasonable investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the Registration Statement as it deems
reasonably necessary to comply with applicable securities laws or rules of the
National Association of Securities Dealers, Inc. Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such holder
of Registrable Securities or underwriter shall reasonably request.
8. Adjustments of Exercise Price and Number of Shares.
8.1. Computation of Adjusted Price. In case the Company shall
at any time after the date hereof pay a dividend in shares of Common Stock or
make a distribution in shares of Common Stock, then upon such dividend or
distribution the Exercise Price in effect immediately prior to such dividend or
distribution shall forthwith be reduced to a price determined by dividing:
(a) an amount equal to the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution
multiplied by the Exercise Price in effect immediately prior to such dividend or
distribution, by
(b) the total number of shares of Common Stock
outstanding immediately after such issuance or sale.
-14-
<PAGE>
For the purposes of any computation to be made in accordance
with the provisions of this Section 8.1, the Common Stock issuable by way of
dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the date following
the date fixed for the determination of stockholders entitled to receive such
dividend or other distribution.
8.2. Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.3. Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Article 8, the number of
Shares issuable upon the exercise of each Warrant shall be adjusted to the
nearest full number by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Shares issuable
upon exercise of the Warrants immediately prior to such adjustment and dividing
the product so obtained by the adjusted Exercise Price.
8.4. Reclassification, Consolidation, Merger, etc. In case of
any reclassification or change of the outstanding shares of Common Stock (other
than a change in par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination), or in the case of any
consolidation of the Company with, or merger of the Company into, another
-15-
<PAGE>
corporation (other than a consolidation or merger in which the Company is the
surviving corporation and which does not result in any reclassification or
change of the outstanding shares of Common Stock, except a change as a result of
a subdivision or combination of such shares or a change in par value, as
aforesaid), or in the case of a sale or conveyance to another corporation of the
property of the Company as an entirety, the Holders shall thereafter have the
right to purchase the kind and number of shares of stock and other securities
and property receivable upon such reclassification, change, consolidation,
merger, sale or conveyance as if the Holders were the owners of the shares of
Common Stock underlying the Warrants immediately prior to any such events at a
price equal to the product of (x) the number of shares of Common Stock issuable
upon exercise of the Holder's Warrants and (y) the Exercise Price in effect
immediately prior to the record date for such reclassification, change,
consolidation, merger, sale or conveyance as if such Holders had exercised the
Warrants.
8.5. Determination of Outstanding Shares of Common Stock. The
number of shares of Common Stock at any one time outstanding shall include the
aggregate number of shares of Common Stock issued and the aggregate number of
shares of Common Stock issuable upon the exercise of options, rights, warrants
and upon the conversion or exchange of convertible or exchangeable securities.
8.6. Dividends and Other Distributions with Respect to
Outstanding Securities. In the event that the Company
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<PAGE>
shall at any time prior to the exercise of all Warrants make any distribution of
its assets to holders of its Common Stock as a liquidating or a partial
liquidating dividend, then the holder of Warrants who exercises its Warrants
after the record date for the determination of those holders of Common Stock
entitled to such distribution of assets as a liquidating or partial liquidating
dividend shall be entitled to receive for the Warrant Price per Warrant, in
addition to each share of Common Stock, the amount of such distribution (or, at
the option of the Company, a sum equal to the value of any such assets at the
time of such distribution as determined by the Board of Directors of the Company
in good faith) which would have been payable to such holder had he been the
holder of record of the Common Stock receivable upon exercise of his Warrant on
the record date for the determination of those entitled to such distribution.
At the time of any such dividend or distribution, the Company shall make
appropriate reserves to ensure the timely performance of the provisions of this
Subsection 8.6.
8.7. Subscription Rights for Shares of Common Stock or Other
Securities. In the case that the Company or an affiliate of the Company shall
at any time after the date hereof and prior to the exercise of all the Warrants
issue any rights, warrants or options to subscribe for shares of Common Stock or
any other securities of the Company or of such affiliate to all the shareholders
of the Company, the Holders of unexercised Warrants on the record date set by
the Company or such affiliate in connection with such issuance of rights,
warrants or options
-17-
<PAGE>
shall be entitled, in addition to the shares of Common Stock or other securities
receivable upon the exercise of the Warrants, to receive such rights, warrants
or options shall be entitled, in addition to the shares of Common Stock or other
securities receivable upon the exercise of the Warrants, to receive such rights
at the time such rights, warrants or options that such Holders would have been
entitled to receive had they been, on such record date, the holders of record of
the number of whole shares of Common Stock then issuable upon exercise of their
outstanding Warrants (assuming for purposes of this Section 8.7), that the
exercise of the Warrants is permissible immediately upon issuance).
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of securities in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the
-18-
<PAGE>
Warrant Certificate, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests.
The Company shall not be required to issue certificates representing
fractions of Shares, nor shall it be required to issue scrip or pay cash in lieu
of fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Shares.
11. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of the Warrants, such number of shares of Common Stock as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Exercise Price therefor, all Shares
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any shareholder. As
long as the Warrants shall be outstanding, the Company shall use its best
efforts to cause all shares of Common Stock issuable upon the exercise of the
Warrants to be listed on or quoted by NASDAQ or listed on such national
securities exchange, in the event the Common Stock is listed on a national
securities exchange.
12. Notices to Warrant Holders.
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<PAGE>
Nothing contained in this Agreement shall be construed as conferring
upon the Holder or Holders the right to vote or to consent or to receive notice
as a shareholder in respect of any meetings of shareholders for the election of
directors or any other matter, or as having any rights whatsoever as a
shareholder of the Company. If, however, at any time prior to the expiration of
the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital
stock of the Company, or any option, right or warrant to subscribe
therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed; or
-20-
<PAGE>
(d) reclassification or change of the outstanding shares of
Common Stock (other than a change in par value to no par value, or
from no par value to par value, or as a result of a subdivision or
combination), consolidation of the Company with, or merger of the
Company into, another corporation (other than a consolidation or
merger in which the Company is the surviving corporation and which
does not result in any reclassification or change of the outstanding
shares of Common Stock, except a change as a result of a subdivision
or combination of such shares or a change in par value, as aforesaid),
or a sale or conveyance to another corporation of the property of the
Company as an entirety is proposed; or
(e) The Company or an affiliate of the Company shall
propose to issue any rights to subscribe for shares of Common Stock or
any other securities of the Company or of such affiliate to all the
shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such
-21-
<PAGE>
record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend or distribution, or the issuance of any convertible or exchangeable
securities or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section
3 of this Agreement or to such other address as the Company may
designate by notice to the Holders.
14. Supplements and Amendments.
The Company and the Underwriter may from time to time supplement or
amend this Agreement without the approval of any Holders of Warrant Certificates
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Underwriter may deem
-22-
<PAGE>
necessary or desirable and which the Company and the Underwriter deem not to
adversely affect the interests of the Holders of Warrant Certificates.
15. Successors.
All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holders inure to the benefit of their respective
successors and assigns hereunder.
16. Termination.
This Agreement shall terminate at the close of business on __________,
2006. Notwithstanding the foregoing, this Agreement will terminate on any
earlier date when all Warrants have been exercised and all the Shares issuable
upon exercise of the Warrants have been resold to the public; provided, however,
that the provisions of Section 7 shall survive any termination pursuant to this
Section 16 until the close of business on _________, 2009.
17. Governing Law.
This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of New York and for all
purposes shall be construed in accordance with the laws of said State.
18. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and the Underwriter and any other registered
holder or holders of the Warrant Certificates, Warrants or the Shares any legal
or equitable right, remedy or claim under this Agreement; and this Agreement
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<PAGE>
shall be for the sole and exclusive benefit of the Company and the Underwriter
and any other holder or holders of the Warrant Certificates, Warrants or the
Shares.
19. Counterparts.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
[SEAL] NETWORK-1 SECURITY SOLUTIONS, INC.
By:__________________________________
Name:
Title:
Attest:
_______________________
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By:__________________________________
Name:
Title:
-24-
<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED FOR PURPOSES OF PUBLIC
DISTRIBUTION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY
NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144
UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION
OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING
THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _________, 2003
No. W-1 187,500 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Whale Securities Co., L.P. or
registered assigns, is the registered holder of 187,500 Warrants to purchase, at
any time from _______, 1999 until 5:00 P.M. New York City time on ________, 2003
("Expiration Date"), up to 187,500 fully-paid and non-assessable shares
("Shares") of common stock, par value $.01 per share (the "Common Stock"), of
Network-1 Security Solutions, Inc., a Delaware corporation (the "Company"), at
the initial exercise price, subject to adjustment in certain events (the
"Exercise Price"), of $13.20 per Share upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of ____________, 1998 between the Company and Whale
Securities Co., L.P. (the "Warrant Agreement"). Payment of the Exercise Price
may be made in cash, or by certified or official bank check in New York Clearing
House funds payable to the order of the Company, or any combination thereof.
No Warrant may be exercised after 5:00 P.M., New York City time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is
<PAGE>
hereby referred to in a description of the rights, limitation of rights,
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax, or other governmental charge
imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated: ___________, 1998 NETWORK-1 SECURITY SOLUTIONS, INC.
[SEAL] By:__________________________
Name:
Title:
Attest:
______________________
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _________ shares of Common
Stock and herewith tenders in payment for such securities cash or a certified or
official bank check payable in New York Clearing House Funds to the order of
Network-1 Security Solutions, Inc. in the amount of $ , all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of , whose
address is __________________, and that such Certificate be delivered to
__________________, whose address is _____________.
Dated: Signature: ______________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _________________________________________
hereby sells, assigns and transfers unto __________________________________
___________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature: ________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate)
_______________________________
_______________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
Exhibit 3.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 07/13/1990
770194001 - 2235929
770194001 CERTIFICATE OF INCORPORATION
OF
NETWORK-1, INC.
FIRST: The name of the corporation is Network-1, Inc.
SECOND: The address of its registered office in the State of Delaware is
Coffee Run Professional Centre, Lancaster Pike and Loveville Road, City of
Hockessin, County of New Castle. Its registered agent at such address is
The Incorporators Ltd.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: The corporation shall have the authority to issue one thousand shares
of common stock without par value.
FIFTH: The Board of Directors is expressly authorized to adopt, amend, or
repeal the By-Laws of the corporation.
SIXTH: The stockholders and directors may hold their meetings and keep the
books and documents of the corporation outside the State of Delaware, at such
places from time to time designated by the By-Laws, except as otherwise
required by the Laws of Delaware.
SEVENTH: The corporation is to have perpetual existence.
EIGHTH: The name and mailing address of the incorporator is Patricia L. Ryan,
Coffee Run Professional Centre, Lancaster Pike & Loveville Road, Hockessin,
DE 19707.
NINTH: The number of directors of the corporation shall be fixed from time to
time by its By-Laws and may be increased or decreased.
TENTH: The Board of Directors is expressly authorized and shall have such
authority as set forth in the By-Laws to the extent such authority would be
valid under Delaware Law.
ELEVENTH: No director of the corporation shall have personal liability to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, provided that this provision shall not eliminate or limit
the liability of a director (a) for any breach of the director's duty or
loyalty to the corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (c) under Section 174 of the Delaware Corporation Law, or (d) for any
transaction from which the director derived an improper personal benefit.
THE UNDERSIGNED Incorporator for the purpose of forming a corporation pursuant
to the laws of the State of Delaware, does make this Certificate, hereby
declaring and certifying that the facts herein stated are true.
July 13, 1990 BY: /s/ Patricia L. Ryan
------------------------------
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
of
NETWORK-1, INC.
- ------------------------------------------------------------------------------
Pursuant to Section 242 of the General Corporation Law
of the State of Delaware
- ------------------------------------------------------------------------------
Network-1, Inc. (the "Corporation"), a Delaware corporation, hereby
certifies as follows:
FIRST: The name of the Corporation is Network-1, Inc.
SECOND: The date on which the Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware is
July 13, 1990, under the name of Network-1, Inc.
THIRD: That the Board of Directors of this Corporation, pursuant to
Section 228, Section 242, and Section 245 of the General Corporation Law of the
State of Delaware, adopted resolutions amending and restating the Certificate of
Incorporation to read in full as follows:
Article I
The name of this Corporation is Network-1, Inc.
Article II
The address of the registered office of this Corporation in the State
of Delaware is 32 Loockerman Square, Suite L-100, City of Dover 19901, County of
Kent. Its registered agent at such address is The Prentice-Hall Corporation
System, Inc.
<PAGE>
Article III
The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
Article IV
A. Classes of Stock
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Preferred Stock" and "Common Stock". The total
number of shares which the Corporation is authorized to issue is thirty million
(30,000,000) shares. Twenty-five (25,000,000) shares shall be Common Stock, par
value one cent ($.01) per share (the "Common Stock"), and five million
(5,000,000) shares shall be Preferred Stock, par value one cent ($.01) per share
(the "Preferred Stock"). The Corporation is authorized to effect a stock split
of the issued and outstanding Common Stock of the Corporation whereby every
share of Common Stock currently outstanding will be converted into 12,836.97
shares of Common Stock, par value $.01 per share. Each share of the
Corporation's Common Stock issued and outstanding on the effective date of this
Amendment shall be and hereby are changed without further action into 12,836.97
fully paid and nonassessable shares of the Corporation's Common Stock.
Fractional shares will be rounded to the nearest whole number.
B. Powers, Preferences, Rights, Qualifications, Limitations and
Restrictions of Preferred Stock.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences of any wholly unissued series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or any of them, and to increase or decrease the number of
shares of any series subsequent to the issue of shares of that series, but not
below the number of shares of such series then outstanding and fix any other
rights, obligations or provisions which may be so determined by Delaware Law.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
Article V
For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation, and regulation of the
powers of the Corporation and of its directors and of its stockholders or any
class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of
the affairs of the Corporation shall be vested in its Board
of Directors. The number of directors of the Corporation
shall be such
2
<PAGE>
as from time to time shall be fixed by, or in the manner provided in,
the By-laws. No election of directors need be by written ballot.
2. The Board of Directors shall have the power
without the assent or vote of the Stockholders, to adopt,
amend, or repeal the By-laws of the Corporation; provided,
however, that any provision for the classification of
directors of the Corporation for staggered terms pursuant to
the provisions of subsection (d) of Section 141 of the
General Corporation Law of the State of Delaware shall be
set forth in an initial By-law or in a By-law adopted by the
stockholders entitled to vote of the Corporation unless
provisions for such classification shall be set forth in
this certificate of incorporation.
3. Whenever the Corporation shall be authorized to
issue only one class of stock, each outstanding share shall
entitle the holder thereof to notice of, and the right to
vote at any meeting of stockholders. Whenever the
Corporation shall be authorized to issue more than one class
of stock, no outstanding share of any class of stock which
is denied voting power under the provisions of the
Certificate of Incorporation shall entitle the holder
thereof to the right to vote at any meeting of stockholders
except as the provisions of paragraph (2) of subsection (b)
of Section 242 of the General Corporation Law of the State
of Delaware shall otherwise require; provided, that no share
of any such class which is otherwise denied voting power
shall entitle the holder thereof to vote upon the increase
or decrease in the number of authorized shares of said
class.
4. The directors in their discretion may submit any
contract or act for approval or ratification at any annual
meeting of the stockholders or at any meeting of the
stockholders called for the purpose of considering any such
act or contract, and any contract or act that shall be
approved or be ratified by the vote of the holders of a
majority of the stock of the Corporation which is
represented in person or by proxy at such meeting and
entitled to vote thereat (provided that a lawful quorum of
stockholders be there represented in person or by proxy)
shall be as valid and binding upon the Corporation and upon
all the stockholders as though it had been approved or
ratified by every stockholder of the Corporation, whether or
not the contract or act would otherwise be open to legal
attack because of directors' interests, or for any other
reason.
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5. In addition to the powers and authorities
hereinbefore or by statute expressly conferred upon them,
the directors are hereby empowered to exercise all such
powers and do all such acts and things as may be exercised
or done by the Corporation; subject nevertheless, to the
provisions of the statutes of Delaware, of this Certificate
of Incorporation, and to any by-laws from time to time made
by the stockholders; provided, however, that no by-law so
made shall invalidate any prior act of the directors which
would have been valid if such by-law had not been made.
Article VI
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the directors'
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the GCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If
the GCL is amended to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the GCL, as so amended. Any repeal or modification of this paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation with respect to events occurring
prior to the time of such repeal or modification.
Article VII
The Corporation shall, to the fullest extent permitted by the
provisions of the General Corporation Law of Delaware, as now or hereafter in
effect, indemnify all persons whom it may indemnify under such provisions. The
indemnification provided by this Article shall not limit or exclude any rights,
indemnities or limitations of liability to which any person may be entitled,
whether as a matter of law, under the By-Laws of the Corporation, by agreement,
vote of the stockholders or disinterested directors of the Corporation or
otherwise.
Article VIII
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or the
stockholders or class of stockholders of this Corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in
number representing three fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as
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the case may be, agree to any compromise or arrangement and to any
reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
Article IX
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed by statute, and all
rights and powers conferred upon stockholders, directors, and officers herein
are granted subject to this reservation.
Article X
The foregoing Amendment and Restatement to the Certificate of
Incorporation was duly adopted by the Corporation's Board of Directors in
accordance with the provisions of Section 242 and Section 245 of the General
Corporation Law of the State of Delaware and thereafterwards duly adopted by the
written consent of a majority of stockholders of the Corporation in accordance
with the provisions of Section 228 of the General Corporation Law of the State
of Delaware, written notice of such adoption having been given in accordance
with the provisions of the aforesaid Section 228 to all stockholders of the
Corporation not so consenting.
IN WITNESS WHEREOF, Network-1, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by its president and attested
to by its secretary this 25th day of February, 1994.
NETWORK-1, INC.
/s/ Robert Russo
-----------------------------------
Robert Russo, President and
Chief Operating Officer
ATTEST
/s/ William Hancock
- ------------------------------
William Hancock, Secretary
5
<PAGE>
CERTIFICATE OF AMENDMENTS TO THE
CERTIFICATE OF INCORPORATION
of
NETWORK-1, INC.
- ------------------------------------------------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
- ------------------------------------------------------------------------------
Network-1, Inc. (the "Corporation"), a Delaware corporation, hereby
certifies as follows:
FIRST: The Board of Directors of said corporation duly adopted a
resolution setting forth and declaring advisable the amendment of Article first
of the Amended and Restated Certificate of Incorporation of said Corporation so
that, as amended, said Article shall read as follows:
ARTICLE FIRST
The name of the Corporation is Network-1 Software & Technology, Inc.
SECOND: In lieu of a vote of Stockholders, written consent to the
foregoing amendment has been given by a majority of the outstanding stock
entitled to vote thereon in accordance with the provisions of Section 228 of the
General Corporation Law of the State of Delaware, and such amendment has been
duly adopted by the Board of Directors of the Corporation in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF AND UNDER PENALTIES OF PERJURY, Network-1, Inc. has
caused this Certificate of Amendment to the Certificate of Incorporation to be
signed by its president and attested to by its secretary this 15th day of March,
1994.
NETWORK-1, INC.
/s/ Robert Russo
-------------------------------------
Robert Russo, President and
Chief Operating Officer
ATTEST
/s/ William Hancock
- ---------------------------------
William Hancock, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
of
NETWORK-1 SOFTWARE & TECHNOLOGY
- ------------------------------------------------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
- ------------------------------------------------------------------------------
Network-1 Software & Technology, Inc., (the "Corporation"), a Delaware
corporation, hereby certifies as follows:
FIRST: The Board of Directors of the Corporation duly adopted a
resolution setting forth and declaring advisable the amendment of Article First
of the Amended and Restated Certification of Incorporation of the Corporation so
that, as amended, said Article shall read as follows:
ARTICLE FIRST
The name of the Corporation is Network-1 Security Solutions, Inc.
SECOND: In lieu of a vote of stockholders, written consent to the
foregoing amendment has been given by a majority of the outstanding stock
entitled to vote thereon in accordance with the provisions of Section 228 of the
General Corporation Law of the State of Delaware, and such amendment has been
duly adopted by the Board of Directors of the Corporation in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF AND UNDER PENALTIES OF PERJURY, Network-1 Software &
Technology, Inc. has caused this Certificate of Amendment to the Certificate of
Incorporation to be signed by its President and attested to by its Secretary
this 13th day of May, 1998.
Network-1 Software & Technology, Inc.
/s/ Avi A. Fogel
-------------------------------------
Avi A. Fogel, President and
Chief Executive Officer
ATTEST
/s/ William Hancock
- ---------------------------------
William Hancock, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
of
NETWORK-1 SECURITY SOLUTIONS, INC.
- ------------------------------------------------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
- ------------------------------------------------------------------------------
Network-1 Security Solutions, Inc., (the "Corporation"), a Delaware
corporation, hereby certifies as follows:
FIRST: The Board of Directors of the Corporation duly adopted a
resolution setting forth and declaring advisable the amendment of Article IV of
the Amended and Restated Certification of Incorporation of the Corporation so
that, as amended, said Article shall read as follows:
ARTICLE IV
A. Classes of Stock
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Preferred Stock" and "Common Stock". The total
number of shares which the Corporation is authorized to issue is thirty million
(30,000,000) shares. Twenty-five million (25,000,000) shares shall be Common
Stock, $.01 par value per share (the "Common Stock"), and five million
(5,000,000) shares shall be Preferred Stock, $.01 par value per share (the
"Preferred Stock"). The Corporation is authorized to effect a reverse stock
split of the issued and outstanding Common Stock of the Corporation whereby each
1.61083 shares of Common Stock, $.01 par value, currently outstanding will be
converted into one share of Common Stock, $.01 par value per share. Each
1.61083 shares of the Corporation's Common Stock issued and outstanding on the
effective date of this Amendment shall be and hereby are changed without further
action into one fully paid and non-assessable share of the Corporation's Common
Stock. Fractional shares will be rounded to the nearest whole number.
SECOND: In lieu of a vote of stockholders, written consent to the
foregoing amendment has been given by a majority of the outstanding stock
entitled to vote thereon in accordance with the provisions of Section 228 of the
General Corporation Law of the State of Delaware, and such amendment has been
duly adopted by the Board of Directors of the Corporation in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS WHEREOF AND UNDER PENALTIES OF PERJURY, Network-1 Security
Solutions, Inc. has caused this Certificate of Amendment to the Certificate of
Incorporation to be signed by its President and attested to by its Secretary
this 17th day of July, 1998.
Network-1 Security Solutions, Inc.
/s/ Avi A. Fogel
-------------------------------------
Avi A. Fogel, President and
Chief Executive Officer
ATTEST
/s/ Robert Russo
- ----------------------------
Robert Russo, Secretary
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
NETWORK-1 SECURITY SOLUTIONS, INC.
A DELAWARE CORPORATION
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office of the Corporation
shall be established and maintained at 32 Loockerman Square, Suite L-100, City
of Dover 19901, County of Kent, in the State of Delaware.
Section 2. OTHER OFFICES. The Corporation may have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
CORPORATE SEAL
Section 3. CORPORATE SEAL. The corporate seal shall be circular and
shall consist of a die bearing the name of the corporation, the year of it's
creation and the words "Corporate Seal Delaware". Said seal may be used by
causing it, or a facsimile thereof, to be impressed or affixed or otherwise
reproduced.
ARTICLE III
STOCKHOLDERS' MEETINGS
Section 4. PLACE OF MEETINGS. Meetings of the stockholders of the
Corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the Corporation required to be
maintained pursuant to Section 2 hereof.
Section 5. ANNUAL MEETING. Annual meetings of stockholders for the
election of Directors and for such other business as may be stated in the notice
of the meeting, shall be
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held at such place, either within or without the State of Delaware, and at such
time and date as the Board of Directors, by resolution, shall determine and as
set forth in the notice of the meeting. If the date of the annual meeting shall
fall upon a legal holiday, the meeting shall be held on the next succeeding
business day. At each annual meeting, the stockholders entitled to vote shall
elect a Board of Directors and may transact such other corporate business as
shall be stated in the notice of the meeting.
Section 6. SPECIAL MEETINGS. Special meetings of the stockholders of
the Corporation may be called, for any purpose or purposes, unless otherwise
prescribed by statute or by the Certificate of Incorporation, by (i) the
Chairman of the Board of Directors, (ii) the President or (iii) the Board of
Directors, and shall be called by the President or Secretary at the request in
writing of a majority of the stockholders entitled to vote thereat. No business
may be transacted at such special meeting other than specified in notice of such
meeting.
Section 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, as the same may be amended or restated
(hereinafter, the "Certificate of Incorporation"), written notice of each
meeting of stockholders shall be given not less than ten (10) nor more than
sixty (60) days before the date of the meeting to each stockholder entitled to
vote at such meeting, such notice to specify the place, date, time and purpose
or purposes of the meeting. Notice of any meeting of stockholders may be waived
in writing, signed by the person entitled to notice thereof, either before or
after such meeting, and will be waived by any stockholder by his attendance
thereat in person or by proxy, except when the stockholder attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Any stockholder so waiving notice of such meeting shall be bound by
the proceedings of any such meeting in all respects as if due notice thereof had
been given.
Section 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these By-laws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the Chairman of the meeting or by vote of the holders of a majority of the
shares represented thereat, but no
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<PAGE>
other business shall be transacted at such meeting. The stockholders present at
a duly called or convened meeting, at which a quorum is present, may continue to
transact business until adjournment. When a quorum is once present to organize
a meeting, it is not broken by the subsequent withdrawal of any stockholders.
Except as otherwise provided by law, the Certificate of Incorporation or these
By-laws, all action taken by the holders of a majority of the votes cast,
excluding abstentions, at any meeting at which a quorum is present shall be
valid and binding upon the Corporation; provided, however, that Directors shall
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
Directors. Where a separate vote by a class or classes is required, a majority
of the outstanding shares of such class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter and the affirmative vote of the majority
(plurality, in the case of the election of Directors) of shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class.
Section 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the Chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the Corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these By-laws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents shall have the right to do so either
in person or by an agent or agents authorized by a written proxy executed by
such person or his duly authorized agent, which proxy shall be filed with the
Secretary at or before the meeting at which it is to be used. An
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<PAGE>
agent so appointed need not be a stockholder. Elections of Directors need not
be by written ballot, unless otherwise provided in the Certificate of
Incorporation.
Section 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more person share the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument
or order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1)votes, the act of the
majority so voting binds all; (c) if more than one (1)votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the General Corporation Law of Delaware, Section 217(b).
If the instrument filed with the Secretary shows that any such tenancy is held
in unequal interests, a majority or even-split for the purpose of clause (c)
shall be a majority or even-split in interest.
Section 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.
Section 13. ACTION WITHOUT MEETING. Except as otherwise provided by the
Certificate of Incorporation, whenever the vote of stockholders at a meeting
thereof is required or permitted to be taken in connection with any corporate
action by any provisions of Delaware Corporate Law, or the Certificate of
Incorporation, or of these By-laws, such action may be taken without a meeting,
without prior notice and without a vote, if a
4
<PAGE>
consent or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting.
Effective upon the closing of the Corporation's initial public offering
of securities pursuant to a registration statement filed under the Securities
Act of 1933, as amended (a "Public Offering"), the stockholders of the
Corporation may not take action by written consent without a meeting and must
take any actions at a duly called annual or special meeting. Meetings of
stockholders may be held within or without the State of Delaware, as the
By-laws may provide. The books of the Corporation may be kept (subject to any
provision contained in the statutes) outside the State of Delaware at such
place or places as may be designated from time to time by the Board of
Directors or in these By-laws of the Corporation.
Section 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed, is absent, or designates
the next senior officer present to so act, the President, or, if the President
is absent, the most senior Vice President present, or, in the absence of any
such officer, a Chairman of the meeting chosen by a majority in interest of the
stockholders entitled to vote, present in person or by proxy, shall act as
Chairman. The Secretary, or, in his absence, an Assistant Secretary directed to
do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the Corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the Chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such Chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the Corporation and their duly authorized and constituted proxies and
such other persons as the Chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and
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<PAGE>
regulation of the opening and closing of the polls for balloting on matters
which are to be voted on by ballot. Unless and to the extent determined by the
Board of Directors or the Chairman of the meeting, meetings of stockholders
shall not be required to be held in accordance with rules of parliamentary
procedure.
ARTICLE IV
DIRECTORS
Section 15. NUMBER AND TERM OF OFFICE. The number of Directors which
shall constitute the whole of the Board of Directors shall be no less than three
(3). The number of authorized Directors may be modified from time to time by
amendment of this Section 15 in accordance with the provisions of Section 44
hereof. At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, and until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the Delaware
General Corporation Law.
The number of Directors which constitute the whole Board of Directors of
the Corporation shall be designated in the By-laws of the Corporation or by
resolution adopted by the Board of Directors. Vacancies occurring on the Board
of Directors for any reason may be filled by vote of a majority of the remaining
members of the Board of Directors, although less than a quorum, at any meeting
of the Board of Directors. A person so elected by the Board of Directors to
fill a vacancy shall hold office until the next succeeding annual meeting of
stockholders of the Corporation and until his or her successor shall have been
duly elected and qualified. Directors need not be stockholders unless so
required by the Certificate of Incorporation. If, for any reason, the Directors
shall not have been elected at an annual meeting, they may be elected as soon
thereafter as convenient at a special meeting of the stockholders called for
that purpose in the manner provided in these By-laws.
Section 16. POWERS. The powers of the Corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
Section 17. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, vacancies and newly created directorships resulting from any
increase in the authorized
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number of Directors may be filled by a majority of the Directors then in office,
although less than a quorum, or by a sole remaining Director, and each Director
so elected shall hold office for the unexpired portion of the term of the
Director whose place shall be vacant and until his or her successor shall have
been duly elected and qualified. A vacancy in the Board of Directors shall be
deemed to exist under this Section 17 in the case of the death, removal or
resignation of any Director, or if the stockholders fail at any meeting of
stockholders at which Directors are to be elected (including any meeting
referred to in Section 19 below) to elect the number of Directors then
constituting the whole Board of Directors.
Section 18. RESIGNATION. Any Director may resign at any time by
delivering his or her written resignation to the Secretary, such resignation to
specify whether it will be effective at a particular time, upon receipt by the
Secretary or at the pleasure of the Board of Directors. If no such
specification is made, it shall be deemed effective at the pleasure of the Board
of Directors. When one or more Directors shall resign from the Board of
Directors, effective at a future date, a majority of the Directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each Director so chosen shall hold
office for the unexpired portion of the term of the Director whose place shall
be vacated and until his successor shall have been duly elected and qualified.
Section 19. REMOVAL. At a special meeting of stockholders called for
the purpose in the manner hereinabove provided, subject to any limitations
imposed by law or the Certificate of Incorporation, the Board of Directors, or
any individual Director, may be removed from office, with or without cause, and
a new Director or Directors elected by a vote of stockholders holding a majority
of the outstanding shares entitled to vote at an election of Directors.
Section 20. MEETINGS.
(a) Annual Meetings. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary and such meeting shall be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
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(b) Regular Meetings. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors shall be held in the office of the
Corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been designated by resolution of the Board of Directors or
the written consent of all Directors.
(c) Special Meetings. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the Directors.
(d) Telephone Meetings. Any member of the Board of Directors, or
of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) Notice of Meetings. Written notice of the time and place of
all special meetings of the Board of Directors shall be given at least one (1)
day before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
Director by attendance thereat, except when the Director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) Waiver of Notice. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either before
or after meeting, each of the Directors not present shall sign a written waiver
of notice, or a consent to holding such meeting, or an approval of the minutes
thereof. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
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<PAGE>
Section 21. QUORUM AND VOTING.
(a) A quorum of the Board of Directors shall consist of a majority
of the exact number of directors fixed from time to time in accordance with
Section 15 of these By-laws, but not less than one (1); provided, however, at
any meeting whether a quorum be present or otherwise, a majority of the
Directors present may adjourn from time to time until the time fixed for the
next regular meeting of the Board of Directors, without notice other than by
announcement at the meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by a vote of the
majority of the Directors present, unless a different vote is required by law,
the Certificate of Incorporation or these By-laws.
Section 22. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 23. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
Director from serving the Corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
Section 24. COMMITTEES.
(a) Executive Committee. The Board of Directors may by resolution
passed by a majority of the whole Board of Directors appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and specifically granted by
the Board of Directors, shall have, and may exercise when the Board of Directors
is not in session, all powers of the Board of Directors in the management of the
business and affairs of the Corporation, including, without limitation, the
power and
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authority to declare a dividend or to authorize the issuance of stock, except
such committee shall not have the power or authority to amend the Certificate of
Incorporation, to adopt an agreement of merger or consolidation, to recommend to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, to recommend to the stockholders of the
Corporation a dissolution of the Corporation or a revocation of a dissolution or
to amend these By-laws.
(b) Other Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall such committee have the powers denied to the Executive Committee
in these By-laws.
(c) Term. Each member of a committee of the Board of Directors
shall serve a term on the committee coexistent with such member's term on the
Board of Directors. The Board of Directors, subject to the provisions of
subsections (a) or (b) of this By-law may at any time increase or decrease the
number of members of a committee or terminate the existence of a committee. The
membership of a committee member shall terminate on the date of his or her death
or voluntary resignation from the committee or from the Board of Directors. The
Board of Directors may at any time for any reason remove any individual
committee member and the Board of Directors may fill any committee vacancy
created by death, resignation, removal or increase in the number of members of
the committee. The Board of Directors may designate one or more Directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee, and, in addition, in the absence or
disqualification of any member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
(d) Meetings. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 24 shall be held at such times and place as
are determined by the Board of Directors, or by any such committee and when
notice thereof has
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been given to each member of such committee, no further notice of such regular
meetings need be given thereafter. Special meetings of any such committee may
be held at any place which has been determined from time to time by such
committee, and may be called by any Director who is a member of such committee,
upon written notice to the members of such committee of the time and place of
such special meeting given in the manner provided for the giving of written
notice to members of the Board of Directors of the time and place of special
meetings of the Board of Directors. Notice of any special meeting of any
committee maybe waived in writing at any time before or after the meeting and
will be waived by any Director by attendance thereat, except when the Director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee.
Section 25. ORGANIZATION. The Chairman of the Board shall preside at
every meeting of the Board of Directors, if present. In the case of any
meeting, if there is no Chairman of the Board or if the Chairman is not present,
a Chairman chosen by a majority of the directors present shall act as Chair of
such meeting. The Secretary of the Corporation or, in the absence of the
Secretary, any person appointed by the Chairman shall act as Secretary of the
meeting.
ARTICLE V
OFFICERS
Section 26. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chief Executive
Officer, the President, one or more Vice Presidents, the Secretary, the Chief
Financial Officer and the Treasurer, all of whom shall be elected at the annual
organizational meeting of the Board of Directors. The Board of Directors may
also appoint one or more Assistant Secretaries, Assistant Treasurers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the Corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other
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compensation of the officers of the Corporation shall be fixed by or in the
manner designated by the Board of Directors.
Section 27. TENURE AND DUTIES OF OFFICERS.
(a) General. All officers shall hold office at the pleasure of the
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors.
(b) Duties of the Chief Executive and Chief Operating Officers.
Subject to the control of the Board of Directors, the Chief Executive Officer
shall have general executive charge, management and control, of the properties,
business and operations of the corporation with all such powers as may be
reasonably incident to such responsibilities; and subject to the control of the
Chief Executive Officer, the Chief Operating Officer (if designated) shall have
general operating charge, management and control, of the properties, business
and operations of the Corporation with all such powers as may be reasonably
incident to such responsibilities. The Chief Executive Officer and, if and to
the extent designated by the Chief Executive Officer, the Chief Operating
Officer, may agree upon and execute all leases, contracts, evidences of
indebtedness and other obligations in the name of the Corporation and may sign
all certificates for shares of capital stock of the Corporation, and each shall
have such other powers and duties as are designated in accordance with these
By-laws and as from time to time may be assigned to each by the Board of
Directors.
(c) Duties of President. Unless the Board of Directors otherwise
determines, subject to the control of the Chief Executive Officer, the President
shall have the authority to agree upon and execute all leases, contracts,
evidences of indebtedness and other obligations in the name of the Corporation;
and, unless the Board of Directors otherwise determines, he shall, in the
absence of the Chairman of the Board or if there be no Chairman of the Board,
preside at all meetings of the stockholders and (should he be a Director) of the
Board of Directors, and the President shall have such other powers and duties as
designated in accordance with these By-laws and as from time to time may be
assigned to him by the Board of Directors.
(d) Duties of Vice Presidents. If and to the extent determined by
the Board of Directors, the Vice Presidents, in the
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order of their seniority, may assume and perform the duties of the President in
the absence or disability of the President or whenever the office of President
is vacant. The Vice Presidents shall perform other duties commonly incident to
their office and shall also perform such other duties and have such other powers
as the Board of Directors or the President shall designate from time to time.
(e) Duties of Secretary. The Secretary shall attend all meetings
of the stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the Corporation. The Secretary shall
give notice in conformity with these By-laws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given in these
By-laws and other duties commonly incident to such office and shall also perform
such other duties and have such other powers as the Board of Directors shall
designate from time to time. The President may direct any Assistant Secretary
to assume and perform the duties of the Secretary in the absence or disability
of the Secretary, and each Assistant Secretary shall perform other duties
commonly incident to such office and shall also perform such other duties and
have such other powers as the Board of Directors or the President, shall
designate from time to time.
(f) Duties of Chief Financial Officer. The Chief Financial Officer
shall keep or cause to be kept the books of account of the Corporation in a
thorough and proper manner and shall render statements of the financial affairs
of the Corporation in such form and as often as required by the Board of
Directors, the Chairman of the Board or the President. The Chief Financial
Officer, subject to the order of the Board of Directors, shall have the custody
of all funds and securities of the Corporation. The Chief Financial Officer
shall perform other duties commonly incident to such office and shall also
perform such other duties and have such other powers as the Board of Directors,
the Chairman of the Board or the President shall designate from time to time.
The Chairman of the Board or the President may direct the Treasurer or any
Assistant Treasurer to assume and perform the duties of the Chief Financial
Officer in the absence or disability of the Chief Financial Officer, and each
Assistant Treasurer shall perform other duties commonly incident to such office
and shall also perform such other duties and have such other powers as the Board
of Directors, the Chairman of the Board or the President shall designate from
time to time.
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Section 28. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
Section 29. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the Corporation under any
contract with the resigning officer.
Section 30. REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the vote or written consent of a majority
of the Directors in office at the time, or by any committee or superior officers
upon whom such power of removal may have been conferred by the Board of
Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
Section 31. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the Corporation
any corporate instrument or document, or to sign on behalf of the Corporation
the corporate name without limitation, or to enter into contracts on behalf of
the Corporation, except where otherwise provided by law or these By-laws, and
such execution or signature shall be binding upon the Corporation.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the Corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the Corporation, shall be executed, signed or endorsed by the Chief
Executive Officer, or the President or any Vice President, and by the Secretary
or Chief Financial Officer or Treasurer or any Assistant Secretary or Assistant
Treasurer. All
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other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositories on funds to the
credit of the Corporation or in special accounts of the Corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the Corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
Section 32. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the Corporation
for itself, or for other parties in any capacity, shall be voted, and all
proxies with respect thereto shall be executed, by the person authorized so
to do by resolution of the Board of Directors, or, in the absence of such
authorization, by the Chairman of the Board of Directors, the President, or
any Vice President.
ARTICLE VII
SHARES OF STOCK
Section 33. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the Corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the Corporation shall be entitled to have a certificate signed by or in the name
of the Corporation by the Chief Executive Officer, or the President or any Vice
President and by the Secretary or Chief Financial Officer or Treasurer or any
Assistant Treasurer or Assistant Secretary, certifying the number of shares
owned by him in the Corporation. Where such certificate is countersigned by a
transfer agent other than the Corporation or its employee, or by a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued with the same effect as if
he were such officer, transfer agent, or registrar at the date of issue. Each
certificate shall state upon the face or
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back thereof, in full or in summary, all of the designations, preferences,
limitations, restrictions on transfer and relative rights of the shares
authorized to be issued.
Section 34. LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The Corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the Corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 35. TRANSFERS.
(a) Transfers of record of shares of stock of the Corporation
shall be made only on its books by the holders thereof, in person or by attorney
duly authorized and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
(b) The Corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the Corporation to restrict the transfer of shares of stock of the Corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the Delaware General Corporation Law.
Section 36. FIXING RECORD DATES.
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
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day on which notice is given, or if notice is waived, at the close of
business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed by the Board of Directors,
the record date for determining stockholders for any such purpose shall be at
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
Section 37. REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
Section 38. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the Corporation, other than stock certificates
(covered in Section 33), may be signed by the Chief Executive Officer, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or
other corporate security shall be authenticated by the manual signature of a
trustee under an indenture pursuant to which such bond, debenture or other
corporate security shall be issued, the
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signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the Corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before any bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the Corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the Corporation.
ARTICLE IX
DIVIDENDS
Section 39. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the Corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.
Section 40. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the Corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the Corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
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FISCAL YEAR
Section 41. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
Section 42. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER
AGENTS.
(a) Directors and Executive Officers. The Corporation shall
indemnify its Directors and executive officers to the fullest extent not
prohibited by the Delaware General Corporation Law; provided, however, that the
Corporation may limit the extent of such indemnification by individual contracts
with its Directors and executive officers; and, provided, further, that the
Corporation shall not be required to indemnify any Director or executive officer
in connection with any proceeding (or part thereof) initiated by such person or
any proceeding by such person against the Corporation or its Directors,
officers, employees or other agents unless (i) such indemnification is expressly
required to be made by law, (ii) the proceeding was authorized by the Board of
Directors of the Corporation or (iii) such indemnification is provided by the
Corporation, in its sole discretion, pursuant to the powers vested in the
Corporation under the Delaware General Corporation Law.
(b) Other Officers, Employees and Other Agents. The Corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.
(c) Good Faith.
(1) For purposes of any determination under this By-law, a
Director or executive officer shall be deemed to have acted in good faith and in
a manner such officer reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe that such officer's
conduct was unlawful, if such officer's action is based on information,
opinions, reports and statements, including financial statements and other
financial data, in each case prepared or presented by:
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(A) one or more officers or employees of the Corporation
whom the Director or executive officer believed to be reliable and competent in
the matters presented;
(B) counsel, independent accountants or other persons as
to matters which the Director or executive officer believed to be within such
person's professional competence; and
(C) with respect to a Director, a committee of the Board
upon which such Director does not serve, as to matters within such committee's
designated authority, which committee the Director believes to merit confidence;
so long as, in each case, the Director or executive officer acts without
knowledge that would cause such reliance to be unwarranted.
(2) The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal
proceeding, that such person had reasonable cause to believe that his conduct
was unlawful.
(3) The provisions of this paragraph (c) shall not be deemed
to be exclusive or to limit in any way the circumstances in which a person may
be deemed to have met the applicable standard of conduct set forth by the
Delaware General Corporation Law.
(d) Expenses. The Corporation shall advance, prior to the final
disposition of any proceeding, promptly following request therefor, all expenses
incurred by any Director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this By-law or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this By-law, no advance shall be made by the Corporation if a
determination is reasonably and promptly made (i) by the Board of Directors by a
majority vote of a quorum consisting of Directors who were not parties to the
proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, that the facts known to the decision-making party at the time
such
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determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the Corporation.
(e) Enforcement. Without the necessity of entering into an express
contract, all rights to indemnification and advances to Directors and executive
officers under this By-law shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
Corporation and the Director or executive officer. Any right to indemnification
or advances granted by this By-law to a Director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. The Corporation shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under the Delaware General Corporation Law for
the Corporation to indemnify the claimant for the amount claimed. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because such person has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual determination
by the Corporation (including its Board of Directors, independent legal counsel
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
(f) Non-Exclusivity of Rights. The rights conferred on any person
by this By-law shall not be exclusive of any other right which such person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, By-laws, agreement, vote of stockholders or disinterested
Directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The Corporation is specifically
authorized to enter into individual contracts with any or all of its Directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law.
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(g) Survival of Rights. The rights conferred on any person by this
By-law shall continue as to a person who has ceased to be a Director, officer,
employee or other agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
(h) Insurance. To the fullest extent permitted by the Delaware
General Corporation Law, the Corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this By-law.
(i) Amendments. Any repeal or modification of this By-law shall
only be prospective and shall not affect the rights under this By-law in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the Corporation.
(j) Saving Clause. If this By-law or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Director and executive officer to
the full extent not prohibited by any applicable portion of this By-law that
shall not have been invalidated, or by any other applicable law.
(k) Certain Definitions. For the purposes of this By-law, the
following definitions shall apply:
(1) The term "proceeding" shall be broadly construed and
shall include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(2) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(3) The term the "Corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such
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constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Bylaw with respect to the resulting or
surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
(4) References to a "Director", "officer", "employee", or
"agent" of the Corporation shall include without limitation, situations where
such person is serving at the request of the Corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
(5) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the Corporation" shall include any service as a director,
officer, employee or agent of the Corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this By-law.
ARTICLE XII
NOTICES
Section 43. NOTICES.
(a) Notice to Stockholders. Whenever, under any provisions of
these By-laws, notice is required to be given to any stockholder, it shall be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to such stockholder's last known post office address as
shown by the stock record of the Corporation or its transfer agent.
(b) Notice to Directors. Any notice required to be given to any
Director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be
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sent to such address as such Director shall have filed in writing with the
Secretary, or, in the absence of such filing, to the last known post office
address of such Director.
(c) Address Unknown. If no address of a stockholder or Director be
known, notice may be sent to the office of the Corporation required be
maintained pursuant to Section 2 hereof.
(d) Affidavit of Mailing. An affidavit of mailing, executed by a
duly authorized and competent employee of the Corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
Director or Directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall be conclusive evidence of the
statements therein contained.
(e) Time Notices Deemed Given. All notices given by mail, as above
provided, shall be deemed to have been given as at the time of mailing, and all
notices given by facsimile, telex or telegram shall be deemed to have been given
as of the sending time recorded at the time of transmission.
(f) Methods of Notices. It shall not be necessary that the same
method of giving notice be employed in respect of all Directors, but one
permissible method may be employed in respect of any one or more, and any
other permissible method or methods may be employed in respect of any other
or others.
(g) Failure to Receive Notice. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any Director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
such person in the manner above provided, shall not be affected or extended in
any manner by the failure of such stockholder or such Director to receive such
notice.
(h) Notice to Person with Whom Communication Is Unlawful.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or By-laws of the Corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice
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had been duly given. In the event that the action taken by the Corporation is
such as to require the filing of a certificate under any provision of the
Delaware General Corporation Law, the certificate shall state, if such is the
fact and if notice is required, that notice was given to all persons entitled to
receive notice except such persons with whom communication is unlawful.
(i) Notice to Person with Undeliverable Address. Whenever notice
is required to be given, under any provision of law or the Certificate of
Incorporation or By-laws of the Corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings to such
person during the period between such two consecutive annual meetings, or (ii)
all, and at least two, payments (if sent by first class mail) of dividends or
interest on securities during a twelve-month period, have been mailed addressed
to such person at such person's address as shown on the records of the
Corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action or meeting which shall be taken
or held without notice to such person shall have the same force and effect as if
such notice had been duly given. If any such person shall deliver to the
Corporation a written notice setting forth such person's then current address,
the requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the Corporation is such as to require the filing
of a certificate under any provision of the Delaware General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
Section 44. AMENDMENTS. Except as otherwise set forth in paragraph (i)
of Section 42 of these By-laws, or as provided in the Certificate of
Incorporation, these By-laws may be amended, repealed or adopted by vote of the
holders of the shares at the time entitled to vote in the election of any
Directors. By-laws may also be amended, repealed or adopted by the Board, but
any By-law adopted by the Board may be amended by the shareholders entitled to
vote thereon as hereinbefore provided.
ARTICLE XIV
LOANS TO OFFICERS
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Section 45. LOANS TO OFFICERS. The Corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the Corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the Corporation. The loan, guarantee or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a pledge of
shares of stock of the Corporation. Nothing in this By-law shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the Corporation at
common law or under statute.
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EXHIBIT 4.2
NETWORK-1 SECURITY SOLUTIONS, INC.
1996 STOCK OPTION PLAN
(AS AMENDED)
1. Purpose of Plan
The purpose of the 1996 Stock Option Plan (the "Plan") is to provide an
incentive to Key Employees, Directors and Consultants (as hereinafter defined)
of Network-1 Security Solutions, Inc. (the "Company") who are in a position to
contribute materially to the long term success of the Company, to increase their
interest in the Company's welfare and to aid in attracting and retaining Key
Employees, Directors and Consultants of outstanding ability.
2. Definitions
Unless otherwise specified or unless the context otherwise requires,
the following terms, as used in this Stock Option Plan, have the following
meanings:
a) "Affiliate" means a corporation which for purposes of Section 422
of the Code, is a parent or subsidiary of the Company, direct or indirect, each
as defined in Section 424 of the Code.
b) "Board of Directors" or "Board" means the Board of Directors of
the Company.
c) "Code" means the United States Internal Revenue Code of 1986, as
such may be amended from time to time.
d) "Compensation Committee" means the committee to which the Board
of Directors delegates the power to act under or pursuant to the provisions of
the Plan, or the Board of Directors if no committee is selected.
e) "Company" means Network-1 Security Solutions, Inc., a Delaware
corporation.
f) "Consultant" means any person retained by the Company or any of
its Affiliates to render services on a consultant basis.
g) "Disability" or "Disabled" means permanent and total disability
as defined in Section 22(e)(3) of the Code.
h) "Incentive Stock Option" means an Option, as identified below,
which is designated by the Compensation Committee as such and which, when
granted, is intended to be an "incentive stock option" as defined in section 422
of the Code.
<PAGE>
i) "Key Employee" means an employee of the Company or of an
Affiliate, (including, without limitation, an employee who is also serving as an
officer or director of the Company or of an Affiliate), designated by the Board
of Directors or the Committee to be eligible to be granted one or more options
under the Plan.
j) "Non-Qualified Stock Option" shall mean an Option, as defined
below, which is designated by the Compensation Committee as such and which, when
granted, is not intended to be an "Incentive Stock Option" as defined in Code
Section 422.
k) "Option" means a right or option granted under the Plan.
l) "Option Agreement" means an agreement between the Company and a
Participant executed and delivered pursuant to the Plan.
m) "Participant" means a Key Employee to whom one or more Incentive
Stock Options or Non-Qualified Stock Options are granted under the Plan and an
employee, nonemployee director, consultant or independent contractor ("Non Key
Employee") to whom one or more Non-Qualified Stock Options are granted under the
Plan.
n) "Plan" means this Stock Option Plan.
o) "Shares" means the following shares of the capital stock of the
Company as to which Options have been or may be granted under the Plan; 750,000
authorized and unissued common stock, ($0.01) par value, including fractional
shares, any shares of capital stock into which the shares are changed or for
which they are exchanged within the provisions of Section 9 of the Plan.
3. Aggregate Number of Shares
750,000 Shares of the Company's common stock, par value $.01 per share (the
"Common Stock"), shall be the aggregate number of Shares which may be issued
under this Plan. Notwithstanding the foregoing, in the event of any change in
the outstanding shares of Common Stock of the Company by reason of a stock
dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Compensation Committee deems in its sole discretion to be similar circumstances,
the aggregate number and kind of Shares which may be issued under this Plan
shall be appropriately adjusted in a manner determined in the sole discretion of
the Compensation Committee. Reacquired shares of the Company's Common Stock, as
well as unissued shares, may be used for the
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purpose of this Plan. Shares of the Company's Common Stock subject to Options
which have terminated unexercised, either in whole or in part, shall be
available for future Options granted under this Plan.
4. Class of Persons Eligible to Receive Options
(a) All Key Employees, as defined in Section 2 above, including officers
of the Company and of any present or future Company Affiliate, all
members of the Board of Directors of the Company who are not Key
Employees (the "Nonemployee Directors") and Consultants to the Company
and to any present or future Company Affiliate are eligible to receive
an Option or Options under this Plan. The individuals who shall, in
fact, receive an Option or Options under this Plan (the
"Participants") shall be selected by the Compensation Committee, in
its sole discretion, except as otherwise specified in Sections 5 and 6
hereof.
(b) Notwithstanding any other provision of this Plan, the aggregate fair
market value (determined as of the time the option is granted) of the
Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by any individual during any calendar
year shall not exceed $100,000.
5. Administration of Plan
(a) This Plan shall be administered by the Compensation Committee of the
Board of Directors. Prior to the time at which the stock of the
Company is required to be registered under Section 12 of the
Securities Exchange Act of 1934 ("Registration Date"), the
Compensation Committee shall be composed of all or certain members of
the Board of Directors as the Board shall determine. From and after
the Registration Date, the Compensation Committee shall be composed of
a minimum of two members of the Board of Directors as the Board shall
determine, each of whom shall be a "disinterested person" within the
meaning of Rule 16b-3 (c) (2) (i) under the Securities Exchange Act of
1934, as amended, of the Securities and Exchange Commission (the
"SEC") or any future corresponding rule.
(b) The Compensation Committee shall, in addition to its other authority
and subject to the provisions of this Plan, determine the
Participants, whether the Option shall be an Incentive Stock Option or
a Non-Qualified Stock Option (as such terms are defined in Section 2),
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the number of Shares to be subject to each of the options, the time or
times at which the Options shall be granted, the rate of Option
exercisability, and, subject to Section 6 hereof, the price at which
each of the Options is exercisable and the duration of the Option.
(c) The Compensation Committee shall adopt such rules for the conduct of
its business and administration of this Plan as it considers
desirable. A majority of the members of the Compensation Committee
shall constitute a quorum for all purposes. The vote or written
consent of a majority of the members of the Compensation Committee on
a particular matter shall constitute the act of the Compensation
Committee on such matter. The Compensation Committee shall have the
right to construe the Plan and the Options issued pursuant to it, to
correct defects and omissions and to reconcile inconsistencies to the
extent necessary to effectuate the Plan and the Options issued
pursuant to it, and such action shall be final, binding and conclusive
upon all parties concerned. No member of the Compensation Committee
or the Board of Directors shall be liable for any act or omission
(whether or not negligent) taken or omitted in good faith, or for the
exercise of any authority or discretion granted in connection with the
Plan to the Compensation Committee or the Board of Directors, or for
the acts or omissions of any other members of the Compensation
Committee or the Board of Directors. Subject to the numerical
limitations on Compensation Committee membership set forth in Section
5(a) hereof, the Board of Directors may at any time appoint additional
members of the Compensation Committee and may at any time remove any
member of the Compensation Committee with or without cause. Vacancies
in the Compensation Committee, however caused, may be filled by the
Board of Directors, if it so desires.
6. Incentive Stock Options and Non-Qualified Stock Options
(a) Options issued pursuant to this Plan may be either Incentive Stock
Options granted pursuant to Section 6(b) hereof or Non-Qualified Stock
Options granted pursuant to Section 6(c) hereof, as determined by the
Compensation Committee. The Compensation Committee may grant both an
Incentive Stock Option and a Non-Qualified Stock Option to the same
person, or more than one of each type of Option to the same person,
subject to the restrictions set forth in (b) and (c) below.
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<PAGE>
The Option price for Incentive Stock Options issued under this Plan
shall be equal at least to the fair market value (as defined below) of
the Company's Common Stock on the date of the grant of the Option as
determined by the Compensation Committee in accordance with its
interpretation of the requirements of Section 422 of the Code and the
regulations thereunder. The Option price for Non-Qualified Stock
Options issued under this Plan may, in the sole discretion of the
Compensation Committee, be less than the fair market value of the
Common Stock on the date of the grant of the Option. If an Incentive
Stock Option is granted to an individual who, at the time the Option
is granted, owns stock possessing more than 10% of the total combined
voting power of all shares of stock of the Company or any parent or
subsidiary corporation of the Company (a "10% Shareholder"), the
Option price shall not be less than 110% of the fair market value of
the Company's Common Stock on the date of grant of the option. The
fair market value of the Company's Common Stock on any particular date
shall mean the last reported sale price of a share of the Company's
Common Stock on any stock exchange on which such stock is then listed
or admitted to trading, or on the Nasdaq Stock Market, on such date,
or if no sale took place on such day, the last such date on which a
sale took place, or if the Common Stock is not then quoted on the
Nasdaq Stock Market, or listed or admitted to trading on any stock
exchange, the average of the bid and asked prices in the
over-the-counter market on such date, or if none of the foregoing, a
price determined by the Compensation Committee.
(b) Subject to the authority of the Compensation Committee set forth in
Section 5(b) hereof, Incentive Stock Options issued pursuant to this
Plan shall be issued only to Key Employees of the Company
substantially in the form set forth in Appendix A hereof, which form
is hereby incorporated by reference and made a part hereof, and shall
contain substantially the terms and conditions set forth therein.
Nonemployee Directors and Consultants shall not be eligible for
Incentive Stock Options. Incentive Stock Options shall not be
exercisable after the expiration of ten years (five years in the case
of 10% Shareholders) from the date such Options are granted, unless
terminated earlier under the terms of the Option. At the time of the
grant of an Incentive Stock Option hereunder, the Compensation
Committee may, in its discretion, modify or amend any of the Option
terms contained in Appendix
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A for any particular Participant, provided that the Option as modified
or amended satisfies the requirements of Section 422 of the Code and
the regulations thereunder. Each of the Options granted pursuant to
this Section 6(b) is intended, if possible, to be an "Incentive Stock
Option" as that term is defined in Section 422 of the Code and the
regulations thereunder. In the event this Plan or any Option granted
pursuant to this Section 6(b) is in any way inconsistent with the
applicable legal requirements of the Code or the regulations
thereunder for an Incentive Stock Option, this Plan and such Option
shall be deemed automatically amended as of the date hereof to conform
to such legal requirements, if such conformity may be achieved by
amendment.
(c) Subject to the authority of the Compensation Committee set forth in
Section 5(b) hereof, Non-Qualified Stock Options issued pursuant to
this Plan shall be issued to Participants of the Company substantially
in the form set forth in Appendix B hereof, which form is hereby
incorporated by reference and made a part hereof, and shall contain
substantially the terms and conditions set forth therein.
Non-Qualified Stock Options shall expire not more than ten years after
the date they are granted, unless terminated earlier under the Option
terms. At the time of granting a Non-Qualified Stock Option
hereunder, the Compensation Committee may, in its discretion, modify
or amend any of the Option terms contained in Appendix B for any
particular Participant.
(d) Neither the Company nor any of its current or future parent,
subsidiaries or affiliates, nor their officers, directors,
shareholders, stock option plan committees, the Compensation
Committees, employees or agents shall have any liability to any
optionee in the event: (i) an Option granted pursuant to Section 6(b)
hereof does not qualify as an "Incentive Stock Option" as that term is
used in Section 422 of the Code and the regulations thereunder; (ii)
any optionee does not obtain the tax treatment pertaining to an
Incentive Stock Option; or (iii) any Option granted pursuant to
Section 6(c) hereof is an "Incentive Stock Option."
7. Exercise of Option and Issue of Stock
Options shall be exercised by giving written notice to the Company. Such
written notice shall: (1) be signed by the person exercising the Option, (2)
state the number of shares and with respect to which the Option, if any, is
being exercised, (3)
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contain the legend required by Appendix A and B, page 5, paragraph (b) therein,
and (4) specify a date (other than a Saturday, Sunday or legal holiday) not less
than five (5) nor more than ten (10) days after the date of such written notice,
as the date on which the Shares will be taken up and payment made therefor. The
conditions specified above may be waived in the sole discretion of the Company.
Such tender and conveyance shall take place at the principal office of the
Company during ordinary business hours, or at such other hour and place agreed
upon by the Company and the person(s) exercising the Option. On the date
specified in such written notice (which date may be extended by the Company in
order to comply with any law or regulation which requires the Company to take
any action with respect to the Option Shares prior to issuance thereof) the
Company shall accept payment for the Option Shares (in the forms set forth
below) and shall deliver to the person(s) exercising the Option in exchange
therefor a certificate or certificates for fully paid non-assessable shares. In
the event of any failure to take up and pay for the number of Shares specified
in such written notice of the exercise of the Option on the date set forth
therein (or on the extended date as above provided) the exercise of the Option
shall terminate with respect to such number of Shares, but shall continue with
respect to the remaining Shares covered by the Option and not yet acquired
pursuant thereto.
The payment may be in any of the following forms: (a) cash, which may be
evidenced by a check; (b) certificates representing shares of Common Stock of
the Company, which will be valued by the Secretary of the Company at the fair
market value per share of the Company's Common Stock (as determined in
accordance with the Plan) on the last trading day immediately preceding the date
of delivery of such certificates to the Company, accompanied by an assignment of
the stock to the Company, or (c) any combination of cash and Common Stock of the
Company valued as provided in clause (b). Any assignment of stock shall be in a
form and substance satisfactory to the Secretary of the Company, including
guarantees of signature(s) and payment of all transfer taxes if the Secretary
deems such guarantees necessary or desirable or determines that such taxes are
due and payable.
8. Assignability and Transferability of Option
By its terms, an Option granted to a Participant shall not be transferable
by the Participant otherwise than by will or the laws of descent and
distribution, and shall be exercisable, during the Participant's lifetime only
by such Participant and Participant's legal guardian or custodian in the event
of disability. Any attempted transfer, assignment, pledge, hypothecation or
other disposition of any Option or of any rights granted thereunder, otherwise
than by will or the laws of descent
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<PAGE>
and distribution, or the levy of any attachment or similar process upon an
Option or such rights, shall be null and void.
9. Adjustments Upon Changes in Capitalization
In the event that the authorized and outstanding shares of Common Stock of
the Company are changed into or exchanged for a different number or kind of
shares or other securities of the Company or of another corporation by reason of
any reorganization, merger, consolidation, recapitalization, reclassification,
change in par value, stock split-up, combination of shares or dividend payable
in capital stock, or the like, appropriate adjustments to prevent dilution or
enlargement of the rights granted to or available for, Participants, shall be
made in the manner and kind of shares for the purpose of which Options may be
granted under the Plan, and, in addition, appropriate adjustment shall be made
in the number and kind of shares and in the option price per share subject to
outstanding Options. No such adjustment shall be made which shall, within the
meaning of Section 424 of the Code, constitute such a modification, extension or
renewal of an Incentive Stock Option as to cause it to be considered as the
grant of a new Incentive Stock Option.
10. Modification, Amendment, Suspension and Termination
Options shall not be granted pursuant to this Plan after the expiration of
ten years from the date the Plan is adopted by the Board of Directors of the
Company. The Board of Directors reserves the right at any time, and from time
to time, to modify or amend this Plan in any way, or to suspend or terminate it,
effective as of such date, which date may be either before or after the taking
of such action, as may be specified by the Board of Directors; provided,
however, that such action shall not affect Options granted under the Plan prior
to the actual date on which such action occurred. If a modification or
amendment of this Plan is required by the Code or the regulations thereunder to
be approved by the shareholders of the Company in order to permit the granting
of Incentive Stock Options pursuant to the modified or amended Plan, such
modification or amendment shall also be approved by the shareholders of the
Company in such manner as is prescribed by the Code and the regulations
thereunder. If the Board of Directors voluntarily submits a proposed
modification, amendment, suspension or termination for shareholder approval,
such submission shall not require any future modifications, amendments,
suspensions or terminations (whether or not relating to the same provision or
subject matter) to be similarly submitted for shareholder approval.
11. Effectiveness of Plan
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This Plan shall become effective on the date of its adoption by the
Company's Board of Directors, subject however to approval by the holders of the
Company's Common Stock in the manner as prescribed in the Code and the
regulations thereunder. Options may be granted under this Plan prior to
obtaining shareholder approval, provided such Options shall not be exercisable
before
such shareholder approval is obtained.
12. Indemnification of Compensation Committee
In addition to such other rights of indemnification as they may have as
directors or as members of the Compensation Committee, the members of the
Compensation Committee (or the directors acting with respect to the Plan if
there is no Compensation Committee) shall be indemnified by the Company against
all reasonable expenses, including attorneys fees, actually and reasonably
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein to which they or any of them may be a party
by reason of any action taken by them as members of the Compensation Committee
and against all amounts paid by them in settlement thereof (provided such
settlement is approved by legal counsel selected by the Company) or paid by them
in satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Compensation Committee member is liable for gross
negligence or willful misconduct in the performance of his or her duties. To
receive such indemnification, a Compensation Committee member must first offer
in writing to the Company the opportunity, at its own expense, to defend any
such action, suit or proceeding.
13. General Conditions
(a) Nothing contained in this Plan or any Option granted pursuant to this
Plan shall confer upon any employee the right to continue in the
employ of the Company or any present or future parent, affiliated or
subsidiary corporation or interfere in any way with the rights of the
Company or any present or future parent, affiliated or subsidiary
corporation to terminate his employment in any way.
(b) Corporate action constituting an offer of stock for sale to any
employee under the terms of the Options to be granted hereunder shall
be deemed complete as of the date when the Compensation Committee
authorizes the grant of the Option to the employee, regardless of when
the Option is actually delivered to the employee or acknowledged or
agreed to by him.
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(c) If the Company's Common Stock has not been registered under Section 12
of the Securities Exchange Act of 1934, the exercise of an Option will
not be effective unless and until the Option holder executes and
delivers to the Company a Stock Restriction Agreement, in the form on
file in the office of the Secretary of the Company.
(d) The use of the masculine pronoun shall include the feminine gender
whenever appropriate.
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APPENDIX A
INCENTIVE STOCK OPTION
To: --------------------------------------------------------------
Name
--------------------------------------------------------------
Address
Date of Grant: ------------------------------
You are hereby granted an option* (the "Option"), effective as of the date
hereof, to purchase ___ shares of Common Stock, par value $.01 per share
("Common Stock"), of Network-1 Security Solutions, Inc. (the "Company") at a
price of ___ per share pursuant to the Company's 1996 Stock Option Plan adopted
by the Company's Board of Directors and Stockholders effective March 7, 1996, as
amended (the "Plan"). Your option price is intended to equal at least the fair
market value of the Company's Common Stock as of the date hereof; provided,
however, that if, at the time this option is granted, you own stock possessing
more than 10% of the total combined voting power of all shares of stock of the
Company or any parent or subsidiary (an "Affiliate") of the Company (a "10%
Shareholder"), your option price is intended to be at least 110% of the fair
market value of the Company's Common Stock as of the date hereof.
Your Option may first be exercised on and after [one year from the date of
grant], but not before that time. Your Option may be exercised either: (i) on
and after ___________ and prior to the Termination Date (as hereinafter
defined), for up to _____% of the total number of shares subject to the Option
minus the number of shares previously purchased by exercise of the Option (as
adjusted for any change in the outstanding shares of the Common Stock of the
Company, by reason of a stock dividend, stock split, combination of shares,
recapitalization, merger, consolidation, transfer of assets, reorganization,
conversion or what the Compensation Committee deems in its sole discretion to be
similar circumstances); or (ii) each succeeding year thereafter and prior to the
Termination Date (as hereinafter defined) for up to an additional [twenty (20%)
percent] of the total number of shares subject to the Option minus the number of
shares previously purchased by exercise of the Option (as adjusted for any
change in the outstanding shares of the Common Stock of the Company by reason of
a stock dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Compensation Committee deems
<PAGE>
in its sole discretion to be similar circumstances). No fractional shares shall
be issued or delivered.
* This Incentive Stock Option is to be issued only to Key Employees of the
Company. Nonemployee Directors and Consultants are not eligible for this
option.
This Option shall terminate and is not exercisable after the expiration of
ten years from the date of its grant (five years from the date of grant if, at
the time of the grant, you are a 10% Shareholder) (the "Scheduled Termination
Date"), except if terminated earlier as hereinafter provided (the "Termination
Date").
In the event of a "change of control" (as hereafter defined) of the
Company, your Option may, from and after the date of the change of control, and
notwithstanding the second paragraph of this option, be exercised for up to 100%
of the total number of shares then subject to the Option minus the number of
shares previously purchased upon exercise of the Option (as adjusted for any
changes in the outstanding Common Stock by reason of a stock dividend, stock
split, combination of shares, recapitalization, merger, consolidation, transfer
of assets, reorganization, conversion or what the Compensation Committee deems
in its sole discretion to be similar circumstances).
A "change of control" shall be deemed to have occurred upon the happening
of any of the following events:
1. A change within a twelve-month period in a majority of the members of
the Board of Directors of the Company;
2. A change within a twelve-month period in the holders of more than 50%
of the outstanding voting stock of the Company; or
3. Any other event deemed to constitute a "change in control" by the
Compensation Committee.
You may exercise your option as set forth in Section 7 of the Plan.
If the Company's Common Stock has not been registered under Section 12 of
the Securities Exchange Act of 1934, the exercise
of your option will not be effective unless and until you execute and deliver to
the Company a Stock Restriction Agreement, in the form on file in the office of
the Secretary of the Company.
Your Option will, to the extent not previously exercised by
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you, terminate thirty (30) days after the date on which your employment by the
Company or Affiliate of the Company is terminated, whether such termination is
voluntary or not, other than by reason of disability as defined in Section
22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations thereunder, or death, in which case your Option will terminate six
(6) months from the date of termination of employment due to disability or death
(but in no event later than the Scheduled Termination Date). After the date
your employment is terminated, as aforesaid, you may exercise this Option only
for the number of shares which you had a right to purchase and did not purchase
on the date your employment terminated. If you are employed by an Affiliate of
the Company, your employment shall be deemed to have terminated on the date your
employer ceases to be an Affiliate of the Company, unless you are on that date
transferred to the Company or another Affiliate of the Company. Your employment
shall not be deemed to have terminated if you are transferred from the Company
to an Affiliate, or vice versa, or from one Affiliate to another Affiliate.
Anything in this Option to the contrary notwithstanding, your option will
terminate immediately if your employment is terminated for cause (as determined
by the Company in its sole and absolute discretion). Your employment shall be
deemed to have been terminated for cause if you are terminated due to, among
other reasons, (i) your willful misconduct or gross negligence, (ii) your
material breach of any agreement with the Company or (iii) your failure to
render satisfactory services to the Company.
If you die while employed by the Company or an Affiliate of the Company,
your legatee(s), distributee(s), executor(s) or administrator(s), as the case
may be, may, at any time within six (6) months after the date of your death (but
in no event later than the Scheduled Termination Date), exercise the Option as
to any shares which you had a right to purchase and did not purchase during your
lifetime. If your employment with the Company, or an Affiliate is terminated by
reason of your becoming disabled (within the meaning of Section 22(e)(3) of the
Code and the regulations thereunder), you or your legal guardian or custodian
may at any time within six (6) months after the date of such termination (but in
no event later than the Scheduled Termination Date), exercise the Option as to
any shares which you had a right to purchase and did not purchase prior to such
termination. Your legatee, distributee, executor, administrator, guardian or
custodian must present proof of his authority satisfactory to the Company prior
to being allowed to exercise this Option.
This Option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal
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guardian or custodian in the event of disability. Until the Option price has
been paid in full pursuant to due exercise of this Option and the purchased
shares are delivered to you, you do not have any rights as a shareholder of the
Company. The Company reserves the right not to deliver to you the shares
purchased by virtue of the exercise of this Option during any period of time in
which the Company deems, in its sole discretion, that such delivery would
violate a federal, state, local or securities exchange rule, regulation or law.
Notwithstanding anything to the contrary contained herein, this Option is
not exercisable until all of the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this Option is granted is approved by
the shareholders of the Company in the manner prescribed by the Code and the
regulations thereunder;
(b) Until this Option and the optioned shares are approved and/or
registered with such federal, state and local regulatory bodies or agencies and
securities exchanges as the Company may deem necessary or desirable; or
(c) During any period of time in which the Company deems that the
exercisability of this Option, the offer to sell the shares optioned hereunder,
or the sale thereof, may violate a federal, state, local or securities exchange
rule, regulation or law, or may cause the Company to be legally obligated to
issue or sell more shares than the Company is legally entitled to issue or sell.
The following two paragraphs shall be applicable if, on the date of
exercise of this Option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as amended,
and under applicable state securities laws, and shall continue to be applicable
for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that he will
acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration The optionee shall
execute such instruments, representations, acknowledgements and agreements as
the Company
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may, in its sole discretion, deem advisable to avoid any violation of federal,
state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the optionee
hereunder shall bear the following legend:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under applicable
state securities laws. The shares have been acquired for investment
and may not be offered, sold, transferred, pledged or otherwise
disposed of without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company
that the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and legend
set forth in the two immediately preceding paragraphs is to prevent violations
of the Securities Act of 1933, as amended, and any applicable state securities
laws.
It is the intention of the Company and you that this option shall, if
possible, be an "Incentive Stock Option" as that term is used in Section 422 of
the Code and the regulations thereunder. In the event this Option is in any way
inconsistent with the legal requirements of the Code or the regulations
thereunder for an "Incentive Stock Option" this Option shall be deemed
automatically amended as of the date hereof to conform to such legal
requirements, if such conformity may be achieved by amendment.
This Option shall be subject to the terms of the Plan in effect on the date
this Option is granted, which terms are hereby incorporated herein by reference
and made a part hereof. In the event of any conflict between the terms of this
Option and the terms of the Plan in effect on the date of this Option, the terms
of the Plan shall govern. This Option constitutes the entire understanding
between the Company and you with respect to the subject matter hereof and no
amendment, modification or waiver of this Option, in whole or in part, shall be
binding upon the Company unless in writing and signed by an appropriate officer
of the Company. This Option and the performances of the parties hereunder shall
be construed in accordance with and governed by the laws of
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the State of New York without regard to principles of conflict of law.
Please sign the copy of this Option and return it to the Company, thereby
indicating your understanding of and agreement with its terms and conditions.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: ____________________________
I hereby acknowledge receipt of a copy of the foregoing Stock Option and
the Network-1 Security Solutions, Inc. 1996 Stock Option Plan, and having read
such documents, hereby signify my understanding of, and my agreement with, their
terms and conditions.
_________________________ ____________________________
(Signature) (Date)
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APPENDIX B
NON-QUALIFIED STOCK OPTION
To: ______________________________________________________
Name
______________________________________________________
Address
Date of Grant: ____________________________________________
You are hereby granted an option (the "Option"), effective as of the date
hereof, to purchase _______ shares of Common Stock, par value $.01 per share
("Common Stock"), of Network-1 Security Solutions, Inc. (the "Company") at a
price of ___ per share pursuant to the Company's 1996 Stock Option Plan adopted
by the Company's Board of Directors and Stockholders effective March 7, 1996
(the "Plan"). [Your option price is intended to equal at least the fair market
value of the Company's Common Stock as of the date hereof.]
Your Option may first be exercised on and after one (1) year from the date
of Grant, but not before that time. Your Option may be exercised either: (i) on
and after ___________ and prior to the Termination Date (as hereinafter
defined), for up to _____% of the total number of shares subject to the Option
minus the number of shares previously purchased by exercise of the Option (as
adjusted for any change in the outstanding shares of the Common Stock of the
Company, by reason of a stock dividend, stock split, combination of shares,
recapitalization, merger, consolidation, transfer of assets, reorganization,
conversion or what the Compensation Committee deems in its sole discretion to be
similar circumstances); or (ii) each succeeding year thereafter and prior to the
Termination Date (as hereinafter defined) for up to an additional [twenty (20%)
percent] of the total number of shares subject to the Option minus the number of
shares previously purchased by exercise of the Option (as adjusted for any
change in the outstanding shares of the Common Stock of the Company by reason of
a stock dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Compensation Committee deems in its sole discretion to be similar
circumstances). No fractional shares shall be issued or delivered.
This Option shall terminate and is not exercisable after the expiration of
[ten years] from the date of its grant (the "Scheduled Termination Date"),
except if terminated earlier as hereinafter provided (the "Termination Date").
<PAGE>
In the event of a "change of control" (as hereafter defined) of the
Company, your Option may, from and after the date of the change of control, and
notwithstanding the second paragraph of this option, be exercised for up to 100%
of the total number of shares then subject to the Option minus the number of
shares previously purchased upon exercise of the Option (as adjusted for any
changes in the outstanding Common Stock by reason of a stock dividend, stock
split, combination of shares, recapitalization, merger, consolidation, transfer
of assets, reorganization, conversion or what the Compensation Committee deems
in its sole discretion to be similar circumstances).
A "change of control" shall be deemed to have occurred upon the happening
of any of the following events:
1. A change within a twelve-month period in a majority of the members of the
Board of Directors of the Company;
2. A change within a twelve-month period in the holders of more than 50% of
the outstanding voting stock of the Company; or
3. Any other event deemed to constitute a "change in control" by the
Compensation Committee.
You may exercise your option as set forth in Section 7 of the Plan.
If the Company's Common Stock has not been registered under Section 12 of
the Securities Exchange Act of 1934, the exercise of your Option will not be
effective unless and until you execute and deliver to the Company a Stock
Restriction Agreement, in the form on file in the office of the Secretary of the
Company.
Your Option will, to the extent not previously exercised by you, terminate
thirty (30) days after the date on which your employment by the Company or a
parent or subsidiary corporation (an "Affiliate") of the Company is terminated,
whether such termination is voluntary or not, other than by reason of disability
as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended
(the "Code"), and the regulations thereunder, or death, in which case your
Option will terminate six (6) months from the date of termination of employment
due to disability or death (but in no event later than the Scheduled Termination
Date). After the date your employment is terminated, as aforesaid, you may
exercise this Option only for the number of shares which you had a right to
purchase and did not purchase on the date your employment terminated. If you
are employed by an Affiliate of the Company, your employment shall be deemed to
have terminated on the date your employer ceases to be an Affiliate of the
Company, unless you are on that date transferred to the Company or another
Affiliate of the
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Company. Your employment shall not be deemed to have terminated if you are
transferred from the Company to an Affiliate, or vice versa, or from one
Affiliate to another Affiliate.
Anything in this Option to the contrary notwithstanding, your Option will
terminate immediately if your employment is terminated for cause (as determined
by the Company in its sole and absolute discretion). Your employment shall be
deemed to have been terminated for cause if you are terminated due to, among
other reasons, (i) your willful misconduct or gross negligence, (ii) your
material breach of any agreement with the Company or (iii) your failure to
render satisfactory services to the Company.
If you die while employed by the Company or an Affiliate of the Company
your legatee(s), distributee(s), executor(s) or administrator(s), as the case
may be, may, at any time within six (6) months after the date of your death (but
in no event later than the Scheduled Termination Date), exercise the Option as
to any shares which you had a right to purchase and did not purchase during your
lifetime. If your employment with the Company or an Affiliate is terminated by
reason of your becoming disabled (within the meaning of Section 22(e)(3) of the
Code and the regulations thereunder), you or your legal guardian or custodian
may at any time within six (6) months after the date of such termination (but in
no event later than the Scheduled Termination Date), exercise the Option as to
any shares which you had a right to purchase and did not purchase prior to such
termination. Your legatee, distributee, executor, administrator, guardian or
custodian must present proof of his authority satisfactory to the Company prior
to being allowed to exercise this Option.
This Option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the Option price has been paid in full pursuant to due
exercise of this Option and the purchased shares are delivered to you, you do
not have any rights as a shareholder of the Company. The Company reserves the
right not to deliver to you the shares purchased by virtue of the exercise of
this Option during any period of time in which the Company deems, in its sole
discretion, that such delivery would violate a federal, state, local or
securities exchange rule, regulation or law.
Notwithstanding anything to the contrary contained herein, this Option is
not exercisable until all the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this Option is granted is
approved by the shareholders of the Company in the
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manner prescribed by the Code and the regulations thereunder;
(b) Until this Option and the optioned shares are approved and/or
registered with such federal, state and local regulatory bodies or agencies and
securities exchanges as the Company may deem necessary or desirable; or
(c) During any period of time in which the Company deems that the
exercisability of this Option, the offer to sell the shares optioned hereunder,
or the sale thereof, may violate a federal, state, local or securities exchange
rule, regulation or law, or may cause the Company to be legally obligated to
issue or sell more shares than the Company is legally entitled to issue or sell.
The following two paragraphs shall be applicable if, on the date of
exercise of this Option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as amended,
and under applicable state securities laws, and shall continue to be applicable
for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that he will
acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, representations, acknowledgements and agreements as
the Company may, in its sole discretion, deem advisable to avoid any violation
of federal, state, local, or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the optionee
hereunder shall bear the following legend:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under applicable
state securities laws. The shares have been acquired for investment
and may not be offered, sold, transferred, pledged or otherwise
disposed of without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel
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acceptable to the Company that the proposed transaction will be exempt
from such registration."
The foregoing legend shall be removed upon registration of the legended
shares under the Securities Act of 1933, as amended, and under any applicable
state laws or upon receipt of any opinion of counsel acceptable to the Company
that said registration is no longer required.
The sole purpose of the agreements, warranties, representations and legend
set forth in the two immediately preceding paragraphs is to prevent violations
of the Securities Act of 1933, as amended, and any applicable state securities
laws.
It is the intention of the Company and you that this Option shall not be an
"Incentive Stock Option" as that term is used in Section 422 of the Code and the
regulations thereunder.
This Option shall be subject to the terms of the Plan in effect on the date
this Option is granted, which terms are hereby incorporated herein by reference
and made a part hereof. In the event of any conflict between the terms of this
Option and the terms of the Plan in effect on the date of this Option, the terms
of the Plan shall govern. This Option constitutes the entire understanding
between the Company and you with respect to the subject matter hereof and no
amendment, modification or waiver of this Option, in whole or in part, shall be
binding upon the Company unless in writing and signed by an appropriate officer
of the Company. This Option and the performances of the parties hereunder shall
be construed in accordance with and governed by the laws of the State of New
York without regard to principles of conflict of laws.
Please sign the copy of this Option and return it to the Company, thereby
indicating your understanding of and agreement with its terms and conditions.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: _______________________________
I hereby acknowledge receipt of a copy of the foregoing Stock Option and
the Network-1 Security Solutions, Inc. 1996 Stock Option Plan, and having read
such documents, hereby signify my understanding of and my agreement with their
terms and conditions.
____________________________ _______________________________
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(Signature) (Date)
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Exhibit 10.1
EMPLOYMENT AGREEMENT dated as of May 18, 1998, between NETWORK-1
SOFTWARE & TECHNOLOGY, INC., a Delaware corporation with its principal office
located at 909 Third Avenue, 9th Floor, New York, New York 10022 (the
"Company"), and AVI A. FOGEL residing at 22 Hollywood Drive, Chestnet Hill,
Massachusetts (the "Executive").
The Company desires to enter into this Agreement in order to assure
itself of the service of Executive, and Executive desires to accept employment
with the Company, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties agree as follows:
SECTION 1. Employment. The Company hereby employs Executive, and
Executive hereby accepts employment by the Company, upon the terms and
conditions hereinafter set forth.
SECTION 2. Term. The employment of Executive hereunder shall be
for a period commencing on the date hereof (the "Commencement Date") and ending
on the fourth anniversary of the Commencement Date (the "Term") or such earlier
date upon which the employment of the Executive shall terminate in accordance
with the provisions hereof. The period commencing on the Commencement Date and
ending on the date of termination of the Executive's employment hereunder shall
be called the "Term of Employment" for Executive, and the date on which the
Executive's employment hereunder shall terminate shall be called the
"Termination Date.".
SECTION 3. Duties. During the Term of Employment, Executive shall
be employed as the President and Chief Executive Officer of the Company and
shall perform such duties as are consistent therewith as the Board of Directors
of the Company (the "Board") shall designate. Executive shall use his best
efforts to perform well and faithfully the foregoing duties and
responsibilities. In addition, effective upon the Commencement Date, Executive
shall serve as a member of the Board. For purposes of this Agreement, so long
as Executive shall serve as a member of the Board, any references herein to
decisions or determinations to be made by the Board with respect to Executive
(including, without limitation, matters relating to compensation and
termination) shall be made by a majority of the then members of the Board
excluding Executive, who shall recuse himself and abstain from voting with
respect to any such matters.
SECTION 4. Time to be Devoted to Employment. During the Term of
Employment, Executive shall devote all of his business
<PAGE>
time, attention and energies to the business of the Company (except for
vacations to which he is entitled pursuant to Section 6(b) and periods of
illness or incapacity). During the Term of Employment, Executive shall not
engage in any business activity which, in the reasonable judgment of the Board,
conflicts with the duties of Executive hereunder, whether or not such activity
is pursued for gain, profit or other pecuniary advantage.
SECTION 5. Compensation.
(a) The Company shall pay to Executive an annual base salary
(the "Base Salary") during the Term of Employment of not less than $150,000 per
annum, payable in such installments (but not less often than monthly) as is
generally the policy of the Company with respect to its executive officers,
which Base Salary shall be subject to such increases as the Board, in its sole
discretion, may from time to time determine. Executive's Base Salary and
performance shall be reviewed at least annually by the Board.
(b) In addition, to the Base Salary set forth in paragraph 5(a)
above, during the term of employment, Executive shall be eligible to receive
incentive compensation of up to $50,000 per annum (to be distributed as directed
by the Board of Directors) based upon the Company's attainment of certain
financial results to be established by mutual agreement between the Board and
Executive.
(c) On the Commencement Date the Company shall grant to the
Executive a non-qualified stock option (the "Option") of five (5) years'
duration for the purchase of 475,000 shares (the "Shares") of the Company's
Common Stock at an exercise price of $1.50 per share. The Option shall vest as
to 34% of the Shares covered thereby on the Commencement Date and an additional
22% of the Shares covered thereby on each anniversary of the Commencement Date,
conditioned only on the Executive's continued employment by the Company. The
form of Option is attached as Exhibit A hereto.
SECTION 6. Business Expenses; Benefits.
(a) The Company shall reimburse Executive, in accordance with
the practice from time to time for executive officers of the Company, for all
reasonable and necessary expenses and other disbursements incurred by Executive
for or on behalf of the Company in the performance of Executive's duties
hereunder. Executive shall provide such appropriate documentation of expenses
and disbursements as may from time to time be required by the Company.
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(b) During the Term of Employment, Executive shall be entitled
to four (4) weeks vacation per year.
(c) During the Term of Employment, Executive shall be entitled
to participate in the group health, life and disability insurance benefits, and
retirement plan benefits made available from time to time for its employees
generally.
SECTION 7. Involuntary Termination.
(a) If Executive is incapacitated or disabled (such condition
being hereinafter referred to as a "Disability") in a manner that would qualify
Executive for benefits under the disability policy of the Company (the
"Disability Policy"), the Term of Employment and employment of the Executive
under this Agreement shall cease (such termination, as well as a termination
under Section 7(b), being hereinafter referred to as an "Involuntary
Termination") and Executive shall be entitled to receive the benefits payable
under the Disability Policy and in accordance with Section 9 hereof.
(b) If Executive dies during the Term of Employment, the Term of
Employment and Executive's employment hereunder shall cease as of the date of
the Executive's death and Executive shall be entitled to receive the benefits
payable in accordance with Section 9 hereof.
SECTION 8. Termination by the Company.
(a) Termination For Cause. The Company may terminate the Term of
Employment and the employment of the Executive hereunder at any time for Cause
(as hereinafter defined) (such termination being referred to herein as a
"Termination For Cause") by giving Executive written notice of such termination,
effective immediately upon the giving of such notice to the Executive. As used
in this Agreement, "Cause" means the Executive's (a) commission of an act (i)
constituting a felony or (ii) involving fraud, moral turpitude, theft or
dishonesty which is not a felony and which materially adversely affects the
Company or could reasonably be expected to materially adversely affect the
Company, (b) repeated failure to be reasonably available to perform his duties,
which, if curable, shall not have been cured within 10 business days of written
notice thereof from the Company, (c) repeated failure to follow the lawful
directions of the Board, which, if curable, shall not have been cured within 30
business days of written notice thereof from the Company, (d) material breach of
any agreement with the Company (including any provisions of this or any
agreement between Executive and the
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Company) which, if curable, shall not have been cured within 30 business days of
written notice thereof from the Company.
(b) Termination Other Than for Cause. The Company may terminate
this Agreement and the employment of Executive other than for cause as defined
in Section 8(a) above (such termination shall be defined as a "Termination Other
Than for Cause") by giving Executive written notice of such termination, which
notice shall be effective upon the giving of such notice or such later date set
forth therein.
SECTION 9. Effect of Termination.
(a) Upon the termination of the Term of Employment and
Executive's employment hereunder due to Termination for Cause (as defined in
Section 8(a) above), neither Executive nor his beneficiary or estate shall have
any further rights or claims against the Company under this Agreement, except to
receive (i) the unpaid portion, if any, of the Base Salary provided for in
Section 5(a), computed on a pro rata basis to the Termination Date (based on the
actual number of days elapsed over the actual number of days elapsed over the
year in which such termination occurs), (ii) any unpaid accrued benefits of
Executive, (iii) reimbursement for any expenses for which Executive shall not
have been reimbursed as provided in Section 6(a), and (iv) Executive's rights
under the vested portion of the Option.
(b) Upon the termination of Executive's employment hereunder due
to an Involuntary Termination, neither Executive nor his beneficiary or estate
shall have any further rights or claims against the Company under this Agreement
except the right to receive (i) the amounts set forth in Section 9(a), and
(ii)the vesting of all of the Options that would have vested in the year of
Involuntary Termination and one-half of the Options that would have vested in
the year following the year of Involuntary Termination.
(c) Upon the termination of Executive's employment upon a
Termination Other Than for Cause (as defined in Section 8(b) above), neither
Executive nor his beneficiary nor his estate shall have any rights or claims
against the Company except to receive (i) the amounts set forth in 9(b)
(including Options), and (ii) the lesser of (A) one year's Base Salary as in
effect at the time of the Termination Other Than for Cause or (B) Executive's
Base Salary for the balance of the term of this Agreement.
(d) For purposes of this Section 9, if Executive is asked to
assume any duties or the material reduction of duties, either of which is
substantially inconsistent with the position of
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President and Chief Executive Officer of the Company, Executive, upon 30 days
notice to the Board of Directors setting forth in reasonable detail the respects
in which Executive believes such assignment or duties are substantially
inconsistent with the level of Executive's position, may resign from the Company
and such resignation will be treated as a Termination Other Than For Cause
pursuant to this Section 9.
(e) Upon the termination of Executive's employment hereunder for
any reason, Executive shall, upon the written request of a majority of the
members of the Board, immediately resign as a member of the Board.
SECTION 10. Insurance. The Company may, for its own benefit, in its
sole discretion, maintain "key-man" life and disability insurance policies
covering Executive. Executive will cooperate with the Company and provide such
information or other assistance as the Company may reasonably request in
connection with the Company's obtaining and maintaining such policies.
SECTION 11. Disclosure of Information. Executive will not, either
during the Term of Employment or at any time thereafter, divulge, publish,
communicate, furnish or make accessible to anyone any knowledge or information
with respect to the Company's confidential, secret or proprietary products,
technology, methods, plans, materials and processes, or with respect to any
other confidential, secret or proprietary aspects of the business, activities or
products of the Company including, without limitation, (a) software programs,
source code, object code, product development information, research and
development projects or other technical data pertaining to the Company's
products (whether or not subject to patent, trademark or copyright protection)
or (b) any customer or client lists, telephone leads, prospects lists, sales
figures and forecasts, purchase costs, financial projections, advertising and
marketing plans and business strategies and plans; except as such items set
forth in clauses (a) and (b) above may already be in the public domain through
no fault of Employee (all of the foregoing items set forth in clauses (a) and
(b) being referred to herein collectively as "Confidential Property"). Upon the
termination of the Term of Employment, Executive shall return to the Company all
property (including Confidential Property) of the Company (or any subsidiary or
affiliate thereof) then in the possession of Executive and all books, records,
computer tapes or discs and all other material containing non-public information
concerning the business, clients or affairs of the Company or any subsidiary or
affiliate thereof.
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SECTION 12. Right to Inventions. Executive shall promptly
disclose, grant and assign to the Company for its sole use and benefit any and
all marks, designs, logos, inventions, improvements, technical information and
suggestions relating in any way to the business conducted by the Company, which
he may develop or which may be acquired by Executive during the Term of
Employment (whether or not during usual working hours), together with all
trademarks, patent applications, letters, patent, copyrights and reissues
thereof that may at any time be granted for or upon any such mark, design, logo,
invention, improvement or technical information (collectively, "Inventions"). In
connection therewith, Executive shall (at the Company's sole cost and expense)
take all actions reasonably necessary or desirable to assign and/or confirm the
assignment of any Invention to the Company.
SECTION 13. Restrictive Covenant.
(a) The Company is in the business of developing, marketing,
licensing and supporting network software security products and also provides
consulting in network security, network design, troubleshooting and engineering
(the "Business"). Executive acknowledges and recognizes that the Business has
been conducted, and sales of its products have been made, throughout the United
States, and Executive further acknowledges and recognizes the highly competitive
nature of the industry in which the Business is involved. Accordingly, in
consideration of the premises contained herein, the consideration to be received
hereunder, stock options to be granted Executive, Executive shall not, during
the Non-Competition Period (as defined below): (i) directly or indirectly
engage, whether or not such engagement shall be as a partner, stockholder,
affiliate or other participant, in any Competitive Business (as defined below),
or represent in any way any Competitive Business, whether or not such engagement
or representation shall be for profit, (ii) interfere with, disrupt or attempt
to disrupt the relationship, contractual or otherwise, between the Company and
any other person or entity, including, without limitation, any customer,
supplier, employee or consultant of the Company, (iii) induce any employee of
the Company to terminate his employment with the Company or to engage in any
Competitive Business in any manner described in the foregoing clause (i) (as
well as an officer or director of any Competitive Business), or (iv)
affirmatively assist or induce any other person or entity to engage in any
Competitive Business in any manner described in the foregoing clause (i) (as
well as an officer or director of any Competitive Business). Anything contained
in this Section 13 to the contrary notwithstanding, an investment by Executive
in any publicly traded company in which Executive and his affiliates exercise no
operational or strategic
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control and which constitutes less than 5% of the capital of such entity shall
not constitute a breach of this Section 13.
(b) As used herein, "Non-Competition Period" shall mean the
period commencing on the date hereof and terminating on the Termination Date;
provided, however, that if the Term of Employment shall have been terminated
pursuant to Section 8 (a), then "Non-Competition Period" shall mean the period
commencing on the date hereof and ending on the second anniversary of the
Termination Date. "Competitive Business" shall mean any business in any State
of the United States engaged in the development, marketing and licensing of
network software security products, or in any other line of business in which
the Company was engaged or had a formal plan to enter as of the Termination
Date.
(c) Executive understands that the foregoing restrictions may
limit his ability to earn a livelihood in a business similar to the business of
the Company, but he nevertheless believes that he has received and will receive
sufficient consideration and other benefits as an employee of the Company and as
otherwise provided hereunder and pursuant to other agreements between the
Company and Executive to justify clearly such restrictions which, in any event
(given his education, skills and ability), Executive does not believe would
prevent him from earning a living.
SECTION 14. Enforcement; Severability; Etc. It is the desire and
intent of the parties that the provisions of this Agreement shall be enforced to
the fullest extent permissible under the laws and public policies applied in
each jurisdiction in which enforcement is sought. Accordingly, if any particular
provision of this Agreement shall be adjudicated to be invalid or unenforceable,
such provision shall be deemed amended to (a) delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such provision in the particular jurisdiction in
which such adjudication is made or (b) otherwise to render it enforceable in
such jurisdiction.
SECTION 15. Remedies. Executive acknowledges and understands that
the provisions of this Agreement are of a special and unique nature, the loss of
which cannot be adequately compensated for in damages by an action at law, and
that the breach or threatened breach of the provisions of this Agreement would
cause the Company irreparable harm. In the event of a breach or threatened
breach by Executive of the provisions of this Agreement, the Company shall be
entitled to an injunction restraining him from such breach. Nothing contained in
this Agreement shall be construed as prohibiting the Company from or
7
<PAGE>
limiting the Company in pursuing any other remedies available for any breach or
threatened breach of this Agreement.
SECTION 16. Notices. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if personally delivered or if sent
by a nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
if to the Company, to: Network-1 Software & Technology, Inc.
909 Third Avenue, 9th Floor
New York, New York 10022
Telecopier: (212) 293-3090
Telephone: (212) 293-3068
Attention: Robert Russo
with copies to: Bizar Martin & Taub, LLP
1350 Avenue of the Americas
29th Floor
New York, NY 10019
Telecopier:(212) 581-8958
Telephone: (212) 265-8600
Attention: Sam Schwartz, Esq.
if to Executive, to: Avi A. Fogel
22 Hollywood Drive
Chestnut Hill, Massachusetts 02167-3070
or to such other address as the party to whom notice is to be given may have
furnished to the other party or parties in writing in accordance herewith. Any
such notice or communication shall be deemed to have been received (a) in the
case of personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, (c) in the case of telecopy transmission, when received, and (d) in
the case of mailing, on the third business day following that on which the piece
of mail containing such communication is posted.
SECTION 17. Binding Agreement; Benefit. The provisions of this
Agreement will be binding upon, and will inure to the benefit of, the respective
heirs, legal representatives, successors and assigns of the parties.
8
<PAGE>
SECTION 18. Governing Law. This Agreement will be governed by,
construed and enforced in accordance with, the laws of the State of
Massachusetts (without giving effect to principles of conflicts of laws).
SECTION 19. Waiver of Breach. The waiver by either party of a
breach of any provision of this Agreement must be in writing and shall not
operate or be construed as a waiver of any other breach.
SECTION 20. Entire Agreement; Amendments. This Agreement contains
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements or understandings between the parties
with respect thereto. This Agreement may be amended only by an agreement in
writing signed by the parties.
SECTION 21. Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
SECTION 22. Assignment. This Agreement is personal in its nature
and the parties shall not, without the consent of the other, assign or transfer
this Agreement or any rights or obligations hereunder; provided, however, that
the Company may assign this Agreement to any of its subsidiaries and affiliates.
SECTION 23. Gender. Any reference to the masculine gender shall be
deemed to include the feminine and neuter genders unless the context otherwise
requires.
SECTION 24. Counterparts. This Agreement may be executed in
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Employment Agreement as of the date first written above.
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
/s/ Avi Fogel By: /s/ Robert Russo
- ------------------ ---------------------------------
Avi A. Fogel
9
<PAGE>
NEITHER THE OPTION REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR UNDER ANY STATE SECURITIES LAW AND MAY
NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT OR LAWS,
THE RULES AND REGULATIONS THEREUNDER OR THE
PROVISIONS OF THIS OPTION CERTIFICATE
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
______________________
OPTION TO PURCHASE
SHARES OF COMMON STOCK
AS HEREIN DESCRIBED
Dated: as of May ____, 1998
This certifies that, for value received
NAME: Avi A. Fogel ("Optionee")
ADDRESS: 22 Hollywood Drive
Chestnut Hill, MA 02167-3070
or permitted assigns (the "Holder") are entitled, subject to the terms set forth
herein, to purchase from Network-1 Software & Technology, Inc. (the "Company"),
a Delaware corporation, having its offices at 909 Third Avenue, 9th Floor, New
York, New York 10022, Four Hundred Seventy Five Thousand (475,000) shares of the
Company's common stock subject to adjustment as set forth herein.
1. As used herein:
(a) "Common Stock" or "Common Shares" shall initially refer to the
Company's common stock including Underlying Securities, as more fully set forth
in Section 5 hereof.
(b) "Option Price" or "Common Share Price" shall be One Dollar and
Fifty Cents ($1.50) per share.
<PAGE>
(c) "Underlying Securities" or "Underlying Shares"
or "Underlying Stock" shall refer to the Common Shares or other securities or
property issuable or issued upon exercise of this Option.
(d) "Change of Control" shall mean:
(i) the acquisition by any person, entity or "group", within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended(the "Exchange Act"), of
beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of forty (40%) percent or
more of the combined voting power of the then outstanding
securities entitled to vote generally in the election of
directors where such person, entity or group owned less than
5% of such voting power on the date of this Option; or
(ii) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in
the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the
total voting power represented by the voting securities of
the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the
shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets (other than to a subsidiary or subsidiaries).
2. (a) The purchase rights represented by this Option may be exercised
by the Holder hereof, in whole or in part (but not as to less than a whole
Common Share), as to the vested portion (as defined below) of this Option only,
at any time, and from time to time, during the period commencing this date,
until May __, 2003 (the "Expiration Date"), by the presentation of this Option,
with the purchase form attached duly executed, at the Company's office (or such
office or agency of the Company as it may designate in writing to the Holder
hereof by notice pursuant to Section 13 hereof), specifying the number of Common
Shares as to which the Option is being exercised, and upon payment by the Holder
to the Company in cash or by certified check or bank draft, in an amount
2
<PAGE>
equal to the Option Price times the number of Common Shares then being purchased
hereunder. This Option shall vest as follows:
(i) As to 34% of the Underlying Shares on the date of this
Option;
(ii) As to the balance of 66% of the Underlying Shares, 22% of
such shares on each of the first three anniversary dates
of the date of this Option, provided the Optionee is then
an employee of the Company;
(iii) As to 50% of the remaining Underlying Shares if a Change in
Control occurs within one year of the date of this Option,
provided the Optionee is then an employee of the Company;
(iv) As to all of the unvested portion of this Option if a Change
of Control occurs more than one year after the date of this
Option, provided the Optionee is then an employee of the
Company.
The portion of this Option which has vested pursuant to (i) to
(iv) above shall be referred to as the "vested portion".
(b) The Company agrees that the Holder hereof shall
be deemed the record owner of such Underlying Securities as of the close of
business on the date on which this Option shall have been presented and payment
made for such Underlying Securities as aforesaid. Certificates for the
Underlying Securities so obtained shall be delivered to the Holder hereof within
a reasonable time, not exceeding seven (7) days, after the rights represented by
this Option shall have been so exercised. If this Option shall be exercised in
part only or transferred in part subject to the provisions herein, the Company
shall, upon surrender of this Option for cancellation or partial transfer,
deliver a new Option evidencing the rights of the Holder hereof to purchase the
balance of the Underlying Shares which such Holder is entitled to purchase
hereunder.
3. Subject to the provisions of Section 8 hereof, (i) this Option is
exchangeable at the option of the Holder at the aforesaid office of the Company
for other Options of different denominations entitling the Holder thereof to
purchase in the aggregate the same number of Common Shares as are purchasable
hereunder; and (ii) this Option may be divided or combined with other Options
which carry the same rights, in either case, upon presentation hereof at the
aforesaid office of the Company together with a written notice, signed by the
Holder hereof, specifying the names and denominations in which new Options are
to be issued, and the payment of any transfer tax due in connection therewith.
3
<PAGE>
4. Subject and pursuant to the provisions of this Section 4, the Option
Price and number of Common Shares subject to this Option shall be subject to
adjustment from time to time as set forth hereinafter in this Section 4.
(a) If the Company shall at any time subdivide its outstanding Common
Shares by recapitalization, reclassification, stock dividend, or split-up
thereof or other means, the number of Common Shares subject to this Option
immediately prior to such subdivision shall be proportionately increased and the
Option Price shall be proportionately decreased, and if the Company shall at any
time combine the outstanding Common Shares by recapitalization, reclassification
or combination thereof or other means, the number of Common Shares subject to
this Option immediately prior to such combination shall be proportionately
decreased and the Option Price shall be proportionately increased. Any such
adjustment to the Option Price shall become effective at the close of business
on the record date for such subdivision or combination.
(b) If the Company after the date hereof shall distribute to all of
the holders of its Common Shares any securities including, but not limited to
Common Shares, or other assets (other than a cash distribution made as a
dividend payable out of earnings or out of any earned surplus legally available
for dividends under the laws of the jurisdiction of incorporation of the
Company), the Board of Directors shall be required to make such equitable
adjustment in the Option Price and the type and/or number of Underlying
Securities in effect immediately prior to the record date of such distribution
as may be necessary to preserve to the Holder of this Option rights
substantially proportionate to and economically equivalent to those enjoyed
hereunder by such Holder immediately prior to the happening of such
distribution. Any such adjustment made reasonably and in good faith by the
Board of Directors shall be final and binding upon the Holders and shall become
effective as of the record date for such distribution.
(c) No adjustment in the number of Common Shares subject to this
Option or the Option Price shall be required under this Section 4 unless such
adjustment would require an increase or decrease in such number of shares of at
least 1% of the then adjusted number of Common Shares issuable upon exercise of
the Option, provided, however, that any adjustments which by reason of the
foregoing are not required at the time to be made shall be carried forward and
taken into account and included in determining the amount of any subsequent
adjustment. If the Company shall make a record of the Holders of its Common
Shares for the purpose of entitling them to receive any dividend or distribution
and legally abandon its plan to pay or deliver such dividend or distribution
then no adjustment in the number of Common Shares subject to the Option shall be
required by reason of the making of such record.
4
<PAGE>
(d) In case of any capital reorganization or reclassification or
change of the outstanding Common Shares (exclusive of a change covered by
Section 4(a) hereof or which solely affects the par value of such Common Shares)
or in the case of any merger or consolidation of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any reclassification,
change, capital reorganization or change in the ownership of the outstanding
Common Shares), or in the case of any sale or conveyance or transfer of all or
substantially all of the assets of the Company and in connection with which the
Company is dissolved, the Holder of this Option shall have the right thereafter
(until the expiration of the right of exercise of this Option) to receive upon
the exercise hereof, for the same aggregate Option Price payable hereunder
immediately prior to such event, the kind and amount of shares of stock or other
securities or property receivable upon such reclassification, change, capital
reorganization, merger or consolidation, or upon the dissolution following any
sale or other transfer, by a holder of the number of Common Shares of the
Company equal to the number of common shares obtainable upon exercise of this
Option immediately prior to such event; and if any reorganization,
reclassification, change, merger, consolidation, sale or transfer also results
in a change in Common Shares covered by Section 4(a), then such adjustment shall
be made pursuant to both this Section 4(d) and Section 4(a). The provisions of
this Section 4(d) shall similarly apply to successive reclassification, or
capital reorganizations, mergers or consolidations, changes, sales or other
transfers.
(e) The Company shall not be required to issue fractional Common
Shares upon any exercise of this Option. As to any final fraction of a Common
Share which the Holder of this Option would otherwise be entitled to purchase
upon such exercise, the Company shall pay a cash adjustment in respect of such
final fraction in an amount equal to the same fraction of the "current market
price" (as defined in Section 4(f) below) of a share of such stock on the
business day preceding the day of exercise. The Holder of this Option, by his
acceptance hereof, expressly waives any right to receive any fractional shares
of stock upon exercise of this Option.
(f) As used herein, the "current market price" per share of Common
Stock on any date shall be: (i) if the Common Stock is listed or admitted for
trading on any national securities exchange, the last reported sales price as
reported on such national securities exchange; (ii) if the Common Stock is not
listed or admitted for trading on any national securities exchange, the average
of the last reported closing bid and asked quotation for the Common Stock as
reported on the Automated Quotation System of NASDAQ or a similar service if
NASDAQ is not reporting such information; (iii) if the Common Stock is not
listed or admitted for trading on any national securities exchange or quoted by
NASDAQ
5
<PAGE>
or a similar service, the average of the last reported bid and asked quotation
for the Common Stock as quoted by a market maker in the Common Stock (or if
there is more than one market maker, the bid and asked quotation shall be
obtained from two market makers and the average of the lowest bid and highest
asked quotation shall be the "current market price"); or (iv) if the Common
Stock is not listed or admitted for trading on any national securities exchange
or quoted by NASDAQ and there is no market maker in the Common Stock, the fair
market value of such shares as determined by the Board of Directors.
(g) Irrespective of any adjustments pursuant to this Section 4 in the
Option Price or in the number, or kind, or class of shares or other securities
or other property obtainable upon exercise of this Option, and without impairing
any such adjustment the certificate representing this Option may continue to
express the Option Price and the number of Common Shares obtainable upon
exercise at the same price and number of Common Shares as are stated herein.
(h) Until this Option is exercised, the Underlying Shares, and the
Option Price shall be determined exclusively pursuant to the provisions hereof.
(i) Upon any adjustment of this Option the Company shall give written
notice thereof to the Holder which notice shall include the number of Underlying
Securities purchasable and the price per share upon exercise of this Option and
shall set forth in reasonable detail the events which resulted in such
adjustment
5. For the purposes of this Option, the terms "Common Shares" or "Common
Stock" shall mean (i) the class of stock designated as the common stock of the
Company on the date set forth on the first page hereof or (ii) any other class
of stock resulting from successive changes or reclassification of such Common
Stock consisting solely of changes from par value to no par value, or from no
par value to par value or changes in par value. If at any time, as a result of
an adjustment made pursuant to Section 4, the securities or other property
obtainable upon exercise of this Option shall include shares or other securities
of another corporation or other property, then thereafter, the number of such
other shares or other securities or property so obtainable shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Shares contained in
Section 4, and all other provisions of this Option with respect to Common Shares
shall apply on like terms to any such other shares or other securities or
property. Subject to the foregoing, and unless the context requires otherwise,
all references herein to Common Shares shall, in the event of an adjustment
pursuant to Section 4, be deemed to refer also to any other shares or other
securities or property when obtainable as a result of such adjustments.
6
<PAGE>
6. The Company covenants and agrees that:
(a) During the period within which the rights represented by this
Option may be exercised, the Company shall, at all times, reserve and keep
available out of its authorized capital stock, solely for the purposes of
issuance upon exercise of this Option, such number of its Common Shares as shall
be issuable upon the exercise of this Option and at its expense will obtain the
listing thereof on all quotation systems or national securities exchanges on
which the Common Shares are then listed; and if at any time the number of
authorized Common Shares shall not be sufficient to effect the exercise of this
Option, the Company will take such corporate action as may be necessary to
increase its authorized but unissued Common Shares to such number of shares as
shall be sufficient for such purpose; the Company shall have analogous
obligations with respect to any other securities or property issuable upon
exercise of this Option;
(b) All Common Shares which may be issued upon exercise of the rights
represented by this Option will, upon issuance, be validly issued, fully paid,
non-assessable and free from all taxes, liens and charges with respect to the
issuance thereof; and
(c) All original issue taxes payable in respect of the issuance of
Common Shares upon the exercise of the rights represented by this Option shall
be borne by the Company, but in no event shall the Company be responsible or
liable for income taxes or transfer taxes upon the transfer of any Options.
7. Until exercised, this Option shall not entitle the Holder hereof to
any voting rights or other rights as a shareholder of the Company.
8. This Option may not be transferred, sold or assigned except to, in
whole or in part (i) any entity controlled by, or under common control with, the
Optionee, (ii) the spouse, lineal descendants, estate or a trust for the benefit
of any of the foregoing, or (iii) by operation of law. No transfer of all or a
portion of the Option (as permitted hereby) or the Underlying Securities shall
be made at any time unless the Company shall have been supplied with evidence
reasonably satisfactory to it that such transfer is not in violation of the
Securities Act of 1933, as amended (the "Act"). Subject to the satisfaction of
the aforesaid condition and upon surrender of this Option or certificates for
any Underlying Securities at the office of the Company, the Company shall
deliver a new Option or Options or new certificate or certificates for
Underlying Securities to and in the name of the permitted assignee or assignees
named therein. Any such certificate may bear a legend reflecting the
restrictions on transfer set forth herein.
7
<PAGE>
9. If this Option is lost, stolen, mutilated or destroyed, the Company
shall, on such terms as to indemnity or otherwise as the Company may reasonably
impose, issue a new Option of like denomination, tenor and date. Any such new
Option shall constitute an original contractual obligation of the Company,
whether or not the allegedly lost, stolen, mutilated or destroyed Option shall
be at any time enforceable by anyone.
10. Any Option issued pursuant to the provisions of Section 9 hereof, or
upon transfer, exchange, division or partial exercise of this Option or
combination thereof with another Option or Options, shall set forth each
provision set forth in Sections 1 through 15, inclusive, of this Option as each
such provision is set forth herein, and shall be duly executed on behalf of the
Company by a duly authorized officer.
11. Upon surrender of this Option for transfer or exchange or upon the
exercise hereof, this Option shall be canceled by the Company, and shall not be
reissued by the Company and, except as provided in Section 2 in case of a
partial exercise, Section 3 in case of an exchange or Section 8 in case of a
transfer, or Section 9 in case of mutilation. Any new Option certificate shall
be issued promptly but not later than fifteen (15) days after receipt of the old
Option certificate.
12. This Option shall inure to the benefit of and be binding upon the
Holder hereof, the Company and their respective successors, heirs, executors,
legal representatives and assigns.
13. All notices required hereunder shall be in writing and shall be deemed
given when telegraphed, delivered personally or within two (2) days after
mailing when mailed by certified or registered mail, return receipt requested,
to the party to whom such notice is intended, at the address of such other party
as set forth on the first page hereof, or at such other address of which the
Company or Holder has been advised by the notice hereunder.
14. In the event that any one or more of the provisions contained herein,
or the application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be in any way impaired thereby, it being
intended that all of the rights and privileges of the Holders shall be
enforceable to the fullest extent permitted by law.
15. The validity, interpretation and performance of this Option and of the
terms and provisions hereof shall be governed by the laws of the State of New
York applicable to agreements entered into and performed entirely in such
state.
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Option to be executed
by its duly authorized officer as of May ___, 1998.
Network-1 Software & Technology, Inc.
By:
----------------------------------
9
<PAGE>
PURCHASE FORM
To Be Executed
Upon Exercise of Option
The undersigned record holder of the within Option hereby irrevocably
elects to exercise the right to purchase _______ Common Shares evidenced by the
within Option, according to the terms and conditions thereof, and herewith makes
payment of the purchase price in full.
The undersigned requests that certificates for such shares shall be issued
in the name set forth below.
Dated: ,
------------------------------------
Signature
------------------------------------
Print Name of Signatory
------------------------------------
Name to whom certificates are
to be issued if different from above
Address
------------------------------------
------------------------------------
Social Security No. or other
identifying number
------------------------------------
If said number of shares shall not be all the shares purchasable under the
within Option, the undersigned requests that a new Option for the unexercised
portion shall be registered in the name of:
------------------------------------
(Please Print)
Address
------------------------------------
------------------------------------
Social Security No. or other
identifying number
------------------------------------
Signature
------------------------------------
------------------------------------
Print Name of Signatory
10
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED , hereby sells, assigns and
transfers to (Social Security or I.D. No. )
the within Option, or that portion of this Option purchasable for _______
common shares together with all rights, title and interest therein, and does
hereby irrevocably constitute and appoint ____________________ attorney to
transfer such Option on the register of the within named Company, with full
power of substitution.
---------------------------------
(Signature)
Dated: , 19
Signature Guaranteed:
- ----------------------------
11
<PAGE>
May 30, 1998
Avi A. Fogel
22 Hollywood Drive
Chestnut Hill, Massachusetts 02167-3070
Re: Amendment to Employment Agreement
Dear Avi:
This letter agreement shall serve to amend Section 5(a) and 5(b) of your
Employment Agreement, dated May 18, 1998, with Network-1 Security Solutions,
Inc. (the "Employment Agreement"), as follows:
SECTION 5. Compensation.
(a) The Company shall pay to Executive an annual base salary (the
"Base Salary") during the Term of Employment of $150,000 per annum, payable
in such installments (but not less often than monthly) as is generally the
policy of the Company with respect to its executive officers, which Base
Salary shall be subject to annual increases of up to 20% as the Board, in
its sole discretion, may from time to time determine. Executive's Base
Salary and performance shall be reviewed at least annually by the Board.
(b) In addition to the Base Salary set forth in paragraph 5(a) above,
during the term of employment, Executive shall be eligible to receive a
cash bonus of up to $50,000 per annum (to be distributed as directed by the
Board of Directors) subject to the discretion of the Board of Directors.
All other terms and provisions of the Employment Agreement shall remain in
full force and effect.
If the foregoing confirms our agreement, kindly execute this letter at the
appropriate place provided below:
Very truly yours,
Network-1 Security Solutions, Inc.
By: /s/ Robert Russo
------------------------------
Robert Russo, Vice President
Agreed and Accepted:
/s/ Avi A. Fogel
- -------------------------
Avi A. Fogel
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT dated as of May 18, 1998, between NETWORK-1
SECURITY SOLUTIONS, INC., a Delaware corporation with its principal office
located at 909 Third Avenue, 9th Floor, New York, New York 10022 (the
"Company"), and ROBERT OLSEN residing at 138 Ford Road, Sudbury,
Massachusetts 01776 (the "Executive").
The Company desires to enter into this Agreement in order to assure
itself of the service of Executive, and Executive desires to accept
employment with the Company, upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties agree as follows:
SECTION 1. Employment. The Company hereby employs Executive,
and Executive hereby accepts employment by the Company, upon the terms and
conditions hereinafter set forth.
SECTION 2. Term. The employment of Executive hereunder shall be
for a period commencing on the date hereof (the "Commencement Date") and
ending on the third anniversary of the Commencement Date (the "Term") or
such earlier date upon which the employment of the Executive shall terminate
in accordance with the provisions hereof. The period commencing on the
Commencement Date and ending on the date of termination of the Executive's
employment hereunder shall be called the "Term of Employment" for Executive,
and the date on which the Executive's employment hereunder shall terminate
shall be called the "Termination Date."
SECTION 3. Duties. During the Term of Employment, Executive
shall be employed as the Vice President of Product Management of the Company
and shall perform such duties as are consistent therewith as the Board of
Directors of the Company (the "Board") shall designate. Executive shall use
his best efforts to perform well and faithfully the foregoing duties and
responsibilities.
SECTION 4. Time to be Devoted to Employment. During the Term of
Employment, Executive shall devote all of his business time, attention and
energies to the business of the Company (except for vacations to which he is
entitled pursuant to Section 6(b) and periods of illness or incapacity).
During the Term of Employment, Executive shall not engage in any business
activity which, in the reasonable judgment of the Board, conflicts with the
duties of Executive hereunder, whether or not such activity is pursued for
gain, profit or other pecuniary advantage.
<PAGE>
SECTION 5. Compensation.
(a) The Company shall pay to Executive an annual base salary
(the "Base Salary") during the Term of Employment of not less than $120,000
per annum, payable in such installments (but not less often than monthly) as
is generally the policy of the Company with respect to its executive
officers, which Base Salary shall be subject to such increases as the Board,
in its sole discretion, may from time to time determine. Executive's Base
Salary and performance shall be reviewed at least annually by the Board.
(b) In addition, to the Base Salary set forth in paragraph
5(a) above, during the term of employment, Executive shall be eligible to
receive incentive compensation of up to $30,000 per annum (to be distributed
s directed by the Board of Directors) based upon the Company's attainment of
certain goals to be established by the Board and the Company's Chief
Executive Officer in consultation with Executive.
(c) On the Commencement Date the Company shall grant to the
Executive an incentive stock option (the "Option") of ten (10) years'
duration for the purchase of 95,000 shares (the "Shares") of the Company's
Common Stock at an exercise price of $3.47 per share post-split per share.
The Option shall vest as to 34% of the Shares covered thereby on the
Commencement Date and an additional 22% of the Shares covered thereby on each
anniversary of the Commencement Date, conditioned only on the Executive's
continued employment by the Company. The form of Option is attached as
Exhibit A hereto.
SECTION 6. Business Expenses; Benefits.
(a) The Company shall reimburse Executive, in accordance with
the practice from time to time for executive officers of the Company, for all
reasonable and necessary expenses and other disbursements incurred by
Executive for or on behalf of the Company in the performance of Executive's
duties hereunder. Executive shall provide such appropriate documentation of
expenses and disbursements as may from time to time be required by the
Company.
(b) During the Term of Employment, Executive shall be
entitled to four (4) weeks vacation per year.
(a) During the Term of Employment, Executive shall be
entitled to participate in the group health, life and disability insurance
benefits, and retirement plan benefits made available from time to time for
its employees generally.
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SECTION 7. Involuntary Termination.
(a) If Executive is incapacitated or disabled (such condition
being hereinafter referred to as a "Disability") in a manner that would
qualify Executive for benefits under the disability policy of the Company
(the "Disability Policy"), the Term of Employment and employment of the
Executive under this Agreement shall cease (such termination, as well as a
termination under Section 7(b), being hereinafter referred to as an
"Involuntary Termination") and Executive shall be entitled to receive the
benefits payable under the Disability Policy and in accordance with Section 9
hereof.
(b) If Executive dies during the Term of Employment, the Term
of Employment and Executive's employment hereunder shall cease as of the date
of the Executive's death and Executive shall be entitled to receive the
benefits payable in accordance with Section 9 hereof.
SECTION 8. Termination by the Company.
(a) Termination For Cause. The Company may terminate the Term
of Employment and the employment of the Executive hereunder at any time for
Cause (as hereinafter defined) (such termination being referred to herein as
a "Termination For Cause") by giving Executive written notice of such
termination, effective immediately upon the giving of such notice to the
Executive. As used in this Agreement, "Cause" means the Executive's (a)
commission of an act (i) constituting a felony or (ii) involving fraud, moral
turpitude, theft or dishonesty which is not a felony and which materially
adversely affects the Company or could reasonably be expected to materially
adversely affect the Company, (b) repeated failure to be reasonably available
to perform his duties, which, if curable, shall not have been cured within 30
business days of written notice thereof from the Company, (c) repeated
failure to follow the lawful directions of the Board, which, if curable,
shall not have been cured within 30 business days of written notice thereof
from the Company, (d) material breach of any agreement with the Company
(including any provisions of this or any agreement between Executive and the
Company) which, if curable, shall not have been cured within 30 business days
of written notice thereof from the Company or (e) voluntary resignation
(except as set forth in paragraph 9(d) hereof).
(b) Termination Other Than for Cause. The Company may
terminate this Agreement and the employment of Executive other than for cause
as defined in Section 8(a) above (such termination shall be defined as a
"Termination Other Than for Cause") by giving Executive written notice of
such termination, which notice
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shall be effective upon the giving of such notice or such later date set
forth therein.
SECTION 9. Effect of Termination.
(a) Upon the termination of the Term of Employment and
Executive's employment hereunder due to Termination for Cause (as defined in
Section 8(a) above), neither Executive nor his beneficiary or estate shall
have any further rights or claims against the Company under this Agreement,
except to receive (i) the unpaid portion, if any, of the Base Salary provided
for in Section 5(a), computed on a pro rata basis to the Termination Date
(based on the actual number of days elapsed over the actual number of days
elapsed over the year in which such termination occurs), (ii) any unpaid
accrued benefits of Executive, (iii) reimbursement for any expenses for which
Executive shall not have been reimbursed as provided in Section 6(a), and
(iv) Executive's rights under the vested portion of the Option.
(b) Upon the termination of Executive's employment hereunder
due to an Involuntary Termination, neither Executive nor his beneficiary or
estate shall have any further rights or claims against the Company under this
Agreement except the right to receive (i) the amounts set forth in Section
9(a), and (ii)the vesting of all of the Options that would have vested in the
year of Involuntary Termination and one-half of the Options that would have
vested in the year following the year of Involuntary Termination.
(c) Upon the termination of Executive's employment upon a
Termination Other Than for Cause (as defined in Section 8(b) above), neither
Executive nor his beneficiary nor his estate shall have any rights or claims
against the Company except to receive (i) the amounts set forth in 9(b)
(including Options), and (ii) the lesser of (A) one year's Base Salary as in
effect at the time of the Termination Other Than for Cause or (B) Executive's
Base Salary for the balance of the term of this Agreement.
(d) For purposes of this Section 9, if Executive is asked to
assume any duties or the material reduction of duties, either of which is
substantially inconsistent with the position of Vice President of Product
Management of the Company, Executive, upon 30 days notice to the Board of
Directors setting forth in reasonable detail the respects in which Executive
believes such assignment or duties are substantially inconsistent with the
level of Executive's position, may resign from the Company and such
resignation will be treated as a Termination Other Than For Cause pursuant to
this Section 9.
SECTION 10. Insurance. The Company may, for its own benefit, in
its sole discretion, maintain "key-man" life and disability insurance
policies covering Executive. Executive will
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cooperate with the Company and provide such information or other assistance
as the Company may reasonably request in connection with the Company's
obtaining and maintaining such policies.
SECTION 11. Disclosure of Information. Executive will not,
either during the Term of Employment or at any time thereafter, divulge,
publish, communicate, furnish or make accessible to anyone any knowledge or
information with respect to the Company's confidential, secret or proprietary
products, technology, methods, plans, materials and processes, or with
respect to any other confidential, secret or proprietary aspects of the
business, activities or products of the Company including, without
limitation, (a) software programs, source code, object code, product
development information, research and development projects or other technical
data pertaining to the Company's products (whether or not subject to patent,
trademark or copyright protection) or (b) any customer or client lists,
telephone leads, prospects lists, sales figures and forecasts, purchase
costs, financial projections, advertising and marketing plans and business
strategies and plans; except as such items set forth in clauses (a) and (b)
above may already be in the public domain through no fault of Employee (all
of the foregoing items set forth in clauses (a) and (b) being referred to
herein collectively as "Confidential Property"). Upon the termination of the
Term of Employment, Executive shall return to the Company all property
(including Confidential Property) of the Company (or any subsidiary or
affiliate thereof) then in the possession of Executive and all books,
records, computer tapes or discs and all other material containing non-public
information concerning the business, clients or affairs of the Company or any
subsidiary or affiliate thereof.
SECTION 12. Right to Inventions. Executive shall promptly
disclose, grant and assign to the Company for its sole use and benefit any
and all marks, designs, logos, inventions, improvements, technical
information and suggestions relating in any way to the business conducted by
the Company, which he may develop or which may be acquired by Executive
during the Term of Employment (whether or not during usual working hours),
together with all trademarks, patent applications, letters, patent,
copyrights and reissues thereof that may at any time be granted for or upon
any such mark, design, logo, invention, improvement or technical information
(collectively, "Inventions"). In connection therewith, Executive shall (at
the Company's sole cost and expense) take all actions reasonably necessary or
desirable to assign and/or confirm the assignment of any Invention to the
Company.
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SECTION 13. Restrictive Covenant.
(a) The Company is in the business of developing, marketing,
licensing and supporting network software security products and also provides
consulting in network security, network design, troubleshooting and
engineering (the "Business"). Executive acknowledges and recognizes that the
Business has been conducted, and sales of its products have been made,
throughout the United States, and Executive further acknowledges and
recognizes the highly competitive nature of the industry in which the
Business is involved. Accordingly, in consideration of the premises
contained herein, the consideration to be received hereunder, stock options
to be granted Executive, Executive shall not, during the Non-Competition
Period (as defined below): (i) directly or indirectly engage, whether or not
such engagement shall be as a partner, stockholder, affiliate or other
participant, in any Competitive Business (as defined below), or represent in
any way any Competitive Business, whether or not such engagement or
representation shall be for profit, (ii) interfere with, disrupt or attempt
to disrupt the relationship, contractual or otherwise, between the Company
and any other person or entity, including, without limitation, any customer,
supplier, employee or consultant of the Company, (iii) induce any employee of
the Company to terminate his employment with the Company or to engage in any
Competitive Business in any manner described in the foregoing clause (i) (as
well as an officer or director of any Competitive Business), or (iv)
affirmatively assist or induce any other person or entity to engage in any
Competitive Business in any manner described in the foregoing clause (i) (as
well as an officer or director of any Competitive Business). Anything
contained in this Section 13 to the contrary notwithstanding, an investment
by Executive in any publicly traded company in which Executive and his
affiliates exercise no operational or strategic control and which constitutes
less than 5% of the capital of such entity shall not constitute a breach of
this Section 13.
(b) As used herein, "Non-Competition Period" shall mean the
period commencing on the date hereof and terminating on the Termination Date;
provided, however, that if the Term of Employment shall have been terminated
pursuant to Section 8 (a), then "Non-Competition Period" shall mean the
period commencing on the date hereof and ending on the second anniversary of
the Termination Date. "Competitive Business" shall mean any business in any
State of the United States engaged in the development, marketing and
licensing of network software security products, or in any other line of
business in which the Company was engaged or had a formal plan to enter as of
the Termination Date.
(c) Executive understands that the foregoing restrictions may
limit his ability to earn a livelihood in a business similar to the business
of the Company, but he nevertheless believes that he has received and will
receive
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sufficient consideration and other benefits as an employee of the Company and
as otherwise provided hereunder and pursuant to other agreements between the
Company and Executive to justify clearly such restrictions which, in any
event (given his education, skills and ability), Executive does not believe
would prevent him from earning a living.
SECTION 14. Enforcement; Severability; Etc. It is the desire
and intent of the parties that the provisions of this Agreement shall be
enforced to the fullest extent permissible under the laws and public policies
applied in each jurisdiction in which enforcement is sought. Accordingly, if
any particular provision of this Agreement shall be adjudicated to be invalid
or unenforceable, such provision shall be deemed amended to (a) delete
therefrom the portion thus adjudicated to be invalid or unenforceable, such
deletion to apply only with respect to the operation of such provision in the
particular jurisdiction in which such adjudication is made or (b) otherwise
to render it enforceable in such jurisdiction.
SECTION 15. Remedies. Executive acknowledges and understands
that the provisions of this Agreement are of a special and unique nature, the
loss of which cannot be adequately compensated for in damages by an action at
law, and that the breach or threatened breach of the provisions of this
Agreement would cause the Company irreparable harm. In the event of a breach
or threatened breach by Executive of the provisions of this Agreement, the
Company shall be entitled to an injunction restraining him from such breach.
Nothing contained in this Agreement shall be construed as prohibiting the
Company from or limiting the Company in pursuing any other remedies available
for any breach or threatened breach of this Agreement.
SECTION 16. Notices. All notices, claims, certificates,
requests, demands and other communications hereunder shall be in writing and
shall be deemed to have been duly given and delivered if personally delivered
or if sent by a nationally-recognized overnight courier, by telecopy, or by
registered or certified mail, return receipt requested and postage prepaid,
addressed as follows:
if to the Company, to: Network-1 Security Solutions, Inc.
22 Hollywood Drive
Chestnut Hill, MA 02167-3070
Attention: Avi Fogel, President
and Chief Executive Officer
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with copies to: Bizar Martin & Taub, LLP
1350 Avenue of the Americas
29th Floor
New York, NY 10019
Telecopier:(212) 581-8958
Telephone: (212) 265-8600
Attention: Sam Schwartz, Esq.
if to Executive, to: Robert P. Olsen
138 Ford Road
Sudbury, Massachusetts 02167-3070
or to such other address as the party to whom notice is to be given may have
furnished to the other party or parties in writing in accordance herewith.
Any such notice or communication shall be deemed to have been received (a) in
the case of personal delivery, on the date of such delivery, (b) in the case
of nationally-recognized overnight courier, on the next business day after
the date when sent, (c) in the case of telecopy transmission, when received,
and (d) in the case of mailing, on the third business day following that on
which the piece of mail containing such communication is posted.
SECTION 17. Binding Agreement; Benefit. The provisions of this
Agreement will be binding upon, and will inure to the benefit of, the
respective heirs, legal representatives, successors and assigns of the
parties.
SECTION 18. Governing Law. This Agreement will be governed by,
construed and enforced in accordance with, the laws of the State of
Massachusetts (without giving effect to principles of conflicts of laws).
SECTION 19. Waiver of Breach. The waiver by either party of a
breach of any provision of this Agreement must be in writing and shall not
operate or be construed as a waiver of any other breach.
SECTION 20. Entire Agreement; Amendments. This Agreement
contains the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements or understandings between
the parties with respect thereto. This Agreement may be amended only by an
agreement in writing signed by the parties.
SECTION 21. Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
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SECTION 22. Assignment. This Agreement is personal in its nature
and the parties shall not, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided,
however, that the Company may assign this Agreement to any of its
subsidiaries and affiliates.
SECTION 23. Gender. Any reference to the masculine gender shall
be deemed to include the feminine and neuter genders unless the context
otherwise requires.
SECTION 24. Counterparts. This Agreement may be executed in
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Employment Agreement as of the date first written above.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
---------------------------------
Avi A. Fogel, President and
Chief Executive Officer
/s/ Robert P. Olsen
---------------------------------
Robert P. Olsen
<PAGE>
INCENTIVE STOCK OPTION
To: Robert P. Olsen
138 Ford Road, Sudbury, Massachusetts 01776
Address
Date of Grant: May 18, 1998
You are hereby granted an option (the "Option"), effective as of the
date hereof, to purchase 95,000 shares of Common Stock, par value $.01 per
share ("Common Stock"), of Network-1 Security Solutions, Inc. (the "Company")
at a price of $3.47 per share pursuant to the Company's 1996 Stock Option
Plan (the "Plan") adopted by the Company's Board of Directors effective March
7, 1996 and approved by the stockholders of the Company. Your option price
is intended to equal at least the fair market value of the Company's Common
Stock as of the date hereof; provided, however, that if, at the time this
option is granted, you own stock possessing more than 10% of the total
combined voting power of all shares of stock of the Company or any parent or
subsidiary (an "Affiliate") of the Company (a "10% Shareholder"), your option
price is intended to be at least 110% of the fair market value of the
Company's Common Stock as of the date hereof.
This Option shall vest as follows: (i) as to 34% of the shares
underlying this Option on the date of this Option;(ii) as to the balance of
66% of the shares underlying this Option, 22% of such shares on each of the
first three anniversary dates of the date of this Option, provided you are
then an employee of the Company; (iii) as to 50% of the remaining shares
underlying this Option if a Change in Control (as hereinafter defined) occurs
within one year of the date of this Option, provided you are then an employee
of the Company; (iv) as to all of the unvested portion of this Option if a
Change of Control (as hereinafter defined) occurs more than one year after
the date of this Option, provided you are then an employee of the Company.
The shares subject to this Option shall be adjusted for any change in
the outstanding shares of the Common Stock of the Company by reason of a
stock dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Compensation Committee deems in its sole discretion to be similar
circumstances. No fractional shares shall be issued or delivered.
This Option shall terminate and is not exercisable after the expiration
of ten years from the date of its grant (five years from the date of grant
if, at the time of the grant, you are a 10% Shareholder) (the "Scheduled
Termination Date"), except if
<PAGE>
terminated earlier as hereinafter provided (the "Termination Date").
A "Change of Control" shall be deemed to have occurred upon the happening
of any of the following events:
(i) the acquisition by any person, entity or "group", within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended(the "Exchange Act"), of
beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of forty (40%) percent or
more of the combined voting power of the then outstanding
securities entitled to vote generally in the election of
directors where such person, entity or group owned less than 5%
of such voting power on the date of this Option; or
(ii) The shareholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty
percent (50%) of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the
shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets (other than to a subsidiary or subsidiaries).
(iii) Any other event deemed to constitute a "Change in Control" by the
Compensation Committee.
You may exercise your option as set forth in Section 7 of the Plan.
If the Company's Common Stock has not been registered under Section 12 of
the Securities Exchange Act of 1934, the exercise
of your option will not be effective unless and until you execute and deliver to
the Company a Stock Restriction Agreement, in the form on file in the office of
the Secretary of the Company.
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<PAGE>
Your Option will, to the extent not previously exercised by you,
terminate thirty (30) days after the date on which your employment by the
Company or Affiliate of the Company is terminated, whether such termination
is voluntary or not, other than by reason of disability as defined in Section
22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder, or death, in which case your Option will
terminate six (6) months from the date of termination of employment due to
disability or death (but in no event later than the Scheduled Termination
Date). After the date your employment is terminated, as aforesaid, you may
exercise this Option only for the number of shares which you had a right to
purchase and did not purchase on the date your employment terminated. If you
are employed by an Affiliate of the Company, your employment shall be deemed
to have terminated on the date your employer ceases to be an Affiliate of the
Company, unless you are on that date transferred to the Company or another
Affiliate of the Company. Your employment shall not be deemed to have
terminated if you are transferred from the Company to an Affiliate, or vice
versa, or from one Affiliate to another Affiliate.
If you die while employed by the Company or an Affiliate of the Company,
your legatee(s), distributee(s), executor(s) or administrator(s), as the case
may be, may, at any time within six (6) months after the date of your death
(but in no event later than the Scheduled Termination Date), exercise the
Option as to any shares which you had a right to purchase and did not
purchase during your lifetime. If your employment with the Company, or an
Affiliate is terminated by reason of your becoming disabled (within the
meaning of Section 22(e)(3) of the Code and the regulations thereunder), you
or your legal guardian or custodian may at any time within six (6) months
after the date of such termination (but in no event later than the Scheduled
Termination Date), exercise the Option as to any shares which you had a right
to purchase and did not purchase prior to such termination. Your legatee,
distributee, executor, administrator, guardian or custodian must present
proof of his authority satisfactory to the Company prior to being allowed to
exercise this Option.
This Option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by
you, including, for this purpose, your legal guardian or custodian in the
event of disability. Until the Option price has been paid in full pursuant
to due exercise of this Option and the purchased shares are delivered to you,
you do not have any rights as a shareholder of the Company. The Company
reserves the right not to deliver to you the shares purchased by virtue of
the exercise of this Option during any period of time in which the Company
deems, in its sole discretion, that such delivery would violate a federal,
state, local or securities exchange rule, regulation or law.
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<PAGE>
Notwithstanding anything to the contrary contained herein, this Option
is not exercisable until all of the following events occur and during the
following periods of time:
(a) Until this Option and the optioned shares are approved and/or
registered with such federal, state and local regulatory bodies or agencies
and securities exchanges as the Company may deem necessary or desirable; or
(b) During any period of time in which the Company deems that the
exercisability of this Option, the offer to sell the shares optioned
hereunder, or the sale thereof, may violate a federal, state, local or
securities exchange rule, regulation or law, or may cause the Company to be
legally obligated to issue or sell more shares than the Company is legally
entitled to issue or sell.
The following two paragraphs shall be applicable if, on the date of
exercise of this Option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as
amended, and under applicable state securities laws, and shall continue to be
applicable for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that he will
acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that
the proposed transaction will be exempt from such registration. The optionee
shall execute such instruments, representations, acknowledgements and
agreements as the Company may, in its sole discretion, deem advisable to
avoid any violation of federal, state, local or securities exchange rule,
regulation or law.
(b) The certificates for Common Stock to be issued to the optionee
hereunder shall bear the following legend:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under applicable
state securities laws. The shares have been acquired for investment
and may not be offered, sold, transferred, pledged or otherwise
disposed of without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel
4
<PAGE>
acceptable to the Company that the proposed transaction will be exempt
from such registration."
The foregoing legend shall be removed upon registration of the legended
shares under the Securities Act of 1933, as amended, and under any applicable
state laws or upon receipt of any opinion of counsel acceptable to the
Company that said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable
state securities laws.
It is the intention of the Company and you that this option shall, if
possible, be an "Incentive Stock Option" as that term is used in Section 422
of the Code and the regulations thereunder. In the event this Option is in
any way inconsistent with the legal requirements of the Code or the
regulations thereunder for an "Incentive Stock Option" this Option shall be
deemed automatically amended as of the date hereof to conform to such legal
requirements, if such conformity may be achieved by amendment.
This Option shall be subject to the terms of the Plan in effect on the
date this Option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the
terms of this Option and the terms of the Plan in effect on the date of this
Option, the terms of the Plan shall govern. This Option constitutes the
entire understanding between the Company and you with respect to the subject
matter hereof and no amendment, modification or waiver of this Option, in
whole or in part, shall be binding upon the Company unless in writing and
signed by an appropriate officer of the Company. This Option and the
performances of the parties hereunder shall be construed in accordance with
and governed by the laws of the State of New York without regard to
principles of conflict of law.
Please sign the copy of this Option and return it to the Company,
thereby indicating your understanding of and agreement with its terms and
conditions.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: ____________________________
I hereby acknowledge receipt of a copy of the foregoing Stock Option and
the Network-1 Security Solutions, Inc. 1996 Stock Option
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<PAGE>
Plan, and having read such documents, hereby signify my understanding of, and my
agreement with, their terms and conditions.
_________________________ ____________________________
(Signature) (Date)
6
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Exhibit 10.3
EMPLOYMENT AGREEMENT dated as of May 19, 1998, between NETWORK-1
SECURITY SOLUTIONS, INC., a Delaware corporation with its principal office
located at 909 Third Avenue, 9th Floor, New York, New York 10022 (the
"Company"), and Murray P. Fish residing at 3 Wabanaki Way, Andover, MA 01810
(the "Executive").
The Company desires to enter into this Agreement in order to assure
itself of the service of Executive, and Executive desires to accept
employment with the Company, upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties agree as follows:
SECTION 1. Employment. The Company hereby employs Executive,
and Executive hereby accepts employment by the Company, upon the terms and
conditions hereinafter set forth.
SECTION 2. Term. The employment of Executive hereunder shall be
for a period commencing on the date hereof (the "Commencement Date") and
ending on the third anniversary of the Commencement Date (the "Term") or such
earlier date upon which the employment of the Executive shall terminate in
accordance with the provisions hereof. The period commencing on the
Commencement Date and ending on the date of termination of the Executive's
employment hereunder shall be called the "Term of Employment" for Executive,
and the date on which the Executive's employment hereunder shall terminate
shall be called the "Termination Date."
SECTION 3. Duties. During the Term of Employment, Executive
shall be employed as the Chief Financial Officer of the Company and shall
perform such duties as are consistent therewith as the Chief Executive
Officer ("CEO") and the Board of Directors of the Company (the "Board") shall
designate. Executive shall use his best efforts to perform well and
faithfully the foregoing duties and responsibilities.
SECTION 4. Time to be Devoted to Employment. During the Term of
Employment, Executive shall devote all of his business time, attention and
energies to the business of the Company (except for vacations to which he is
entitled pursuant to Section 6(b) and periods of illness or incapacity).
During the Term of Employment, Executive shall not engage in any business
activity which, in the reasonable judgment of the Board, conflicts with the
duties of Executive hereunder, whether or not such activity is pursued for
gain, profit or other pecuniary advantage.
<PAGE>
SECTION 5. Compensation.
(a) The Company shall pay to Executive an annual base salary
(the "Base Salary") during the Term of Employment of not less than $120,000
per annum, payable in such installments (but not less often than monthly) as
is generally the policy of the Company with respect to its executive
officers, which Base Salary shall be subject to such increases as the Board,
in its sole discretion, may from time to time determine. Executive's Base
Salary and performance shall be reviewed at least annually by the Board.
(b) In addition, to the Base Salary set forth in paragraph
5(a) above, during the term of employment, Executive shall be eligible to
receive incentive compensation of up to $30,000 per annum (to be distributed
as directed by the Board of Directors) based upon the Company's attainment of
certain goals to be established by the Board and the CEO.
(c) On the Commencement Date the Company shall grant to the
Executive an incentive stock option (the "Option") of ten (10) years'
duration for the purchase of 94,234 shares (the "Shares") of the Company's
Common Stock at an exercise price of $3.47 per share. The Option shall vest
as to 34% of the Shares covered thereby on the Commencement Date and an
additional 22% of the Shares covered thereby on each anniversary of the
Commencement Date, conditioned only on the Executive's continued employment
by the Company. The form of Option is attached as Exhibit A hereto.
SECTION 6. Business Expenses; Benefits.
(a) The Company shall reimburse Executive, in accordance with
the practice from time to time for executive officers of the Company, for all
reasonable and necessary expenses and other disbursements incurred by
Executive for or on behalf of the Company in the performance of Executive's
duties hereunder. Executive shall provide such appropriate documentation of
expenses and disbursements as may from time to time be required by the
Company.
(b) During the Term of Employment, Executive shall be
entitled to four (4) weeks vacation per year.
(a) During the Term of Employment, Executive shall be
entitled to participate in the group health, life and disability insurance
benefits, and retirement plan benefits made available from time to time for
its employees generally.
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SECTION 7. Involuntary Termination.
(a) If Executive is incapacitated or disabled (such condition
being hereinafter referred to as a "Disability") in a manner that would
qualify Executive for benefits under the disability policy of the Company
(the "Disability Policy"), the Term of Employment and employment of the
Executive under this Agreement shall cease (such termination, as well as a
termination under Section 7(b), being hereinafter referred to as an
"Involuntary Termination") and Executive shall be entitled to receive the
benefits payable under the Disability Policy and in accordance with Section 9
hereof.
(b) If Executive dies during the Term of Employment, the Term
of Employment and Executive's employment hereunder shall cease as of the date
of the Executive's death and Executive shall be entitled to receive the
benefits payable in accordance with Section 9 hereof.
SECTION 8. Termination by the Company.
(a) Termination For Cause. The Company may terminate the Term
of Employment and the employment of the Executive hereunder at any time for
Cause (as hereinafter defined) (such termination being referred to herein as
a "Termination For Cause") by giving Executive written notice of such
termination, effective immediately upon the giving of such notice to the
Executive. As used in this Agreement, "Cause" means the Executive's (a)
commission of an act (i) constituting a felony or (ii) involving fraud, moral
turpitude, theft or dishonesty which is not a felony and which materially
adversely affects the Company or could reasonably be expected to materially
adversely affect the Company, (b) repeated failure to be reasonably available
to perform his duties, which, if curable, shall not have been cured within 30
business days of written notice thereof from the Company, (c) repeated
failure to follow the lawful directions of the CEO or the Board, which, if
curable, shall not have been cured within 30 business days of written notice
thereof from the Company, (d) material breach of any agreement with the
Company (including any provisions of this or any agreement between Executive
and the Company) which, if curable, shall not have been cured within 30
business days of written notice thereof from the Company or (e) voluntary
resignation (except as set forth in paragraph 9(d) hereof).
(b) Termination Other Than for Cause. The Company may
terminate this Agreement and the employment of Executive other than for cause
as defined in Section 8(a) above (such termination shall be defined as a
"Termination Other Than for Cause") by giving Executive written notice of
such termination, which notice
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shall be effective upon the giving of such notice or such later date set
forth therein.
SECTION 9. Effect of Termination.
(a) Upon the termination of the Term of Employment and
Executive's employment hereunder due to Termination for Cause (as defined in
Section 8(a) above), neither Executive nor his beneficiary or estate shall
have any further rights or claims against the Company under this Agreement,
except to receive (i) the unpaid portion, if any, of the Base Salary provided
for in Section 5(a), computed on a pro rata basis to the Termination Date
(based on the actual number of days elapsed over the actual number of days
elapsed over the year in which such termination occurs), (ii) any unpaid
accrued benefits of Executive, (iii) reimbursement for any expenses for which
Executive shall not have been reimbursed as provided in Section 6(a), and
(iv) Executive's rights under the vested portion of the Option.
(b) Upon the termination of Executive's employment hereunder
due to an Involuntary Termination, neither Executive nor his beneficiary or
estate shall have any further rights or claims against the Company under this
Agreement except the right to receive (i) the amounts set forth in Section
9(a), and (ii)the vesting of all of the Options that would have vested in the
year of Involuntary Termination and one-half of the Options that would have
vested in the year following the year of Involuntary Termination.
(c) Upon the termination of Executive's employment upon a
Termination Other Than for Cause (as defined in Section 8(b) above), neither
Executive nor his beneficiary nor his estate shall have any rights or claims
against the Company except to receive (i) the amounts set forth in 9(b)
(including Options), and (ii) the lesser of (A) six month's Base Salary as in
effect at the time of the Termination Other Than for Cause or (B) Executive's
Base Salary for the balance of the term of this Agreement.
(d) For purposes of this Section 9, if Executive is asked to
assume any duties or the material reduction of duties, either of which is
substantially inconsistent with the position of Chief Financial Officer,
Executive, upon 30 days notice to the Board of Directors setting forth in
reasonable detail the respects in which Executive believes such assignment or
duties are substantially inconsistent with the level of Executive's position,
may resign from the Company and such resignation will be treated as a
Termination Other Than For Cause pursuant to this Section 9.
SECTION 10. Insurance. The Company may, for its own benefit, in
its sole discretion, maintain "key-man" life and
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disability insurance policies covering Executive. Executive will cooperate
with the Company and provide such information or other assistance as the
Company may reasonably request in connection with the Company's obtaining and
maintaining such policies.
SECTION 11. Disclosure of Information. Executive will not,
either during the Term of Employment or at any time thereafter, divulge,
publish, communicate, furnish or make accessible to anyone any knowledge or
information with respect to the Company's confidential, secret or proprietary
products, technology, methods, plans, materials and processes, or with
respect to any other confidential, secret or proprietary aspects of the
business, activities or products of the Company including, without
limitation, (a) software programs, source code, object code, product
development information, research and development projects or other technical
data pertaining to the Company's products (whether or not subject to patent,
trademark or copyright protection) or (b) any customer or client lists,
telephone leads, prospects lists, sales figures and forecasts, purchase
costs, financial projections, advertising and marketing plans and business
strategies and plans; except as such items set forth in clauses (a) and (b)
above may already be in the public domain through no fault of Employee (all
of the foregoing items set forth in clauses (a) and (b) being referred to
herein collectively as "Confidential Property"). Upon the termination of the
Term of Employment, Executive shall return to the Company all property
(including Confidential Property) of the Company (or any subsidiary or
affiliate thereof) then in the possession of Executive and all books,
records, computer tapes or discs and all other material containing non-public
information concerning the business, clients or affairs of the Company or any
subsidiary or affiliate thereof.
SECTION 12. Right to Inventions. Executive shall promptly
disclose, grant and assign to the Company for its sole use and benefit any
and all marks, designs, logos, inventions, improvements, technical
information and suggestions relating in any way to the business conducted by
the Company, which he may develop or which may be acquired by Executive
during the Term of Employment (whether or not during usual working hours),
together with all trademarks, patent applications, letters, patent,
copyrights and reissues thereof that may at any time be granted for or upon
any such mark, design, logo, invention, improvement or technical information
(collectively, "Inventions"). In connection therewith, Executive shall (at
the Company's sole cost and expense) take all actions reasonably necessary or
desirable to assign and/or confirm the assignment of any Invention to the
Company.
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SECTION 13. Restrictive Covenant.
(a) The Company is in the business of developing, marketing,
licensing and supporting network software security products and also provides
consulting in network security, network design, troubleshooting and
engineering (the "Business"). Executive acknowledges and recognizes that the
Business has been conducted, and sales of its products have been made,
throughout the United States, and Executive further acknowledges and
recognizes the highly competitive nature of the industry in which the
Business is involved. Accordingly, in consideration of the premises
contained herein, the consideration to be received hereunder, stock options
to be granted Executive, Executive shall not, during the Non-Competition
Period (as defined below): (i) directly or indirectly engage, whether or not
such engagement shall be as a partner, stockholder, affiliate or other
participant, in any Competitive Business (as defined below), or represent in
any way any Competitive Business, whether or not such engagement or
representation shall be for profit, (ii) interfere with, disrupt or attempt
to disrupt the relationship, contractual or otherwise, between the Company
and any other person or entity, including, without limitation, any customer,
supplier, employee or consultant of the Company, (iii) induce any employee of
the Company to terminate his employment with the Company or to engage in any
Competitive Business in any manner described in the foregoing clause (i) (as
well as an officer or director of any Competitive Business), or (iv)
affirmatively assist or induce any other person or entity to engage in any
Competitive Business in any manner described in the foregoing clause (i) (as
well as an officer or director of any Competitive Business). Anything
contained in this Section 13 to the contrary notwithstanding, an investment
by Executive in any publicly traded company in which Executive and his
affiliates exercise no operational or strategic control and which constitutes
less than 5% of the capital of such entity shall not constitute a breach of
this Section 13.
(b) As used herein, "Non-Competition Period" shall mean the
period commencing on the date hereof and terminating on the Termination Date;
provided, however, that if the Term of Employment shall have been terminated
pursuant to Section 8 (a), then "Non-Competition Period" shall mean the
period commencing on the date hereof and ending on the second anniversary of
the Termination Date. "Competitive Business" shall mean any business in any
State of the United States engaged in the development, marketing and
licensing of network software security products, or in any other line of
business in which the Company was engaged or had a formal plan to enter as of
the Termination Date.
(c) Executive understands that the foregoing restrictions may
limit his ability to earn a livelihood in a
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<PAGE>
business similar to the business of the Company, but he nevertheless believes
that he has received and will receive sufficient consideration and other
benefits as an employee of the Company and as otherwise provided hereunder
and pursuant to other agreements between the Company and Executive to justify
clearly such restrictions which, in any event (given his education, skills
and ability), Executive does not believe would prevent him from earning a
living.
SECTION 14. Enforcement; Severability; Etc. It is the desire
and intent of the parties that the provisions of this Agreement shall be
enforced to the fullest extent permissible under the laws and public policies
applied in each jurisdiction in which enforcement is sought. Accordingly, if
any particular provision of this Agreement shall be adjudicated to be invalid
or unenforceable, such provision shall be deemed amended to (a) delete
therefrom the portion thus adjudicated to be invalid or unenforceable, such
deletion to apply only with respect to the operation of such provision in the
particular jurisdiction in which such adjudication is made or (b) otherwise
to render it enforceable in such jurisdiction.
SECTION 15. Remedies. Executive acknowledges and understands
that the provisions of this Agreement are of a special and unique nature, the
loss of which cannot be adequately compensated for in damages by an action at
law, and that the breach or threatened breach of the provisions of this
Agreement would cause the Company irreparable harm. In the event of a breach
or threatened breach by Executive of the provisions of this Agreement, the
Company shall be entitled to an injunction restraining him from such breach.
Nothing contained in this Agreement shall be construed as prohibiting the
Company from or limiting the Company in pursuing any other remedies available
for any breach or threatened breach of this Agreement.
SECTION 16. Notices. All notices, claims, certificates,
requests, demands and other communications hereunder shall be in writing and
shall be deemed to have been duly given and delivered if personally delivered
or if sent by a nationally-recognized overnight courier, by telecopy, or by
registered or certified mail, return receipt requested and postage prepaid,
addressed as follows:
if to the Company, to: Network-1 Security Solutions, Inc.
22 Hollywood Drive
Chestnut Hill, MA 02167-3070
Attention: Avi Fogel, President
and Chief Executive Officer
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with copies to: Bizar Martin & Taub, LLP
1350 Avenue of the Americas
29th Floor
New York, NY 10019
Fax: (212) 581-8958
Telephone: (212) 265-8600
Attention: Sam Schwartz, Esq.
if to Executive, to: Murray P. Fish
3 Wabanaki Way
Andover, MA 01810
or to such other address as the party to whom notice is to be given may have
furnished to the other party or parties in writing in accordance herewith.
Any such notice or communication shall be deemed to have been received (a) in
the case of personal delivery, on the date of such delivery, (b) in the case
of nationally-recognized overnight courier, on the next business day after
the date when sent, (c) in the case of telecopy transmission, when received,
and (d) in the case of mailing, on the third business day following that on
which the piece of mail containing such communication is posted.
SECTION 17. Binding Agreement; Benefit. The provisions of this
Agreement will be binding upon, and will inure to the benefit of, the
respective heirs, legal representatives, successors and assigns of the
parties.
SECTION 18. Governing Law. This Agreement will be governed by,
construed and enforced in accordance with, the laws of the State of
Massachusetts (without giving effect to principles of conflicts of laws).
SECTION 19. Waiver of Breach. The waiver by either party of a
breach of any provision of this Agreement must be in writing and shall not
operate or be construed as a waiver of any other breach.
SECTION 20. Entire Agreement; Amendments. This Agreement
contains the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements or understandings between
the parties with respect thereto. This Agreement may be amended only by an
agreement in writing signed by the parties.
SECTION 21. Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
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SECTION 22. Assignment. This Agreement is personal in its nature
and the parties shall not, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided,
however, that the Company may assign this Agreement to any of its
subsidiaries and affiliates.
SECTION 23. Gender. Any reference to the masculine gender shall
be deemed to include the feminine and neuter genders unless the context
otherwise requires.
SECTION 24. Counterparts. This Agreement may be executed in
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Employment Agreement as of the date first written above.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
----------------------------------
Avi A. Fogel, President and
Chief Executive Officer
/s/ Murray P. Fish
----------------------------------
Murray P. Fish
<PAGE>
INCENTIVE STOCK OPTION
To: Murray P. Fish
--------------------------------------------------------------
Address
Date of Grant: May 19, 1997
You are hereby granted an option (the "Option"), effective as of the
date hereof, to purchase 94,234 shares of Common Stock, par value $.01 per
share ("Common Stock"), of Network-1 Security Solutions, Inc. (the "Company")
at a price of $3.47 per share pursuant to the Company's 1996 Stock Option
Plan (the "Plan") adopted by the Company's Board of Directors and approved by
the stockholders of the Company on March 7, 1996. Your option price is
intended to equal at least the fair market value of the Company's Common
Stock as of the date hereof; provided, however, that if, at the time this
option is granted, you own stock possessing more than 10% of the total
combined voting power of all shares of stock of the Company or any parent or
subsidiary (an "Affiliate") of the Company (a "10% Shareholder"), your option
price is intended to be at least 110% of the fair market value of the
Company's Common Stock as of the date hereof.
This Option shall vest as follows: (i) as to 34% of the shares
underlying the Option on the date of this Option;(ii) as to the balance of
66% of the shares underlying the Option, 22% of such shares on each of the
first three anniversary dates of the date of this Option, provided the
Optionee is then an employee of the Company; (iii) as to 50% of the remaining
shares underlying the Option if a Change in Control (as hereinafter defined)
occurs within one year of the date of this Option, provided the Optionee is
then an employee of the Company; (iv) as to all of the unvested portion of
this Option if a Change of Control (as hereinafter defined) occurs more than
one year after the date of this Option, provided the Optionee is then an
employee of the Company.
The shares subject to this Option shall be adjusted for any change in
the outstanding shares of the Common Stock of the Company by reason of a
stock dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Compensation Committee deems in its sole discretion to be similar
circumstances. No fractional shares shall be issued or delivered.
This Option shall terminate and is not exercisable after the expiration
of ten years from the date of its grant (five years from the date of grant
if, at the time of the grant, you are a 10% Shareholder) (the "Scheduled
Termination Date"), except if
<PAGE>
terminated earlier as hereinafter provided (the "Termination Date").
A "change of control" shall be deemed to have occurred upon the
happening of any of the following events:
(i) the acquisition by any person, entity or "group", within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended(the "Exchange Act"), of
beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of forty (40%) percent or
more of the combined voting power of the then outstanding
securities entitled to vote generally in the election of
directors where such person, entity or group owned less than 5%
of such voting power on the date of this Option; or
(ii) The shareholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty
percent (50%) of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the
shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets (other than to a subsidiary or subsidiaries).
(iii) Any other event deemed to constitute a "change in control" by the
Compensation Committee.
You may exercise your option as set forth in Section 7 of the Plan.
If the Company's Common Stock has not been registered under Section 12
of the Securities Exchange Act of 1934, the exercise of your option will not
be effective unless and until you execute and deliver to the Company a Stock
Restriction Agreement, in the form on file in the office of the Secretary of
the Company.
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<PAGE>
Your Option will, to the extent not previously exercised by you,
terminate thirty (30) days after the date on which your employment by the
Company or Affiliate of the Company is terminated, whether such termination
is voluntary or not, other than by reason of disability as defined in Section
22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder, or death, in which case your Option will
terminate six (6) months from the date of termination of employment due to
disability or death (but in no event later than the Scheduled Termination
Date). After the date your employment is terminated, as aforesaid, you may
exercise this Option only for the number of shares which you had a right to
purchase and did not purchase on the date your employment terminated. If you
are employed by an Affiliate of the Company, your employment shall be deemed
to have terminated on the date your employer ceases to be an Affiliate of the
Company, unless you are on that date transferred to the Company or another
Affiliate of the Company. Your employment shall not be deemed to have
terminated if you are transferred from the Company to an Affiliate, or vice
versa, or from one Affiliate to another Affiliate.
If you die while employed by the Company or an Affiliate of the Company,
your legatee(s), distributee(s), executor(s) or administrator(s), as the case
may be, may, at any time within six (6) months after the date of your death
(but in no event later than the Scheduled Termination Date), exercise the
Option as to any shares which you had a right to purchase and did not
purchase during your lifetime. If your employment with the Company, or an
Affiliate is terminated by reason of your becoming disabled (within the
meaning of Section 22(e)(3) of the Code and the regulations thereunder), you
or your legal guardian or custodian may at any time within six (6) months
after the date of such termination (but in no event later than the Scheduled
Termination Date), exercise the Option as to any shares which you had a right
to purchase and did not purchase prior to such termination. Your legatee,
distributee, executor, administrator, guardian or custodian must present
proof of his authority satisfactory to the Company prior to being allowed to
exercise this Option.
This Option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by
you, including, for this purpose, your legal guardian or custodian in the
event of disability. Until the Option price has been paid in full pursuant
to due exercise of this Option and the purchased shares are delivered to you,
you do not haveany rights as a shareholder of the Company. The Company
reserves the right not to deliver to you the shares purchased by virtue of
the exercise of this Option during any period of time in which the Company
deems, in its sole discretion, that such delivery would violate a federal,
state, local or securities exchange rule, regulation or law.
3
<PAGE>
Notwithstanding anything to the contrary contained herein, this Option
is not exercisable until all of the following events occur and during the
following periods of time:
(a) Until this Option and the optioned shares are approved and/or
registered with such federal, state and local regulatory bodies or agencies
and securities exchanges as the Company may deem necessary or desirable; or
(b) During any period of time in which the Company deems that the
exercisability of this Option, the offer to sell the shares optioned
hereunder, or the sale thereof, may violate a federal, state, local or
securities exchange rule, regulation or law, or may cause the Company to be
legally obligated to issue or sell more shares than the Company is legally
entitled to issue or sell.
The following two paragraphs shall be applicable if, on the date of
exercise of this Option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as
amended, and under applicable state securities laws, and shall continue to be
applicable for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that he will
acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that
the proposed transaction will be exempt from such registration. The optionee
shall execute such instruments, representations, acknowledgements and
agreements as the Company may, in its sole discretion, deem advisable to
avoid any violation of federal, state, local or securities exchange rule,
regulation or law.
(b) The certificates for Common Stock to be issued to the optionee
hereunder shall bear the following legend:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under applicable
state securities laws. The shares have been acquired for investment
and may not be offered, sold, transferred, pledged or otherwise
disposed of without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel
4
<PAGE>
acceptable to the Company that the proposed transaction will be exempt
from such registration."
The foregoing legend shall be removed upon registration of the legended
shares under the Securities Act of 1933, as amended, and under any applicable
state laws or upon receipt of any opinion of counsel acceptable to the
Company that said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable
state securities laws.
It is the intention of the Company and you that this option shall, if
possible, be an "Incentive Stock Option" as that term is used in Section 422
of the Code and the regulations thereunder. In the event this Option is in
any way inconsistent with the legal requirements of the Code or the
regulations thereunder for an "Incentive Stock Option" this Option shall be
deemed automatically amended as of the date hereof to conform to such legal
requirements, if such conformity may be achieved by amendment.
This Option shall be subject to the terms of the Plan in effect on the
date this Option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the
terms of this Option and the terms of the Plan in effect on the date of this
Option, the terms of the Plan shall govern. This Option constitutes the
entire understanding between the Company and you with respect to the subject
matter hereof and no amendment, modification or waiver of this Option, in
whole or in part, shall be binding upon the Company unless in writing and
signed by an appropriate officer of the Company. This Option and the
performances of the parties hereunder shall be construed in accordance with
and governed by the laws of the State of New York without regard to
principles of conflict of law.
Please sign the copy of this Option and return it to the Company,
thereby indicating your understanding of and agreement with its terms and
conditions.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: ____________________________
I hereby acknowledge receipt of a copy of the foregoing Stock Option and
the Network-1 Security Solutions, Inc. 1996 Stock Option
5
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Plan, and having read such documents, hereby signify my understanding of, and
my agreement with, their terms and conditions.
- ----------------------------------- -----------------------------------
(Signature) (Date)
6
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Exhibit 10.4
EMPLOYMENT AGREEMENT dated as of June 30, 1998, between NETWORK-1
SECURITY SOLUTIONS, INC., a Delaware corporation with its principal office
located at 909 Third Avenue, 9th Floor, New York, New York 10022 (the
"Company"), and WILLIAM HANCOCK residing at 4907 Wareham Drive, Arlington, Texas
76017 (the "Executive").
The Company desires to enter into this Agreement in order to assure
itself of the service of Executive, and Executive desires to accept employment
with the Company, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties agree as follows:
SECTION 1. Employment. The Company hereby employs Executive, and
Executive hereby accepts employment by the Company, upon the terms and
conditions hereinafter set forth.
SECTION 2. Term. The employment of Executive hereunder shall be
for a period commencing on the date hereof (the "Commencement Date") and ending
on the third anniversary of the Commencement Date (the "Term") or such earlier
date upon which the employment of the Executive shall terminate in accordance
with the provisions hereof. The period commencing on the Commencement Date and
ending on the date of termination of the Executive's employment hereunder shall
be called the "Term of Employment" for Executive, and the date on which the
Executive's employment hereunder shall terminate shall be called the
"Termination Date."
SECTION 3. Duties. During the Term of Employment, Executive shall
be employed as Chief Technology Officer of the Company and shall perform such
duties as are consistent therewith as the Chief Executive Officer ("CEO") and
the Board of Directors (the "Board") of the Company shall designate. Executive
shall use his best efforts to perform well and faithfully the foregoing duties
and responsibilities.
SECTION 4. Time to be Devoted to Employment. During the Term of
Employment, Executive shall devote all of his business time, attention and
energies to the business of the Company (except for writing articles for
magazines and publishing books, vacations to which he is entitled pursuant to
Section 6(b) and periods of illness or incapacity). During the Term of
Employment, Executive shall not engage in any business activity which, in the
reasonable judgment of the Board, conflicts with the duties of Executive
hereunder, whether or not such activity is pursued for gain, profit or other
pecuniary advantage.
<PAGE>
SECTION 5. Compensation.
(a) The Company shall pay to Executive an annual base salary
(the "Base Salary") during the Term of Employment of $160,000 per annum, payable
in such installments (but not less often than monthly) as is generally the
policy of the Company with respect to its executive officers, which Base Salary
shall be subject to such increases as the Board, in its sole discretion, may
from time to time determine.
SECTION 6. Business Expenses; Benefits.
(a) The Company shall reimburse Executive, in accordance with
the practice from time to time for executive officers of the Company, for all
reasonable and necessary expenses and other disbursements incurred by Executive
for or on behalf of the Company in the performance of Executive's duties
hereunder. Executive shall provide such appropriate documentation of expenses
and disbursements as may from time to time be required by the Company.
(b) During the Term of Employment, Executive shall be entitled
to four (4) weeks vacation per year.
(c) During the Term of Employment, Executive shall be entitled
to participate in the group health, life and disability insurance benefits, and
retirement plan benefits made available from time to time for its employees
generally.
SECTION 7. Involuntary Termination.
(a) If Executive is incapacitated or disabled (such condition
being hereinafter referred to as a "Disability") in a manner that would qualify
Executive for benefits under the disability policy of the Company (the
"Disability Policy"), the Term of Employment and employment of the Executive
under this Agreement shall cease (such termination, as well as a termination
under Section 7(b), being hereinafter referred to as an "Involuntary
Termination") and Executive shall be entitled to receive the benefits payable
under the Disability Policy and in accordance with Section 9 hereof.
(b) If Executive dies during the Term of Employment, the Term of
Employment and Executive's employment hereunder shall cease as of the date of
the Executive's death and Executive shall be entitled to receive the benefits
payable in accordance with Section 9 hereof.
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SECTION 8. Termination by the Company.
(a) Termination For Cause. The Company may terminate the Term of
Employment and the employment of the Executive hereunder at any time for Cause
(as hereinafter defined) (such termination being referred to herein as a
"Termination For Cause") by giving Executive written notice of such termination,
effective immediately upon the giving of such notice to the Executive. As used
in this Agreement, "Cause" means the Executive's (a) commission of an act (i)
constituting a felony or (ii) involving fraud, moral turpitude, theft or
dishonesty which is not a felony and which materially adversely affects the
Company or could reasonably be expected to materially adversely affect the
Company, (b) repeated failure to be reasonably available to perform his duties,
which, if curable, shall not have been cured within 30 business days of written
notice thereof from the Company, (c) repeated failure to follow the lawful
directions of the Board or the CEO, which, if curable, shall not have been cured
within 30 business days of written notice thereof from the Company, (d) material
breach of any agreement with the Company (including any provisions of this or
any agreement between Executive and the Company) which, if curable, shall not
have been cured within 30 business days of written notice thereof from the
Company or (e) voluntary resignation (except as set forth in paragraph 9(d)
hereof).
(b) Termination Other Than for Cause. The Company may terminate
this Agreement and the employment of Executive other than for cause as defined
in Section 8(a) above (such termination shall be defined as a "Termination Other
Than for Cause") by giving Executive written notice of such termination, which
notice shall be effective upon the giving of such notice or such later date set
forth therein.
SECTION 9. Effect of Termination.
(a) Upon the termination of the Term of Employment and
Executive's employment hereunder due to Termination for Cause (as defined in
Section 8(a) above), neither Executive nor his beneficiary or estate shall have
any further rights or claims against the Company under this Agreement, except to
receive (i) the unpaid portion, if any, of the Base Salary provided for in
Section 5(a), computed on a pro rata basis to the Termination Date (based on the
actual number of days elapsed over the actual number of days elapsed over the
year in which such termination occurs), (ii) any unpaid accrued benefits of
Executive and (iii) reimbursement for any expenses for which Executive shall not
have been reimbursed as provided in Section 6(a).
(b) Upon the termination of Executive's employment hereunder due
to an Involuntary Termination, neither Executive nor
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his beneficiary or estate shall have any further rights or claims against the
Company under this Agreement except the right to receive the amounts set forth
in Section 9(a).
(c) Upon the termination of Executive's employment upon a
Termination Other Than for Cause (as defined in Section 8(b) above), neither
Executive nor his beneficiary nor his estate shall have any rights or claims
against the Company except to receive (i) the amounts set forth in 9(a), and
(ii) the lesser of (A) six months Base Salary as in effect at the time of the
Termination Other Than for Cause or (B) Executive's Base Salary for the balance
of the term of this Agreement.
(d) For purposes of this Section 9, if Executive is asked to
assume any duties or the material reduction of duties, either of which is
substantially inconsistent with the position of Chief Technology Officer of the
Company, Executive, upon 30 days notice to the Chief Executive Officer and the
Board of Directors setting forth in reasonable detail the respects in which
Executive believes such assignment or duties are substantially inconsistent with
the level of Executive's position, may resign from the Company and such
resignation will be treated as a Termination Other Than For Cause pursuant to
this Section 9.
(e) Upon termination of Executive's employment for Cause in
accordance with Section 8(a) hereof, the Company shall have an option to
repurchase (the "Repurchase Option") 50% of the shares of common stock (after
giving effect to the exercise of all outstanding options and warrants and the
conversion or exchange of outstanding securities into common stock) of the
Company then owned by Executive or any of his Affiliates at a purchase price
equal to $1.00 per share. The Company shall have the right to exercise the
Repurchase Option within 30 days of the effective date of termination of
Executive's employment for Cause in accordance with Section 8 hereof. For
purposes herein Affiliates shall be defined as (i) any entity controlled by or
under common control with Executive or (ii) the spouse, lineal descendant,
estate or a trust for the benefit of Executive.
SECTION 10. Insurance. The Company may, for its own benefit, in its
sole discretion, maintain "key-man" life and disability insurance policies
covering Executive. Executive will cooperate with the Company and provide such
information or other assistance as the Company may reasonably request in
connection with the Company's obtaining and maintaining such policies.
SECTION 11. Disclosure of Information. Executive will not, either
during the Term of Employment or at any time thereafter, divulge, publish,
communicate, furnish or make accessible to anyone any knowledge or information
with respect to the Company's confidential, secret or proprietary products,
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technology, methods, plans, materials and processes, or with respect to any
other confidential, secret or proprietary aspects of the business, activities or
products of the Company including, without limitation, (a) software programs,
source code, object code, product development information, research and
development projects or other technical data pertaining to the Company's
products (whether or not subject to patent, trademark or copyright protection)
or (b) any customer or client lists, telephone leads, prospects lists, sales
figures and forecasts, purchase costs, financial projections, advertising and
marketing plans and business strategies and plans; except as such items set
forth in clauses (a) and (b) above may already be in the public domain through
no fault of Employee (all of the foregoing items set forth in clauses (a) and
(b) being referred to herein collectively as "Confidential Property"). Upon the
termination of the Term of Employment, Executive shall return to the Company all
property (including Confidential Property) of the Company (or any subsidiary or
affiliate thereof) then in the possession of Executive and all books, records,
computer tapes or discs and all other material containing non-public information
concerning the business, clients or affairs of the Company or any subsidiary or
affiliate thereof.
SECTION 12. Right to Inventions. Executive shall promptly
disclose, grant and assign to the Company for its sole use and benefit any and
all marks, designs, logos, inventions, improvements, technical information and
suggestions relating in any way to the business conducted by the Company, which
he may develop or which may be acquired by Executive during the Term of
Employment (whether or not during usual working hours), together with all
trademarks, patent applications, letters, patent, copyrights and reissues
thereof that may at any time be granted for or upon any such mark, design, logo,
invention, improvement or technical information (collectively, "Inventions"). In
connection therewith, Executive shall (at the Company's sole cost and expense)
take all actions reasonably necessary or desirable to assign and/or confirm the
assignment of any Invention to the Company.
SECTION 13. Restrictive Covenant.
(a) The Company is in the business of developing, marketing,
licensing and supporting network software security products and also provides
consulting in network security, network design, troubleshooting and engineering
(the "Business"). Executive acknowledges and recognizes that the Business has
been conducted, and sales of its products have been made, throughout the United
States, and Executive further acknowledges and recognizes the highly competitive
nature of the industry in which the Business is involved. Accordingly, in
consideration of the premises contained herein, the consideration to be received
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hereunder, stock options to be granted Executive, Executive shall not, during
the Non-Competition Period (as defined below): (i) directly or indirectly
engage, whether or not such engagement shall be as a partner, stockholder,
affiliate or other participant, in any Competitive Business (as defined below),
or represent in any way any Competitive Business, whether or not such engagement
or representation shall be for profit, (ii) interfere with, disrupt or attempt
to disrupt the relationship, contractual or otherwise, between the Company and
any other person or entity, including, without limitation, any customer,
supplier, employee or consultant of the Company, (iii) induce any employee of
the Company to terminate his employment with the Company or to engage in any
Competitive Business in any manner described in the foregoing clause (i) (as
well as an officer or director of any Competitive Business), or (iv)
affirmatively assist or induce any other person or entity to engage in any
Competitive Business in any manner described in the foregoing clause (i) (as
well as an officer or director of any Competitive Business). Anything contained
in this Section 13 to the contrary notwithstanding, an investment by Executive
in any publicly traded company in which Executive and his affiliates exercise no
operational or strategic control and which constitutes less than 5% of the
capital of such entity shall not constitute a breach of this Section 13.
(b) As used herein, "Non-Competition Period" shall mean the
period commencing on the date hereof and terminating on the Termination Date;
provided, however, that if the Term of Employment shall have been terminated
pursuant to Section 8 (a), then "Non-Competition Period" shall mean the period
commencing on the date hereof and ending on the second anniversary of the
Termination Date. "Competitive Business" shall mean any business in any State
of the United States engaged in the development, marketing and licensing of
network software security products, or in any other line of business in which
the Company was engaged or had a formal plan to enter as of the Termination
Date; provided, however, during the period beginning on the Termination Date and
ending on the second anniversary thereof, Executive shall not be precluded from
engaging in consulting services in the computer industry including, but not
limited to, network design, troubleshooting and engineering.
(c) Executive understands that the foregoing restrictions may
limit his ability to earn a livelihood in a business similar to the business of
the Company, but he nevertheless believes that he has received and will receive
sufficient consideration and other benefits as an employee of the Company and as
otherwise provided hereunder and pursuant to other agreements between the
Company and Executive to justify clearly such restrictions which, in any event
(given his education, skills and ability), Executive does not believe would
prevent him from earning a living.
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SECTION 14. Enforcement; Severability; Etc. It is the desire and
intent of the parties that the provisions of this Agreement shall be enforced to
the fullest extent permissible under the laws and public policies applied in
each jurisdiction in which enforcement is sought. Accordingly, if any particular
provision of this Agreement shall be adjudicated to be invalid or unenforceable,
such provision shall be deemed amended to (a) delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such provision in the particular jurisdiction in
which such adjudication is made or (b) otherwise to render it enforceable in
such jurisdiction.
SECTION 15. Remedies. Executive acknowledges and understands that
the provisions of this Agreement are of a special and unique nature, the loss of
which cannot be adequately compensated for in damages by an action at law, and
that the breach or threatened breach of the provisions of this Agreement would
cause the Company irreparable harm. In the event of a breach or threatened
breach by Executive of the provisions of this Agreement, the Company shall be
entitled to an injunction restraining him from such breach. Nothing contained in
this Agreement shall be construed as prohibiting the Company from or limiting
the Company in pursuing any other remedies available for any breach or
threatened breach of this Agreement.
SECTION 16. Notices. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if personally delivered or if sent
by a nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
if to the Company, to: Network-1 Security Solutions, Inc.
909 Third Avenue, 9th Floor
New York, New York 10022
Fax: (212) 293-3090
Telephone: (212) 293-3068
Attention: Avi Fogel, President
and Chief Executive Officer
with copies to: Bizar Martin & Taub, LLP
1350 Avenue of the Americas
29th Floor
New York, NY 10019
Fax: (212) 581-8958
Telephone: (212) 265-8600
Attention: Sam Schwartz, Esq.
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if to Executive, to: William Hancock
4907 Wareham Drive
Arlington, Texas 76017
or to such other address as the party to whom notice is to be given may have
furnished to the other party or parties in writing in accordance herewith. Any
such notice or communication shall be deemed to have been received (a) in the
case of personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, (c) in the case of telecopy transmission, when received, and (d) in
the case of mailing, on the third business day following that on which the piece
of mail containing such communication is posted.
SECTION 17. Binding Agreement; Benefit. The provisions of this
Agreement will be binding upon, and will inure to the benefit of, the respective
heirs, legal representatives, successors and assigns of the parties.
SECTION 18. Governing Law. This Agreement will be governed by,
construed and enforced in accordance with, the laws of the State of
Massachusetts (without giving effect to principles of conflicts of laws).
SECTION 19. Waiver of Breach. The waiver by either party of a
breach of any provision of this Agreement must be in writing and shall not
operate or be construed as a waiver of any other breach.
SECTION 20. Entire Agreement; Amendments. This Agreement contains
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements or understandings between the parties
with respect thereto. This Agreement may be amended only by an agreement in
writing signed by the parties.
SECTION 21. Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
SECTION 22. Assignment. This Agreement is personal in its nature
and the parties shall not, without the consent of the other, assign or transfer
this Agreement or any rights or obligations hereunder; provided, however, that
the Company may assign this Agreement to any of its subsidiaries and affiliates.
SECTION 23. Gender. Any reference to the masculine gender shall be
deemed to include the feminine and neuter genders unless the context otherwise
requires.
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SECTION 24. Counterparts. This Agreement may be executed in
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Employment Agreement as of the date first written above.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
--------------------------------
Avi A. Fogel, President and
Chief Executive Officer
/s/ William Hancock
--------------------------------
William Hancock
<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of this 4th day of April, 1994, by and
between NETWORK-1 SOFTWARE & TECHNOLOGY, INC., a Delaware corporation with a
principal place of business at 33-20 28th Street, Long Island City, NY 11101
(hereinafter referred to as the "Company") and ROBERT RUSSO, residing at
33-20 28th Street, Long Island City, NY 11106 (hereinafter referred to as
"Executive").
W I T N E S S E T H:
WHEREAS, Executive is President and Chief Operating Officer of the
Company; and
WHEREAS, Executive's services have and will continue to constitute a
major factor in the growth and development of the Company; and
WHEREAS, the Company desires to employ and retain the experience, ability
and services of Executive as President and Chief Operating Officer;
NOW, THEREFORE, it is mutually agreed by and between the parties hereto
as follows:
1. EMPLOYMENT
The Company hereby agrees to employ Executive as its President and Chief
Operating Officer and Executive hereby accepts such employment subject to and
upon the terms and conditions of this Agreement.
2. DUTIES
Executive shall, during the term of his employment with the
<PAGE>
Company, devote his full business time and efforts to the affairs of the
Company and shall perform such functions consistent with such office as the
Board of Directors of the Company may reasonably request.
3. COMPENSATION
As compensation for his services hereunder, the Company shall pay
Executive, a salary payable bi-weekly in the amount of $145,000 per annum for
the first year of Executive's employment; and for each year thereafter at a
rate equal to ten (10%) percent above the previous year's salary. Executive
may also receive such bonus compensation as the Board of Directors, in its
sole discretion, may determine; provided that as long as a designee of the
Purchasers (as defined in the Stock Purchase Agreement dated as of April ___,
1994, among the Company and such Purchasers) (the "Purchasers Designee") is a
member of the Board of Directors of the Company, any such bonus compensation
shall be approved by such Purchasers Designee.
4. REIMBURSEMENT OF EXPENSES
The Company shall also reimburse Executive for all reasonable expenses
incurred in connection with his performance of services hereunder, including,
but not limited to, expenses for business travel, entertainment and meals,
upon Executive's presentation of an itemized account of such expenditures.
Executive's substantiation of such expenses shall be made in a manner
acceptable to the Company and as required by the Internal Revenue Service.
5. TERM
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This Agreement shall be for a term of three (3) years commencing upon the
date hereof, unless sooner terminated pursuant to the terms herein.
6. TERMINATION
The Company shall have the right to terminate this Agreement for cause if
Executive shall commit any of the following acts of default (the "Act(s) of
Default"):
(i) Executive shall have materially breached any of the
provisions or covenants set forth herein; or
(ii) Executive shall have committed any material act of
malfeasance, disloyalty or breach of trust against the Company; or
(iii) Executive shall have committed any act of gross
negligence or bad faith in the performance of his duties and obligations
hereunder.
In the event the Company elects to terminate this Agreement as set forth
above, the Company shall send written notice of termination to Executive
describing the action of Executive constituting the Act of Default, and this
Agreement shall terminate ten (10) days after the date of postmark of such
written notice. In the event this Agreement is terminated for cause pursuant
to this paragraph, Executive shall not be entitled to receive any
compensation or additional benefits pursuant to Sections 3 and 7 hereof after
the date of termination. Nothing contained in this Agreement shall be deemed
to limit any other rights the Company may have to terminate Executive's
employment hereunder upon any ground permitted by law.
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7. ADDITIONAL BENEFITS
Nothing contained herein shall be deemed to limit or affect the right of
Executive to receive other forms of additional compensation or to participate
in any retirement, disability, profit sharing, stock option, cash bonus or
other plan or arrangement, or in any other benefits now or hereafter provided
by the Company for executives of similar position.
8. DEATH OR DISABILITY
(a) In the event that Executive shall become incapacitated by
reason of mental or physical disability or otherwise during the term of this
Agreement so that he is prevented from performing his principal duties and
services hereunder for a period of four (4) consecutive months, or for
shorter periods aggregating four (4) months in any twelve (12) month period,
the Company shall have the right to terminate this Agreement by sending
written notice of termination to Executive, and thereupon his employment
pursuant to this Agreement shall terminate; provided, however, in such event,
the Company shall pay to Executive the salary on a monthly basis as set forth
in Section 3 hereof for a period of six (6) months from the date of
termination.
(b) In the event of the death of Executive during the term of this
Agreement, the Company shall pay to his estate the salary on a monthly basis
as set forth in Section 3 hereof for the period of six (6) months from the
date of death.
9. RESTRICTIVE COVENANT
(a) Executive agrees that during the term of this Agreement or any
renewals or extensions hereof, and for a period of two (2)
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years thereafter in the event that Executive has breached this Agreement
including, without limitation, voluntary termination or has otherwise been
terminated for cause including as a result of any Act of Default as set forth
in Section 6 hereof, he will not, directly or indirectly, engage or
participate in any activity, make any financial investment, or become
employed by or become a principal or director of or render advisory or other
services to or for any person, firm or corporation located in the United
States that engages, directly or indirectly, in competition with any of the
business operations, activities or products of the Company including, but not
limited to, (i) network consulting and training and (ii) network management
and network security products (as such operations, activities and products
may exist at any time during the term of Executive's employment with the
Company). Nothing contained herein, however, shall restrict Executive from
making any investments in any business or enterprise whose securities are
listed on a national securities exchange or actively traded in the
over-the-counter market, which business or enterprise is or might be directly
or indirectly in competition with any of the business operations, activities
or products of the Company; provided, however, that such investment does not
result in Executive owning 5% or more of the outstanding voting securities of
such entity or otherwise give Executive the right to control or influence the
policy decisions of such business.
(b) Executive will not, either during the term of this Agreement or
at any time thereafter, divulge, furnish or make accessible to anyone
(otherwise than in the regular course of
5
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business of the Company) any knowledge or information with respect to
confidential or secret methods, plans, products, technology, materials, or
processes of the Company, or with respect to any other confidential or secret
aspects of the business, activities or products of the Company including,
without limitation, (x) products, technologies, processes, designs,
materials, developments, inventions or discoveries (whether or not subject to
patent, trademark or copyright protection) or (y) any customer or client
lists, telephone leads, prospects lists, advertising and marketing plans and
strategies and sales promotion materials, forms or literature; except as such
items set forth in clauses (x) and (y) may already be in the public domain
through no fault of Executive (all of the foregoing items set forth in
clauses (x) and (y) being referred to herein collectively as "Intangible
Property").
(c) Executive agrees that any such Intangible Property that he may
conceive, make, invent, develop or suggest during the term of this Agreement
(whether individually or jointly with any other person or persons), relating
in any way to the business or activities of the Company, shall be the sole,
exclusive and absolute property of the Company. Executive will immediately
disclose any such Intangible Property to Company, except where the same is
lawfully protected from disclosure to the Company as a trade secret of a
third party or by any other lawful bar to such disclosure. Executive shall
return all tangible evidence of Intangible Property to the Company prior to
or at the termination of his employment.
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(d) Executive agrees that during the term of this Agreement or any
renewals or extensions hereof, and for a period of two (2) year thereafter,
he will not:
(i) Directly or indirectly solicit, raid, entice or induce any
employee of the Company, or any subsidiary of the Company or any entity which
directly or indirectly is controlled by or is under common control with the
Company, to be employed by any other person, corporation or entity; or
(ii) Directly or indirectly approach any such employee for such
purposes; or
(iii) Authorize or knowingly approve the taking of such
actions by other persons on behalf of any such person, corporation or entity
or assist any such person, corporation or entity in taking such action.
(e) Executive agrees that during the term of this Agreement or any
renewals or extensions hereof, he will not at any time enter into on behalf
of the Company or cause the Company to enter into, directly or indirectly,
any transactions with any entity in which he or any member of his immediate
family may be interested as a partner, trustee, director, officer, employee,
shareholder, lender of money or guarantor, unless the material facts as to
his interest (or the interest of such family member) and as to the
transaction are disclosed or are known to the Board of Directors of the
Company and the transaction is authorized, approved and ratified by the
Directors.
(f) Executive acknowledges that the services to be rendered by him
hereunder are of a special, unique and extraordinary
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character and that it would be very difficult or impossible to replace such
services, and further that irreparable injury would be sustained by the
Company in the event of a violation by Executive of any of the provisions of
this Agreement and by reason thereof, Executive consents and agrees that if
he violates any of the provisions of this Agreement, the Company shall be
entitled to an injunction to be issued by any court of competent jurisdiction
restraining him from committing or continuing any violation of this
Agreement, in addition to all other remedies available to the Company under
this Agreement or otherwise.
10. REPRESENTATION AND WARRANTY OF EXECUTIVE
Executive represents and warrants that he is not a party to any
agreement, contract or understanding, whether of employment or otherwise, or
under any physical or mental disability which would in any way restrict or
prohibit him from undertaking or performing in accordance with the terms and
conditions of this Agreement.
11. SEVERABILITY
If any provision of this Agreement shall be held invalid or
unenforceable, the remainder of this Agreement shall nonetheless remain in
full force and effect. In the event that a court of competent jurisdiction
determines that any covenant set forth herein is impermissibly broad in
scope, duration or geographical area, then the parties intend that such court
should limit the scope duration or geographical area of such covenant to the
extent and only to the extent necessary to render such covenant reasonable
and enforceable, and enforce the covenant as so limited.
12. NOTICES
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All notices required or permitted to be given under the terms of this
Agreement shall be in writing and shall be deemed to have been duly given as
of the date of postmark if delivered to the addressee by certified mail,
return receipt requested as follows:
IF TO THE COMPANY: Network-1 Software & Technology, Inc.
2307 Roosevelt Drive
Arlington, Texas 76016
Attn.: William Hancock
Executive Vice President
WITH A COPY TO: Bizar & Martin
485 Madison Avenue
New York, NY 10002
Attn: Sam Schwartz, Esq.
IF TO EXECUTIVE: Robert Russo
33-20 28th Street
Long Island City, NY 11106
13. BENEFIT
This Agreement shall inure to, and shall be binding upon, the parties
hereto and the successors and assigns of the Company and the personal
representatives and heirs of Executive.
14. WAIVER
The waiver by either party of any breach or violation of any provision of
this Agreement shall not operate or be construed as a waiver of any
subsequent breach or violation hereof. Any such waiver must be in writing and
signed by the party charged with making the same.
15. GOVERNING LAW
This Agreement shall be governed by and construed in all respects in
accordance with the laws of the State of New York, without regard to its
principles of conflict of laws.
16. ENTIRE AGREEMENT
This Agreement supersedes all prior agreements and
9
<PAGE>
understandings between the Company and Executive and contains the entire
agreement between the parties hereto with respect to the subject matter
hereof. No modification, addition or amendment shall be made hereto, except
by written agreement signed by both parties hereto and approved by the
uanimous consent of the Board of Directors so long as the Purchasers Designee
is a member of the Board of Directors.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
By:/s/ William Hancock
-----------------------------
William Hancock,
Executive Vice President
EXECUTIVE:
/s/ Robert Russo
--------------------------------
Robert Russo
10
<PAGE>
February 16, 1996
Mr. Robert Russo
Network-1 Software & Technology, Inc.
909 Third Avenue
New York, New York 10022
Re: Extension of Employment Agreement
Dear Bob:
This letter agreement shall supplement the Employment Agreement, dated
April 4, 1994, between yourself and Network-1 Software & Technology, Inc. and
shall serve to extend the term of said Employment Agreement for an additional
two (2) year period expiring April 4, 1999.
If the foregoing correctly confirms our understanding, kindly execute this
agreement at the appropriate place provided below.
Very truly yours,
Network-1 Software & Technology
Inc.
By: /s/ William Hancock
---------------------------------
William Hancock, Vice-President
Agreed and Accepted:
/s/ Robert Russo
- ---------------------------
Robert Russo
<PAGE>
Exhibit 10.6
June 30, 1998
Avi A. Fogel, President and Chief Executive Officer
Network-1 Security Solutions, Inc.
909 Third Avenue - 9th Floor
New York, New York 10022
Dear Avi:
This letter shall confirm that each of the undersigned agree that the
provision in paragraph 3 of our respective employment agreements, dated April 4,
1994, and as amended on February 16, 1996, with Network-1, providing for a 10%
increase in salary was waived by us at the time we were eligible for such 10%
increases due to the financial circumstances of Network-1 and we will make no
claim for such 10% increase at any time in the future.
Very truly yours,
/s/ Robert Russo
------------------------------
Robert Russo
/s/ William Hancock
------------------------------
William Hancock
N/A
------------------------------
Kenneth Conquest
AGREED AND ACCEPTED:
Network-1 Security Solutions, Inc.
By /s/ Avi A. Fogel
---------------------------------------
Avi A. Fogel, President and
and Chief Executive Officer
<PAGE>
Exhibit 10.7
[LOGO] LEASE AND SERVICE AGREEMENT
This Agreement is made this 5th day of June, by and between ALLIANCE Wellesley
LP d/b/a ALLIANCE Business Centers ("Lessor") having offices known in the
building located at 70 Walnut Street, Wellesley Massachusetts 02181 (the
"Facility and or the "Building") and Network-1 Software and Technology, Inc.,
("Lessee") a New York corporation with an address of 909 Third Avenue, New York,
NY 10022.
The parties for themselves, their heirs, legal representatives, successors and
assigns, agree as follows:
1. Demise and Description of Property.
a. Lessor Leases to Lessee and Lessee leases from Lessor, the "Premises"
(defined below), being a subpart of Lessor's total leased facility space, for
the term and subject to the conditions and covenants hereinafter set forth and
to all encumbrances, restrictions, zoning laws, regulations or statutes
affecting the Building, Facility or Premises.
b. The Premises consists of Facility office space number(s) #411 & 412 as
shown in the floor plan amended hereto. Lessor hereby grants Lessee the
privilege to use in common with other lessees and parties that Lessor may
designate certain office amenities located in the Facility, the use of all of
which are subject to such reasonable rules and regulations as Lessor currently
has in place and may adopt from time to time. The amenities are more
particularly described in attached Exhibit "A." "The Operating Standards" as
presently in place and governing the use of the Premises and the Facility are
attached in Exhibit "B".
2. Use.
a. The premises shall be used by Lessee solely for a software and
technology business and such other normally incident uses and for no other
purpose, in strict accordance with the Operation Standards. Additionally, Lessor
shall not offer at the Premises any services which Lessor provides to its
lessees, including, but not limited to those amenities or services described in
attached Exhibit "A." In the event Lessee breaches any provision of this
paragraph, Lessor shall be entitled to exercise any rights or remedies available
to the Lessor pursuant to this Agreement together with such other rights and
remedies as the Lessor may otherwise have and choose to exercise.
b. Lessee shall not make nor permit to be made any use of the Premises
which would violate any of the terms of this Agreement or which, directly or
indirectly, is forbidden by statute, ordinance or government regulations, which
may be dangerous to life, limb or property, which may invalidate or increase the
premium of any policy of insurance carried on the building or on the Facility,
which will suffer or permit the Premises to be used in any manner or anything to
be brought into or kept there which, in the sole judgment of lessor, shall in
any way impair or tend to impair the high quality character, reputation or
appearance of the Building or the Facility, or which may or tend to impair or
interfere with any services performed by Lessor or Lessee or for others.
3. Term.
a. The term of this Agreement shall be for a period of three months,
commencing 9:00 a.m. on the first day of June, 1998, and ending 5:00 p.m. on the
last day of August 31, 1998, unless renewed as provided in paragraph "3(b)"
herein.
b. Upon the ending term date set forth herein or any extension thereof,
the Agreement shall be extended for the same period of time as the initial term
and upon the same terms and conditions as herein contained except for the amount
of base rental charges, which shall each be increased by seven percent (7%),
unless either party notifies the other in writing by certified or registered
mail, return receipt requested, or delivered by hand that the Agreement shall
not be extended within the period hereinafter specified or automatically
renewed. If Lessee has less than three offices, such notice shall be given at
least 60 days prior to the expiration date of this Agreement. If Lessee has
three or more offices, such notice shall be given at least 90 days prior to the
expiration date of this Agreement.
c. In the event the entire Premises or the Facility are damaged, destroyed
or taken by eminent domain or acquired by private purchase in lieu of eminent
domain so as to render the Premises fully untenantable and unrestorable in
Lessor's sole judgment, then within 90 days thereafter by written notice to the
other party, either party shall be able to terminate this Agreement, which will
terminate as of the date thereof.
4. Rent.
a. For and during the term of this Agreement, Lessee shall pay Lessor as
rent for the Premises a total rental of $7,680.00, payable in equal monthly
installments of $2,560.00, each payable in advance of the first day of each
calendar month after the commencement of the term, or a daily prorated amount
for any partial calendar month during the term. If any payment of rent or other
charges due under this Agreement is not received within five (5) calendar days
after its due date, the Lessee will also pay, as additional rent, a late payment
charge which shall be an amount equal to 10% of any amount owed to Lessor or $50
whichever is greater.
b. It is additionally specifically covenanted and agreed that the
financial terms of this Agreement are strictly confidential and Lessee agrees
not to knowingly or willfully divulge this information to or any other Lessee or
potential Lessee of Lessor. Any such disclosure by the Lessee of the financial
terms of this Agreement as
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set forth herein above, shall constitute a material breach of this lease.
c. the first such payment of rental as well as the payment of the Deposit
as set forth below shall be paid by Lessee simultaneously with execution of this
Agreement. Should the Lessee fail to make such payment prior to the commencement
of the term of this Agreement, then, at Lessor's sole option, the agreement
shall be null and void and of no further effect.
d. The rental payable during the term of this agreement shall be increased
on the first day of the month following notification of any rental increase
(however designated) which the Lessor might receive from the Lessor's
over-landlord ("Building"). The term "direct expenses" as used herein shall
refer to the same items and costs as are used by the building in its
determination of expenses and costs passed on to Lessor. Lessor shall
immediately notify lessee in writing of any such increase, and shall bill lessee
upon such notification for each and every month thereafter for the balance of
the term.
e. Rent charges are based on the value of the rental Premises and services
to be used by four person(s) only. If more than said number of person(s)
habitually use the Premises or services, the Fixed Monthly Rental charges will
be increased by a factor of $100.00 for each additional person who habitually
uses the Premises.
f. If a Lessee check is returned for any reason, Lessee will pay an
additional charge of $100.00 per returned check and, for the purpose of
considering default and/or late charges, it will be as if the payment
represented by the returned check had never been made.
5. Security Deposit.
a. Lessee shall deposit with lessor $3,840.00 or the equivalent of 1.5
months rent, in good or certified funds with a domestic bank, as a non-interest
bearing security deposit. Lessor may use the security deposit to cure any
default of Lessee under this Agreement, restore the Premises including any and
all furniture, fixtures and equipment provided by Lessor and vendors at the
Premises to their original condition and configuration, reasonable wear and tear
excepted, to pay for repairs to any damage to the Premises. Executive Suite or
Building caused by Lessee or lessee's guests, to pay any rent or other charges
which lessee owes Lessor at or prior to the expiration of this Agreement, and to
reimburse Lessor for costs or expenses arising from any other obligation of
Lessee which Lessee has failed to perform. If lessor transfers control or
ownership of the Premises and Lessor transfers the security deposit to such
purchaser, Lessee will look solely to the new Lessor for the return of the
Security deposit, and the lessor named in this Agreement shall be released from
all liability for the return of the security deposit.
b. The security deposit (less any sums used by Lessor in accordance with
the terms and conditions of this Agreement) will be returned within sixty (60)
days after the termination of any services rendered or expiration of the term
hereof. The security deposit shall not under any circumstances be applied in
lieu of , be the final payment(s) of fixed Monthly rental charges or service
charges under this Agreement.
c. In the event that by reason of the Lessee's default in its obligations
pursuant to this Agreement or otherwise, including But not limited to the
payment of the Fixed Monthly Rental Charge, any amounts due by reason of the
Lessee's use of additional services hereto and/or by reason of the Lessee's use
of telephone services as supplied pursuant to this Agreement. Lessor shall be
entitled to apply any of the security deposited pursuant to this Agreement to
any outstanding sums due or owing to the Lessor, and Lessor shall have the right
to charge the Lessee, as additional rent, such sums as are necessary to
replenish any and all amounts applied so as to cause the security to be returned
to its entire amount. The failure to pay such amounts as are necessary to
replenish the security shall be considered a breach of this Agreement and shall
entitle the Lessor to exercise any of its rights pursuant to this Agreement or
otherwise.
6. Delivery of Possession.
If, for any reason whatsoever, Lessor cannot deliver possession of the
Premises to Lessee at the commencement of the term, this Agreement shall not be
void nor voidable nor shall Lessor be liable to lessee for any loss or damage
resulting therefrom; but there shall be an abatement of rent for the period
between the stated term commencement and the time when Lessor does deliver
possession of the Premises.
7. Services.
a. So long as Lessee is not in default hereunder, Lessor shall make
available certain amenities to Lessee as more particularly described in Exhibit
"A." Such services shall be offered to Lessee, in conjunction with such services
being offered by Lessor to its other Lessees, without charge for the reasonable
use of the same.
b. In addition, provided Lessee is not in default hereunder and provided
the cost thereof does not exceed the Security Deposit, Lessor shall make
available to Lessee certain other services the cost of which shall be billed to
the Lessee as additional rent and the payment of which shall be subject to the
same terms and conditions as those governing the payment of the Fixed Monthly
Rental Charge herein regardless of when such charges are billed to the Lessee.
8. Telephone Services.
a. Provided Lessee is not in default of any of the terms, covenants,
conditions or provisions of this Agreement, Lessor will make available to
Lessee, a telecommunications package which will consist of some combination of
telephone equipment, numbers, lines, conference calling, voice mail, local, long
distance and international service, and directory listing. All components of the
telecommunications package including any telephone numbers used by Lessee will
remain at all times the property of Lessor and Lessee will acquire no rights in
the components beyond the term specified by Lessor.
b. Upon Lessee's written request, Lessee shall be entitled to appoint
Lessor as its exclusive agent for the sole purpose of procuring and arranging
Lessee's local "white pages" listings, Lessor shall have no involvement nor
responsibility for any "yellow pages" listings desired by Lessee.
c. Lessor shall not be liable for any interruption or error in the
performance of its services to Lessee under this Section. Lessee waives any
recourse as against the Lessor for any claimed Liability arising from the
provision of telecommunication services including, but not limited to; injuries
to persons or property arising out of mistakes, omissions, interruptions,
delays, errors or defects in transmissions occurring in the course of furnishing
telecommunications services provided same are not caused by the willful acts of
the Lessor, as well any claim for business interruption and for consequential
damages.
d. Lessor shall use reasonable efforts to provide Telephone services to
Lessee in a first-class, professional manner. Telephone
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service charges shall be as per Lessor's then scheduled rates for the same, or
as the same may be amended by Lessor from time to time.
e. In the event that any toll fraud is traceable to telecommunications
services employed by Lessee, such toll fraud shall be deemed to be a material
default in the Lessee's obligations hereunder. Lessee further hereby agrees to
indemnify, hold harmless and to reimburse Lessor for all charges associated with
any such toll fraud including, but not limited to, unauthorized use of calling
cards or telephone lines.
f. It is expressly acknowledged and agreed that Lessor shall be the sole
and exclusive provider of telecommunication services to Lessee. Lessee hereby
agrees and covenants that it will not sue any other telephone service or
telephone carrier to provide it service in the Premises. In the event that
Lessee uses or acquires any other telephone service at the Premises, such use
and/or installation shall constitute a material default in the Lessee's
obligations hereunder.
9. Furniture and Fixtures.
At its own cost and expense, Lessor shall furnish and install furniture,
fixtures and equipment as are in Lessor's sole opinion necessary to provide
suitable office accommodations for Lessee, upon such terms and conditions
routinely applicable to the Facility. All such furniture, fixtures and equipment
shall remain Lessor's property.
10. Insurance; Waiver of Claims.
a. Lessor has no obligation to and will not carry insurance for Lessee's
benefit. Lessor will not be liable to Lessee or to any other person for damages
on account of loss, damage or theft, to any business or personal property of
Lessee. Lessee hereby waives any claims against Lessor from any loss, cost
liability or expense (including reasonable attorneys' fees) arising from
Lessee's use of the Premises or any common areas made available to Lessee by
Lessor or from the conduct of Lessee's business, or from any activity, work, or
thing done in the Premises or common areas by Lessee or Lessee's agents,
contractors, visitors or employees. To the extent that Lessor has any liability
for any of the forgoing pursuant to any law, ordinance or statute, Lessee shall
seek recovery for such loss(es)/or damage(s) from its own insurance company as
provided for in subparagraph (c) herein prior to making any claims against
Lessor.
b. The Lessor shall not be liable or responsible to the Lessee for any
injury or damage resulting from the acts or omissions of Lessor, its employees,
persons leasing office space or obtaining services from the Lessor, or other
persons occupying any part of the Premises or Building, or for any failure of
services provided such as water, gas or electricity, HVAC or for any injury or
damage to person or property caused by any person except for such loss or damage
arising from the willful or grossly negligent misconduct of the Lessor, its
agents, servants, or employees or from the Lessor's failure to make repairs
which it is obligated to make hereunder. Neither Lessor or any of its agents,
employees, officers or directors shall be responsible for damages resulting from
any error, omission or defect in any work performed or provided as part of the
services rendered, whether uncompensated services or compensated services.
c. Lessee shall provide Lessor with a certificate of insurance evidencing
General/Public Liability coverage with liability limits not less than One
Million Dollars ($1,000,000) per occurrence for Bodily Injury and/or Property
Damage Liability and One Hundred Thousand Dollars ($100,000) per occurrence for
Fire/Legal Liability. Said insurance coverage shall remain in force during the
term of this Agreement and renewals thereof. The Lessor, Alliance National, Inc.
and Alliance Business Centers, Inc. shall be named as an additional named
insured on each of these policies. Lessee's failure to provide or maintain such
insurance shall not reduce or otherwise alter Lessee's liability or
responsibility to pay any judgement rendered against Lessee for such Liability
and Damages. Failure to maintain such insurance and/or to name the Lessor and
its designees, as set forth above, shall constitute a material breach of this
Agreement.
d. Both parties hereby agree to defend, indemnify and hold the other
harmless from and against any and all claims, damages, injury, loss and expenses
to or of any person or property resulting from the acts or negligence of their
agents, employees, invitees and/or licensees while in the Building, Executive
Suite and/or Premises.
e. Any fire and extended risk casualty insurance that Lessee maintains
shall include a waiver of subrogation in favor of Lessor and Building Landlord,
and any fire and extended risk insurance carried on the Facility by Lessor shall
likewise contain a waiver of subrogation in favor of Lessee.
11. Waiver of Breach.
Should Lessor not insist upon the strict performance of any term or
condition of this Agreement or to exercise any right or remedy available for a
breach thereof, and no acceptance of full or partial payment during the
continuance of any such breach shall constitute a waiver of any such breach or
any such term or condition. No term or condition of this Agreement required to
be performed by Lessee and no breach thereof, shall be waived, altered or
modified, except by a written instrument executed by Lessor. No waiver of any
breach shall affect or alter any term or condition in this Agreement, and each
term or condition shall continue in full force and effect with respect to any
other than existing or subsequent breach thereof.
12. Operating Standards.
The Operating Standards attached to this Agreement as Exhibit "B" are
hereby made an integral part of this Agreement. Lessee, its employees, agents,
guests, invitees, visitors and/or any other persons caused to be present in and
around the Premises by the Lessee shall perform and abide by the rules and
regulations and any amendments or additions to said rules and regulations as
Lessor may make. In addition, Lessee, its employees and agents shall abide by
all applicable governmental rules, regulations, statutes and ordinances relating
in any way to the Premises or the Facility or Lessee's use or occupancy of the
Premises or the Facility, failing which Lessee shall be in default hereunder and
shall pay any fines or penalties imposed for such violation(s) directly to the
appropriate governmental authority or to the Lessor, if Lessor has paid such
amount on behalf of Lessee. Such remedy shall not be exclusive. It is hereby
further explicitly agreed and understood that full compliance with the Operating
Standards as set forth constitutes a material obligation of this Agreement, and
that the failure to so comply shall constitute a violation of this Agreement
entitling the Lessor to exercise any of its remedies pursuant to this Agreement
or otherwise.
13. Employment of Lessor's Employees.
a. Lessee agrees that it will not, during the term of this Agreement and
any renewals thereof, or for the period of one year
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after the expiration or sooner termination of this Agreement, hire or issue an
offer to employ any person who is or has been an employee of Lessor or Lessor's
agent without prior consent from Lessor. If Lessee either hires an employee of
Lessor or Lessor's agent; or hires any person who has been an employee of Lessor
or its agent within six months prior to the time they are hired by Lessee,
Lessee will, at Lessors sole option, be liable to Lessor for liquidated damages
equal to six months wages of the employee, at the rate last paid that employee
by Lessor.
b. If Lessor assists in hiring an employee for Lessee, Lessee shall pay to
the Lessor a commission equal to 20% of that employee's annual salary. The
provisions hereof shall survive the expiration or sooner termination of the term
thereof.
14. Alteration.
If Lessee requires any special wiring or office alterations for
extraordinary business machines or other purposes not consistent with the
current wiring, extraordinary telephone equipment or computer equipment. Such
alteration shall be done (i) only with the express written permission of the
Lessor, and if said permission is granted, then (ii) by an agent designated by
Lessor at Lessee's cost. The electrical current shall be used for ordinary
lighting purposes only, unless written permission to do otherwise shall first
have been obtained from Lessor at an agreed cost to Lessee. Lessor further
reserves the sole and exclusive right to limit the number and type of lines and
telephone equipment Lessee can install in the leased Premises.
15. Re-Entry.
Lessor and its agents shall have the right to enter the Premises at any
time for the purpose of making any repairs, alterations, inspections which it
shall deem necessary for the preservation, safety or improvements of said
Premises, without in any way being deemed or held to have committed an eviction
(constructive or otherwise) of or trespass against Lessee.
b. In the event that any such relocation is effected, the Lessee hereby
acknowledges that, unless otherwise agreed in writing, that all of the terms and
conditions of this Agreement shall remain in full force and effect.
16. Relocation.
a. Lessee agrees that the Lessor may, in its sole discretion, relocate the
lessee from its present Premises to a like or similar office space within the
same facility upon ten (10) days notice to the Lessee. In the event that the
Lessor requires the Lessee to relocate, the Lessor hereby agrees to bear the
reasonable cost of any such relocation, which cost shall be limited to the cost
associated with the physical transfer of the Lessee's property to any different
office, which the Lessor may designate.
17. Assignment and Subletting.
No assignment or subletting of the Premises, this Agreement or any part
thereof shall be made by Lessee without Lessor's prior written consent which
consent may be withheld for any or no reason in Lessor's sole discretion.
Neither all nor any part of Lessee's interest in the Premises or this Agreement
shall be encumbered, assigned or transferred, in whole or in part, either by act
of the Lessee of by operation of law.
18. Surrender.
a. On expiration of the term, any extended term, or sooner termination of
this Agreement, Lessee shall promptly surrender and deliver the Premises to
Lessor, without demand, and in as good condition as when let, ordinary wear and
tear excepted.
b. Upon Lessee serving a notice of cancellation as provided in 3b herein
Lessor shall have the right to show Lessee's Premises during the 60 day period
(for one or two offices) or 90 day period (for three or more offices) as the
case may be.
c. Without prior written approval of Lessor, Lessee shall not remove any
of its property from the Premises upon termination of this Agreement or at any
other time, except during Lessor's normal business hours. In the event Lessor
consents to Lessee's removing property before or after normal business hours,
any expenses incurred by Lessor as a result, including but not limited to
expenses for personnel, security, elevator, utilities and the like shall be paid
by Lessee in advance, to the extent determinable by Lessor, by certified and/or
bank check.
d. If Lessee vacates the Premises and leaves behind any property,
whatsoever, same will be deemed abandoned by Lessee and may be disposed of by
Lessor at Lessee's expense. If Lessee defaults in the payment of sums due to
Lessor, and Lessor changes the locks, removes Lessee's property, or otherwise
denies access to Lessee, Lessor shall not be liable for conversion or partial,
actual and/or constructive eviction.
19. Holding Over.
a. In the event that Lessee, should not renew this Agreement in accordance
with the terms and conditions hereof, and/or fail to surrender the Premises upon
the expiration of the term of the Agreement as provided herein. Lessee agrees to
pay Lessor, as liquidated damages, a sum equal to twice the monthly rent and all
additional charges for services provided by Lessor to Lessee, for each month
that Lessee retains possession of the Premises or any part thereof, provided,
however, that the acceptance of such sums, representing liquidated damages shall
not be deemed to be permission to Lessee to continue in possession of the
Premises.
20. Default and Remedies.
a. If the Lessee shall default in fulfilling any of its terms, conditions,
covenants or provisions of this Agreement, including but not limited to:
1. Payment of fixed Monthly Rental Charges and/or any other charges
hereunder within ten days of the date such charges become due;
2. Becomes comes insolvent, makes an assignment for benefit or creditors,
or files a voluntary petition under any bankruptcy or insolvency law, or
has filed against it an involuntary petition under any such law;
3. Defaults in fulfilling any of the terms, conditions, covenants or
provisions of this Agreement including but not limited to the breach of
any of the terms and conditions set forth in the exhibits attached hereto;
4. The abandonment and/or vacatur of the Premises by the Lessee;
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then, after five days notice of any such default(s), the Lessor may, at its sole
discretion, terminate this Agreement upon five days notice to the Lessee, and
upon the expiration of such notice period, the Lessee shall quit and surrender
the Premises to the Lessor. In the event that the Lessee fails to quit and
surrender the Premises, the Lessor may re-enter and take possession of the
Premises and remove all persons and property therefrom, as well as disconnect
any telephone lines installed for the benefit of Lessee, without any liability
whatsoever to Lessee. In addition, Lessor may elect concurrently or alternately
to accelerate all of Lessee's obligations hereunder including without limitation
the rental, direct expenses, Schedule B Costs, and Telephone Services costs,
and/or the re-letting of the Premises or any part thereof, for all or any part
of the remainder of said term, to a party satisfactory to Lessor, at any monthly
rental rate. Lessor, in its sole discretion, may accept notwithstanding the
foregoing. Lessor shall have no obligation, implied or otherwise, to mitigate
its damage(s) under such circumstances.
b. Should Lessor be unable to re-let the Premises, or should each monthly
re-rental be less than the rental, Lessee is obligated to pay under this
Agreement or any renewal thereof, at Lessor's option Lessee shall pay the amount
of such deficiency, plus the expenses of reletting, immediately in one lump sum
(if allowable under law) to Lessor upon demand and/or as such obligations
accrue.
c. If Lessee shall default in the observance or performance of any term or
covenant on Lessee's part to be observed or performed under or by virtue of any
of the terms or provisions in any article of this lease, then, unless otherwise
provided elsewhere in this lease. Lessor may immediately or at any time
thereafter and with notice perform the obligation of Lessee thereunder, and if
Lessor in connection therewith or in connection with any default by Lessee in
the covenant to pay rent hereunder, makes any expenditures or incurs any
obligations for the payment of money, including but not limited to attorney's
fees, in instituting, prosecuting or defending any actions or proceeding, such
sums so paid or obligations incurred with interest and costs shall be deemed to
be additional rent hereunder and shall be paid by Lessee to Lessor rendition of
any bill or statement to Lessee therefor, and if Lessee's lease term shall have
expired at the time of making of such expenditures or incurring of such
obligations, such sums shall be recoverable by Lessor as damages.
21. Mail & Telephone Forwarding.
a. After termination or expiration of the term of this Agreement, Lessee
hereby agrees that it will take all reasonable steps to notify all parties of
Lessee's new address and phone numbers. Lessor shall have no obligation, to
notify any person or entity of Lessee's new address and/or phone numbers, except
as expressly provided herein.
b. Lessor will, unless otherwise instructed by Lessee in writing, forward
mail to Lessee at its new address and give out new telephone number via voice
mail message for a period of three (3) months at the rate of $150.00 per month,
which sums shall be deducted from any amounts deposited with the Lessor as
security hereunder and paid to the Lessor in advance. In the event that there is
not sufficient security remaining on deposit to pay for the charges set forth
herein, unless the Lessee shall pay the charges set forth herein to the Lessor
in advance, Lessor shall have no obligation to provide the services set forth
herein.
22. Notices.
Any notice under this Agreement shall be in writing and shall be either
delivered by hand or by first class mail to the party at the address set forth
below. Lessor hereby designates its address as:
ALLIANCE BUSINESS CENTERS
70 Walnut Street
Wellesley, MA 02181
Attn: Management
With a copy by regular first class mail to:
ALLIANCE Business Centers
122 East 42nd Street, Suite 2707
New York, NY 10168
Attn: Legal Department
Lessee hereby designates its address (which address must be an address within
the United States), as
Mr. Sam Schwartz
Bizar, Martin & Taub, LLP
1350 Avenue of Americas
New York, NY 10019
212-265-8600
212-581-8958
If such mail is properly addressed and mailed, as above, it shall be deemed
notice for all purposes, given when sent or delivered, even if returned as
undelivered.
23. Landlord's Election Under This Agreement.
Upon early termination of the main Building lease, this Agreement shall
terminate unless the Building Landlord under the main lease elects to have
this Agreement assigned to the Building Landlord or another entity as
provided in the main lease. Upon notice to Lessor of the termination of
the main lease and such election (i) the Agreement shall be deemed to have
been assigned by Lessor to the Bsuilding Landlord or to such other entity
as is designated in such notice by the Building Landlord, (ii) the
Building Landlord shall be deemed to be the Lessor under this Agreement
and shall assume all rights and responsibilities of Lessor under this
Agreement, and (iii) Lessee shall be deemed to have attorned to the
Building Landlord as Lessor under this Agreement.
24. Time of Essence.
Time is of the essence as to the performance by Lessee of all covenants,
terms and provisions of this Agreement.
25. Severability.
The invalidity of any one or more of the sections, subsections, sentences,
clauses or words contained in this Agreement or the application thereof to any
particular set of circumstances, shall not affect the validity of the remaining
portions of this Agreement or of their valid application to any other set of
circumstances. All of said sections, subsections, sentences, clauses and words
are inserted conditionally on being valid in law, and in the event that one or
more of the sections, subsections, sentences, clauses or words contained herein
shall be deemed invalid, this Agreement shall be construed as if such invalid
sections, subsections, sentences, clauses or words had not been inserted. In
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the event that any part of this Agreement shall be held to be unenforceable or
invalid, the remaining parts of this Agreement shall nevertheless continue to be
valid and enforceable as though the invalid portions had not been a part hereof.
In addition, the parties acknowledge (i) that this Agreement has been fully
negotiated by and between the parties in good faith and is the result of the
joint efforts of both parties, (ii) that both parties have been provided with
the opportunity to consult with legal counsel regarding its terms, conditions
and provisions and (iii) that regardless of whether or not either party has
elected to consult with legal counsel, it is the intent of the parties that in
no event shall the terms, conditions or provisions of this Agreement be
construed against either party as the drafter of this Agreement.
26. Execution by Lessee.
The party or parties executing this Agreement on behalf of the Lessee
warrant(s) and represent(s): (i) that such executing party (or parties) has (or
have) complete and full authority to execute this Agreement on behalf of Lessee;
(ii) that Lessee shall fully perform its obligations hereunder.
27. Assumption Agreement and Covenants.
This Agreement is subject and subordinate to the main Building lease
governing the Facility, under which Lessor is bound as tenant; and the
provisions of the main lease, other than as to the payment of rent or other
monies, are incorporated into this Agreement as if completely herein rewritten.
Lessee shall comply with and be bound by all provisions of the main lease except
that the payment of rent shall be governed by the provisions of this Agreement,
and Lessee shall indemnify and hold Lessor harmless from and against any claim
or liability under the main lease of Lessor arising from Lessee's breach of the
Main Lease or this Agreement. Lessor covenants and warrants that the use of the
Premises as a business office is consistent with and does not violate the terms
of the initial lease
28. Covenant and Conditions.
Each term, provision and obligation of this Agreement to be performed by
Lessee shall be construed as both a covenant and condition.
29. Entire Agreement.
This Agreement embodies the entire understandings between the parties
relative to its subject matter, and shall not be modified, changed or altered in
any respect except in writing signed by all parties
30. Counterparts.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same instrument.
One data line to be determined for 24 hr internet access at a reduced rate
to be determined. Other data lines will have a 40% discount.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Agreement as of
the date first above written.
LESSOR: ALLIANCE BUSINESS CENTERS
--------------------------------
By: /s/ T. Revy, AGM 6/15/98
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LESSEE: NETWORK 1 SOFTWARE & TECHNOLOGY
--------------------------------
(If a corporation)
By: /s/ Murray P. Fish
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Title: CFO
----------------------------------
[Corporate Seal]
LESSEE:
(If an individual or partnership)
By:
------------------------------------
By:
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EXHIBIT "A"
o Furnished Private Office
o Furnished, Decorated Reception Room with Professional
Receptionist
o Personalized Telephone Answering During Office Hours
o 24 hour Voicemail
o Twenty hours of Conference Room or private furnished offices, subject to
prior scheduling and use by other lessees
o Complete Mail Room Facility
o Receipt of Mail and Packages
o Complete Kitchen Facilities with Coffee Machine
o Utilities and Maintenance
o HVAC During Normal Business Hours
o Janitorial Services
o 8 hours per month courtesy use of other ALLIANCE Business Centers
affiliated facilities. Locations subject to current affiliation and
availability.
6
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EXHIBIT "B" OPERATING STANDARDS
1. Lessees and their guests will conduct themselves in a businesslike manner;
proper attire will be worn at all times; and the noise level will be kept
to a level so as not to interfere with or annoy other Lessees.
2. Lessee shall not provide or offer to provide any services to Lessor's
customers if such services are available from Lessor.
3. Lessee will not affix anything to the walls of the Premises without the
prior written consent of the Lessor.
4. Lessee will not prop open any corridor doors, exit doors or doors
connecting corridors during or after business hours.
5. Lessees using public areas may only do so with the consent of the Lessor,
and those areas must be kept neat and attractive at all times.
6. Lessee will not conduct any activity within the Premises, Executive Suite
or Building, which in the sole judgment of the Landlord will create
excessive traffic or is inappropriate to the executive office suite
environment.
7. Lessee may not conduct business in the corridors or any other areas except
in its designated offices or conference rooms without the written consent
of Lessor.
8. All corridors, halls, elevators and stairways shall not be obstructed by
Lessee or used for any purpose other than normal egress and ingress.
9. No advertisement, identifying signs or other notices shall be inscribed,
painted or affixed on any part of the corridors, doors, or public areas.
10. Without Lessor's specific prior written permission, Lessee is not
permitted to place "mass market", direct mail or advertising (i.e.
newspaper, classified advertisements, yellow pages, billboards) using
Lessor's assigned telephone number or take any such action that would
generate a excessive of incoming calls.
11. Lessee shall not solicit clients of Lessor or and their employees in the
Building without first obtaining Lessor's prior written approval.
12. Immediately following Lessee's use of conference room space and/or
audio/visual equipment, Lessee shall clean up and return the space and
equipment to the state and condition it was in prior to Lessee's use. If
not, Lessor may charge Lessee for any other expenses required to restore
the conference space and/or equipment to its original condition.
13. Lessor must be notified in writing if Lessor desires to utilize the
conference room or other common areas of the Executive Suite during
evening or weekend hours. Lessor may deny the Lessee access if the desired
usage is inappropriate and may disrupt normal operations.
14. Lessee shall not, without Lessor's written consent, store or operate any
computer (except a desktop/laptop computer or fax machine) or any other
large business machines, reproduction equipment, heating equipment, stove,
speaker phones, radios, stereo equipment or other mechanical amplification
equipment, refrigerator or coffee equipment, or conduct a mechanical
business, do any cooking, or use or allow to be used on the Premises oil,
burning fluids, gasoline, kerosene for heating, warming or lighting. No
article deemed extra hazardous on account of fire or any explosives shall
be brought into said Premises or Facility. No offensive gases, odors or
liquids shall be permitted.
15. Lessee will bring no animals into the Premises or Facility except for
those assisting disabled individuals.
16. Lessee shall not remove furniture fixtures or decorative material from
offices or common areas without the written consent of Lessor.
17. Lessee shall not make any additional copies of any Lessor issued keys. All
keys and security cards are the property of Lessor and must be returned
upon request or by the close of the business on the expiration or sooner
termination of the Agreement term. Any lost or unreturned keys or cards
shall incur a $25.00 per item charge and the cost to re-key the office.
18. Lessee shall not smoke nor allow smoking in any area of the Facility,
including the Premises, and shall comply with all governmental regulations
and ordinances concerning smoking.
19. Lessee shall not allow more than three visitors in the reception lobby of
the Premises at any one time.
20. Lessee's parking rights (if any) are defined by Lessor's Agreement with
the owner of the Building, Landlord reserves the right to modify parking
arrangements if required to do so by Building management.
21. Lessee shall cooperate and be courteous with all other occupants of the
Facility and Lessor's staff and personnel.
22. Lessor reserves the right to make such other reasonable rules and
regulations as in its judgment may from time to time be needed for the
safety, care, appropriate operation and cleanliness of the Facility.
<PAGE>
Exhibit 10.8
[LOGO] GREATER DALLAS ASSOCIATION OF REALTORS(R), INC. [LOGO]
COMMERCIAL LEASE AGREEMENT
TABLE OF CONTENTS
Article Page
------- ----
1. Defined Terms............................................... 1
2. Lease and Lease Term........................................ 2
3. Rent and Security Deposit................................... 2
4. Taxes....................................................... 2
5. Insurance and Indemnity..................................... 2
6. Use of Demised Premises..................................... 3
7. Property Condition: Maintenance, Repairs and Alterations.... 4
8. Damage or Destruction....................................... 4
9. Condemnation................................................ 5
10. Assignment and Subletting................................... 5
11. Default and Remedies........................................ 5
12. Landlord's Contractual Lien................................. 6
13. Protection of Lenders....................................... 6
14. Professional Service Fees................................... 7
15. Environmental Representations and Indemnity................. 7
16. Miscellaneous............................................... 8
17. Additional Provisions....................................... 8
An Exhibit or Exhibits may be attached to this Lease which shall be made a part
of this Lease for all purposes [check all boxes which apply].
EXHIBITS TO LEASE
|X| Exhibit A Floor Plan/Site Plan
|X| Exhibit B Legal Description of Property
|X| Exhibit C Renewal Options
|_| Exhibit D Right of First Refusal for Additional Space
|X| Exhibit E Guarantee
|_| Exhibit F Expense Reimbursement
|_| Exhibit G Percentage Rental/Gross Sales Reports
|X| Exhibit H Construction of Improvements
|_| Exhibit I _____________________
ARTICLE ONE: DEFINED TERMS
As used in this Lease, the following terms set forth in this Article One
shall have the respective meanings set forth hereinbelow:
1.01. Date of Lease: June 29, 1994
1.02. Landlord: Greenview Limited Partnership
Address of Landlord: c/o Republic Management, 8100 Lomo Alto,
Ste. 240, Dallas, TX 75225
Telephone: (214) 696-6084
1.03. Tenant: Network-1 Software & Technology, Inc.
Address of Tenant: P.O. Box 8370 Long Island, NY 11101
Telephone: ______________________
1.04. Premises:
A. Street Address (including county): 878 Greenview Drive,
Tarrant County, Grand Prairie, TX
B. Floor or site plan: Being a floor area of approximately 7,489
square feet and being approximately IRR by IRR feet (measured
to the exterior of outside walls and to the center of the
interior walls, and being more particularly shown in outline
on the floor/site plan attached hereto as Exhibit A. (The
aforementioned street address and the floor or site plan shall
collectively be referred to herein as the "Demised Premises".)
C. Legal description: The legal description of the property on
which the floor/site plan is situated is more particularly
described in Exhibit B attached hereto (the "Property").
1.05. Lease Term: 5 years and -0- months beginning on the date set forth
in Exhibit H and ending on the 31st day of July, 1999.
1.06. Base Rent: $262,115 total Base Rent for the Lease Term payable in
monthly installments of $4,368.58 per month in advance
1.07. Security Deposit: $4,368.58
1.08. Permitted Use: [See Section 6.01] Office warehouse
1.09. Principal Broker: [If none, so state] Republic Management, Inc.
Address: 8100 Lomo Alto, Ste. 240, Dallas, Texas 75225
1.10 Cooperating Broker: [If none, so state] Walker Property Advisors
Address: 2000 E. Lamar, Ste. 600, Arlington, TX 76006
1.11. Professional Service Fees: [See Article 14]
A. Payments due to the Principal Broker shall be calculated and
paid in accordance with Paragraph |_| A or |_| B of Section
14.01. [Check applicable paragraph] *Based on 42 months
B. The percentage applicable for leases in Sections 14.01 and
14.02 shall be Six and one half percent (6 1/2%) and the
percentage applicable in Section 14.02 in the event of a sale
shall be n/a percent (___%).
1.12 Holdover Rent: [See Section 2.04] 125% of Base Rental per month in
advance.
1.13. Daily Late Charge: [See Section 3.03] Twenty-five ($25.00) Dollars
($25.00) per day, after the fifth of each month.
1.14. Acceptance: [See Section 16.13] The number of days for acceptance of
this offer to lease shall be 5 days.
Page 1
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ARTICLE TWO: LEASE AND LEASE TERM
2.01. Lease of Demised Premises for Lease Term. Landlord leases the
Demised Premises to Tenant and Tenant leases the Demised Premises from Landlord
for the Lease Term stated in Section 1.05. As used herein, the "Commencement
Date" shall be the date specified in Section 1.05 for the beginning of the Lease
Term, unless advanced or delayed under any provision of this Lease.
2.02. Delay in Commencement. Landlord shall not be liable subject to
Exhibit H, Paragraph 5, to Tenant if Landlord does not deliver possession of the
Demised Premises to Tenant on the first date specified in Section 1.05 above.
Landlord's nondelivery of possession of the Demised Premises to Tenant on that
date shall not affect this Lease or the obligations of Tenant under this Lease.
However, the Commencement Date shall be delayed until possession of the Demised
Premises is delivered to Tenant. The Lease Term shall be extended for a period
equal to the delay in delivery of possession of the Demised Premises to Tenant,
plus the number of days necessary for the Lease Term to expire on the last day
of a month. If Tenant gives such notice, the Lease shall be canceled effective
as of the date of its execution, and no party hereto shall have any obligations,
one to the other. If Tenant does not give such notice within the time specified,
Tenant shall have no right to cancel the Lease, and the Lease Term shall
commence upon the delivery of possession of the Demised Premises to Tenant. If
delivery of possession of the Demised Premises to Tenant is delayed, Landlord
and Tenant shall upon such delivery, execute an amendment to this Lease setting
forth the Commencement Date and expiration date of the Lease Term.
2.03. Early Occupancy. If Tenant occupies the Demised Premises prior to
the Commencement date, Tenant's occupancy of the Demised Premises shall be
subject to all of the provisions of this Lease. Early occupancy of the Demised
Premises shall not advance the expiration date of the Lease Term. Unless
provided otherwise herein, Tenant shall pay Base Rent and all other charges
specified in this Lease for the period of occupancy.
2.04. Holding Over. Tenant shall vacate the Demised Premises upon the
expiration of the Lease Term or earlier termination of this Lease. Tenant shall
reimburse Landlord for and Indemnify Landlord against all damages incurred by
Landlord as a result of any delay by Tenant in vacating the Demised Premises. If
Tenant does not vacate the Demised Premises upon the expiration of the Lease
Term or earlier termination of the Lease, Tenant's occupancy of the Demised
Premises shall be a "month to month" tenancy, subject to all of the terms of
this Lease applicable to a month to month tenancy, except that the Base Rent per
month then in effect shall be the amount designated in Section 1.12.
ARTICLE THREE: RENT AND SECURITY DEPOSIT
3.01. Manner of Payment. All sums payable hereunder by Tenant (the "Rent")
shall be made to the Landlord at the address designated in Section 1.02 or to
such other party or address as Landlord may designate. Any and all payments made
to a designated third party for the account of the Landlord shall be deemed made
to Landlord when received by said designated third party. All sums payable by
Tenant hereunder, whether or not expressly denominated as rent, shall constitute
rent for the purposes of Section 502(b)(6) of the Bankruptcy Code and for all
other purposes. The Base Rent is the minimum rent for the Demised Premises and
is subject to the terms and conditions contained in this Lease together with the
Exhibits attached hereto, if any.
3.02. Time of Payment. Upon execution hereof, Tenant shall pay the
installment of rent for the first month of the Lease Term. On or before the
first day of the second month of the Lease Term and of each month thereafter,
the installment of rent and other sums due hereunder shall be due and payable,
in advance, without off-set, deduction or prior demand. If the Lease Term
commences or ends on a day other than the first or last day of a calendar month,
the rent for any fractional calendar month following the Commencement Date or
preceding the end of the Lease Term shall be prorated by days.
3.03. Late Charges. Tenant's failure to pay sums due hereunder promptly
may cause Landlord to incur unanticipated costs. The exact amount of such costs
are impractical or extremely difficult to ascertain. Such costs may include, but
are not limited to processing and accounting charges and late charges which may
be imposed on Landlord by any ground lease, deed of trust or mortgage
encumbering the Demised Premises. Therefore, if any sum due hereunder is not
received within 5 days of when due, Tenant shall pay the Landlord a late charge
equal to the Daily Late Charge for each day after the due date until such
delinquent sum is received. If any check tendered in payment of any sum due from
Tenant hereunder is dishonored for any reason, Tenant shall pay a late charge
for each day after said due date until good funds are received by the Landlord.
The parties agree that such late charge represents a fair and reasonable
estimate of the costs Landlord will incur by reason of such late payment or such
dishonored check.
3.04. Security Deposit. Upon execution hereof, Tenant shall deposit with
Landlord a cash Security Deposit in the sum stated in Section 1.07. Landlord may
apply all or part of the Security Deposit to any unpaid rent or other charges
due from Tenant or to cure any other defaults of Tenant. If Landlord uses any
part of the Security Deposit, Tenant shall restore the Security Deposit to its
full amount within ten (10) days after landlord's written demand. Tenant's
failure to restore the full amount of the Security Deposit within the time
specified shall be a default under this Lease. No interest shall be paid on the
Security Deposit. Landlord shall not be required to keep the Security Deposit
separate from its other accounts and no trust relationship is created with
respect to the Security Deposit. Upon any termination of this Lease not
resulting from Tenant's default, and after Tenant has vacated the Demised
Premises in the manner required by this Lease, Landlord shall refund the unused
portion of the Security Deposit to Tenant. Landlord will hold the security
deposit in accordance with applicable law.
3.05. Good Funds Payments. If, for any reason whatsoever, any two or more
payments by check from Tenant to Landlord for Rent are dishonored and returned
unpaid, thereafter, Landlord may, at Landlord's sole option, upon written notice
to Tenant, require that all future payments of Rent for the remaining term of
the Lease shall be made by cash, cashier's check, or money order and that the
delivery of Tenant's personal or corporate check will no longer constitute
payment of Rent as provided in this Lease. Any acceptance by Landlord of a
payment for Rent by Tenant's personal or corporate check thereafter shall not be
construed as a waiver of Landlord's rights to insist upon payment by good funds
as set forth in this Section 3.05.
ARTICLE FOUR: TAXES
4.01. Payment by Landlord. Landlord shall pay the real estate taxes on the
Demised Premises during the Lease Term.
4.02. Improvements by Tenant. In the event the real estate taxes levied
against the Demised Premises fir the real estate tax year in which the Lease
Term commences are increased in the current tax year or subsequent tax years as
a result of any alterations, additions or improvements made by Tenant or by
Landlord at the request of Tenant, Tenant shall pay to Landlord upon demand the
amount of such increase and continue to pay such increase during the term of
this Lease. Landlord shall use reasonable efforts to obtain from the tax
assessor or assessors a written statement of the total amount of such increase.
4.03. Joint Assessment. If the real estate taxes are assessed against the
Demised Premises jointly with other property not constituting a part of the
Demised Premises, the real estate taxes for such years shall be equal to the
amount bearing the same proportion to the aggregate assessment that the total
square feet of building area in the Demised Premises bears to the square feet of
building area included in the joint assessment.
4.04. Personal Property Taxes. Tenant shall pay all taxes assessed against
trade fixtures, furnishings, equipment, or any other personal property belonging
to Tenant. Tenant shall use reasonable efforts to have its personal property
taxed separately from the Demised Premises, but if any of Tenant's personal
property is taxed with the Demised Premises, Tenant shall pay the taxes for the
personal property within fifteen (15) days after Tenant receives a written
statement for such personal property taxes.
ARTICLE FIVE: INSURANCE AND INDEMNITY
5.01. Casualty Insurance. During the Lease Term, Landlord shall maintain
policies of insurance covering loss of or damage to the Demised Premises in such
amount or percentage of replacement value as Landlord deems reasonable in
relation to the age, location, type of construction and physical condition of
the Demised Premises and the availability of such insurance at reasonable rates.
Such policies shall provide protection against all perils included within the
classification of fire and extended coverage and any other perils which Landlord
deems necessary. Landlord may obtain insurance coverage for Tenant's fixtures,
equipment or building improvements installed by Tenant in or on the Demised
Premises. Tenant shall at Tenant's expense, maintain such primary or additional
insurance on its fixtures, equipment and building improvements as Tenant deems
necessary to protect its interest. Tenant shall not do or permit to be done
anything which invalidates any such insurance policies.
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Demised Premises, whether such damage or injury is caused by or results from:
(a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage,
obstruction or other defects or pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures or any other cause; (c) conditions arising
on or about the Demised Premises or upon other portions of any building of which
the Demised Premises is a part, or from other sources or places; or (d) any act
or omission of any other tenant of any building of which the Demised Premises is
a part. Landlord shall not be liable for any such damage or injury even though
the cause of or the means of repairing such damage or injury are not accessible
to Tenant. The provisions of this Section 6.08 shall not, however, exempt
Landlord from liability for Landlord's gross negligence or willful misconduct.
ARTICLE SEVEN: PROPERTY CONDITION, MAINTENANCE, REPAIRS AND ALTERATIONS
7.01. Property Conditions. Intentionally omitted.
7.02. Acceptance of Demised Premises. Tenant acknowledges that a full and
complete inspection of the Demised Premises and adjacent common areas has been
made and Landlord has fully and adequately disclosed the existence of any
defects which would interfere with Tenant's use of the Demised Premises for
their intended commercial purpose. Tenant specifically acknowledges that as a
result of such inspection and disclosure, Tenant has taken possession of the
Demised Premises and has made its own determination to fully accept same in its
as-is condition, subject to completion of Landlord's work described in Exhibit
H.
7.03. Obligation to Repair. Except as otherwise provided herein,
including, without limitation, the provisions of Section 17, Landlord shall be
under no obligation to perform any repair, maintenance or management service in
the Demised Premises or adjacent common areas. Tenant shall be fully
responsible, at its expense, for all repair, maintenance and management services
other than those which are expressly assumed by Landlord.
A. Landlord's Obligation to Repair.
(1) Subject to the provisions of Article Eight (Damage or
Destruction) and Article Nine (Condemnation) and except for damage
caused by any act or omission of Tenant, Landlord shall keep the
foundation, roof and the structural portions of exterior walls of
the improvements of the Demised Premises in good order, condition
and repair. Landlord shall not be obligated to maintain or repair
windows, doors, plate glass or the surfaces of walls. In addition,
Landlord shall not be obligated to make any repairs under this
Section until a reasonable time after receipt of written notice from
Tenant of the need of such repairs. If any repairs are required to
be made by Landlord, Tenant shall, at Tenant's sole cost and
expense, promptly remove Tenant's fixtures, inventory, equipment and
other property, to the extent required to enable Landlord to make
such repairs. Landlord's liability hereunder shall be limited to the
cost of such repairs or corrections. Tenant waives the benefit of
any present or future law which might give Tenant the right to
repair the Demised Premises at Landlord's expense or to terminate
the Lease because of the condition. Landlord is responsible for the
care of the landscaping & regular mowing of grass & maintenance of
the paving and parking lot.
(2) Landlord and Tenant expressly agree that all repair,
maintenance management and other services to be performed by
Landlord or Landlord's agents exclusively consist of the exercise of
professional judgment by such service providers, and Tenant
expressly waives any claims for breach of warranty arising from the
performance of such services.
B. Tenant's Obligation to Repair. Subject to the provisions of the
last sentence of Section 7.01, the preceding Section 7.03.A, Article Eight
(Damage or Destruction) and Article Nine (Condemnation), Tenant shall, at
all times, keep all other portions of the Demised Premises in good order,
condition and repair, including but not limited to repairs (including all
necessary replacements) of the windows, plate glass, doors, heating
system, air conditioning equipment, electrical and lighting system, fire
protection sprinkler system, dock levelers, interior and exterior plumbing
and the interior of the building in general. Landlord is responsible for
plumbing repairs below the slab if not caused by Tenant's actions. In
addition, Tenant shall, at Tenant's expense, repair any damage to any
portion of the Property, including the roof, foundation, or structural
portions of the exterior walls of the Demised Premises, caused by Tenant's
acts or omissions. If Tenant fails to maintain and repair the Property as
required by this Section, Landlord may, on ten (10) days' prior written
notice, enter the Demised Premises and perform such maintenance or repair
on behalf of Tenant, except that no notice shall be required in case of
emergency, and Tenant shall reimburse Landlord for all costs incurred in
performing such maintenance or repair immediately upon demand.
7.04. Alterations, Additions and Improvements. Tenant shall not create any
openings in the roof or exterior walls, or make any alterations, additions or
improvements to the Demised Premises without the prior written consent of
Landlord. Consent for nonstructural alterations, additions or improvements shall
not be unreasonably withheld by Landlord. Tenant shall have the right to erect
or install shelves, bins, machinery, air conditioning or heating equipment and
trade fixtures, provided that Tenant complies with all applicable governmental
laws, ordinances, codes, and regulations. At the expiration or termination of
this Lease, Tenant shall, subject to the restrictions of Section 7.05 below,
have the right to remove such items so installed by it, provided Tenant is not
in default at the time of such removal and provided further that Tenant shall,
at the time of removal of such items, repair in a good and workmanlike manner
any damage caused by installation or removal thereof. Tenant shall pay for all
costs incurred or arising out of alterations, additions or improvements in or to
the Demised Premises and shall not permit a mechanic's or materialman's lien to
be filed against the Demised Premises. Upon request by Landlord, Tenant shall
deliver to Landlord proof of payment reasonably satisfactory to Landlord of all
costs incurred or arising out of any such alterations, additions or
improvements.
7.05. Conditions upon Termination. Upon the termination of the Lease,
Tenant shall surrender the Demised Premises to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provisions of the Lease. Tenant
shall not be obligated to repair any damage which Landlord is required to repair
under Article Eight (Damage or Destruction). In addition, Landlord may require
Tenant to remove any alterations, additions or improvements (whether or not made
with Landlord's consent) prior to the termination of the Lease and to restore
the Demised Premises to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the termination of the Lease. In no event, however, shall Tenant remove any
of the following materials or equipment without Landlord's prior written
consent; any power wiring or power panels; lighting or lighting fixtures; wall
coverings; drapes, blinds or other window coverings; carpets or other floor
coverings; heaters, air conditioners or any other heating or air conditioning
equipment; fencing or security gates; or other similar building operating
equipment and decorations.
ARTICLE EIGHT: DAMAGE OR DESTRUCTION
8.01. Notice. If the building or other improvements situated on the
Demised Premises should be damaged or destroyed by fire, tornado or other
casualty, Tenant shall immediately give written notice thereof to the Landlord.
8.02. Partial Damage. If the building or other improvements situated on
the Demised Premises are damaged by fire, tornado, or other casualty but not to
such an extent that rebuilding or repairs cannot reasonably be completed within
ninety (90) days from the date Landlord receives written notification by Tenant
of the happening of the damage, this Lease shall not terminate, but Landlord
shall, at its sole cost and risk, proceed forthwith and use reasonable diligence
to rebuild or repair such building and other improvements on the Demised
Premises (other than leasehold improvements made by Tenant or any assignee,
subtenant or other occupant of the Demised Premises) to substantially the
condition in which they existed prior to such damage within said ninety (90)
days, provided, however, if the casualty occurs during the final eighteen (18)
months of the Lease Term, Landlord shall not be required to rebuild or repair
such damage unless Tenant shall exercise its renewal option (if any is contained
herein) within fifteen (15) days after the date of receipt by Landlord of the
notification of the occurrence of the damage. If Tenant does not elect to
exercise its renewal option or if there is no renewal option contained herein or
previously unexercised at such time, this Lease shall terminate at the option of
Landlord and the Rent shall be abated for the unexpired portion of this Lease,
effective from the date of actual receipt by Landlord of the written
notification of the damage. If the building and other improvements are to be
rebuilt or repaired and are untenantable in whole or in part following such
damage, the monthly installments of Rent payable hereunder during the period in
which they are untenantable shall be adjusted equitably. Landlord will give
written notice of whether Landlord intends to repair or rebuild the Premises
within forty-five (45) days.
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8.03 Substantial or Total Destruction. If the building or other
improvements situated on the Demised Premises are substantially or totally
destroyed by fire, tornado, or other casualty, or so damaged that rebuilding or
repairs cannot reasonably be completed within ninety (90) days from the date
Landlord receives written notification by Tenant of the happening of the damage,
this Lease shall terminate at the option of either Landlord or Tenant and
monthly installments of Rent shall be abated for the unexpired portion of this
Lease, effective from the date of receipt by Landlord or Tenant or such written
notification. If this Lease is not terminated, the building and the improvements
shall be rebuilt or repaired and monthly installments of Rent abated to the
extent provided under Section 8.02.
ARTICLE NINE: CONDEMNATION
If, during the term of this Lease or any extension or renewal thereof, all
or a substantial part of the Demised Premises are taken for any public or
quasi-public use under any governmental Law, ordinance or regulation or by right
or eminent domain, or are sold to the condemning authority under threat of
condemnation, this Lease shall terminate and the monthly installments of Rent
shall be abated during the unexpired portion of this Lease, effective from the
date of taking of the Demised Premises by the condemning authority. If less than
a substantial part of the Demised Premises is taken for public or quasi-public
use under any governmental law, ordinance or regulation, or by right of eminent
domain, or is sold to the condemning authority under threat of condemnation,
Landlord, at its option, may by written notice terminate this Lease or shall
forthwith at its sole expense restore and reconstruct the buildings and
improvements (other than leasehold improvements made by Tenant or any assignee,
subtenant or other occupant of the Demised Premises) situated on the Demised
Premises in order to make the same reasonably tenantable and suitable for the
use for which the Demised Premises is leased as defined in Section 6.01. The
monthly installments of Base Rent payable hereunder during the unexpired portion
of this Lease shall be adjusted equitably. Landlord and Tenant shall each be
entitled to receive and retain such separate award, and portions of lump sum
awards as may be allocated to their respective interests in any condemnation
proceedings. The termination of this Lease shall not affect the rights of the
respective parties to such awards.
ARTICLE TEN: ASSIGNMENT AND SUBLETTING
Tenant shall not, without the prior written consent of Landlord not to be
unreasonable withheld, assign this Lease or sublet the Demised Premises or any
portion thereof. Any assignment or subletting shall be expressly subject to all
terms and provisions of this Lease, including, the provisions of Section 6.01
pertaining to the use of the Demised Premises. In the event of any assignment or
subletting, Tenant shall remain fully liable for the full performance of all
Tenant's obligations under this Lease. Tenant shall not assign its rights
hereunder or sublet the Demised Premises without first obtaining a written
agreement from the assignee or sublessee whereby the assignee or sublessee
agrees to assume the obligations of Tenant hereunder and to be bound by the
terms of this Lease. No such assignment or subletting shall constitute a
novation. In the event of the occurrence of an event of default while the
Demised Premises is assigned or sublet, Landlord, in addition to any other
remedies provided herein or by law, may at Landlords option, collect directly
from such assignee or subtenant all rents becoming due under such assignment or
subletting and apply such rent against any sums due to Landlord hereunder. No
direct collection by Landlord from any such assignee or subtenant shall release
Tenant from the performance of its obligations hereunder.
ARTICLE ELEVEN: DEFAULT AND REMEDIES
11.01. Default. Each of the following events shall be an event of default
under this Lease:
A. Failure of Tenant to pay any installment of the Rent or other sum
payable to Landlord hereunder on the date that same is due and such
failure shall continue for a period of ten (10) days;
B. Failure of Tenant to comply with any term, condition or covenant
of this Lease, other than the payment of Base Rent or other sum of money,
and such failure shall not be cured within thirty (30) days after written
notice thereof to Tenant;
C. Tenant or any guarantor of Tenant's obligations hereunder shall
generally fail to pay its debts as they become due or shall admit in
writing its inability so pay its debts, or shall make a general assignment
for the benefit of creditors;
D. Tenant or any guarantor of Tenant's obligations hereunder shall
commence any case, proceeding or other action seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or
its debts under any law relating to bankruptcy, insolvency, reorganization
or relief of debtors, or seeking appointment of a receiver, trustee,
custodian or other similar official for it or for all or any substantial
part of its property;
E. Any case, proceeding or other action against Tenant or any
guarantor of Tenant's obligations hereunder shall be commenced seeking to
have an order for relief entered against it as debtor, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution or
composition of it or its debts under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, or seeking appointment of
a receiver, trustee, custodian or other similar official for it or for all
or any substantial part of its property, and Tenant (i) fails to obtain a
dismissal of such case, proceeding, or other action within ninety (90)
days of its commencement; or (ii) converts the case from one chapter of
the Federal Bankruptcy Code to another chapter; or (iii) is the subject of
an order of relief which is not fully stayed within thirty (30) business
days after the entry thereof; and
F. Abandonment by Tenant of substantial portion of the Demised
Premises or cessation of the use of the Demised Premises for the purpose
leased, or any other legal purpose.
11.02. Remedies. Upon the occurrence of any of the events of default
listed in Section 11.01, Landlord shall have the option to pursue any one or
more of the following remedies without any prior notice or demand whatsoever:
A. Terminate this Lease, in which event Tenant shall immediately
surrender the Demised Premises to Landlord. If Tenant fails to so
surrender the Demised Premises, Landlord may, without prejudice to any
other remedy which it may have for possession of the Demised Premises or
arrearages in Rent, enter upon and take possession of the Demised Premises
and expel or remove Tenant and any other person who may be occupying the
Demised Premises or any part thereof, by force if necessary, without being
liable for prosecution or any claim for damages therefor. Tenant shall pay
to Landlord on demand the amount of all loss and damage which Landlord may
suffer by reason of such termination, whether through inability to relet
the Demised Premises on satisfactory terms or otherwise.
B. Enter upon and take possession of the Demised Premises, by force
if necessary, without terminating this Lease and without being liable for
prosecution or for any claim for damages therefor, and expel or remove
Tenant and any other person who may be occupying the Demised Premises or
any part thereof. Landlord may relet the Demised Premises and receive the
rent therefor. Tenant agrees to pay to Landlord monthly or on demand from
time to time any deficiency that may arise by reason of any such
reletting. In determining the amount of such deficiency, the professional
service fees, reasonable attorneys' fees, remodeling expenses and other
costs of reletting shall be subtracted from the amount of rent received
under such reletting.
C. Enter upon the Demised Premises, by force if necessary, without
terminating this Lease and without being liable for prosecution or for any
claim for damages therefor, and do whatever Tenant is obligated to do
under the terms of this Lease. Tenant agrees to pay Landlord on demand for
expenses which Landlord may incur in thus effecting compliance with
Tenant's obligations under this Lease, together with interest thereon at
the rate of twelve percent (l2%) per annum from the date expended until
paid. Landlord shall not be liable for any damages resulting to Tenant
from such action, whether caused by negligence of Landlord or otherwise.
D. In addition to the foregoing remedies, Landlord shall have the
right to change or modify the locks on the Demised Premises in the event
Tenant fails to pay the monthly installment of Rent when due & such
failure continues for 15 days. Landlord shall not be obligated to provide
another key to Tenant or allow Tenant to regain entry to the Demises
Premises unless and until Tenant pays Landlord all Rent which is
delinquent. Tenant agrees that Landlord shall not be liable for any
damages resulting to the Tenant from the lockout. At such time that
Landlord changes or modified the lock, Landlord shall post a "Notice of
Change of Locks" on the front of the Demised Premises. Such Notice shall
state the following:
(1) That Tenant's monthly installment of Rent is delinquent,
and therefore, under authority of Section 11.02D of Tenant's Lease,
the Landlord has exercised its contractual right to change or modify
Tenant's door lock;
(2) That the Notice has been posted on the Tenant's front door
by a representative of Landlord and that Tenant should make
arrangements to pay the delinquent installment of Rent when Tenant
picks up the key; and
Page 5
<PAGE>
(3) That the failure of the Tenant to comply with the
provisions of the Lease and the Notice and/or tampering with or
changing the door lock(s) by Tenant may subject the Tenant to legal
liability.
E. No re-entry or taking possession of the Demised Premises by
Landlord shall be construed as an election to terminate this Lease, unless
a written notice of such intention is given to Tenant. Notwithstanding any
such reletting or re-entry or taking possession, Landlord may, at any time
thereafter, elect to terminate this Lease for a previous default. Pursuit
of any of the foregoing remedies shall not preclude pursuit of any of the
other remedies provided by law, nor shall pursuit of any remedy herein
provided constitute a forfeiture or waiver of any monthly installment of
Rent due to Landlord hereunder or of any damages accruing to Landlord by
reason of the violation of any of the terms, provisions and covenants
herein contained. Forbearance by Landlord to enforce one or more of the
remedies herein provided upon an event of default shall not, be deemed or
construed to constitute a waiver of any other violation or default. The
loss or damage that Landlord may suffer by reason of termination of this
Lease or the deficiency from any reletting as provided for above shall
include the expense of repossession and any repairs or remodeling
undertaken by Landlord following possession. Should Landlord terminate
this Lease at any time for any default, in addition to any other remedy
Landlord may have, Landlord may recover from Tenant all damages Landlord
may incur by reason of such default, including the cost of recovering the
Demised Premises and the cost of the rental then remaining unpaid.
11.03. Notice of Default. Tenant shall give written notice of any failure
by Landlord to perform any of its obligations under this Lease to Landlord and
to any ground lessor, mortgagee or beneficiary under any deed of trust
encumbering the Demised Premises whose name and address have been furnished to
Tenant in writing. Landlord shall not be in default under this Lease unless
Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such
nonperformance within thirty (30) days after receipt of Tenant's notice.
However, if such nonperformance reasonably requires more than thirty (30) days
to cure, Landlord shall not be in default if such cure is commenced within such
30-day period and thereafter diligently pursued to completion.
11.04. Limitation of Landlord's Liability. As used in this Lease, the term
"Landlord" means only the current owner or owners of the fee title to the
Demised Premises or the leasehold estate under a ground lease of the Demised
Premises at the time in question. Each Landlord is obligated to perform the
obligations of Landlord under this Lease only during the time such Landlord owns
such interest or title. Any Landlord who transfers its title or interest is
relieved of all liability with respect to the obligations of Landlord under this
Lease accruing on or after the date of transfer. However, each Landlord shall
deliver to its transferee the Security Deposit held by Landlord if such Security
Deposit has not then been applied under the terms of this Lease. The exclusive
remedies of Tenant for the failure of Landlord to perform any of its obligations
under this lease shall be to proceed against the interest of Landlord in and to
the project and the Property
ARTICLE TWELVE: LANDLORD'S CONTRACTUAL LIEN
ARTICLE THIRTEEN: PROTECTION OF LENDERS
13.01. Subordination. Landlord shall have the right to subordinate this
Lease to any future ground Lease, deed of trust or mortgage encumbering the
Demised Premises, and advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. Landlord's right to obtain such a future subordination is subject
to Landlord's providing Tenant with a written Subordination, Nondisturbance and
Attornment Agreement from any such ground lessor, beneficiary or mortgagee
wherein Tenant's right to peaceable possession of the Demised Premises during
the Lease Term shall not be disturbed if Tenant pays the Rent and performs all
of Tenant's obligations under this Lease and is not otherwise in default. If any
ground lessor, beneficiary, or mortgagee elects to have this Lease superior to
the lien of its ground lease, deed of trust or mortgage and gives written notice
thereof to Tenant, this Lease shall be deemed superior to such ground lease,
deed of trust or mortgage whether this Lease is dated prior or subsequent so the
date of said ground lease, deed of trust or mortgage or the date of recording
thereof. Tenant's rights under this Lease, unless specifically modified at the
time this Lease is executed, are subordinated to any existing ground lease, deed
of trust or mortgage encumbering the Demised Premises.
13.02. Attornment. If Landlord's interest in the Demised Premises is
transferred voluntarily or involuntarily to any ground lessor, beneficiary under
a deed of trust, mortgagee or purchaser at a foreclosure sale, Tenant shall
attorn to the transferee of or successor to Landlord's interest in the Demised
Premises and recognize such transferee or successor as Landlord under this
Lease. Tenant waives the protection of any statute or rule of law which gives or
purports to give Tenant any right to terminate this Lease or surrender
possession of the Demised Premises upon the transfer of Landlord's interest.
13.03. Signing of Documents. Tenant shall sign and deliver any instruments
or documents necessary or appropriate to evidence any such attornment or
subordination or agreement to do so. If Tenant fails to do so within thirty (30)
days after written request, Tenant hereby makes, constitutes and irrevocably
appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
13.04. Estoppel Certificate.
A. Upon Landlords written request, Tenant shall execute, acknowledge
and deliver to Landlord a written statement certifying; (i) that none of
the terms or provisions of this Lease have been changed (or if they have
been changed, stating how they have been changed); (ii) that this Lease
has not been canceled or terminated; (iii) the last date of payment of the
Base Rent and other charges and the time period covered by such payment;
and (iv) that Landlord is not in default under this Lease (or, if Landlord
is claimed to be in default, stating why). Tenant shall deliver such
statement to Landlord within ten (10) days after Landlord's request. Any
such statement by Tenant may be furnished by Landlord to any prospective
purchaser or lender of the Demised Premises. Such purchaser or lender may
rely conclusively upon such statement as true and correct.
B. If Tenant does not deliver such statement to Landlord within such
10-day period, Landlord, and any prospective purchaser or lender, may
conclusively presume and rely upon the following facts: (i) that the terms
and provisions of this Lease have not been changed except as otherwise
represented by Landlord; (ii) that this Lease has not been canceled or
terminated except as otherwise represented by Landlord; (iii) that not
more than one monthly installment of Base Rent or other charges have been
paid in advance; and (iv) that Landlord is not in default under the Lease.
In such event, Tenant shall be estopped from denying the truth of such
facts.
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ARTICLE FOURTEEN: PROFESSIONAL SERVICE FEES
14.01. Amount and Manner of Payment of Service Fees. Fees due to the
Principal Broker shall be calculated and paid in accordance with Article 1.11 as
follows:
A. Landlord agrees to pay to the Principal Broker a fee for
negotiating this Lease equal to the percentage stated in Section 1.11B of
each monthly Rent payment at the time such payment is due.
B. Landlord agrees so pay to the Principal Broker a fee for
negotiating this Lease equal to the percentage stated in Section 1.11B of
the total Rent to become due to Landlord during the term of this Lease.
Said fees shall be payable to the Principal Broker on the date of the
execution of this Lease.
14.02. Intentionally omitted.
14.03. Intentionally omitted.
14.04. Intentionally omitted.
14.05. Intentionally omitted.
14.06. Intentionally omitted.
14.07. Intentionally omitted.
ARTICLE FIFTEEN: ENVIRONMENTAL REPRESENTATIONS AND INDEMNITY
15.01. Tenant's Compliance with Environmental Laws. Tenant, at Tenant's
expense, shall comply with all laws, rules, orders, ordinances, directions,
regulations and requirements of federal, state, county and municipal authorities
pertaining to Tenant's use of the Property and with the recorded covenants,
conditions and restrictions, regardless of when they become effective,
including, without limitation, all applicable federal, state and local laws,
regulations or ordinances pertaining to air and water quality, Hazardous
Material (as defined hereinafter), waste disposal, air emissions and other
environmental matters, all zoning and other land use matters, and with any
direction of any public officer or officers, pursuant to law, which shall impose
any duty upon Landlord or Tenant with respect to the use or occupation of the
Property.
15.02. Tenant's Indemnification. Tenant shall not cause or permit any
hazardous material to be brought upon, kept or used in or about the Property by
Tenant, its agents, employees, contractors or invitees without the prior written
consent of Landlord. If Tenant breaches the obligations stated in the preceding
Section or sentence, or if the presence of Hazardous Material on the Property
caused or permitted by Tenant results in contamination of the Property or any
other property, or if contamination of the Property or any other property by
Hazardous Material otherwise occurs for which Tenant is legally liable to
Landlord for damage resulting therefrom, then Tenant shall indemnify, defend and
hold Landlord harmless from any and all claims, judgments, damages, penalties,
fines, costs, liabilities or losses (including, without limitation, diminution
in value of the Property, damages for the loss or restriction on use of rentable
or unusable space or of any amenity or appurtenance of the Property, damages
arising from any adverse impact on marketing of building space or land area, and
sums paid in settlement of claims, attorneys fees, consultant fees and expert
fees) which arise during or after the Lease Term as a result of such
contamination. This indemnification of Landlord by Tenant includes, without
limitation, costs incurred in connection with any investigation of site
conditions or any cleanup, remedial work, removal or restoration work required
by any federal, state or local government agency or political subdivision
because of Hazardous Material present in the soil or ground water on or under
the Property. Without limiting the foregoing, if the presence of any Hazardous
Material on the Property or any other property caused or permitted by Tenant
results in any contamination of the Property, Tenant shall promptly take all
actions at its sole expense as are necessary to return the Property to the
condition existing prior to the introduction of any such Hazardous Material to
the Property, provided that Landlord's approval of such actions shall first be
obtained. The foregoing indemnity shall survive the expiration or earlier
termination of this Lease.
15.03. Intentionally omitted.
15.04. Intentionally omitted.
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<PAGE>
indemnification provided by this Article 15.04 shall specifically cover costs
incurred in connection with any investigation of site conditions or any
clean-up, remedial work, removal or restoration work required by any federal,
state or local governmental agency or political subdivision because of the
presence or suspected presence of Hazardous Material in the soil or groundwater
on or under the Property, unless the Hazardous Material is released by Tenant or
is present solely as a result of the negligence or willful conduct of Tenant,
its officers, employees, or agents.
15.05. Definitions. For purposes of this Article 15, the term "Hazardous
Material" shall mean any pollutant, toxic substance, hazardous waste, hazardous
material, hazardous substance, or oil as defined in or pursuant to the Resource
Conservation and Recovery Act, as amended, the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, the Federal Clean Water
Act, as amended, or any other federal, state or local environmental law,
regulation, ordinance, rule, or bylaw, whether existing as of the date hereof,
previously enforced or subsequently enacted.
15.06. Survival. The indemnities contained in this Article 15 shall
survive the expiration or earlier termination of this Lease.
15.07. Intentionally omitted.
ARTICLE SIXTEEN: MISCELLANEOUS
16.01. Forces Majeure. In the event performance by Landlord of any term,
condition or covenant in this Lease is delayed or prevented by any Act of God,
strike, lockout, shortage of material or labor, restriction by any governmental
authority, civil riot, flood, or any other cause not within the control of
Landlord, the period for performance of such term, condition or covenant shall
be extended for a period equal to the period Landlord is so delayed or hindered.
16.02. Interpretation. The captions of the Articles or Sections of this
Lease are to assist the parties in reading this Lease and are not a part of the
terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. For convenience, each party hereto is referred to in the neuter
gender, but the masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenants agents, employees, contractors,
invitees, successors or others using the Demised Premises with Tenant's
expressed or implied permission.
16.03. Waivers. All waivers must be in writing and signed by the waiving
party. Landlords failure to enforce any provisions of this Lease or its
acceptance of late installments of Rent shall not be a waiver and shall not
estop Landlord from enforcing that provision or any other provision of this
Lease in the future. No statement on a payment check from Tenant or in a letter
accompanying a payment check shall be binding on Landlord. Landlord may, with or
without notice to Tenant, negotiate, cash, or endorse such check without being
bound to the conditions of such statement.
16.04. Severability. A determination by a court of competent jurisdiction
that any provision of this Lease or any part thereof is invalid or unenforceable
shall not cancel or invalidate the remainder of such provision or this Lease,
which shall remain in full force and effect.
16.05. Joins and Several Liability. All parties signing this Lease as
Tenant shall be jointly and severally liable for all obligations of Tenant.
16.06. Incorporation of Prior Agreements; Modifications. This Lease is the
only agreement between the parties pertaining to the lease of the Demised
Premises and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
16.07. Notices. All notices required or permitted under this Lease shall
be in writing and shall be personally delivered or shall be deemed to be
delivered, whether actually received or not, when deposited in the United States
mail, postage pre-paid, registered or certified mail, return receipt requested,
addressed as stated herein. Notices to Tenant shall be delivered to the address
specified in Section 1.03 above, except that, upon Tenant's taking possession of
the Demised Premises, the Demised Premises shall be Tenant's address for notice
purposes. Notices to any ether party hereto shall be delivered to the address
specified in Article One as the address for such party. Any party hereto may
change its notice address upon written notice to the other parties.
16.08. Attorneys' Fees. If on account of any breach or default by any
party hereto in its obligations to any other party hereto (including but not
limited to the Principal Broker), it shall become necessary for the
nondefaulting party to employ an attorney to enforce or defend any of its rights
or remedies hereunder, the defaulting party agrees to pay the nondefaulting
party its reasonable attorneys' fees, whether or not suit is instituted in
connection therewith.
16.09. Venue. All obligations hereunder, including but not limited to the
payment of fees so the Principal Broker, shall be performable and payable in the
county in which the Property is located.
16.10. Governing Law. The laws of the State of Texas shall govern this
Lease.
16.11. Survival. All obligations of any party hereto not fulfilled at the
expiration or the earlier termination of this Lease shall survive such
expiration or earlier termination as continuing obligations of such party.
16.12. Binding Effect. This Lease shall inure to the benefit of and be
binding upon each of the parties hereto and their respective heirs,
representatives, successors and assigns; provided, however, Landlord shall have
no obligation to Tenants successors or assigns unless the rights or interests of
such successors or assigns are acquired in accordance with the terms of this
Lease.
16.13. Execution as Offer. The execution of this Lease by the first party
to do so constitutes an offer to lease the Demised Premises. Unless within the
number of days stated in Section 1.14 above after the date of its execution by
the first party to do so, this Lease is signed by the other party and a fully
executed copy is delivered to the first party, such offer shall be automatically
withdrawn and terminated.
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ARTICLE SEVENTEEN: ADDITIONAL PROVISIONS
Additional provisions may be set forth in the blank space below, and/or an
Exhibit or Exhibits may be attached hereto which shall be made a part of this
Lease for all purposes.
17.1 Landlord agrees to warrant the major components of HVAC units for a period
of one (1) year. Tenant must show Landlord evidence of a regular HVAC
maintenance program.
17.2 Tenant shall have a cancellation option after three years of the lease, if
a six month rent penalty is paid and a six month notice is given to
Landlord. After four (4) years, a three month rent penalty, with a six (6)
month notice.
EFFECTIVE as of the date stated in Section 1.01 above.
BROKERS: REPUBLIC MANAGEMENT, INC.
/s/ Republic Management
- ---------------------------------------------
Principal Broker, Member of the
Greater Dallas Association of REALTORS', Inc.
By: /s/ Craig M. Franks
------------------------------------------
Name:
---------------------------------------
Address:
------------------------------------
- ---------------------------------------------
- ---------------------------------------------
Telephone: ----------------------------------
License No.: --------------------------------
Walker Property Advisors
- ---------------------------------------------
Cooperating Broker
By:
------------------------------------------
Name:
---------------------------------------
Address:
------------------------------------
- ---------------------------------------------
- ---------------------------------------------
Telephone: ----------------------------------
License No.: --------------------------------
LANDLORD: GREENVIEW LIMITED PARTNERSHIP
/s/ Devcor Equities INC. G.P.
- ---------------------------------------------
By: /s/ J. P. DiBlasio
------------------------------------------
Name: J. P. DiBlasio
---------------------------------------
Title: Exec-Vice President
--------------------------------------
Date of Execution by Landlord: July 14, 1994
--------------
TENANT:
Network-1 Software & Technology, Inc.
- ---------------------------------------------
By: /s/ Robert Russo
------------------------------------------
Name: Robert Russo
---------------------------------------
Title: President
--------------------------------------
Date of Execution by Tenant:
----------------
********************************************************************************
[For voluntary use only by members of the
Greater Dallas Association of REALTORS', Inc.]
<PAGE>
o / o Greenview
Grand Prairie, Texas
Exhibit "A"
[Floor plan graphic omitted]
<PAGE>
Exhibit "B"
Greenview Tech
Lot 7, Box 2
GISD Comm, #5
Grand Prairie, Texas 75050
Tarrant County
<PAGE>
GREATER DALLAS ASSOCIATION OF REALTORS(R), INC.
EXHIBIT C
RENEWAL OPTIONS
PROPERTY ADDRESS OR DESCRIPTION: 878 Greenview Drive, Tarrant County, Grand
Prairie, TX 75050
DATE OF LEASE 6/29/94
1. Option(s) to Extend Term
Landlord hereby grants to Tenant One options(s) [the "Options(s)"] to
extend the Lease Terms for additional term(s) of 5 years, each [the
"Extension(s)"], on the same terms, conditions and covenants set forth in the
Lease Agreement, except as provided below. Each Option, shall be exercised only
by written notice delivered to the Landlord at least One Hundred Eighty Days
(180) days before the expiration of the Lease Term or the preceding Extension of
the Lease Term. If Tenant fails to deliver Landlord written notice of the
exercise of an Option within the prescribed time period, such Option and any
succeeding Options shall lapse, and there will be no further right to extend the
Lease Term, Each Option shall be exercisable by Tenant on the express condition
that at the time of the exercise, and at all times prior to the commencement of
such Extension(s), Tenant shall not be in default under any of the provisions of
this Lease. The foregoing Option(s) are personal to Tenant and may not be
exercised by any assignee or subtenant.
2. Calculation of Rent
The Base Rent during the Extension(s) shall be determined by one of the
following methods: [INDICATED BY CHECKING The APPROPRIATE BOX UPON THE EXECUTION
OF THE LEASE AGREEMENT]
|_| (a) Consumer Price Index Adjustment
|X| (b) Fair Rental Value Adjustment
|_| (c) Fixed Rental Adjustment
A. Consumer Price Index Adjustment
The monthly rent during the particular Extension shall be determined by
multiplying the monthly installment of Base Rent during the Lease Term by a
fraction determined as follows:
(1) The numerator shall be the latest Index.
(2) The denominator shill be the initial Index.
If such computation would reduce the rent for the particular Extension,
it shall be disregarded, and the rent during the immediately preceding period
shall apply instead.
The Index, as defined herein, shall mean the Consumer Price Index for
Urban Consumers (all items), Dallas/Fort Worth, Texas, area (1984 = 100)
published by the United States Department of Labor, Bureau of Labor Statistics.
The initial Index shall mean the Index published for the nearest calendar
month preceding the commencement date of the Lease Term. The latest Index shall
mean the Index published for the nearest calendar month preceding the first day
of the Extension.
If a base year other than 1984 is adopted, the Index shall be converted in
accordance with the appropriate conversion factor. If the Index is discontinued
or revised, such other Index or computation with which it is replaced shall be
used in order to obtain substantially the same result as would have been
obtained it if had not been discontinued or revised.
B. Fair Rental Value Adjustment
The Base Rent shall be increased on the first day of the particular
Extension to the "Fair Rental Value" of the Demised Premises, determined in the
following manner:
(1) If the Landlord and Tenant have not been able to agree on the
Fair Rental Value Adjustment prior to the date the option is required to
be exercised, the rent for the Extension shall be determined as follows:
Within fifteen (15) days following the exercise of the option, Landlord
and Tenant shall endeavor in good faith to agree upon a single appraiser.
If Landlord and Tenant are unable to agree upon a single appraiser within
said fifteen (15) day period, each shall then, by written notice to the
other, given within ten (10) days after said fifteen(15) day period,
appoint one appraiser. Within ten (10) days after the two appraisers are
appointed, they shall appoint a third appraiser. If either Landlord or
Tenant fails to appoint its appraiser within the prescribed time period
the single appraiser appointed shall determine the Fair Rental Value of
the Demised Premises. Each party shall bear the cost of the appraiser
appointed by it and the parties shall share equally the cost of the third
appraiser.
(2) The "Fair Rental Value" of the Demised Premises shall mean the
price that a ready and willing tenant would pay as of the commencement of
the Extension as monthly rent to a ready and willing landlord of demised
premises comparable to the Demised Premises if such property were exposed
for lease on the open market for a reasonable period of time and taking
into account all of the purposes for which such property may be used and
not just the use proposed to be made of the Demised Premises by Tenant.
The Fair Rental Value of the Demised Premises shall be the average of the
two of the three appraisals which are closest in amount, and the third
appraisal shall be disregarded. In no event shall the rent be reduced by
reason of such computation. If the Fair Rental Value is not determined
prior to the commencement of the Extension, then Tenant shall continue to
pay to Landlord the rent applicable to the Demised Premises immediately
prior to such Extension until the Fair Rental Value is determined, and
when it is determined, Tenant shall pay to Landlord within ten (10) days
after receipt of such notice the difference between the rent actually paid
by Tenant to Landlord and the new rent determined hereunder. Tenant will
give written approval of Fair Rental Value within fifteen (15) days of
their notice of its determination, no notice of approval will allow tenant
not to extend the lease.
C. Fixed Adjustments
The Base Rent shall be increased to the following amounts on the following
dates:
Date Amount
------------------------------------ ---------------------------------
------------------------------------ ---------------------------------
------------------------------------ ---------------------------------
------------------------------------ ---------------------------------
------------------------------------ ---------------------------------
INITIALS: LANDLORD: JPD INITIALS: TENANT: RR
----------- ----
----------- ----
<PAGE>
GREATER DALLAS ASSOCIATION OF REALTORS(R), INC.
EXHIBIT E
GUARANTEE
PROPERTY ADDRESS OR DESCRIPTION: 878 Greenview Drive, Tarrant County, Grand
Prairie, TX 75050
DATE OF LEASE: 6/29/94
1. In order to induce Greenview Limited Partnership ("Landlord") to
execute the Lease to which this Guarantee is attached (the "Lease") with
Network-1 Software & Technology, Inc ("Tenant") for the Demised Premises in 878
Greenview Dr., Tarrant County, State of Texas, the undersigned (whether one or
more than one) has guaranteed and by this instrument does hereby guarantee the
full payment and performance of all liabilities, obligations, and duties
(including, but not limited to, payment of Rent) imposed upon Tenant under the
terms of the Lease, as if the undersigned has executed the Lease as Tenant
thereunder.
2. The undersigned hereby waives notice of acceptance of this guarantee
and all other notices in connection herewith or in connection with the
liabilities, obligations, and duties guaranteed hereby, including notices of
default by Tenant under the Lease, and waives diligence, presentment, and suit
on the part of Landlord in the enforcement of any liability, obligation, or duty
guaranteed hereby.
3. The undersigned further agrees that Landlord shall not be first
required to enforce against Tenant or any other person any liability,
obligation, or duty guaranteed hereby before seeking enforcement thereof against
the undersigned. Suit may be brought and maintained against the undersigned by
Landlord to enforce any liability, obligation, or duly guaranteed hereby without
joinder of Tenant or any other person. The liability of the undersigned shall
not be affected by any indulgence, compromise, settlement, or variation of terms
which may be extended to Tenant by Landlord or agreed upon by Landlord and
Tenant, and shall not be impaired, modified, changed, released, or limited in
any manner whatsoever by any impairment, modification, change, release, or
limitation of the liability of Tenant or its estate in bankruptcy, or of any
remedy for the enforcement thereof, resulting from the operation of any present
or future provision of the United States Bankruptcy Code, or any similar law or
statute of the United States or any state thereof. Landlord and Tenant, without
notice to or consent by the undersigned, may at any time or times enter into
such extensions, amendments, assignments, subleases, or other covenants
respecting the Lease as they may deem appropriate; and the undersigned shall not
be released thereby, but shall continue to be fully liable for the payment and
performance of all liabilities, obligations and duties of Tenant under the Lease
as so extended, amended, assigned or otherwise, modified.
4. It is understood that other agreements similar to this guarantee may,
at Landlord's sole option and discretion, be executed by other persons with
respect to the Lease. This guarantee shall be cumulative of any such agreements
and the liabilities and obligations of the undersigned hereunder shall in no
event be affected or diminished by reason of such other agreements. Moreover, in
the event Landlord obtains another signature of more than one guarantor on this
page or by obtaining additional guarantee agreements, or both, the undersigned
agrees that Landlord, in Landlord's sole discretion, may (i) bring suit against
all guarantors of the Lease, jointly and severally, or against any one or more
of them: (ii) compound or settle with any one or more of the guarantors for such
consideration as Landlord may deem proper; and (iii) release one or more of the
guarantors from liability. The undersigned further agrees that no such action
shall impair the rights of Landlord to enforce the Lease against any remaining
guarantor or guarantors, including the undersigned.
5. If the party executing this guarantee is a corporation, then the
undersigned officer personally represents and warrants that the Board of
Directors of such corporation, in a duly held meeting, has determined that this
guarantee may reasonably be expected to benefit the corporation.
6. The undersigned agrees that if Landlord shall employ an attorney to
present, enforce, or defend any of Landlord's rights or remedies hereunder, the
undersigned shall pay the reasonable attorney's fees incurred by Landlord in
such connection.
7. This agreement shall be binding upon the undersigned and the
successors, heirs, executors, and administrators of the undersigned, and shall
inure to the benefit of Landlord and Landlord's heirs, executors,
administrators, successors and assigns.
8. See Below
EXECUTED this ______ day of __________________________________ 19__, to be
effective the same day as the effective day of the Lease.
GUARANTOR(S)
WITNESS or ATTEST Name: William Hancock
----------------------------------
(printed or typed)
- ------------------------------------- By: /s/ William Hancock
Signature of Witness ------------------------------------
(Signature)
Printed Name of Witness:
------------- Title: Executive V.P
Address of Witness: ---------------------------------
------------------ Address: 4907 Wareham Dr.
- ------------------------------------- -------------------------------
- ------------------------------------- Arlington, TX 76017
----------------------------------------
(If the Signatory is signing as officer
of a corporate Guarantor, specify the
title of the Signatory in such
corporation.)
8. Notwithstanding anything herein to the contrary, the maximum
liability of Guarantor hereunder shall not exceed the following
amount: Year 1 - $15,000.00, Year 2 -- $10,000.00, Year 3 --
$5,000,000. This guarantee shall terminate on August 1, 1997.
INITIALS: LANDLORD: JPD INITIALS: TENANT:
----------- --------
----------- --------
<PAGE>
GREATER DALLAS ASSOCIATION OF REALTORS(R), INC.
EXHIBIT E
GUARANTEE
PROPERTY ADDRESS OR DESCRIPTION: 878 Greenview Drive, Tarrant County, Grand
Prairie, TX 75050
DATE OF LEASE: 6/29/94
1. In order to induce Greenview Limited Partnership ("Landlord") to
execute the Lease to which this Guarantee is attached (the "Lease") with
Network-1 Software & Technology, Inc ("Tenant") for the Demised Premises in 878
Greenview Dr., Tarrant County, State of Texas, the undersigned (whether one or
more than one) has guaranteed and by this instrument does hereby guarantee the
full payment and performance of all liabilities, obligations, and duties
(including, but not limited to, payment of Rent) imposed upon Tenant under the
terms of the Lease, as if the undersigned has executed the Lease as Tenant
thereunder.
2. The undersigned hereby waives notice of acceptance of this guarantee
and all other notices in connection herewith or in connection with the
liabilities, obligations, and duties guaranteed hereby, including notices of
default by Tenant under the Lease, and waives diligence, presentment, and suit
on the part of Landlord in the enforcement of any liability, obligation, or duty
guaranteed hereby.
3. The undersigned further agrees that Landlord shall not be first
required to enforce against Tenant or any other person any liability,
obligation, or duty guaranteed hereby before seeking enforcement thereof against
the undersigned. Suit may be brought and maintained against the undersigned by
Landlord to enforce any liability, obligation, or duly guaranteed hereby without
joinder of Tenant or any other person. The liability of the undersigned shall
not be affected by any indulgence, compromise, settlement, or variation of terms
which may be extended to Tenant by Landlord or agreed upon by Landlord and
Tenant, and shall not be impaired, modified, changed, released, or limited in
any manner whatsoever by any impairment, modification, change, release, or
limitation of the liability of Tenant or its estate in bankruptcy, or of any
remedy for the enforcement thereof, resulting from the operation of any present
or future provision of the United States Bankruptcy Code, or any similar law or
statute of the United States or any state thereof. Landlord and Tenant, without
notice to or consent by the undersigned, may at any time or times enter into
such extensions, amendments, assignments, subleases, or other covenants
respecting the Lease as they may deem appropriate; and the undersigned shall not
be released thereby, but shall continue to be fully liable for the payment and
performance of all liabilities, obligations and duties of Tenant under the Lease
as so extended, amended, assigned or otherwise, modified.
4. It is understood that other agreements similar to this guarantee may,
at Landlord's sole option and discretion, be executed by other persons with
respect to the Lease. This guarantee shall be cumulative of any such agreements
and the liabilities and obligations of the undersigned hereunder shall in no
event be affected or diminished by reason of such other agreements. Moreover, in
the event Landlord obtains another signature of more than one guarantor on this
page or by obtaining additional guarantee agreements, or both, the undersigned
agrees that Landlord, in Landlord's sole discretion, may (i) bring suit against
all guarantors of the Lease, jointly and severally, or against any one or more
of them: (ii) compound or settle with any one or more of the guarantors for such
consideration as Landlord may deem proper; and (iii) release one or more of the
guarantors from liability. The undersigned further agrees that no such action
shall impair the rights of Landlord to enforce the Lease against any remaining
guarantor or guarantors, including the undersigned.
5. If the party executing this guarantee is a corporation, then the
undersigned officer personally represents and warrants that the Board of
Directors of such corporation, in a duly held meeting, has determined that this
guarantee may reasonably be expected to benefit the corporation.
6. The undersigned agrees that if Landlord shall employ an attorney to
present, enforce, or defend any of Landlord's rights or remedies hereunder, the
undersigned shall pay the reasonable attorney's fees incurred by Landlord in
such connection.
7. This agreement shall be binding upon the undersigned and the
successors, heirs, executors, and administrators of the undersigned, and shall
inure to the benefit of Landlord and Landlord's heirs, executors,
administrators, successors and assigns.
8. See Below
EXECUTED this ______ day of __________________________________ 19__, to be
effective the same day as the effective day of the Lease.
GUARANTOR(S)
WITNESS or ATTEST Name: Robert Russo
----------------------------------
(printed or typed)
- ------------------------------------- By: /s/ Robert Russo
Signature of Witness ------------------------------------
(Signature)
Printed Name of Witness:
------------- Title: President
Address of Witness: ---------------------------------
------------------ Address: 33-20 28th St.
- ------------------------------------- -------------------------------
- ------------------------------------- Long Island City, NY 11106
----------------------------------------
(if the Signatory signing as officer of
a corporate Guarantor, specify the title
of the Signatory in such corporation.)
8. Notwithstanding anything herein to the contrary, the maximum
liability of Guarantor hereunder shall not exceed the following
amount: Year 1 - $15,000.00, Year 2 -- $10,000.00, Year 3 --
$5,00o,00~ This guarantee shall terminate on August 1, 1997,
INITIALS: LANDLORD: JPD INITIALS: TENANT: RR
----------- --------
----------- --------
<PAGE>
GREATER DALLAS ASSOCIATION OF REALTORS(R), INC.
EXHIBIT H.
CONSTRUCTION OF IMPROVEMENTS
PROPERTY ADDRESS OR DESCRIPTION: 878 Greenview Dr., Tarrant County Grand,
Prairie, TX 75050
DATE OF LEASE: 6/29/94
1. Construction of Improvements:
A. Landlord agrees to construct (or complete) a building and other
improvements upon the Demised Premises in accordance with Paragraph 6
being prepared forthwith by Landlord and delivered to Tenant. Upon
approval by Tenant, two or more sets or said Plans and Specifications
shall be signed by both parties, with one signed set retained by Tenant.
Changes to said Paragraph 6 thereafter shall be made only by written
addenda signed by both parties.
2. Completion Date:
A. It is estimated by Landlord that the building and other
Improvements shall be completed by July 30, 1994.
B. Landlord shill notify Tenant in writing when construction has
been completed. Tenant shall thereupon inspect the building and other
improvements, and if same have in fact been completed in accordance with
the Plans and Specifications, the Lease Term shall begin upon the date of
completion with Base Rent due and payable as provided in Article Three of
the Lease.
C. If the building and other improvements have not in fact been
completed in accordance with the Paragraph 6, written notification of the
items deemed incomplete shall be given by Tenant to Landlord immediately
following inspection. Landlord shall forthwith proceed to finish the
incomplete items, and the lease term shall begin upon the date that such
items are in fact complete.
D. Completion, as used herein, shall mean substantial completion.
Substantial completion shall mean at such time as the Landlord completes
the requirements that allow Tenant to obtain a Certificate of Occupancy
issued by the local municipal authorities whose jurisdiction includes the
Demised Premises, and is the stage when the construction is sufficiently
complete in accordance with the Plans and Specifications that the Tenant
can occupy or utilize the Demised Premises for its intended use, except
for minor "punch list" items remaining to be completed.
3. Letter of Acceptance: Tenant agrees to execute and deliver to Landlord,
with a copy to the Principal Broker, a Letter of Acceptance, addressed to
Landlord and signed by Tenant (or its authorized representative) acknowledging
that construction has been completed in accordance with the Paragraph 6
and acknowledging the Commencement Date of the Lease Term.
4. Taking of Possession: The taking of possession of the Demised Premises
along with the letter in Paragraph 3 by Tenant shall be deemed conclusively to
be acknowledgement by Tenant that construction has been completed in accordance
with Paragraph 6 (except for latent defects) and that the Lease Term has begun
as of the later of August 1, 1994 or Landlord's completion of items in Paragraph
6.
5. Failure to Complete: In the event that the building and other
improvements have not been completed in accordance with the Plans and
Specifications by August 15, 1994, or by such date as extended by application of
Section 16.01, Tenant shall have the right and option to terminate this Lease by
giving written notice of Tenant's intention to terminate as of a certain date
not less than fifteen (15) days prior to said certain date. If the building and
other improvements have not been completed by said certain date, the lease
shall, at the option of Tenant, terminate with no further liability of one party
to the other, and Tenant's payments shall be promptly returned.
6. Landlord agrees at his sole cost and expense to perform the following
work by August 15th:
A.) Construct 130 linear feet of vinyl sheetrock wall, with [ILLEGIBLE]
walls up to the deck
B.) Install new glass front door, same as existing
C.) Divide electrical service and HVAC units; i.e. install separate
meters or sub-meters for electrical & gas.
D.) Construct a handicap restroom next to existing
E.) Items A & D above to be substantially similar to that currently
on Premises.
INITIALS: LANDLORD: JPD INITIALS: TENANT: RR
----------- -----------
----------- -----------
<PAGE>
CMH Capital Management Corp.
909 Third Avenue, 9th Floor
New York, NY 10022
August 30, 1996
Robert Russo, President
Network-1 Software & Technology, Inc.
909 Third Avenue
New York, New York 10022
Dear Bob:
This letter agreement shall set forth the terms of retention of CMH
Capital Management Corp. ("CMH") by Network-1 Software & Technology, Inc.
("Network-1") for financial advisory services.
1. CMH agrees to provide financial advisory services to Network-1
for a term of [one (1) year from the date hereof] which services shall include,
but not be limited to, advice related to strategic business relationships,
structuring securities offerings and other financings, assistance in updating
Network-1's Business Plan including preparation of financial projections,
attendance at meetings with potential strategic partners and business
relationships, and general advice related to Network-1 and its products.
2. In consideration of services to be provided by CMH, CMH shall
receive from Network-1 within ninety (90) days of the date hereof a seven (7)
year warrant to purchase up to 50,000 shares of common stock of Network-1 at an
exercise price of $5.00 per share. The form of Warrant is attached hereto as
Exhibit A.
3. In addition to the compensation described in paragraph 2 herein,
Network-1 agrees to promptly reimburse CMH upon request from time to time for
all reasonable out-of-pocket expenses incurred in connection with CMH's
performance of services pursuant to this agreement. Any such expenses in excess
of $500 shall be subject to the prior approval of Network-1.
4. In connection with CMH providing financial advisory services as
provided herein, Network-1 agrees to indemnify and hold harmless CMH, including
its officers and directors, against any and all losses, claims, damages,
liabilities or reasonable costs (including legal fees and expenses) directly or
indirectly, relating to or arising out of CMH's activities as a financial
advisor for Network-1 as provided herein, provided, however, such indemnity
agreement shall not apply to any such loss, claim, damage, liability or cost to
the extent it is found in a final judgment by a court of competent jurisdiction
to have resulted
<PAGE>
primarily and directly from the negligence or willful misconduct of CMH.
Network-1 also agrees that CMH shall not have any liability whether direct or
indirect, in contract or otherwise to Network-1 for or in connection with the
engagement of CMH as provided herein except for any such liability for losses,
claims, damages, liabilities or costs that is found in a final judgment by a
court of competent jurisdiction (not subject to further appeal) to have resulted
primarily and directly from CMH's negligence or willful misconduct.
5. Either party hereto may terminate this agreement at any time
after ninety (90) days from the date hereof upon written notice, without
liability or continuing obligation to the other (except for expenses incurred),
up to the date of termination. The termination of this agreement shall not
affect the consideration received by CMH as provided in paragraph 2 or the
indemnification provided in paragraph 4 hereof.
6. The validity and interpretation of this agreement shall be
governed by the laws in the State of New York, applicable to agreements made and
to be fully performed therein.
7. The benefits of this agreement shall inure to respective
successors and permitted assigns of the parties hereto and the obligations and
liabilities assumed in this agreement by the parties hereto shall be binding
upon their respective successors and permitted assigns.
8. This agreement constitutes the complete understanding among the
parties hereto with respect to the subject matter hereof and no amendment or
modification of any provisions hereof shall be valid unless made in writing and
signed by all the parties hereto.
If the foregoing correctly sets forth our agreement, please sign a
copy of this letter in the space provided and return it to us.
Very truly yours,
CMH Capital Management Corp.
By: /s/ Corey Horowitz
-------------------------
Corey Horowitz, President
Agreed and Accepted this
30th day of August, 1996.
Network-1 Software & Technology, Inc.
By: /s/ Robert Russo
-----------------------
Robert Russo, President
2
<PAGE>
CMH Capital Management Corp.
909 Third Avenue, 9th Floor
New York, New York 10022
January 15, 1997
Robert Russo, President
Network-1 Software & Technology, Inc.
909 Third Avenue, 9th Floor
New York, New York 10022
Dear Bob:
This letter shall serve to amend the financial advisory agreement (the
"1996 Advisory Agreement"), dated August 30, 1996, between Network-1 Software &
Technology, Inc. ("Network-1") and CMH Capital Management Corp. ("CMH") as
follows:
1. The term of the 1996 Advisory Agreement shall be extended until
January 15, 1999.
2. CMH shall receive on the date hereof an additional seven (7) year
warrant to purchase up to 50,000 shares of common stock of Network-1 at an
exercise price of $4.00 per share. The form of warrant is attached hereto as
Exhibit A.
3. In addition, at any time between the date hereof and January 15,
1999, if Network-1 shall complete a merger or sale of substantially all of its
assets, then CMH shall be entitled to a cash fee equal to 2% of the value of the
total consideration received in connection with such transaction. If all or a
portion of the consideration paid in the transaction is other than cash, then
the value of such non-cash consideration shall be equal to the fair market value
on the date the transaction is consummated.
4. All other terms and provisions set forth in the 1996 Advisory
Agreement shall remain in full force and effect.
If the foregoing correctly sets forth our agreement, please sign a
copy of this letter at the appropriate space provided below.
Very truly yours,
CMH Capital Management Corp.
By: /s/ Corey Horowitz
-------------------------
Corey Horowitz, President
Agreed and Accepted:
Network-1 Software & Technology, Inc.
By: /s/ Robert Russo
-----------------------
Robert Russo, President
<PAGE>
CMH Capital Management Corp.
Corey M. Horowitz
President
January 30, 1997
Robert Russo, President
Network-1 Software & Technology, Inc.
909 Third Avenue, 9th Floor
New York, N.Y. 10022
Dear Bob:
This letter shall serve to amend the financial advisory agreement (the
"1996 Advisory Agreement"), dated August 30, 1996, between Network-1 Software &
Technology, Inc. ("Network-1") and CMH Capital Management Corp. "CMH"), as
amended by the letter agreement (the "Letter Agreement"), dated January 15, 1997
between Network-1 and CMH.
1. Network-1 has requested that CMH review, negotiate and develop new
business opportunities for Network-1. In this regard, CMH has engaged in
conversations and negotiations with third parties, and has provided general
business advice to Network-1. CMH has expended, and will continue to expend,
significant time to the affairs of Network-1 to assist Network-1 in achieving
its business plan.
2. In consideration of the services described above, Network-1 agrees to
pay CMH a monthly fee (the "Monthly Fee") equal to $12,500 beginning on January
31, 1997. Network-1's obligation to pay the Monthly Fee shall continue for two
(2) years from the date hereof, unless terminated earlier by agreement between
network-1 and CMH.
3. Since Network-1's cash flow is insufficient to permit regular monthly
payments of the Monthly Fee, payments to CMH shall accrue until the earlier of
(a) the receipt by Network-1 of proceeds from a financing in excess of $5
million, or (b) such time as network-1 shall, in its discretion, determine that
regular monthly payments can be made to CMH.
4. All other terms and provisions set forth in the 1996 Agreement and the
Letter Agreement shall remain in full force and effect.
5. If the foregoing correctly sets forth our agreement, please sign a copy
of this letter in the appropriate space provided below.
Very truly yours,
CMH Capital Management Corp.
/s/ Corey Horowitz
-----------------------------
Corey M. Horowitz
Agreed and Accepted:
Network-1 Software & Technology, Inc.
/s/ Robert Russo, President
- ---------------------------
Robert Russo, President
909 Third Avenue, 9th Floor, New York, NY 10022 Phone: 212.293.3082 Fax:
212.293.3090 Internet: [email protected]
<PAGE>
Exhibit 10.10
May 14, 1998
Robert Russo, President
Network-1 Software & Technology, Inc.
909 Third Avenue, Ninth Floor
New York, New York 10022
Dear Bob:
This letter shall serve to amend paragraph 3 of our letter
agreement, dated January 15, 1997, between Network-1 Software & Technology,
Inc. ("Network-1") and CMH Capital Management Corp. ("CMH") (the "CMH January
1997 Letter Agreement"), a copy which is attached hereto, to provide as
follows:
"3. In addition, at any time between the date hereof and January
15, 2001, if Network-1 shall complete a merger or sale of substantially all
of its assets (a "Transaction"), then CMH shall be entitled to a cash fee
equal to 3% of the Transaction Value. "Transaction Value" shall mean the
total proceeds and other consideration paid or received or to be paid or
received in connection with a Transaction, including, without limitation: (i)
cash; (ii) notes, securities and other property; (iii) liabilities, including
all debt, pension liabilities, guarantees and capitalized leases directly or
indirectly assumed, acquired, refinanced or extinguished and (iv) payments
made in installments. For purposes of computing any fees payable to CMH
hereunder, non-cash consideration shall be valued as follows: (x) publicly
traded securities shall be valued at the average of their closing prices (as
reported in The Wall Street Journal) for the five trading day period
immediately preceding the closing of the Transaction and (y) any other
non-cash consideration shall be valued at the fair market value thereof as
determined in good faith by the Company and CMH."
You understand that Applewood Associates, L.P. ("Applewood") will be
working with CMH to provide financial advisory services to Network-1
including, but not limited to, advice related to strategic business
relationships including potential mergers and acquisitions, structuring
securities offerings and other financings, assisting in updating Network-1's
business plan, and general advice related to Network-1 and its products. CMH
agrees to immediately advise Applewood of any contacts with respect to a
proposed Transaction, and CMH agrees to work together with Applewood in all
respects with respect to a Transaction. CMH further agrees that in the event
it is due a fee from Network-1 pursuant to paragraph 3 of the CMH January
1997 Letter Agreement, as amended above, CMH agrees to share a portion of its
fee with Applewood as follows: 1/3 of the CMH fee or 1% of the Transaction
Value shall be paid to Applewood if Network-1 enters into a definitive
agreement with respect to a Transaction within one year from the date hereof
and 1/2 of the CMH fee or 1.5% of the Transaction Value if Network-1 enters
into a definitive agreement with respect to a Transaction after one (1) year
from the date hereof.
<PAGE>
All other terms and provisions of the January 1997 Letter Agreement
shall remain in full force and effect. If the foregoing currently sets forth
our agreement, please sign a copy of this letter at the appropriate space
provided below.
CMH Capital Management Corp.
By: /s/ Corey Horowitz
------------------------------
Corey Horowitz, President
Agreed and Accepted:
Network-1 Software & Technology, Inc.
By: /s/ Robert Russo
-------------------------------------
Robert Russo, President
Applewood Associates, L.P.
By: /s/ Irwin Lieber
-------------------------------------
<PAGE>
Exhibit 10.11
MASTER SOFTWARE LICENSE AGREEMENT
BETWEEN
ELECTRONIC DATA SYSTEMS CORPORATION
AND
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
- -------------------------------------------------------------------------------
EDS CONFIDENTIAL
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
FOR
MASTER SOFTWARE LICENSE AGREEMENT
ARTICLE I. AGREEMENT, TERM, AND DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
1.1 Agreement and Term......................................................................1
1.2 Certain Definitions.....................................................................1
ARTICLE II. PURCHASE ORDERS
2.1 Preparation of Purchase Orders..........................................................2
2.2 Issuance and Acceptance of Purchase Orders..............................................2
2.3 Purchase Order Alterations..............................................................3
2.4 Evaluation Purchase Orders..............................................................3
2.5 Cancellation of Purchase Orders.........................................................3
ARTICLE III. PROVISION OF LICENSED SOFTWARE AND SERVICES
3.1 General.................................................................................3
3.2 Transportation of Licensed Software.....................................................3
3.3 Risk of Loss............................................................................3
3.4 Installation of Licensed Software.......................................................4
3.5 Right to Cancel for Delays..............................................................4
3.6 Resale of Products by EDS...............................................................4
3.7 Time and Materials Services.............................................................5
3.8 Services in General.....................................................................6
3.9 Use of Existing Materials...............................................................7
3.10 Further Acts...........................................................................7
3.11 Time of Performance....................................................................7
3.12 EDS Business Practices.................................................................7
ARTICLE IV. PROVISION OF LICENSED SOFTWARE
4.1 Acceptance of Licensed Software.........................................................8
4.2 Grant of License........................................................................8
4.3 Transfer of Licensed Software...........................................................9
4.4 Ownership of Licensed Software and Modifications........................................9
4.5 Central Distribution....................................................................9
4.6 Proprietary Markings....................................................................10
4.7 Duplication of Documentation............................................................10
4.8 Non-Disclosure..........................................................................10
4.9 Licensed Software Support Services......................................................10
4.10 Licensed Software Support Services Options.............................................11
4.11 Provision of Source Code...............................................................12
4.12 Acquisition of Third Party Software....................................................13
4.13 Software from an Authorized Third Party................................................13
ARTICLE V. WARRANTIES, INDEMNITIES, AND LIABILITIES
5.1 Warranty................................................................................13
5.2 Proprietary Rights Indemnification......................................................14
5.3 Cross Indemnification...................................................................15
5.4 Limitation of Liability.................................................................15
5.5 Insurance...............................................................................15
5.6 Survival of Article V...................................................................15
ARTICLE VI. PAYMENTS TO SUPPLIER
6.1 Charges, Prices, and Fees for Licensed Software and Services............................16
6.2 Modifications to Charges................................................................16
6.3 Auto Payment............................................................................16
6.4 Payment Through Invoicing...............................................................17
6.5 Taxes...................................................................................17
ARTICLE VII. TERMINATION
7.1 Termination for Cause...................................................................18
7.2 Termination for Insolvency or Bankruptcy................................................18
7.3 Termination for Non-Payment.............................................................19
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
7.4 Termination of Software License.........................................................19
7.5 Rights Upon Termination.................................................................19
ARTICLE VIII. MISCELLANEOUS
8.1 Binding Nature, Assignment, and Subcontracting..........................................19
8.2 Counterparts............................................................................19
8.3 Headings................................................................................19
8.4 Authorized Agency.......................................................................19
8.5 Relationship of Parties.................................................................20
8.6 Confidentiality.........................................................................20
8.7 Media Releases..........................................................................21
8.8 Dispute Resolution......................................................................21
8.9 Electronic Communications...............................................................21
8.10 Proposals and Special Projects.........................................................21
8.11 Governmental Customers.................................................................21
8.12 International Business.................................................................22
8.13 Compliance with Laws...................................................................22
8.14 Labor..................................................................................22
8.15 Export.................................................................................22
8.16 Notices................................................................................22
8.17 Force Majeure..........................................................................23
8.18 Severability...........................................................................23
8.19 Waiver.................................................................................23
8.20 Remedies...............................................................................23
8.21 Survival of Terms......................................................................23
8.22 Nonexclusive Market and Purchase Rights................................................24
8.23 GOVERNING LAW..........................................................................24
8.24 Entire Agreement.......................................................................24
</TABLE>
ii
<PAGE>
LIST OF EXHIBITS
EXHIBIT A
EDS BUSINESS PRACTICES
EXHIBIT B
CHARGES, PRICES, AND FEES
EXHIBIT C
THIRD PARTY SYSTEM ACCESS AGREEMENT
EXHIBIT D
NON-DISCLOSURE AGREEMENT
EXHIBIT E
RESELLER ACCESS AUTHORIZATION
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MASTER SOFTWARE LICENSE AGREEMENT
THIS MASTER SOFTWARE LICENSE AGREEMENT (the "Agreement"), dated November
10, 1997 (the "Effective Date"), is between NETWORK-1 SOFTWARE & TECHNOLOGY,
INC., a Delaware corporation ("Network-1"), and ELECTRONIC DATA SYSTEMS
CORPORATION, a Delaware corporation ("EDS").
W I T N E S S E T H:
WHEREAS, EDS desires to have the right to license computer software
programs and to obtain services from Network-1 from time to time; and
WHEREAS, Network-1 is willing to provide computer software programs and
services to EDS in accordance with the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration received and to be received, Network-1 and EDS agree as
follows:
ARTICLE I. AGREEMENT, TERM, AND DEFINITIONS
1.1 Agreement and Term. The parties agree that the terms and conditions of
this Agreement apply to the provision of licensed software programs and
related services to EDS by Network-1. The term of this Agreement
commences on the Effective Date and the Agreement shall continue to be in
effect until terminated by either party as set forth in this Agreement.
1.2 Certain Definitions. The following definitions apply to this Agreement:
(a) "Applicable Specifications" means the functional, performance,
operational, compatibility, and other specifications or
characteristics of a Product described in applicable Documentation
and such other specifications or characteristics of a Product agreed
upon in writing by the parties.
(b) "Documentation" means user guides, operating manuals, education
materials, product descriptions and specifications, technical
manuals, supporting materials, and other information relating to the
Products or used in conjunction with the Services, whether
distributed in print, magnetic, electronic, or video format, in
effect as of the date (i) a Product is shipped to or is accepted by
EDS, as applicable, or (ii) the Service is provided to EDS.
(c) "Employee" means those employees, agents, subcontractors,
consultants, and representatives of Network-1 provided or to be
provided by Network-1 to perform Services pursuant to this
Agreement.
(d) "Licensed Software" means computer programs in object code
(including micro code) and/or source code, as applicable, provided
or to be provided by Network-1 pursuant to this Agreement. The
definition of Licensed Software also includes any enhancements,
translations, modifications, updates, releases, or other changes to
Licensed Software which are provided or to be provided as part of
Network-1's performance of warranty Service obligations or pre-paid
support Services pursuant to this Agreement.
(e) "Products" means, individually or collectively as appropriate, any
hardware, Licensed Software, Documentation, and Work Products (as
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later defined in this Agreement) supplies, accessories, and other
commodities, provided or to be provided by Network-1 pursuant to
this Agreement.
(f) "Services" includes, but is not limited to, installation, education,
acceptance testing, support, development, warranty, and time and
materials services, provided or to be provided by Network-1 pursuant
to this Agreement.
(g) "Site" means geographically contiguous buildings, each of which, in
whole or in part, is occupied or accessed by EDS or a customer of
EDS. "Geographically contiguous" means adjacent tracts or parcels of
real property separated, if at all, only by publicly dedicated
rights of way or private easements.
(h) "Warranty Period" means the period specified in Section 5.1(e) of
this Agreement during which the Network-1 is obligated to perform
its warranty obligations.
ARTICLE II. PURCHASE ORDERS
2.1 Preparation of Purchase Orders. Network-1 agrees that licensed software
programs and related services which Network-1 generally makes available
to other customers shall be made available to EDS under the terms and
conditions of this Agreement. EDS may request information about licensed
software programs and related services in order to prepare purchase
orders and Network-1 shall promptly provide to EDS, at no charge,
sufficiently detailed information which is responsive to EDS' request.
From time to time and/or at EDS' request, Network-1 shall provide written
information to EDS about licensed software programs and related services,
and new releases, versions or options related thereto, available or to be
available from Network-1.
2.2 Issuance and Aceptance of Purchase Orders. References in this Section to
purchase orders also apply to alterations to Purchase Orders (as later
defined in this Section). The following governs the issuance and
acceptance of purchase orders under this Agreement:
(a) EDS may issue to Network-1 written purchase orders identifying the
Licensed Software and Services EDS desires to obtain from Network-1.
Each purchase order may include other terms and conditions
applicable to the Licensed Software and Services ordered; such other
terms shall be consistent with the terms and conditions of this
Agreement, or shall be necessary to place a purchase order, such as
billing and shipping information, required delivery dates,
installation locations, and Charges (as later defined in this
Agreement).
(b) Network-1 shall promptly accept purchase orders by providing to EDS
a written or an oral acceptance of such purchase order, or by
commencing performance pursuant to such purchase order. Network-1
shall accept purchase orders which do not establish new or
conflicting terms and conditions from those set forth in this
Agreement. Network-1 shall also accept purchase orders incorporating
terms and conditions which have been separately agreed upon in
writing by the parties.
(c) Network-1 may reject a purchase order which does not meet the
conditions described in subsection (b) above by promptly providing
to EDS a written explanation of the reasons for such rejection.
Network-1 shall accept an alteration to the originally issued
purchase order if such alteration remedies the items set forth in
Network-1's written rejection.
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Purchase orders accepted in accordance with this Section are referred to
as "Purchase Orders." EDS shall have no responsibility or liability for
Licensed Software or Services provided without a Purchase Order.
2.3 Purchase Order Alterations. EDS may issue an alteration to a Purchase
Order in order to, without limitation, (i) change a location for
delivery, (ii) modify the quantity or type of Licensed Software and
Services to be delivered or performed, (iii) implement any change or
modification as required by or permitted in this Agreement, (iv) correct
typographical or clerical errors, or (v) order Licensed Software or
Services which are of superior quality, or are enhancements to or are new
releases or new options of the Licensed Software or Services set forth in
the Purchase Order.
2.4 Evaluation Purchase Orders. EDS may issue a purchase order to Network-1
for Licensed Software evaluation by EDS at no charge for an evaluation
period agreed upon by the parties. Network-1 shall provide the Licensed
Software listed in the evaluation Purchase Order to EDS and shall pay all
related transportation and insurance costs. Such Licensed Software shall
be protected by EDS in accordance with the non-disclosure requirements
specified in this Agreement which are applicable to Licensed Software. At
the conclusion of the evaluation period, EDS shall have the option to
acquire such Licensed Software pursuant to this Agreement or to return
such Licensed Software to Network-1 at Network-1's expense without
obligation to Network-1. Licensed Software which Network-1 and EDS agree
to be the subject of beta testing by EDS shall be subject to a separate
agreement between the parties containing applicable beta test terms and
conditions.
2.5 Cancellation of Purchase Orders. Except as otherwise agreed upon by the
parties, EDS may cancel all or a portion of a Purchase Order relating to
Licensed Software, without charge or penalty at any time prior to the
scheduled delivery date of the affected Licensed Software. Purchase
Orders, or portions thereof, for Services may be canceled as specified in
the applicable sections of this Agreement.
ARTICLE III. PROVISION OF LICENSED SOFTWARE AND SERVICES
3.1 General EDS is entitled to obtain Licensed Software and Services for the
benefit of and use by affiliates of EDS. Such affiliates and their
respective employees are entitled to use the Licensed Software and
Services in accordance with this Agreement and have and are entitled to
all rights, benefits, and protections granted to EDS pursuant to this
Agreement with respect to such Licensed Software and Services. However,
an affiliate of EDS shall only be entitled to obtain Licensed Software
and Services directly from Network-1 pursuant to this Agreement if EDS so
provides written notice to Network-1. EDS is responsible for compliance
by its affiliates with the terms and conditions set forth in this
Agreement. EDS and its affiliates have the right to transfer or remarket
the Licensed Software and Services to third parties.
3.2 Transportation of Lincensed Software. Network-1 shall deliver Licensed
Software to EDS on the delivery date set forth in the applicable Purchase
Order or as otherwise agreed upon by the parties. Charges for
transportation of Licensed Software shall be paid by Network-1. The
method and mode of all transportation shall be those selected by
Network-1.
3.3 Risk if Loss. All risk of loss of, or damage to, Licensed Software shall
be borne by Network-1 until receipt of delivery of such Licensed Software
by EDS. Network-1 agrees to insure Licensed Software until receipt of
delivery of such Licensed Software by EDS. If loss to or damage of
Licensed Software
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occurs prior to receipt of delivery by EDS, Network-1 shall immediately
provide a replacement item or, if Licensed Software is not immediately
replaceable, Network-1 shall give EDS highest priority for the provision
of replacement Licensed Software.
3.4 Installation of Licensed Software. If installation is set forth in the
governing Purchase Order or is included in the Charge for Licensed
Software, Network-1 shall install Licensed Software in good working order
at the designated location on or before the installation date set forth
in the applicable Purchase Order or as otherwise agreed upon by the
parties. Installation Services shall include performance of Network-1's
usual and customary diagnostic tests to determine the operational status
of the Licensed Software. Network-1 shall inform EDS of any education
Services which are included with installation, and such education may be
performed at a time mutually agreed upon by Network-1 and EDS.
3.5 Right to Cancel for Delays. In the event of a delay in delivery of all or
any portion of Licensed Software listed on a Purchase Order or Licensed
Software listed on a series of Purchase Orders which relate to a specific
project or request for proposal (the Licensed Software listed on such
series of Purchase Orders referred to as "Related Licensed Software"), or
in the event of a delay in the performance of Services which is not
excused in this Agreement, EDS may cancel without charge all or any
portion of the Licensed Software, Related Licensed Software or Services
for which delivery or performance has been so delayed. If, in EDS'
opinion, the delivered Licensed Software or Related Licensed Software are
not operable without the remaining undelivered Licensed Software or
Related Licensed Software, EDS may, at Network-1's expense, return any
delivered Licensed Software or Related Licensed Software to Network-1.
EDS shall not be liable for any expenses incurred by Network-1 for
canceled, undelivered, or returned Licensed Software or Related Licensed
Software. EDS shall receive a refund of all amounts paid to Network-1
with respect to the canceled and/or returned Licensed Software, Related
Licensed Software and Services.
3.6 Resale of Products by EDS. During the term of this Agreement, EDS may
promote and resell Products, in conjunction with EDS providing systems
integration, outsourcing or facilities management services to a customer
of EDS ("ITS Customer"), in accordance with the following terms and
conditions:
(a) Charges for Purchase Orders identified for resale shall be as set
forth in Exhibit B.
(b) For a Purchase Order not identified as subject to Auto Payment as
defined in Section 6.3, Network-1 may invoice EDS for resale
products upon delivery and payment will be made in accordance with
the provisions of Section 6.4, Payment Through Invoicing.
(c) Network-1 shall extend the same warranties and indemnifications,
with respect to Products resold by EDS hereunder, as Network-1
extends to other end user customers.
(d) The term of agreements, warranties and indemnities extended by
Network-1 to an ITS Customer shall commence upon delivery of a
Product to an ITS Customer and the ITS Customer shall be governed by
Network-1's then current End User Software License Agreement from
the delivery date to such ITS Customer.
(e) Network-1 shall make available to ITS Customers all training,
technical support and other services related to the Products, on the
same terms and conditions, that are currently generally available or
that may be generally available by Network-1 to other end user
customers.
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(f) During the term that EDS is providing services to an ITS Customer,
EDS shall have authorized access to Licensed Software acquired under
this Section 3.6, in accordance with the provisions of Exhibit E,
titled "Reseller Access Authorization".
3.7 Time and Matericals Services. If available from Network-1 (to be
determined at the sole discretion of Network-1), EDS may obtain on a time
and materials basis from Network-1 consulting, development and other
Services (excluding support Services which are provided pursuant to other
sections of this Agreement) agreed upon by the parties in accordance with
the terms and conditions set forth below.
(a) EDS may specify on a purchase order the names, required number and
skill levels of Employees to perform Services.
(b) During the course of performance of Services, EDS may request
replacement of an Employee or a proposed Employee. In such event,
Network-1 shall, within five (5) working days of receipt of such
request from EDS, provide a substitute Employee of sufficient skill,
knowledge, and training to perform the applicable Services. If,
within the first thirty (30) days after an Employee's commencement
of Services, EDS notifies Network-1 (i) such Employee's level of
performance is unacceptable, (ii) such Employee has failed to
perform as required, or (iii) such Employee, in EDS' sole opinion,
lacks the skill, knowledge or training to perform at the required
level, then EDS shall not be required to pay for Services provided
by such Employee during such period and Network-1 shall refund to
EDS all amounts paid for such Employee's Services. If EDS requests
replacement of an Employee for the above-referenced reasons after
such thirty (30) day time period, or at any time for a reason other
than the reasons indicated above, EDS shall not be required to pay
for, and shall be entitled to a refund of, any sums paid to
Network-1 for such Employee's Services after the date of EDS'
requested replacement of such Employee.
(c) Network-1 shall not replace, without EDS' consent, an Employee then
currently performing Services until the governing Purchase Order
expires or is terminated; however, Network-1 may replace, without
EDS' consent, an Employee for reasons relating to the Employee's
termination with Network-1, promotion, illness, death, or causes
beyond Network-1's control.
(d) EDS shall reimburse Network-1 for reasonable expenses incurred by
Employees in the performance of Services (if requested by Network-1
in advance and approved by EDS) which are related to travel,
lodging, and meals; such expenses shall be reimbursed in accordance
with EDS' guidelines for its own employees.
(e) Network-1 shall establish and shall retain, for a period of three
(3) years following the performance of time and materials Services,
records which adequately substantiate the applicability and accuracy
of Charges for such Services and related expenses to EDS. Upon
receipt of reasonable advance notice from EDS, Network-1 shall
produce such records for audit by EDS.
(f) Purchase Orders for Services provided or to be provided under this
Section may be canceled at any time without charge or penalty, upon
written notice to Network-1.
(g) The parties agree that the ownership of any Work Product created by
or on behalf of Network-1 in its performance of time and material
Service shall be negotiated in good faith by the parties and
documented in a separate agreement supplemental to this Agreement.
Such separate
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agreement shall be signed prior to commencement of Services. In the
event that an agreement is not signed and Network-1 commences
performance of Services, then the parties agree that EDS shall own
any Work Product created by or on behalf of Network-1 in the
performance of such Services.
3.8 Service in General. In connection with the performance of any Services
pursuant to this Agreement:
(a) For purposes of this Agreement, the following definition applies:
"Work Product(s)" means (in any form including source code) any and
all ideas, processes, methods, programming aids, formulas,
manufacturing techniques, mask works, reports, programs, manuals,
tapes, card decks, listings, software, flowcharts and systems and
any improvements, enhancements, or modifications to any of the
foregoing, which are developed, prepared, conceived, made, or
suggested by any Employee or by Network-1 as part of, in connection
with, or in relationship to the performance of Services (except in
connection with Network-1's performance of warranty Service
obligations or pre-paid support Services) pursuant to this
Agreement. Work Products also means all such developments as are
originated or conceived during the term of this Agreement but are
completed or reduced to practice thereafter.
(b) Unless a specific number of Employees is set forth in the governing
Purchase Order, Network-1 warrants it will provide sufficient
Employees to complete the Services ordered within the applicable
time frames established pursuant to this Agreement or as set forth
in such Purchase Order.
(c) Network-1 warrants that Employees shall have sufficient skill,
knowledge, and training to perform Services and that the Services
shall be performed in a professional and workmanlike manner.
(d) Employees performing Services in the United States must be United
States citizens or lawfully admitted in the United States for
permanent residence or lawfully admitted in the United States
holding a visa authorizing the performance of Services on behalf of
Network-1.
(e) Network-1 warrants that all Employees utilized by Network-1 in
performing Services are under a written obligation to Network-1
requiring Employee: (i) to maintain the confidentiality of
information of Network-1's customers, and (ii) if such Employee is
not a full-time employee whose work is considered a "work for hire"
under Section 101 of the United States Copyright Code, to assign all
of Employee's right, title, and interest to Network-1 in and to any
Work Product which is developed, prepared, conceived, made, or
suggested by such Employee while providing Services on behalf of
Network-1.
(f) Network-1 shall require Employees providing Services at an EDS
location to comply with applicable EDS security and safety
regulations and policies.
(g) Network-1 shall provide for and pay the compensation of Employees
and shall pay all taxes, contributions, and benefits (such as, but
not limited to, workers' compensation benefits) which an employer is
required to pay relating to the employment of employees. EDS shall
not be liable to Network-1 or to any Employee for Network-1's
failure to perform its compensation, benefit, or tax obligations.
Network-1 shall indemnify, defend and hold EDS harmless from and
against all such taxes, contributions and benefits and will comply
with all associated governmental regulations, including the filing
of all necessary reports and returns.
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(h) Network-1 shall allow EDS or its designated third party to conduct a
background investigation and drug screening ("Investigation") of any
Employee performing Services in the United States, Canada and Mexico
if EDS intends to provide the Employee with unescorted access to an
EDS location. In connection with such Investigation EDS shall
provide to Network-1 a standard form authorizing the Investigation
and Network-1 shall promptly secure the completion of such form by
the Employee. Any and all information obtained in connection with an
Investigation of any Employee or acquired or made known during such
Investigation shall be deemed confidential and shall not be revealed
to persons without a bona fide need to know. If, after reviewing the
results of an Investigation, EDS elects not to accept an Employee
for performance of Services under this Agreement, Network-1 agrees
to not utilize such Employee in the performance of Services. EDS
shall waive the Investigation for an Employee if Network-1 provides
EDS with written confirmation that: (i) Network-1 has conducted a
background and drug screening investigation of such Employee with
satisfactory results, or (ii) the Employee has been employed with
Network-1 for at least five (5) years in good standing.
3.9 Use of Existing Materials. For purposes of this Agreement, "Existing
Materials" means any confidential or proprietary materials which belong
to third parties or in which Network-1 has a pre-existing intellectual
property interest. To the extent that Work Product(s) under development
may incorporate or require the use of Existing Materials, or to the
extent Network-1 intends, in its performance of Services, to utilize any
such Existing Materials (except as such are utilized by Network-1 in the
performance of warranty Service obligations or pre-paid support
Services), Network-1 shall: (i) notify EDS of such intent prior to
commencement of performance of Services; (ii) identify to EDS the
ownership of such Existing Materials; (iii) describe the use to which
Network-1 intends to put such Existing Materials; and (iv) explain
Network-1's ability to proceed with performance of the Services without
the use of such Existing Materials. EDS may require that Network-1
perform Services without the use of such Existing Materials. If any such
Existing Material is owned by a third party and/or is used in the
performance of Services, Network-1 warrants that it has acquired all
licenses and authorizations necessary to utilize the Existing Material in
the manner and for the purpose intended by Network-1 in its actual use of
such Existing Material in the performance of Services. To the extent that
Existing Materials are incorporated in Work Products, Network-1 grants to
EDS and its affiliates a royalty-free, irrevocable, worldwide,
non-exclusive, perpetual right to use the Work Product together with the
Licensed Software in accordance with the terms and conditions of this
Agreement or in a separate agreement supplemental to this Agreement.
3.10 Further Acts. During and subsequent to the term of this Agreement,
Network-1 shall do, or cause to be done, all such further acts and shall
execute, acknowledge, and deliver, or cause to be executed, acknowledged,
and delivered, any and all further documentation or assignments as EDS
may reasonably require to evidence EDS' right to use the Licensed
Software or Work Products, in accordance with this Agreement.
3.11 Time of Performance. Time is expressly made of the essence with respect
to each and every term and provision of this Article.
3.12 EDS Business Practices. Network-1 shall comply with the EDS Business
Practices set forth in Exhibit A.
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ARTICLE IV. PROVISION OF LICENSED SOFTWARE
4.1 Acceptance of Licensed Software. EDS shall accept delivered copy(ies) of
Licensed Software on the date (the "Acceptance Date") when all necessary
Documentation has been received and the Licensed Software performs in
accordance with and/or conforms to its Applicable Specifications. In the
event Licensed Software does not so perform, EDS may (i) continue to test
the Licensed Software with the assistance of Network-1, (ii) permit
Network-1 to repair or replace the Licensed Software at no additional
expense to EDS, or (iii) return the Licensed Software and Documentation
to Network-1, at Network-1's expense and without liability to Network-1,
and any amounts paid by EDS for the Licensed Software and Documentation
shall be refunded by Network-1 to EDS. Acceptance of Licensed Software
does not waive any warranty rights provided in this Agreement for the
Licensed Software.
4.2 Grant of License. For each item of Licensed Software received by EDS,
Network-1 grants EDS and EDS has a worldwide, nonexclusive, irrevocable,
perpetual license to use, execute, store, and display the object code
version of the Licensed Software, on behalf of EDS and customers of EDS
(a "License") in accordance with the type of License selected and in
accordance with the terms and conditions of this Agreement. A Purchase
Order shall designate the type of License which is selected; if a
Purchase Order fails to designate the type of License desired, then such
License shall be deemed to be a Network Software License (as later
defined in this Section).
(a) A "CPU Software License" permits EDS to use the Licensed Software on
any single computer (which may include more than one central
processing unit) or item of equipment ("CPU") and to copy the
Licensed Software as necessary for archival, maintenance, disaster
recovery testing, or back-up purposes. If EDS desires to run
parallel operations in the process of conducting a disaster recovery
test or transferring operations from one CPU to another CPU, EDS may
operate the Licensed Software on two (2) CPUs for the period of time
reasonably necessary to complete the disaster recovery test or
transfer.
(b) A "Site Software License" permits EDS to use the Licensed Software
at the Site designated in the Purchase Order and to copy the
Licensed Software as necessary for dissemination at the Site and for
archival, maintenance, disaster recovery testing, or back-up
purposes. Notwithstanding the foregoing, the Licensed Software may
be used at other than the designated Site, if (i) the designated
Site cannot be used, (ii) the designated Site is replaced or changed
by EDS, or (iii) EDS provides Network-1 with prior written notice.
If EDS desires to run parallel operations in the process of
conducting a disaster recovery test or transferring operations from
one Site to another Site, EDS may operate the Licensed Software at
two (2) Sites for the period of time reasonably necessary to
complete the disaster recovery test or transfer.
(c) A "Network Software License" permits EDS to use the Licensed
Software on any single computer, file server, or item of equipment
which may be accessed by multiple, networked devices (collectively
hereinafter referred to as the "Network"). Portions of the Licensed
Software may be downloaded as appropriate for use by the devices on
the Network. If EDS desires to run parallel operations in the
process of conducting a disaster recovery test or transferring
operations from one Network to another Network, EDS may operate the
Licensed Software on two (2) Networks for the period of time
reasonably necessary to complete the disaster recovery test or
transfer.
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(d) A "Corporate Software License" permits EDS to use the Licensed
Software at any EDS or EDS customer location and on any items of
equipment and to make and use unlimited copies of the Licensed
Software.
(e) Any License granted under this Agreement permits EDS to (i) use
Licensed Software for its corporate purposes including, but not
limited to, providing services to or processing data of customers of
EDS, providing remote access to the Licensed Software, and
performing disaster recovery, disaster testing, and backup as EDS
deems necessary, and (ii) use and copy Licensed Software and
Documentation for the purpose of creating and using training
materials relating to the Licensed Software, which training
materials may include flow diagrams, system operation schematics, or
screen prints from operation of the Licensed Software. Access to and
use of the Licensed Software by customers of EDS shall be considered
authorized use under this Section so long as such use is in
conjunction with EDS' provision of services to, or EDS' processing
the data of, such customers, and so long as any such customers are
bound by obligations of confidentiality.
(f) EDS shall not disassemble, de-compile, or reverse engineer the
Licensed Software.
The governing License also includes the right to use the source code
version of Licensed Software solely in accordance with the terms and
conditions of the Section of this Agreement titled "Provision of Source
Code."
4.3 Transfer of Licensed Software. During the performance or upon termination
of a contract with an EDS customer or upon any transfer of equipment
incorporating Licensed Software to a third party (such customers and
third parties referred to as "Transferee"), (i) the applicable License
may be assigned to such Transferee, or (ii) upon request by EDS, the
Licensed Software will be licensed directly by Network-1 to such
Transferee. Any assignment of Licensed Software in accordance with this
Section shall be in accordance with the terms and conditions of
Network-1's standard software license agreement or as agreed upon by
Network-1 and Transferee at no additional charge to EDS or Transferee,
and EDS shall have no further liability or responsibility with respect to
Licensed Software.
4.4 Ownership of Licensed Software and Modifications. The Licensed Software
shall be and remain the property of Network-1 or third parties which have
granted Network-1 the right to license the Licensed Software and EDS
shall have no rights or interests therein except as set forth in this
Agreement. EDS shall be entitled to develop interfaces to the Licensed
Software and all such software interfaces to the Licensed Software
developed by EDS shall be and remain the property of EDS, and Network-1
and its Employees shall have no rights or interests therein. Except with
respect to software interfaces to the Licensed Software developed by EDS
as provided above, or pursuant to ss.4.11(c) Provision of Source Code of
this Agreement, EDS may not modify, enhance or otherwise change the
Licensed Software. Except in connection with Network-1's performance of
warranty Service obligations or pre-paid support Services, all
modifications of and software derivative of the Licensed Software
developed at EDS' expense by Network-1 and its Employees shall be
considered Work Product, the ownership of which shall be determined as
set forth in ss.3.7(g) Time and Materials Services.
4.5 Central Distribution. EDS may centrally distribute Licensed Software,
including Corrections, Improvements, and Updates thereto, and related
Documentation to end users of the Licensed Software by copying the
Licensed Software onto EDS supplied disks and physically distributing the
Licensed Software, or by electronically transmitting the Licensed
Software directly from a host computer to the hard disk of one or more
central processing
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units. Network-1 shall provide to EDS, as part of Network-1's price for
Licensed Software, a master disk or disks of the applicable Licensed
Software and one copy of all Documentation relating thereto which EDS
shall be entitled to copy for such distribution. As part of Network-1's
price for Updates for Licensed Software, Network-1 shall update master
disks and the then current documentation related thereto. EDS shall keep
records of such electronic distribution and shall provide a report of
sales to Network-1 in monthly Purchase Orders. EDS shall also provide,
upon Network-1's reasonable request from time to time, a written report
setting forth the total number of copies distributed. If the foregoing
monthly Purchase Order is not identified as being subject to automatic
payment then Network-1 shall invoice EDS for such centrally distributed
Licensed Software and Documentation based on EDS' written report of sales
in accordance with the applicable per copy Charge for copies of Licensed
Software.
4.6 Proprietary Markings. EDS shall not remove or destroy any proprietary
markings or proprietary legends placed upon or contained within the
Licensed Software.
4.7 Duplication of Documentation. EDS may duplicate Licensed Software
Documentation, at no additional charge, for EDS' use or for use by a
customer of EDS in connection with the provision of Licensed Software so
long as all required proprietary markings are retained on all duplicated
copies.
4.8 Non-Disclosure. During the term of a License, EDS will treat the Licensed
Software with the same degree of care and confidentiality which EDS
provides for similar information belonging to EDS which EDS does not wish
disclosed to the public, but not less than reasonable care. This
provision shall not apply to Licensed Software, or any portion thereof,
which is (i) already known by EDS without an obligation of
confidentiality, (ii) publicly known or becomes publicly known through no
unauthorized act of EDS, (iii) rightfully received from a third party
without obligation of confidentiality, (iv) disclosed without similar
restrictions by Network-1 to a third party, (v) approved by Network-1 for
disclosure, or (vi) required to be disclosed pursuant to a requirement of
a governmental agency or law so long as EDS provides Network-1 with
timely prior written notice of such requirement. It will not be a
violation of this Section if (A) EDS provides access to and the use of
the Licensed Software to third parties providing services to EDS so long
as EDS secures execution by such third parties of a confidentiality
agreement as would normally be required by EDS, or (B) EDS independently
develops software which is similar to Licensed Software, so long as such
independent development is substantiated by written documentation.
4.9 Licensed Software Support Services. The support Services set forth below
for the Licensed Software shall be provided by Network-1 to EDS during
the Warranty Period at no charge to EDS. Thereafter, such support
Services shall be provided by Network-1, upon EDS' request, for either a
fixed or open-ended term, at the applicable Charges set forth in Exhibit
B, upon the terms contained in the next Section. EDS may discontinue such
support Services at any time by providing thirty (30) days' advance
written notice to Network-1. If such support Services were provided by
Network-1 for an open-ended term, EDS shall promptly receive a refund of
pre-paid support Charges which reflects the amount for discontinued
support Services after the effective date of the notice.
(a) Network-1 shall promptly notify EDS of any defects, errors or
malfunctions ("Defects") in the Licensed Software or Documentation
of which Network-1 becomes aware from any source and shall promptly
provide to EDS modified versions of Licensed Software or
Documentation which incorporate corrections of any Defects
("Corrections"). Network-1 shall also provide to EDS all operational
and support
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assistance necessary to cause Licensed Software to perform in
accordance with its Applicable Specifications and remedial support
designed to provide a by-pass or temporary fix to a Defect until the
Defect can be permanently corrected. Network-1 shall use its best
efforts to respond to requests from EDS for Licensed Software
support in a manner and time frame which are reasonably responsive
considering the nature and severity of the Defect which gave rise to
such request.
(b) Network-1 shall provide to EDS all upgrades, modifications,
improvements, enhancements, extensions, and other changes to
Licensed Software developed by Network-1 ("Improvements") and all
updates to the Licensed Software necessary to cause the Licensed
Software to operate under new versions or releases of the Licensed
Software's current operating system(s) ("Updates") which are
generally made available to other customers of Network-1. EDS shall
have the option to implement any Improvement or Update and any
failure by EDS to so implement shall not affect EDS' right to
continue to receive support and maintenance Services.
(c) Network-1 shall provide telephone hot-line support between 8:00 a.m.
and 5:00 p.m. at the applicable maintenance location. In addition,
Network-1 shall provide to EDS, at the request of EDS and at
Network-1's then current established charges therefor, additional
telephone hot-line support for up to twenty-four (24) hours per day,
seven (7) days per week.
(d) Network-1 shall provide to EDS any revisions to the existing
Documentation developed for the Licensed Software or necessary to
reflect all Corrections, Improvements, or Updates.
(e) Network-1 shall make Licensed Software training available to persons
designated by EDS to the extent agreed upon by the parties.
(f) If the applicable Charge for Licensed Software is payable on a
periodic basis, and such Charge includes provision of support
Services, then if an Event of Default as described in the Section of
this Agreement titled "Provision of Source Code" occurs or an event
described in the Section of this Agreement titled "Termination for
Insolvency or Bankruptcy" occurs and if Network-1 fails to provide
the support Services described above, then EDS' Charge for the
affected Licensed Software shall be immediately reduced to reflect
such failure by subtracting that portion of the Charge allocable to
the provision of support Services.
4.10 Licensed Software Support Services Options. EDS may obtain the support
Services described in the previous Section for Licensed Software on a
central site support basis and/or on an individual site support basis. In
the absence of a designation of central or individual site support in a
Purchase Order, such support shall be deemed to be individual site
support. The Charges for each option shall be as set forth in Exhibit B
or as otherwise agreed upon by the parties. Where "central site support"
is requested, support Services shall be provided by Network-1 to and
shall be requested by EDS through a single point of contact identified by
EDS on a Purchase Order. To the extent necessitated by geographic
diversity or where required in order to support multiple time zones, EDS
may designate multiple central site support locations. With respect to
central site support, Network-1 shall provide to EDS one master disk and
one copy of all Documentation relating to each Correction, Improvement,
or Update. EDS shall be entitled to copy the disk and Documentation and
distribute the copies or electronically transmit the copied information
to each location supported by the central site. A designation of central
site support shall not prevent an individual user of Licensed Software
from contacting Network-1 in the event of an emergency. Where "individual
site support" is
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requested, support Services shall be provided by Network-1 to the
applicable licensed CPU, Site, or Network, or, in the case of a Corporate
Software License, to a licensed user.
4.11 Provision of Source Code. EDS' ability to utilize adequately Licensed
Software will be seriously jeopardized if Network-1 fails to maintain or
support such Licensed Software unless complete Licensed Software source
code and related Documentation is made available to EDS for EDS' use in
satisfying EDS' maintenance and support requirements. Therefore,
Network-1 agrees that if an "Event of Default" occurs, then Network-1
will provide to EDS one copy of the most current version of the source
code for the affected Licensed Software and associated Documentation in
accordance with the following:
(a) An Event of Default shall be deemed to have occurred if Network-1:
(i) ceases to market or make available maintenance or support
Services for the Licensed Software during a period in which EDS is
entitled to receive or to purchase, or is receiving or purchasing,
such maintenance and support and Network-1 has not promptly cured
such failure within thirty (30) days after receipt of EDS' written
demand that Network-1 make available or perform such maintenance and
support, (ii) becomes insolvent, executes an assignment for the
benefit of creditors, or becomes subject to bankruptcy or
receivership proceedings, (iii) ceases business operations generally
or (iv) has transferred all or substantially all of its assets or
obligations set forth in this Agreement to a third party which has
not assumed all of the obligations of Network-1 set forth in this
Agreement.
(b) Network-1 will promptly and continuously update and supplement the
source code as necessary with all revisions, Corrections,
enhancements, and other changes developed for the Licensed Software
and Documentation. Such source code shall be in a form suitable for
reproduction and use by computer and photocopy equipment, and shall
consist of a full source language statement of the program or
programs comprising the Licensed Software and complete program
maintenance Documentation which comprise the pre-coding detail
design specifications, and all other material necessary to allow a
reasonably skilled programmer or analyst to maintain and enhance the
Licensed Software without the assistance of Network-1 or reference
to any other materials.
(c) The governing License for the Licensed Software includes the right
to use source code received under this Section as necessary to
modify, maintain, and update the Licensed Software solely for
purposes of providing support for EDS and customers of EDS that,
absent the Event of Default, would have been provided by Network-1
under this Agreement, and for no other purpose whatsoever. EDS shall
not distribute the Licensed Software source code received under this
Section to any third party and such source code shall remain subject
to the terms and provisions of this Agreement.
(d) Upon request by EDS, Network-1 will deposit in escrow with an escrow
agent acceptable to EDS and pursuant to a mutually acceptable escrow
agreement supplemental to this Agreement, a copy of the source code
which corresponds to the most current version of the Licensed
Software in use by EDS. EDS shall pay all fees of the escrow agent
for services provided. At a minimum, the terms and conditions of
such mutually acceptable escrow agreement supplemental to this
Agreement shall allow EDS to conduct an audit of, or shall require
that the escrow agent conduct an audit of, the copy of source code
in escrow to ensure that such copy meets the requirements
established in this Section. Network-1's entry into, or failure to
enter into, an agreement with an escrow agent or to deposit the
described materials
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in escrow shall not relieve Network-1 of its obligations to EDS
described in this Section.
(e) If, as a result of an Event of Default, Network-1 fails to provide
required support Services, then any periodic license fee which EDS
is required to pay under this Agreement for Licensed Software shall
be reduced to reflect such lack of support Services. At such time as
Network-1 commences offering the support Services described in this
Agreement for Licensed Software, EDS may obtain such support
Services as provided for elsewhere in this Agreement.
4.12 Acquisition of Third Party Software. If EDS has acquired software
products from a third party and rights to such software products are
subsequently acquired by Network-1 (whether through purchase of the third
party in whole or in part, through purchase of the software products,
through acquisition of the rights to market the software, or through any
other means), then EDS shall have the option of (i) continuing to use the
software products under the original license agreement with such third
party at no additional charge to EDS other than applicable fees
identified in such license agreement, or (ii) using the software products
under the terms and conditions of this Agreement.
4.13 Software from an Authorized Third Party. If EDS acquires Network-1's
software products from a value added reseller, dealer, distributor, or
other Network-1 authorized third party provider or if the Licensed
Software is embedded in software products acquired from a third party,
Network-1 agrees that, at EDS' option, such software products shall be
deemed to have been acquired under this Agreement.
ARTICLE V. WARRANTIES, INDEMNITIES, AND LIABILITIES
5.1 Warranty. Network-1 represents and warrants that:
(a) Network-1 has not and will not enter into agreements or commitments
which are inconsistent with or conflict with the rights granted to
EDS in this Agreement;
(b) The Products are and shall be free and clear of all liens and
encumbrances, and EDS shall be entitled to use the Products without
disturbance;
(c) No portion of the Products contain, at the time of delivery, any
"back door," "time bomb," "Trojan horse," "worm," "drop dead
device," "virus," or other computer software routines or hardware
components designed to (i) permit access or use of either the
Products or EDS' computer systems by Network-1 or a third party not
authorized by this Agreement, (ii) disable, damage or erase the
Products or data, or (iii) perform any other such actions;
(d) The Products and the design thereof shall not contain preprogrammed
preventative routines or similar devices which prevent EDS from
exercising the rights set forth in Article IV of this Agreement or
from utilizing the Products for the purpose for which they were
designed;
(e) Each Product and its media (i) shall be new and shall be free from
defects in manufacture, materials, and design, (ii) shall be
manufactured in a good and workmanlike manner using a skilled staff
fully qualified to perform their respective duties, and (iii) shall
function properly under ordinary use and operate in conformance with
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its Applicable Specifications and Documentation from the date of
receipt until the date ninety (90) days after EDS requests, and
Network-1 provides, the pass-key necessary for installation and
activation of the Licensed Software.
(f) The Products are, and shall continue to be, data, program, and
upward compatible with any other Products available or to be
available from Network-1 so that data files created for a Product
can be utilized without adaptation with other Products and Products
will operate with other Products and will not result in the need for
alteration, emulation, or other loss of efficiency. Network-1 shall
provide to EDS at least ninety (90) days prior written notice to
discontinue any Product.
(g) Neither the performance nor the functionality of the Products will
be affected by any changes to the date format or date calculations
within any part of the Product either before, during or after the
year 2000.
During the Warranty Period, Network-1 will provide warranty Service to
EDS at no additional cost and will include all Services or replacement
Products or Product media necessary to enable Network-1 to comply with
the warranties set forth in this Agreement. Network-1 shall pass through
to EDS any manufacturers' warranties which Network-1 receives on the
Products and, at EDS' request, Network-1 shall enforce such warranties on
EDS' behalf. Network-1 agrees that EDS shall be entitled to pass through
to Product end users any warranties received from Network-1 for such
Products pursuant to this Agreement.
5.2 Proprietary Rights Indemnification. Network-1 represents and warrants
that (i) at the time of delivery to EDS, no Product provided under this
Agreement is the subject of any litigation ("Litigation"), and (ii)
Network-1 has all right, title, ownership interest, and/or marketing
rights necessary to provide the Products to EDS and that each License,
the Products and their sale, license, and use hereunder do not and shall
not directly or indirectly violate or infringe upon any copyright,
patent, trade secret, or other proprietary or intellectual property right
of any third party or contribute to such violation or infringement
("Infringement"). Network-1 shall indemnify and hold EDS and Product end
users and their respective successors, officers, directors, employees,
and agents harmless from and against any and all actions, claims, losses,
damages, liabilities, awards, costs, and expenses (including legal fees)
resulting from or arising out of any Litigation, any breach or claimed
breach of the foregoing warranties, or which is based on a claim of an
Infringement and Network-1 shall defend and settle, at its expense, all
suits or proceedings arising therefrom. EDS shall inform Network-1 of any
such suit or proceeding against EDS and shall have the right to
participate in the defense of any such suit or proceeding at its expense
and through counsel of its choosing. Network-1 shall notify EDS of any
actions, claims, or suits against Network-1 based on an alleged
Infringement of any party's intellectual property rights in and to the
Products. In the event a permanent injunction is obtained against use of
the Products by EDS or customers of EDS, Network-1 shall promptly, at its
option and expense, either (A) procure for EDS and Product end users the
right to continue to use the infringing Product as set forth in this
Agreement, or (B) replace or modify the infringing Products to make its
use non-infringing while being capable of performing the same function
without degradation of performance. If, after the use of best efforts,
neither option (A) or (B) is accomplished by Network-1 within thirty (30)
days of the effective date of such permanent injunction, then: (i) the
applicable Purchase Order may be immediately terminated by EDS, (ii)
Network-1 shall promptly refund to EDS a pro rata amount of any prepaid
Charges for maintenance and support Services related thereto, and (iii)
Network-1 shall promptly refund to EDS all prepaid fees or Charges, less
depreciation based on a five (5) year straight line basis, for Product(s)
subject to such
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permanent injunction which cannot be used by EDS or customers of EDS and
which have been paid by EDS to Network-1 pursuant to such Purchase Order.
5.3 Cross Indemnification. In the event any act or omission of a party or its
employees, servants, agents, or representatives causes or results in (i)
damage to or destruction of property of the other party or third parties,
and/or (ii) death or injury to persons including, but not limited to,
employees or invitees of either party, then such party shall indemnify,
defend, and hold the other party harmless from and against any and all
claims, actions, damages, demands, liabilities, costs, and expenses,
including reasonable attorneys' fees and expenses, resulting therefrom.
The indemnifying party shall pay or reimburse the other party promptly
for all such damage, destruction, death, or injury.
5.4 Limitation of Liability. Neither party shall be liable to the other
pursuant to this Agreement for any amounts representing loss of profits,
loss of business or indirect, consequential, exemplary, or punitive
damages of the other party. The foregoing shall not limit the
indemnification, defense and hold harmless obligations set forth in this
Agreement.
5.5 Insurance. Network-1 shall, at Network-1's sole expense, maintain the
following insurance:
a) Commercial General Liability Insurance including contractual
coverage: The limits of this insurance for bodily injury and
property damage combined shall be at least:
<TABLE>
<CAPTION>
<S> <C>
Each Occurrence Limit $1,000,000
General Aggregate Limit $1,000,000
Products-Completed Operations Limit $1,000,000
Personal and Advertising injury Limit $1,000,000
</TABLE>
c) Workers' Compensation Insurance: Such insurance shall provide
coverage in amounts not less than the statutory requirements in the
state where the work is performed, even if such coverage is elective
in that state.
d) Employers Liability Insurance: Such insurance shall provide limits
of not less than $1,000,000 per occurrence.
The insurance specified in (a) and (b) above shall: (i) name EDS, its
directors, officers, employees and agents as additional insureds, and,
(ii) provide that such insurance is primary coverage with respect to all
insureds and additional insureds.
The above insurance coverages may be obtained through any combination of
primary and excess or umbrella liability insurance. EDS may require
higher limits or other types of insurance coverage(s) as necessary and
appropriate under the applicable purchase order.
Network-1 shall provide at EDS' request certificates evidencing the
coverages, limits and provisions specified above on or before the
execution of the Agreement and thereafter upon the renewal of any of the
policies. Network-1 shall require all insurers to provide EDS with a
thirty (30) day advanced written notice of any cancellation, nonrenewal
or material change in any of the policies maintained in accordance with
this Agreement.
5.6 Survival of Article V. The provisions of this Article V, excluding ss.5.5
Insurance, shall survive the term or termination of this Agreement for
any reason.
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ARTICLE VI. PAYMENTS TO SUPPLIER
6.1 Charges, Prices, and Fees for Licensed Software and Services. Charges,
prices, and fees ("Charges") and discounts, if any, for Licensed Software
and Services shall be determined as set forth in Exhibit B, in a Purchase
Order, or as otherwise agreed upon by the parties, unless modified as set
forth in this Agreement. Upon EDS' request, Network-1 shall: (i) provide
to EDS current copies of Network-1's standard published prices, and (ii)
records which substantiate that EDS has received the Charges and
discounts to which EDS is entitled to under this Agreement. In no event
shall Charges exceed Network-1's then current established charges, prices
and fees. If promotional discounts or programs are extended to other
customers, dealers, or distributors of Network-1, EDS shall be entitled
to participate in such promotional discounts or programs. All purchases
which utilize any such discounts shall be deemed for all purposes
including, without limitation, for purposes of calculating accumulated
purchases and any discounts hereunder, to have been purchased or licensed
under this Agreement.
6.2 Modifications to Charges. Where a change in an established Charge for
Licensed Software or Services is provided for in this Agreement,
Network-1 shall give to EDS at least forty-five (45) days' prior written
notice of such change.
(a) Any increase in a Charge for Services shall not occur during the
first twelve (12) months of this Agreement, during the term of the
applicable Purchase Order or during the specified period for
performance of Services, whichever period is longer. Thereafter, any
increase in a Charge for Services shall not exceed five percent (5%)
of such Charge.
(b) All purchase orders issued by EDS prior to the end of the required
notice period will be honored at the then current Charges so long as
the scheduled delivery date of the applicable Licensed Software or
Services is within forty-five (45) days after the effective date of
the increase.
(c) If Network-1's established Charge, less any applicable discount or
promotion, on the scheduled delivery date is lower than the
established Charge for such Licensed Software or Service stated in
the applicable Purchase Order, then EDS shall be entitled to obtain
such Licensed Software or Service at such lower Charge, less any
applicable discount or promotion.
6.3 Auto Payment. This Section shall apply to Purchase Orders identified as
being subject to automatic payment by EDS.
(a) Single Payment for Recurring Charges. All Charges which are due and
payable on a monthly, annual or other periodic basis for Products
and Services ("Recurring Charges") shall be paid by EDS on the same
date of the month for each month that such Charges are due (the
"Remit Date"). The initial payment for a Recurring Charge shall be
made on the first Remit Date after the Applicable Event provided
that such Applicable Event occurs at least five (5) days prior to
the first Remit Date. An "Applicable Event" is the event set forth
in a Purchase Order that initiates payment of Charges (such as the
installation, receipt, or acceptance of the Product; or the
commencement or completion of Services). If the Applicable Event
occurs less than five (5) days prior to the first Remit Date, the
initial payment for such Recurring Charge shall be made on the
following Remit Date, and EDS shall not be subject to interest or
penalties as a result of such late payment.
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(b) Payment for Other Charges. Except for Recurring Charges, or unless
otherwise agreed to by the parties in writing, all payments due
Network-1 for Products and Services shall be paid within thirty (30)
days after the date of the Applicable Event.
(c) Invoices Required Under Auto Payment. Network-1 must send EDS an
invoice to receive payment for any amounts due for any Charges which
are payable and have not been identified on the applicable Purchase
Order which is subject to automatic payment.
(d) Reconciliation. From time to time, at either party's request, the
other party shall assist with the reconciliation of the payments
made by EDS to Network-1.
(e) Taxing Jurisdictions. Network-1 shall provide EDS with the list of
states and taxing jurisdictions, and their respective registration
numbers where Network-1 is qualified and registered to collect
sales/use taxes in all of the taxing jurisdictions within that
state. If such written notification is not received by EDS from
Network-1, then EDS shall remit the appropriate tax directly to the
taxing authority. Network-1 shall promptly notify EDS of any
additional jurisdictions to which Network-1 may qualify and register
to collect sales/use taxes.
6.4 Payment Through Invoicing. This Section applies to Purchase Orders issued
by EDS which are not identified as being subject to automatic payment or
to any invoice received by EDS from Network-1 as permitted by this
Agreement.
(a) Except as otherwise set forth in this Agreement, any undisputed sum
due to Network-1 pursuant to this Agreement shall be payable within
thirty (30) days after receipt by EDS of a correct invoice therefor
from Network-1. Network-1 shall invoice EDS on or after the
applicable Acceptance Date for the Licensed Software covered by such
invoice. Periodic payments, if any, due to Network-1 pursuant to
this Agreement shall be invoiced at the beginning of the period to
which they apply. Payment for any other Services shall be invoiced
as agreed upon by the parties or, in the absence of an agreement,
upon completion of such Services.
(b) A "correct" invoice shall contain (i) Network-1's name and invoice
date, (ii) the specific Purchase Order number if applicable, (iii)
description including serial number as applicable, price, and
quantity of the Licensed Software or Services actually delivered or
rendered, (iv) credits (if applicable), (v) name (where applicable),
title, phone number, and complete mailing address of responsible
official to whom payment is to be sent, and (vi) other
substantiating documentation or information as may reasonably be
required by EDS from time to time. A correct invoice must be
submitted to the appropriate invoice address listed on the
applicable Purchase Order.
6.5 Taxes.
(a) Unless EDS provides evidence of exemption, EDS shall pay or
reimburse Network-1, where EDS is liable under applicable tax
statute, amounts equal to taxes which are imposed upon EDS'
acquisition of Products or Services including federal excise taxes,
or sales or use taxes; provided, however, EDS shall not be obligated
to pay or reimburse Network-1 for any taxes attributable to the sale
of any Products or Services which are imposed on or measured by net
or gross income, capital, net worth, franchise, privilege, any other
taxes, or assessments, nor any of the foregoing imposed on or
payable by Network-1.
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(b) Network-1 agrees to reasonably cooperate with EDS in the audit or
minimization of any applicable tax and shall make available to EDS,
and any taxing authority, all information, records, or documents
relating to any audits or assessments attributable to or resulting
from the payment process under this Agreement, and the filing of any
tax returns or the contesting of any tax.
EDS shall not be obligated to pay or reimburse Network-1 for
additions to taxes, penalties, interest, fees, or other expenses or
costs, if any, incurred by EDS as a result of, or attributable to,
(i) Network-1's failure to verify taxability of a purchase, (ii)
Network-1's failure to correctly calculate or remit taxes in a
timely manner, or (iii) Network-1's negligence, misconduct or
failure to file properly any required returns or reports, or other
required documents.
(c) Upon written notification by EDS and subsequent verification by
Network-1, Network-1 shall reimburse or credit, as applicable, EDS
in a timely manner, for any and all taxes erroneously paid by EDS.
(d) EDS shall provide Network-1 with, and Network-1 shall accept in good
faith, resale, direct pay, or other exemption certificates, as
applicable. Network-1 agrees to separately identify on the invoice
the taxable and non-taxable purchases, the types of tax and the
taxing authorities.
(e) Where Products are destined or Services are performed
internationally, then at EDS' direction, payment may be made by EDS
or its affiliate (i) in country to the local affiliate, (ii) in the
United States, or (iii) in a country mutually agreed upon by the
parties.
(f) If EDS or an affiliate of EDS is required by law to make any
deduction or to withhold from any sum payable hereunder, then the
sum payable by EDS or such affiliate of EDS upon which the deduction
is based shall be paid to Network-1 net of such deduction or
withholding. EDS or such affiliate of EDS shall pay the applicable
tax authorities any such required deduction or withholding.
ARTICLE VII. TERMINATION
7.1 Termination for Cause. Except as provided below by the section of this
Agreement titled "Termination for Non-Payment," in the event that either
party materially or repeatedly defaults in the performance of any of its
duties or obligations set forth in this Agreement, and such default is
not substantially cured within thirty (30) days after written notice is
given to the defaulting party specifying the default, then the party not
in default may, by giving written notice thereof to the defaulting party,
terminate the applicable License or Purchase Order relating to such
default as of a date specified in such notice of termination.
7.2 Termination for Insolvency of Bankruptcy. Either party may immediately
terminate this Agreement and any Purchase Order by giving written notice
to the other party in the event of (i) the liquidation or insolvency of
the other party, (ii) the appointment of a receiver or similar officer
for the other party, (iii) an assignment by the other party for the
benefit of all or substantially all of its creditors, (iv) entry by the
other party into an agreement for the composition, extension, or
readjustment of all or substantially all of its obligations, or (v) the
filing of a meritorious petition in bankruptcy by or against the other
party under any bankruptcy or debtors' law for its relief or
reorganization.
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7.3 Termination for Non-Payment. Network-1 may terminate a Purchase Order, or
any portion thereof, if EDS fails to pay when due any undisputed amounts
due pursuant to such Purchase Order and such failure continues for a
period of sixty (60) days after the last day payment is due, so long as
Network-1 gives EDS written notice of the expiration date of the
aforementioned sixty (60) day period at least thirty (30) days prior to
the expiration date.
7.4 Termination of Software License. EDS may terminate any License for any
reason by providing written notice to Network-1. If EDS elects to so
terminate a License, EDS shall return to Network-1 or, at EDS' option,
destroy, all copies of the Licensed Software and Documentation in EDS'
possession which are the subject of the terminated License, except as may
be necessary for archival purposes.
7.5 Rights Upon Termination. Unless specifically terminated as set forth in
this Article, all Licenses (and EDS' right to use the Licensed Software
in accordance with such Licenses) and Purchase Orders which require
performance or extend beyond the term of this Agreement shall, at EDS'
option, be so performed and extended and shall continue to be subject to
the terms and conditions of this Agreement.
ARTICLE VIII. MISCELLANEOUS
8.1 Binding Nature, Assignment, and Subcontracting. This Agreement shall be
binding on the parties and their respective successors in interest and
assigns. Neither party shall have the power to assign this Agreement
without the prior written consent of the other party, which consent shall
not be unreasonably withheld. If Network-1 subcontracts or delegates any
of its duties or obligations of performance in this Agreement or in a
Purchase Order to any third party, Network-1 shall remain fully
responsible for complete performance of all of Network-1's obligations
set forth in this Agreement or in such Purchase Order and for any such
third party's compliance with the non-disclosure and confidentiality
provisions set forth in this Agreement.
For purposes of this Agreement, the following transactions relating to
the parties shall not be deemed an assignment of this Agreement and shall
not give rise to any requirement of approval or consent by any party to
this Agreement, nor result in any right to terminate of alter this
Agreement: any merger (including, without limitation, a reincorporation
merger), consolidation, reorganization, stock exchange, sale of stock or
substantially all of the assets or other similar or related transaction
in which EDS or Network-1, as applicable, is the surviving entity or, if
not the surviving entity, the surviving entity continues to conduct the
business conducted by such party prior to consummation of the
transaction.
8.2 Counterparts. This Agreement may be executed in several counterparts, all
of which taken together shall constitute one single agreement between the
parties.
8.3 Headings. The Article and Section headings used in this Agreement are for
reference and convenience only and shall not enter into the
interpretation hereof.
8.4 Authorized Agency. From time to time and at any time, EDS may assume
operational responsibility for computer software programs acquired
directly or indirectly from Network-1 by third parties which become
customers or affiliates, or which are acquired by EDS, after the
Effective Date.
(a) With respect to such customers, and immediately upon execution of a
contract between EDS and a customer, the computer software programs
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acquired from Network-1 by such customer shall be governed by the
terms and conditions of this Agreement and EDS may use such computer
software programs in accordance with this Agreement at no additional
charge to EDS or its customer, provided, however, that such computer
software programs may only be used by EDS on behalf of that
customer. With respect to each such customer, Network-1, EDS and the
customer shall execute an access agreement authorizing EDS' use of
the computer software programs. Such access agreement shall be in a
form substantially similar to the Third Party System Access
Agreement attached to this Agreement as Exhibit C.
(b) With respect to any such affiliate, and upon Network-1's receipt of
written notice from EDS and such affiliate, the license or other
agreement governing the use and support of such computer software
programs shall automatically be deemed to have been assigned to EDS,
provided, however, that such assigned license or other agreement
shall be superseded by, and the use and support of the computer
software programs shall be governed by, the terms and conditions of
this Agreement.
(c) With respect to any third party with which EDS either (i) buys,
leases, or otherwise acquires all or a substantial part of the
assets or business of such third party, or (ii) consolidates with or
merges with said third party, the license or other agreement
governing the use and support of such computer software programs
shall automatically be deemed to have been assigned to EDS. At that
time, EDS may supersede such assigned license or other agreement
with the terms and conditions of this Agreement, in which case the
use and support of such computer software programs shall be governed
by the terms and conditions of this Agreement, or EDS may elect to
have the assigned license or other agreement continue to govern the
use of such computer software programs.
8.5 Relationship of Parties. Network-1 is performing pursuant to this
Agreement only as an independent contractor. Network-1 has the sole
obligation to supervise, manage, contract, direct, procure, perform or
cause to be performed its obligations set forth in this Agreement, except
as otherwise agreed upon by the parties. Nothing set forth in this
Agreement shall be construed to create the relationship of principal and
agent between Network-1 and EDS. Network-1 shall not act or attempt to
act or represent itself, directly or by implication, as an agent of EDS
or its affiliates or in any manner assume or create, or attempt to assume
or create, any obligation on behalf of, or in the name of, EDS or its
affiliates.
8.6 Confidentiality. Network-1 acknowledges that in the course of performance
of its obligations pursuant to this Agreement, Network-1 may obtain
confidential and/or proprietary information of EDS or its affiliates or
customers. "Confidential Information" includes: information relating to
development plans, costs, finances, marketing plans, equipment
configurations, data, access or security codes or procedures utilized or
acquired, business opportunities, names of customers, research, and
development; the terms, conditions and existence of this Agreement; any
information designated as confidential in writing or identified as
confidential at the time of disclosure if such disclosure is verbal or
visual; and any copies of the prior categories or excerpts included in
other materials created by the recipient party. Network-1 hereby agrees
that all Confidential Information communicated to it by EDS, its
affiliates, or customers, whether before or after the Effective Date,
shall be and was received in strict confidence, shall be used only for
purposes of this Agreement, and shall not be disclosed by Network-1, its
agents or employees without the prior written consent of EDS. This
provision shall not apply to Confidential Information which is (i)
already known by Network-1 without an obligation of confidentiality, (ii)
publicly known or becomes publicly known
20
<PAGE>
through no unauthorized act of Network-1, (iii) rightfully received from
a third party (other than an EDS customer or an EDS affiliate) without
obligation of confidentiality, (iv) disclosed without similar
restrictions by EDS to a third party (other than an EDS customer or an
EDS affiliate), (v) approved by EDS for disclosure, or (vi) required to
be disclosed pursuant to a requirement of a governmental agency or law so
long as Network-1 provides EDS with timely prior written notice of such
requirement. Except with respect to Licensed Software, which shall be
governed by the section of this Agreement titled "Non-Disclosure,"
information received by EDS from Network-1 shall only be considered
proprietary and/or confidential after a separate agreement in the form of
Exhibit D, attached hereto, has been executed by a duly authorized
representative of each party for the specific purpose of disclosing such
information. The provisions of this Section shall survive the term or
termination of this Agreement for any reason.
8.7 Media Release. Except for any announcement intended solely for internal
distribution by Network-1 or any disclosure required by legal,
accounting, or regulatory requirements beyond the reasonable control of
Network-1, all media releases, public announcements, or public
disclosures (including, but not limited to, promotional or marketing
material) by Network-1 or its employees or agents relating to this
Agreement or its subject matter, or including the name, trade name, trade
mark, or symbol of EDS or any affiliate of EDS, shall be coordinated with
and approved in writing by EDS prior to the release thereof. Network-1
shall not represent directly or indirectly that any Licensed Software or
Service provided by Network-1 to EDS has been approved or endorsed by EDS
or include the name, trade name, trade mark, or symbol of EDS or any
affiliate of EDS on a list of Network-1's customers without EDS' express
written consent.
8.8 Media Releases. In the event of any disagreement regarding performance
under or interpretation of this Agreement and prior to the commencement
of any formal proceedings, the parties shall continue performance as set
forth in this Agreement and shall attempt in good faith to reach a
negotiated resolution by designating a representative of appropriate
authority to resolve the dispute.
8.9 Electronic Communications. If Network-1 and EDS mutually agree, business
communications between the parties, including, but not limited to,
purchase orders, invoices, and payment may be submitted electronically.
In such case, the parties shall mutually agree in writing upon
supplemental terms and conditions, including technical standards, for the
electronic exchange of such items.
8.10 Proposals and Special Projects. EDS may request a written proposal,
quote, or bid from Network-1 for the provision of Licensed Software
and/or Services for a specific EDS project which may be governed by
separately negotiated terms and conditions. In such event, any Licensed
Software and Services obtained for such project shall be deemed for
purposes of calculating accumulated purchases and any discounts set forth
in this Agreement, to have been obtained pursuant to this Agreement.
8.11 Governmental Customers. This Agreement shall apply to the acquisition of
Licensed Software or Services for use in or in support of the performance
of, or resale under, a contract with a federal, state, county, or local
governmental entity (a "Governmental Customer"). Network-1 and EDS may
negotiate in good faith a supplemental agreement incorporating required
flow-down provisions or other provisions relating to, applicable to, or
required by such Governmental Customer or the proposed contract between
EDS and such Governmental Customer. All Licensed Software and Services
obtained pursuant to this Section shall be deemed for purposes of
calculating accumulated purchases and any discounts set forth in this
Agreement, to have been obtained pursuant to this Agreement.
21
<PAGE>
8.12 International Business. This Agreement shall apply to the acquisition of
Licensed Software and Services for use in or in support of the
performance or remarketing of Licensed Software and Services in countries
outside the United States and its territories. Network-1 and EDS and/or
their respective agents, distributors, or affiliates authorized to
conduct business in such countries may negotiate in good faith
supplemental agreements incorporating further terms and conditions
required by local law. All Licensed Software and Services obtained
pursuant to this Section shall be deemed for purposes of calculating
accumulated purchases and any discounts set forth in this Agreement, to
have been obtained pursuant to this Agreement.
8.13 Compliance with Laws. In the performance of Services or the provision of
Products pursuant to this Agreement, Network-1 shall comply with the
requirements of all applicable laws, ordinances, and regulations of the
United States or any state, country, or other governmental entity. In
particular, Network-1 agrees to comply with the United States Export
Administration Act; with Executive Order No. 11246, as amended by
Executive Order No. 11375; the Vietnam Era Veterans Readjustment
Assistance Act of 1974; the Rehabilitation Act of 1973; the Immigration
Reform and Control Act of 1986; and the Americans With Disabilities Act.
This Section incorporates by reference all provisions required by such
laws, orders, rules, regulations, and ordinances. Network-1 shall
indemnify, defend, and hold EDS harmless from and against any and all
claims, actions, or damages arising from or caused by Network-1's failure
to comply with the foregoing.
8.14 Labor. Network-1 shall comply with any labor jurisdictions applicable to
Network-1's performance pursuant to this Agreement and shall cooperate
with EDS in resolving any disputes resulting from any jurisdictional or
labor claims or stoppages. Upon request by Network-1, EDS shall provide
to Network-1 clarification and guidelines regarding relationships with
labor and Network-1's responsibilities with respect thereto.
8.15 Exports. Neither party shall export any Licensed Software or information
protected hereunder by an obligation of confidentiality from the United
States, either directly or indirectly, without first obtaining a license
or clearance as required from the U.S. Department of Commerce or other
agency or department of the United States Government.
8.16 Notices. Wherever one party is required or permitted to give notice to
the other pursuant to this Agreement, such notice shall be deemed given
when delivered in hand, when mailed by registered or certified mail,
return receipt requested, postage prepaid, or when sent by a third party
courier service where receipt is verified by the receiving party's
acknowledgment, and addressed as follows:
In the case of EDS:
Electronic Data Systems Corporation
5400 Legacy Drive
Plano, Texas 75024
Attn: Manager, Contracts Administration
In the case of Network-1:
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
909 Third Ave.
9th Floor
New York, NY 10022
Attn: Robert Russo, President
22
<PAGE>
Either party may from time to time change its address for notification
purposes by giving the other party written notice of the new address and
the date upon which it will become effective; first class, postage
prepaid, mail shall be acceptable for provision of change of address
notices.
8.17 Force Majeure. The term "Force Majeure" shall be defined to include fires
or other casualties or accidents, acts of God, severe weather conditions,
strikes or labor disputes, war or other violence, or any law, order,
proclamation, regulation, ordinance, demand, or requirement of any
governmental agency.
(a) A party whose performance is prevented, restricted, or interfered
with by reason of a Force Majeure condition shall be excused from
such performance to the extent of such Force Majeure condition so
long as such party provides the other party with prompt written
notice describing the Force Majeure condition and takes all
reasonable steps to avoid or remove such causes of nonperformance
and immediately continues performance whenever and to the extent
such causes are removed.
(b) If, due to a Force Majeure condition, the scheduled time of delivery
or performance is or will be delayed for more than thirty (30) days
after the scheduled date, the party not relying upon the Force
Majeure condition may terminate, without liability to the other
party, the Purchase Order or any portion thereof covering the
delayed Products or Services.
(c) If a Force Majeure condition or other delay by Network-1 causes EDS
to terminate its business relationship with a third party for whom
delayed Products were ordered and EDS has no alternative use for the
Products after using reasonable efforts to relocate or otherwise
utilize the Products, then EDS may terminate the applicable Purchase
Order and Network-1 shall refund to EDS all amounts paid thereunder.
8.18 Severability. If, but only to the extent that, any provision of this
Agreement is declared or found to be illegal, unenforceable, or void,
then both parties shall be relieved of all obligations arising under such
provision, it being the intent and agreement of the parties that this
Agreement shall be deemed amended by modifying such provision to the
extent necessary to make it legal and enforceable while preserving its
intent. If that is not possible, another provision that is legal and
enforceable and achieves the same objective shall be substituted. If the
remainder of this Agreement is not affected by such declaration or
finding and is capable of substantial performance, then the remainder
shall be enforced to the extent permitted by law.
8.19 Waiver. Any waiver of this Agreement or of any covenant, condition, or
agreement to be performed by a party under this Agreement shall (i) only
be valid if the waiver is in writing and signed by an authorized
representative of the party against which such waiver is sought to be
enforced, and (ii) apply only to the specific covenant, condition or
agreement to be performed, the specific instance or specific breach
thereof and not to any other instance or breach thereof or subsequent
instance or breach.
8.20 Remedies. All remedies set forth in this Agreement, or available by law
or equity shall be cumulative and not alternative, and may be enforced
concurrently or from time to time.
8.21 Survival of Terms. Termination or expiration of this Agreement for any
reason shall not release either party from any liabilities or obligations
set forth in this Agreement which (i) the parties have expressly agreed
shall survive any such termination or expiration, or (ii) remain to be
23
<PAGE>
performed or by their nature would be intended to be applicable following
any such termination or expiration.
8.22 Nonexclusive Market and Purchase Rights. It is expressly understood and
agreed that this Agreement does not grant to Network-1 an exclusive right
to provide to EDS any or all of the Licensed Software and Services and
shall not prevent EDS from developing or acquiring from other suppliers
computer software programs or services similar to the Licensed Software
and Services. Network-1 agrees that acquisitions by EDS pursuant to this
Agreement shall neither restrict the right of EDS to cease acquiring nor
require EDS to continue any level of such acquisitions. Estimates or
forecasts furnished by EDS to Network-1 prior to or during the term of
this Agreement shall not constitute commitments.
8.23 GOVERNING LAW. THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS
AGREEMENT SHALL NOT BE GOVERNED BY THE PROVISIONS OF THE 1980 UNITED
NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS.
RATHER THESE RIGHTS AND OBLIGATIONS SHALL BE GOVERNED BY THE LAWS, OTHER
THAN CHOICE OF LAW RULES, OF THE STATE OF NEW YORK.
8.24 Entire Agreement. This Agreement constitutes the entire and exclusive
statement of the agreement between the parties with respect to its
subject matter and there are no oral or written representations,
understandings or agreements relating to this Agreement which are not
fully expressed in the Agreement. This Agreement shall not be amended
except by a written agreement signed by both parties. All exhibits,
documents, and schedules referenced in this Agreement or attached to this
Agreement, and each Purchase Order are an integral part of this
Agreement. In the event of any conflict between the terms and conditions
of this Agreement and any such exhibits, documents, or schedules, the
terms of this Agreement shall be controlling unless otherwise stated or
agreed. In the event of a conflict between the terms and conditions of
this Agreement and a Purchase Order issued in accordance with Article II,
the Purchase Order shall be controlling with respect to those
transactions covered by that Purchase Order. Any other terms or
conditions included in any shrink-wrap license agreements, quotes,
invoices, acknowledgments, bills of lading, or other forms utilized or
exchanged by the parties shall not be incorporated in this Agreement or
be binding upon the parties unless the parties expressly agree in writing
or unless otherwise provided for in this Agreement.
IN WITNESS WHEREOF, Network-1 and EDS acknowledge that each of the
provisions of this Agreement were expressly agreed to and have each caused this
Agreement to be signed and delivered by its duly authorized officer or
representative as of the Effective Date.
ELECTRONIC DATA SYSTEMS CORPORATION NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
By: /s/ Joe B. Dorfmeister By: /s/ Robert Russo
- ----------------------------------- ------------------------------------
Printed Name: Joe B. Dorfmeister Printed Name: Robert Russo
- ----------------------------------- ------------------------------------
Title: Contract Manager Title: President
- ----------------------------------- ------------------------------------
Date: 11/18/97 Date: 11/18/97
- ----------------------------------- ------------------------------------
Fed. Tax ID #: 11 3027591
----------------------
24
<PAGE>
EXHIBIT A
EDS BUSINESS PRACTICES
----------------------
EDS' suppliers have played a key role in our continuous growth and success.
We sincerely appreciate your support. In order to avoid any conflict of interest
between our suppliers and EDS employees and to keep business relationships on a
professional basis, EDS has established and briefed its employees on the
following business practices. Please review these business practices carefully
and give a copy of this Exhibit to any of your associates who have a need to
know.
1. EDS expects its suppliers to provide a quality product or service for which
they will be fairly paid.
2. In selecting suppliers, EDS will test the market to assure quality of
service and fairness of price.
3. No EDS employee is to ask for anything of value from a supplier. Gifts from
a supplier such as tickets to athletic events, concerts or the theater,
personal travel, or any type of personal item are discouraged by our
business practices.
4. If any EDS employee is offered or accepts an item of value from a supplier,
the employee is to report it to the appropriate EDS management.
5. If any EDS employee engages in any type of unethical behavior such as
requesting anything of value from a supplier, the supplier is requested to
report the incident to the Director of Purchasing or the General Counsel of
EDS.
6. Occasional meals during visits to a supplier's facilities or a customer's
location during which a supplier incurs normal and reasonable marketing
expenses are acceptable. The EDS employee is required to report such meal
expenses to their management.
EDS appreciates your cooperation in complying with these business
practices.
A-1
<PAGE>
EXHIBIT B
CHARGES, PRICES, AND FEES
I. LICENSED SOFTWARE:
------------------
<TABLE>
<CAPTION>
Product List Price EDS Discount
<S> <C> <C>
FireWall/Plus-NT(TM) Enterprise
Full Featured:
50 concurrent sessions $ 3,750.00 *%
100 concurrent sessions $ 5,750.00 *%
250 concurrent sessions $ 9,000.00 *%
Unlimited concurrent sessions - Intel Only $13,000.00 *%
Unlimited concurrent sessions - DEC Alpha Only $20,000.00 *%
FireWall/Plus-NT(TM) Server
Full Featured (Limited to an NT(TM) Server with only 1 Network Interface Card.)
Unlimited concurrent sessions $ 1,995.00 *%
FireWall/Plus-NT(TM)Workstation $ 995.00 *%
FireWall/Plus-NT(TM) Premiere As Negotiated NA
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EDS PRICE EDS Discount
<S> <C> <C>
V-ONE SmartGate(TM)
SmartGate Software Client Tokens
Model # (SG-000-0400) $ * N/A
SmartGate Server (Unix)
Model # (SS-000-0400) $ * N/A
</TABLE>
II. DISCOUNTS:
EDS may obtain Product(s), other than V-ONE SmartGate Product(s), from Network-1
at a discount of * percent (*%) from the then current List Price, as determined
in accordance with ss. 6.2 Modifications to Charges. EDS may obtain V-ONE
SmartGate Product(s) at the EDS Price, as set forth above. EDS may obtain the
FireWall/Plus-NT(TM) Premiere Product at a price to be mutually agreed upon, and
no discount shall apply.
* This material has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities and Exchange
Commission.
B-1
<PAGE>
III. SERVICES:
A. Licensed Software Support Options (as set forth in ss. 4.9 Licensed
Software Support Options).
Annual Maintenance Fees shall be initially established as fifteen
percent (15%) of the List Price or EDS Price (as set forth in ss.
Exhibit B - Section I. LICENSED SOFTWARE) effective as of the issuance
of the applicable Purchase Order. Such Annual Maintenance Fee, once
initially established, is then subject to modification in accordance
with ss. 6.2 Modifications to Charges.
B. Upon issuance of a Purchase Order for * copies of the
"FireWall/Plus-NT(TM) Enterprise Unlimited concurrent sessions - Intel
Only" product, EDS shall also receive, at no additional Charge, one (1)
week of on-site installation assistance and training from Network-1 on
the Network-1 FireWall/Plus(TM) Product. This offer is only valid for
the EDS Plano facility located at 5400 Legacy Drive, Plano, Texas. The
class sizes and dates of such training shall be determined by EDS and
set forth on the Purchase Order, or communicated to Network-1 by EDS by
any other mutually agreeable means.
C. From time to time and at any time, EDS may request on-site
installation assistance and/or training at any EDS site. Such training
will be provided at locations and for class sizes and dates to be
mutually agreed upon by EDS and Network-1. The Charge for such training
shall be as follows:
(a) * for all training held at the EDS Plano facility located at 5400
Legacy Drive, Plano, Texas.
(b) After one (1) year from the Effective Date of this Agreement, or
for all training to be conducted at any site other than the EDS
Plano facility located at 5400 Legacy Drive, Plano, Texas: the
Charge shall be as mutually agreed upon by EDS and Network-1 and
set forth in the governing Purchase Order, such Charge not to
exceed Network-1's standard rate for similar training services.
EDS will be responsible for the travel and lodging expenses of EDS
students. EDS shall reimburse Network-1 for reasonable expenses incurred
by Employees in the performance of such training (if requested by
Network-1 in advance and approved by EDS) which are related to travel,
lodging, and meals; such expenses shall be reimbursed in accordance with
EDS' guidelines for its own employees.
* This material has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities and Exchange
Commission.
B-2
<PAGE>
EXHIBIT C
THIRD PARTY SYSTEM ACCESS AGREEMENT
-----------------------------------
AMONG
{CUSTOMER},
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
AND
ELECTRONIC DATA SYSTEMS CORPORATION
THIS Third Party System Access Agreement (the "Access Agreement") effective
as of {Effective Date}, is by and among {CUSTOMER LEGAL NAME} ("Customer"),
NETWORK-1 SOFTWARE & TECHNOLOGY, INC. ("Network-1") and ELECTRONIC DATA SYSTEMS
CORPORATION ("EDS").
W I T N E S S E T H:
WHEREAS, Network-1 owns certain software products (hereinafter referred to
as "Software") more specifically described in the {Network-1/Customer Agreement
Name}, dated {Network-1/Customer Agreement Date}, between Customer and Network-1
(the "License Agreement"); and
WHEREAS, Network-1 and EDS have entered into a {EDS/Network-1 Agreement
Name}, dated {EDS/Network-1 Agreement Date}, pursuant to which EDS may obtain
certain software products and services from Network-1 (the "Master Agreement");
WHEREAS, Customer and EDS have entered into an information technology
services agreement (the "ITS Agreement") pursuant to which EDS will provide data
processing and other services ("Services") requiring that EDS have access to the
Software; and
WHEREAS, the parties desire that EDS undertake appropriate contractual
commitments to assure that the Software will be used only in accordance with and
subject to the terms and conditions of the Master Agreement and this Access
Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Customer, Network-1 and EDS hereby
agree as follows:
1. Network-1 hereby grants EDS the right to use, execute, store and display
(collectively "Access") the Software set forth in Attachment 1 to this
Access Agreement for the purpose of performing its obligations pursuant
to the ITS Agreement. The parties agree that EDS' Access of such
Software, and Network-1's support and maintenance obligations with
respect to the Software, shall be governed by the terms and conditions of
the Master Agreement; provided, however, EDS may Access the Software for
the sole and exclusive purpose of providing Services on behalf of
Customer.
2. Customer shall be entitled to all protections under the Master Agreement,
including, but not limited to, proprietary rights indemnification as
defined in the Master Agreement.
3. The parties agree that EDS shall be Customer's agent for payment of any
fees due to Network-1 under the Master Agreement from the date of this
Access Agreement until Network-1 is notified otherwise. In the event of a
conflict
C-1
<PAGE>
between this Access Agreement and the License Agreement, this Access
Agreement will prevail.
4. This Access Agreement shall commence as of the date first set forth above
and shall continue in effect until the earlier of (i) the termination of
the ITS Agreement, (ii) Network-1's receipt of written notice from EDS
that EDS' need to Access the Software has ceased, or (iii) the
termination of the License Agreement. Upon termination of this Access
Agreement, EDS shall discontinue all use of the Software and; provided
that the License Agreement has not terminated, Customer's continued use
of and Network-1's support and maintenance obligations with respect to
the Software shall be governed by the terms and conditions of the License
Agreement. At such time, EDS shall have no further liability or
responsibility with respect to such Software.
IN WITNESS WHEREOF, the parties have caused this Access Agreement to be
executed as of the dates indicated.
NETWORK-1 SOFTWARE & TECHNOLOGY, INC. {CUSTOMER}
By: By:
----------------------------------- -------------------------------
Printed Name: Printed Name:
------------------------ ---------------------
Title: Title:
------------------------------- ----------------------------
Date: Date:
-------------------------------- -----------------------------
ELECTRONIC DATA SYSTEMS CORPORATION
By:
----------------------------------
Printed Name:
------------------------
Title:
-------------------------------
Date:
--------------------------------
C-2
<PAGE>
ATTACHMENT 1
SOFTWARE
This Attachment 1 shall automatically be deemed to include any and all
software products obtained by Customer from Network-1 after the effective date
of the ITS Agreement.
C-3
<PAGE>
EXHIBIT D
NON-DISCLOSURE AGREEMENT
------------------------
THIS NON-DISCLOSURE AGREEMENT, dated |D|, is between ELECTRONIC DATA
SYSTEMS CORPORATION ("EDS") and NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
("Network-1").
W I T N E S S E T H:
WHEREAS, Network-1 may provide information to EDS in connection with the
business purposes described in Schedule A, attached hereto, (the "Business
Purpose") and Network-1 desires EDS to keep certain of such information
confidential; and
WHEREAS, in consideration of the disclosure of such information to EDS, EDS
is willing to keep such information confidential in accordance with the terms
and conditions set forth in this Non-Disclosure Agreement;
NOW, THEREFORE, EDS and Network-1 hereby agree as follows:
1. Information. As used herein, "Information" shall mean both (i) written
information received by EDS from Network-1 which is marked or identified
as confidential, and (ii) oral or visual information identified as
confidential at the time of disclosure which is summarized in writing and
provided to EDS by Network-1 in such written form promptly after such
oral or visual disclosure.
2. Confidentiality. EDS may use Information received under this
Non-Disclosure Agreement, and may provide such Information to its
affiliates and their respective employees for their use, only in
connection with the Business Purpose. EDS agrees that, for a period of
one (1) year from receipt of Information, EDS will treat the Information
with the same degree of care and confidentiality which EDS provides for
similar information belonging to EDS which EDS does not wish disclosed to
the public, but not less than reasonable care. The foregoing shall not
prevent EDS from disclosing Information which is (i) already known by EDS
without an obligation of confidentiality, (ii) publicly known or becomes
publicly known through no unauthorized act of EDS, (iii) rightfully
received from a third party without obligation of confidentiality, (iv)
independently developed by EDS without use of the Information, (v)
disclosed without similar restrictions by Network-1 to a third party,
(vi) approved by Network-1 for disclosure, or (vii) required to be
disclosed pursuant to a requirement of a governmental agency or law so
long as EDS provides Network-1 with timely prior written notice of such
requirement.
3. Return of Information. Upon completion of the Business Purpose and upon
the written request of Network-1, EDS shall return all copies of the
Information to Network-1 or certify in writing that all copies of the
Information have been destroyed. EDS may return the Information, or any
part thereof, to Network-1 at any time.
4. Disclaimer of Warranty and Limitation of Liability. Network-1 makes no
warranty, express or implied, with respect to the Information. Neither
party shall be liable to the other hereunder for amounts representing
loss of profits, loss of business, or indirect, consequential, exemplary,
or punitive damages of the other party in connection with the provision
or use of the Information hereunder.
5. No Further Rights. Nothing contained in this Non-Disclosure Agreement
shall be construed as granting or conferring any rights by license or
otherwise in the Information except as provided hereunder.
D-1
<PAGE>
6. No Commitment. The parties expressly agree that the provision of
Information under this Non-Disclosure Agreement and discussions held in
connection with the Business Purpose shall not prevent EDS from pursuing
similar discussions with third parties or obligate EDS to continue
discussions with Network-1 or to take, continue or forego any action
relating to the Business Purpose. Any estimates or forecasts provided by
EDS to Network-1 shall not constitute commitments.
7. Media Releases. All media releases and public announcements or
disclosures by Network-1 relating to this Non-Disclosure Agreement, its
subject matter or the Business Purpose shall be coordinated with and
approved by EDS in writing prior to the release thereof.
8. Miscellaneous. Any notices required by this Non-Disclosure Agreement
shall be given in hand or sent by first class mail to the applicable
address set forth in Schedule A. The parties agree that this
Non-Disclosure Agreement and any attachments hereto (i) are the complete
and exclusive statement between the parties with respect to the
protection of the confidentiality of the Information, (ii) supersede all
related discussions and other communications between the parties, (iii)
may only be modified in writing by authorized representatives of the
parties, and (iv) SHALL BE GOVERNED BY THE LAWS, OTHER THAN CHOICE OF LAW
RULES, OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, EDS and Network-1 have each caused this Non-Disclosure
Agreement to be signed and delivered by its duly authorized officer or
representative, all as of the date first set forth above.
ELECTRONIC DATA SYSTEMS CORPORATION NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
By: By:
-------------------------------- -----------------------------------
Printed Name: Printed Name:
---------------------- -------------------------
Title: Title:
----------------------------- --------------------------------
Date: Date:
------------------------------ ---------------------------------
D-2
<PAGE>
SCHEDULE A
BUSINESS PURPOSE AND NOTICES
----------------------------
Business Purpose:
||
Addresses for Notices:
EDS:
Electronic Data Systems Corporation
5400 Legacy Drive
Plano, Texas 75024
Attention: Manager, Contracts Administration
Network-1:
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
909 Third Ave.
9th Floor
New York, NY 10022
Attention: Robert Russo, President
D-3
<PAGE>
EXHIBIT E
RESELLER ACCESS AUTHORIZATION
-----------------------------
1. Network-1 hereby grants EDS the right to use, execute, store and display
(collectively "Access") the Products purchased for resale under Section
3.6 of this Agreement, for the purpose of performing its service
obligations to the ITS Customer.
2. EDS shall Access the Licensed Software in accordance with the terms and
restrictions of this Agreement.
3. Network-1 agrees that EDS shall be the ITS Customer's agent for payment
of any fees due to Network-1 for the Licensed Software from the date the
ITS Customer signs the Network-1 End User License Agreement ("Resale
Date"), until Network-1 is notified otherwise.
4. This Reseller Access Authorization shall commence as of the Resell Date
and shall continue in effect until the earlier of (i) Network-1's receipt
of written notice from EDS that EDS' need to Access the Licensed Software
has ceased, or (ii) the termination of the Network-1 End User License
Agreement. Upon termination of Access, EDS shall discontinue all use of
the Licensed Software. Provided that the End User License Agreement has
not terminated, the ITS Customer's continued use of and Network-1's
support and maintenance obligations with respect to the Licensed Software
shall be governed by the terms and conditions of the Network-1 End User
License Agreement. At such time, EDS shall have no further liability or
responsibility with respect to such Licensed Software.
5. During the period of EDS' Access, in the event of any conflict between
this Agreement and the Network-1 End User License Agreement with the ITS
Customer, this Agreement will prevail.
E-1
<PAGE>
May 29, 1998
Electronic Data Systems Corporation
5400 Legacy Corporation
Plano, Texas 75024
Attention: Joe Dorfmeister, Software Contracting Manager
Re: EDS/Network-1
Master Software License Agreement
Dear Mr. Dorfmeister:
This letter shall serve to amend the Master Software License Agreement,
dated November 18, 1997, between Electronic Data Systems Corporation ("EDS") and
Network-1 Software & Technology, Inc. ("Network-1") (the "Agreement") as
follows:
Network-1 shall be authorized to grant licenses or distribution rights with
respect to the Products and the Licensed Software to third parties (the "Third
Party Distributors") on an exclusive basis in certain designated foreign
territories; provided, that, Network-1 warrants the Products and Licensed
Softward shall be made available to EDS in such territories by the Third Party
Distributors at the prices and terms set forth in Exhibit B to the Agreement.
All other terms and provisions of the Agreement shall remain in full force
and effect. Capitalized terms herein shall have the same meaning as set forth in
the Agreement.
If the foregoing confirms our understanding, kindly execute this letter at
the appropriate space provided below.
Very truly yours,
Network-1 Software & Technology, Inc.
By: /s/ Robert Russo
------------------------
Robert Russo, VP
Agreed and Accepted:
Electronic Data Systems Corporation
By: /s/ Joe B. Dorfmeister 5/29/98
-----------------------------------------------
Joe Dorfmeister, Software Contract Manager
<PAGE>
Exhibit 10.12
Software Distribution Agreement
This Software Distribution Agreement (the "Agreement") is made and
entered into this 5th day of June, 1997 by and between Network-1 Software &
Technology, Inc., a Delaware corporation with its principal offices at 909 Third
Avenue, 9th Floor, New York, New York 10022 ("Network-1") and Trusted
Information Systems, Inc., a Delaware corporation with offices at 15204 Omega
Drive, Rockville, Maryland 20850 ("TIS").
1. Definitions. As used in this Agreement:
(a) "Confidential Information" shall mean confidential or other
proprietary information that is disclosed by either party to the other under
this Agreement including, without limitation, software, code and designs,
product specifications and other confidential business information. Confidential
information shall not include information which (i) is or becomes public
knowledge without any action by or involvement of a party; (ii) has been
independently developed other than pursuant to this Agreement; (iii) constitutes
residuals (the "Residuals") as such term is defined in paragraph 6 of the
Non-Disclosure Agreement, dated April 7, 1997, between Network-1 and TIS; (iv)
is disclosed by a party with the prior written approval of the other party; or
(v) is disclosed pursuant to any judicial or government order provided that such
party gives the other party sufficient prior notice to contest such order.
(b) "Derivative Work" means any work which is based upon one or more
pre-existing works such as a revision, modification, translation, abridgement,
condensation, expansion, collection, compilation or any other form in which such
pre-existing work may be recast, transformed or adopted, and which, in the
absence of this Agreement or other authorizations by the owner of the
pre-existing work, would constitute a copyright infringement. Derivative Work
does not include Residuals.
(c) "Effective Date" shall mean the date identified on the signature
page of this Agreement as the effective date.
(d) "End User(s)" means any person or entity which is granted a
sublicense by TIS (including its resellers and distributors), in accordance with
this Agreement, to use the Licensed Product as a component of the TIS Gauntlet
Firewall Product.
(e) "TIS Gauntlet Firewall Product" shall mean the family of firewall
and other software products developed by and for and owned by TIS for use on
Microsoft based operating systems (including, but not limited to, Windows/NT and
Windows 95) as set forth on Exhibit "A" (including any such additional products
to be added by any unilateral amendments provided by TIS to Network-1) and any
Updates or Upgrades relating to such products.
(f) "TIS Gauntlet/Licensed Product" shall mean the TIS Gauntlet
Firewall Product which includes the Licensed Product as a component.
<PAGE>
(g) "Intellectual Property Rights" shall mean all forms of intellectual
property rights and protections that may be obtained for or may pertain to, the
Licensed Product, Confidential Information and marks and may include without
limitation:
(i) all right, title and interest in and to all Letters Patent
and all filed, pending or potential applications for Letters Patent,
including any reissue, reexamination, division, continuation or
continuations -in-part applications throughout the world now or
hereafter filed;
(ii) all right, title and interest in and to all trade secret
rights and equivalent rights arising under the common law, state law,
federal law and laws of foreign countries;
(iii) all right, title and interest in and to all mask works,
copyrights, other literary property or authors rights, whether or not
protected by copyright or as a mask work, under common law, state law,
federal law and laws of foreign countries; and
(iv) all right, title and interest in and to all proprietary
indicia, trademarks, tradenames, symbols, logos and/or brand names
under common law, state law, federal law and laws of foreign countries.
(h) "Licensed Product" means Network-1's NDIS Shim software product as
defined in Exhibit B, as it may be amended from time to time including any and
all Updates and Upgrades.
(i) "Net Receipts" shall mean the actual gross receipts less sales,
use, excise, value added or other similar taxes and allowances for returns,
defects and replacements received by TIS from distribution of the TIS
Gauntlet/Licensed Product (or the TIS Gauntlet Firewall Product without the
Licensed Product (for the period ending December 31, 1998 pursuant to Section
6(b) herein). If the TIS Gauntlet/Licensed Product is distributed with other
products that do not contain the TIS Gauntlet/Licensed Product in a bundle for a
single price, the Net Receipts attributable to the TIS Gauntlet/Licensed Product
will be determined by pro rating the receipts from the sale or license of the
package according to the suggested retail prices, or if no suggested retail
price is announced, the values established by TIS for the separate works
contained in the package, whether or not such products are distributed
separately, provided that such values are reasonably related to the values or
cost of the separate products. Net Receipts will not include any receipts from
copies of the TIS Gauntlet/Licensed Product which are distributed by TIS to
previous purchasers of the TIS Gauntlet/Licensed Product as back-up, replacement
or update copies for which TIS does not receive its standard payment. No
Royalties will be credited or paid to Network-1 with respect to any receipts
from copies of the TIS Gauntlet/Licensed Product supplied for promotional
purposes (as well as evaluation purposes) to the press, trade, sales
representatives or potential customers for the TIS Gauntlet/Licensed Product.
Amounts received by TIS as deposits or advances will not be deemed to have been
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<PAGE>
received until shipment of the TIS Gauntlet/Licensed Products to the End User
making the deposit or advance has been made against such deposit or advance.
Partial payment of an invoice will be pro-rated over all products included in
the invoice. Amounts received by TIS in foreign currencies will be deemed
converted into U.S. dollars at the exchange rate on the date of actual payment.
(j) "Royalties" shall mean the royalties payable with respect to
distribution of the TIS Gauntlet/Licensed Product as described in Section 6
hereof.
(k) "Source Code" shall mean program code applicable to the Licensed
Product, expressed in the form suitable for modification by humans as well as
any Updates and Upgrades as defined herein and any and all applicable related
documentation.
(l) "Specifications" shall mean the published Specifications applicable
to the Licensed Product that are in effect as of the date the Licensed Product
is delivered to TIS. During the term, if Network-1 substantially amends its
specifications, Network-1 shall inform TIS of the revised Specifications.
(m) "Term" shall mean the period beginning on the Effective Date and
terminating on the date this Agreement is terminated under Section 13 hereof.
(n) "Update" means the release of the Licensed Product which is a minor
release or bug fix or an error correction.
(o) "Upgrade" means a new revision of the Licensed Product that
includes enhancements which increase performance or increase functionality for
which Network-1 charges a license fee.
2. Grant of License.
(a) Subject to the terms and conditions set forth in this Agreement,
Network-1 hereby grants to TIS a worldwide, perpetual (subject to termination as
provided in Section 13), non-exclusive license to (i) incorporate and/or bundle
the Licensed Product only with the TIS Gauntlet Firewall Product and to market,
distribute, and sublicense the Licensed Product solely as a component of the TIS
Gauntlet Firewall Product; and (ii) to use the License Product for testing,
demonstration, training, promotional and evaluation purposes by its personnel,
end users, resellers and distributors.
(b) If Network-1 should make any Updates or Upgrades to the Licensed
Product, Network-1 shall make (at no additional cost to TIS) the same available
to TIS under the terms and conditions of this Agreement.
(c) TIS may not modify, enhance or otherwise change the Licensed
Product except to the extent required to integrate the Licensed Product with the
TIS Gauntlet Firewall
3
<PAGE>
Product. Any such permissible modification, enhancement or change to the
Licensed Product by TIS shall be the exclusive property of TIS (the "TIS
Modifications") and TIS will automatically grant Network-1, a worldwide, fully
paid-up, non-exclusive, perpetual, irrevocable license to market, sublicense,
use and distribute the TIS Modifications except that Network-1 may not
sublicense, distribute or otherwise provide the TIS Modifications to direct
competitors of TIS as listed on Exhibit C hereto (Exhibit C may be amended by
TIS upon consent of Network-1 which shall not be unreasonably withheld).
(d) TIS agrees to allow Network-1 to enforce its rights under any
agreement TIS may have with any third party or End User to protect any
confidentiality and proprietary property of Network- 1 included in the Licensed
Product.
(e) Except as otherwise provided herein, TIS shall not copy the
Licensed Product in whole or in part, except as reasonably necessary for
archival backup purposes and for use by TIS of the Licensed Product as permitted
under this Agreement. TIS agrees to reproduce on all documentation relating to
the TIS Gauntlet/Licensed Product, proprietary trademark or copyright markings
as follows: "The NDIS Shim is a product of Network-1 Software & Technology,
Inc."
(f) Network-1, at its sole discretion, shall have the right to modify
the Licensed Product at any time during the Term provided that Network-1
provides TIS with Beta source code relating to such modification as soon as it
is available and gives TIS thirty (30) days prior notice of such change,
including any revised or additional Specifications.
(g) All licenses to End Users, whether granted by TIS directly or
through a reseller or distributor, shall contain TIS' standard license, a copy
of which is attached hereto as Exhibit D.
3. Source Code Escrow.
Network-1 has deposited in escrow with TIS the Source Code which shall
be maintained in escrow by TIS in a secure environment at its office location at
15204 Omega Drive, Rockville, Maryland 20850 (or such other location TIS
provides Network-1 upon 30 days prior notice). TIS shall employ such procedures
with respect to the Source Code that are no less restrictive than the strictest
procedures used by it to protect its own confidential and proprietary source
code which procedures shall be no less than reasonable care. TIS shall allow a
limited number of its employees and consultants (a list of consultants will be
provided to Network- 1 prior to access) to have access to the Source Code
provided such employees or consultants execute confidentiality agreements in the
form annexed hereto as Exhibit E, and only for the following purposes: (i)
integrating the Licensed Product with TIS Gauntlet Firewall Product and (ii)
maintenance and bug fixes.
4. Marketing and Distribution of the Licensed Product.
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<PAGE>
TIS will be responsible for and have sole discretion (except as
otherwise expressly provided herein) with respect to determining and
implementing all or any marketing strategies, policies or programs relating to
the distribution of the Licensed Product by TIS as provided herein, including,
without limitation, methods of marketing, pricing, packaging, labeling and
identification, protection, advertising, terms and conditions of sale and/or
license, collection of end users' names, scope and expense of marketing, and use
of warranty or user registration procedures. TIS shall have the right to
distribute the Licensed Product in accordance with the terms of this Agreement
in a variety of forms, and by any variety of methods, in its sole discretion.
5. Delivery and Acceptance.
(a) Delivery. Network-1 has delivered the Licensed Product to TIS and
will provide (at no additional cost to TIS) all Updates and Upgrades to TIS'
designated representatives of which TIS will advise Network-1 in writing. TIS
has evaluated the Licensed Product and the Licensed Product is hereby deemed
accepted by TIS. Except as set forth in Section 6 hereof, TIS shall not be
required to make any payments to Network-1 with respect to the Licensed Product.
6. Royalty Payments.
(a) Non-Refundable Royalty Payment. Upon execution of this Agreement,
TIS shall pay to Network-1 a non-refundable advance against Royalties of
$500,000 (the "Non-Refundable Advance"). The Non-Refundable Advance will be
credited to TIS' account against which all future Royalties of TIS pursuant to
Section 6(b) herein shall be applied until the Non-Refundable Advance is thereby
drawn down in its entirety. TIS shall have no obligation to pay Royalties to
Network-1 until the Royalties payable pursuant to Section 6(b) exceed $500,000
(the amount of the Non-Refundable Advance). Notwithstanding the aforementioned
credit against Royalties, in no event shall TIS be entitled to a refund of any
portion of the Non-Refundable Advance.
(b) Royalty Payments. Beginning on the date of TIS' first shipment of a
particular TIS Gauntlet/Licensed Product, and continuing through and including
December 31, 1998 (the "Initial Period") regardless of whether the Licensed
Product is distributed as a component of such particular TIS Gauntlet Firewall
Product during the Initial Period, TIS shall be obligated to Network-1 for
Royalties of * percent (*%) of TIS' Net Receipts derived from such particular
TIS Gauntlet Firewall Product. (For example, if during the Initial Period Net
Receipts from a particular TIS Gauntlet/Licensed Product are $5 million and Net
Receipts from the same particular TIS Gauntlet Firewall Product distributed
without the Licensed Product are $5 million - the Royalties credited Network-1
shall be *% of $10 million or $*). Beginning on January 1, 1999 and continuously
thereafter or until this Agreement is terminated in accordance with the
provisions of Section 13 hereof, TIS' obligation to Network-1 for Royalties
shall equal *% of the
* This material has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities and Exchange
Commission.
5
<PAGE>
Net Receipts derived solely from the TIS Gauntlet/Licensed Product. All royalty
payments pursuant to this Section 6(b) shall be made by TIS to Network-1 on a
quarterly basis, within thirty (30) days following the end of each calendar
quarter.
(c) Reports of Royalties. TIS shall deliver to Network- 1, along with
its payment of Royalties due for each quarter, a written report showing, in
reasonable detail, its calculation of Royalties payable with respect to such
calendar quarter. TIS shall maintain such books and records as are necessary to
properly calculate the amount of Royalties to be paid pursuant to this
Agreement. A certified public accountant to be chosen by Network- 1, and
approved by TIS (which approval shall not be unreasonably withheld), may, upon
reasonable notice and during normal TIS business hours, but no more often than
once each year, inspect the records of TIS on which such reports are based. Any
information revealed in such inspections shall be confidential and not disclosed
to anyone, except to the extent necessary to identify to Network-1, TIS or any
fact finder in any action instituted to enforce the terms of this Agreement, any
inaccuracy which may be found in the amount of Royalties due to Network-1 or
except as otherwise provided by law. The fees and expenses of the independent
certified public accountant shall be paid by Network-1, unless the inspection
uncovers an underpayment for the evaluation period in question in excess of 5%
of the amount actually paid by TIS during the period of the audit, in which case
the fees and expenses of the certified public accountant shall be paid by TIS.
7. Support. Network-1 shall provide TIS with technical support in
connection with integration of the Licensed Product with the TIS Gauntlet
Firewall Product which shall include (i) up to one (1) week on-site support for
purposes of integration of the Licensed Product with the TIS Gauntlet Firewall
Product, (ii) support for bug fixes related to the Licensed Product and (iii)
support for modifications to the Licensed Product caused by operating system
changes provided that the Licensed Product is then currently offered by
Network-1 on such operating system. Except as otherwise provided herein,
following TIS' release of the TIS Gauntlet/Licensed Product, any technical
support provided by Network-1 to TIS on site shall be billed at Network-1's
standard rates of $2,000 per day.
8. Intellectual Property Rights. Except as otherwise specifically
provided in this Agreement, TIS hereby acknowledges that Network-1 and its
licensors (as their interests may appear) retain all Intellectual Property
Rights (including, without limitation, any and all related patents, trademarks,
copyrights or proprietary or trade secret rights) in the Licensed Product and
Confidential Information, including, without limitation, all corrections,
modifications and other Derivative Works to the Licensed Product. Except for the
TIS Modifications, TIS hereby assigns to Network-1 all Intellectual Property
Rights it may hereafter possess in the Licensed Product and Confidential
Information and all Derivative Works and agrees (i) to execute all documents,
and take all actions, that may be necessary to confirm such rights, and (ii) to
retain all proprietary marks, legends and patent and copyright notices that
appear on the Licensed Product or Confidential Information delivered to TIS by
Network-1 and all whole or partial copies thereof.
9. Confidentiality. TIS agrees to observe complete confidentiality with
respect
6
<PAGE>
to the Confidential Information, not to disclose or permit any third party or
entity access to, the Confidential Information (or any portion thereof) without
the prior written approval of Network-1 (except such disclosure which is
required to perform any obligations under this Agreement) and to insure that any
employees, or any third parties who receive access to the Confidential
Information, are advised of the confidential and proprietary nature thereof and
are prohibited from copying, utilizing or otherwise revealing the Confidential
Information in any manner not already permitted under this agreement or the
Non-Disclosure Agreement between the parties, dated April 7, 1997. Without
limiting the foregoing, TIS agrees to employ with regard to the Confidential
Information, procedures no less restrictive than the strictest procedures used
by it to protect its own confidential and proprietary information which
procedures shall be no less than reasonable care.
10. Warranties. Network-1 represents and warrants that (i) the Licensed
Product is, and the Upgrades and Updates will be, the original creation of
Network-1, Network-1 is the sole and exclusive owner of the Licensed Product,
and will be the sole and exclusive owner of the Upgrades and Updates (except as
otherwise disclosed to TIS) and, Network-1 has the rights to grant licenses
therefor as granted to TIS under this Agreement, (ii) the grant to and the
exercise by TIS of any and all rights set forth in this Agreement and
Network-1's disclosures to TIS pursuant to this Agreement do not, and will not,
violate the U.S. patent rights, copyrights, trade secret rights, trademark
rights or other proprietary contractual or other rights of any third party,
(iii) for a period of ninety (90) days following the first use of the Licensed
Product by an End User, the Licensed Product and Upgrades will substantially
conform to and operate as described in applicable Specifications, and (iv)
Network-1 has full power and authority to enter into this Agreement and to grant
the rights and obligations set forth herein and this Agreement is enforceable in
accordance with its terms.
11. Disclaimer. EXCEPT FOR THE EXPRESS WARRANTIES STATED IN SECTION 10
HEREIN, NETWORK-1 DISCLAIM(S) ALL EXPRESS OR IMPLIED WARRANTIES WITH RESPECT TO
THE LICENSED PRODUCT FURNISHED HEREUNDER, INCLUDING, WITHOUT LIMITATION, ALL
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
12. Indemnification.
(a) By Network-1. Network-1 agrees to indemnify, hold harmless and
defend TIS, its officers, directors, employees, contractors, licensors and
agents, from any claims, liabilities, damages, costs and expenses (including
reasonable attorneys' fees and costs of suit) to the extent they arise out of
(i) a material breach of this Agreement by Network-1, (ii) a breach of any of
the representations and warranties set forth in Section 10 hereof or any other
representations set forth in this Agreement and (iii) any claims of infringement
of any U.S. copyright, patent or trade secret or other proprietary rights,
arising from the Licensed Product and any modification, enhancement or misuse of
the Licensed Product by Network-1. If Network-1 receives notice of an alleged
infringement, Network-1 shall use its best efforts, subject to commercial
reasonableness, to either obtain the right to continue use of the Licensed
Product,
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<PAGE>
or to modify the Licensed Product so that it is no longer infringing.
(b) By TIS. TIS agrees to indemnify, hold harmless and defend
Network-1, its officers, directors, employees, contractors, licensors and
agents, from any claims, liabilities, damages, costs and expenses including
reasonable attorneys' fees and costs of suit) to the extent they arise out of
(i) a material breach by TIS of the terms and provisions of this Agreement, and
(ii) any claim of infringement of any U.S. copyright, patent or trade secret or
other proprietary rights relating to the TIS Gauntlet Firewall Product excluding
any such claim relating to the Licensed Product.
(c) Indemnification Conditions. Promptly after receipt by Network-1 or
TIS of notice of any claim that may affect the Licensed Product or the
commencement of any action, proceeding, or investigation in respect of which
indemnity or reimbursement may be sought as provided above, such party (the
"Indemnitee") shall notify the party from whom indemnification is claimed (the
"Indemnitor"), but the failure of such Indemnitee to notify the Indemnitor with
respect to a particular action, proceeding or investigation shall not relieve
the Indemnitor from any obligation or liability (i) which it may have pursuant
to this Agreement if the Indemnitor is not substantially prejudiced by the
failure to notify or (ii) which it may have otherwise than pursuant to this
Agreement. The Indemnitor shall promptly assume the defense of the Indemnitee
with counsel reasonably satisfactory to the Indemnitee, and the fees and
expenses of such counsel shall be at the sole cost and expense of the
Indemnitor. The Indemnitee will cooperate with the Indemnitor in the defense of
any action, proceeding or investigation for which the Indemnitor assumes the
defense. Notwithstanding the foregoing, the Indemnitee shall have the right to
employ separate counsel in any action, proceeding, or investigation and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the Indemnitee unless (i) the Indemnitor has agreed
to pay such fees and expenses, (ii) the Indemnitor shall have failed promptly to
assume the defense of such action, proceeding or investigation and employ
counsel reasonably satisfactory to the Indemnitee, or (iii) in the reasonable
judgment of the Indemnitee there may be one or more defenses available to the
Indemnitee which are not available to the Indemnitor with respect to such
action, claim, or proceeding, in which case the Indemnitor shall not have the
right to assume the defense of such action, proceeding or investigation on
behalf of the Indemnitee. The Indemnitor shall not be liable for the settlement
by the Indemnitee of any action, proceeding or investigation effected without
its consent, which consent shall not be unreasonably withheld. The Indemnitor
shall not enter into any settlement in any action, suit or proceeding to which
the Indemnitee is a party, unless such settlement includes a general release of
the Indemnitee with no payment by the Indemnitee of consideration.
13. Term and Termination.
(a) Term of Agreement. Subject to the foregoing limitation, this
Agreement shall continue perpetually, unless terminated in accordance with the
provisions of Section 13 below.
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(b) Termination. TIS may terminate this Agreement effective at the end
of any calendar year beginning with the year ended December 31, 1998 by giving
Network-1 prior written notice at any time during the month of October preceding
such year end. Network-1 may terminate this Agreement upon thirty (30) days
prior notice if for any two consecutive calendar quarters after December 31,
1998, TIS does not pay Network-1 minimum Royalties of $* per quarter, payment to
be provided in accordance with the terms of this Agreement. In addition, if at
any time after December 31, 1998, TIS does not offer the Licensed Product as
part of any TIS Gauntlet Firewall Product for any ninety (90) day period,
Network-1 shall have the right to terminate this Agreement upon thirty (30) days
prior notice.
(c) Termination Upon Breach. Each party shall have the right to
terminate this Agreement provided (i) such party provides thirty (30) days prior
notice to the other party; (ii) the other party is in a material breach of any
of the terms of this Agreement; and (iii) the prior breach is not cured within
such thirty (30) day period. Any such notice shall provide, in reasonable
detail, a description of the alleged breach and the requested cure of that
breach.
(d) Effect of Termination. In the event of a termination of this
Agreement pursuant to this Section 13, TIS shall have the right, for a period of
180 days, to distribute its existing inventory of the TIS Gauntlet/Licensed
Product pursuant to the terms of this Agreement. Any such termination shall not
affect the rights of any End User that has purchased the TIS Gauntlet/Licensed
Product from TIS in accordance with the terms of this Agreement prior to its
termination. Upon termination of this Agreement, for any reason, TIS will return
to Network-1 all copies of the Licensed Product or certify to Network-1 that TIS
has destroyed all such copies, except that TIS may retain one (1) copy of the
object code for the Licensed Product solely for the purpose of supporting its
existing licensees.
14. Limitation of Liability. EXCEPT FOR PAYMENTS DUE PURSUANT TO
SECTION 6 HEREIN AND THE INDEMNIFICATION PROVISIONS OF SECTION 12 HEREOF, IN NO
EVENT SHALL EITHER PARTY (OR ITS LICENSORS) BE LIABLE FOR ANY LOSS REVENUES OR
PROFITS OR OTHER SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS
AGREEMENT OR RELATED TO THE LICENSED PRODUCT, EVEN IF THE PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES.
15. General Provisions.
(a) Export Compliance. The rights and obligations of TIS shall be
subject to such United States laws and regulations as shall from time to time
govern the license and delivery of technology abroad by persons subject to the
jurisdiction of the United States, including the Export Administration Act of
1979, as amended, any successor legislation to the Export Administration Act of
1979, and the Export Administration regulations issued by the Department
* This material has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities and Exchange
Commission.
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of Commerce, International Trade Administration, Office of Export
Administration. TIS agrees that it shall not, directly or indirectly, export,
reexport or transship the Licensed Product or any parts or copies thereof in
such manner as to violate such laws and regulations in effect from time to time.
(b) Publicity. Neither party shall, without first obtaining the written
consent of the other party, which consent shall not be unreasonably withheld,
announce this Agreement in a press release or other promotional material. In
addition, neither party shall disclose the terms and conditions of this
Agreement to any third party, except as may be required (i) to implement and
enforce the terms of this Agreement, or (ii) by legal procedure or by law, or
(iii) by Network-1 in connection with an Initial Public Offering ("IPO"). In the
case of clause (iii) above, Network-1 may, for the sole purpose of initiating or
affecting its IPO, disclose the full terms and conditions of this Agreement only
to its legal counsel, its investment bankers, its investment bankers' legal
counsel, securities regulatory authorities and potential investors who are bound
by a confidentiality agreement covering the terms and conditions of this
Agreement as Confidential Information of Network-1 and TIS. In addition,
Network-1 may disclose in a prospectus for an IPO such material information
concerning this Agreement as the attorneys who advise Network-1 on matters
relating to the Securities Act of 1933, as amended, shall advise is necessary to
be disclosed in such prospectus. A copy of the proposed IPO prospectus
disclosure shall be provided to TIS and TIS shall not unreasonably withhold its
consent to such disclosure.
(c) Equitable Relief. Each party acknowledges that any breach of its
obligations under this Agreement with respect to the grant of the license
hereunder, Intellectual Proprietary Rights or Confidential Information will
cause the other party irreparable injury for which there are inadequate remedies
at law, and that such party will be entitled to seek equitable relief with
respect to any such breach in addition to all other remedies provided by this
Agreement or available at law.
(d) Successors and Assigns. Except as otherwise provided herein, this
Agreement may not be assigned in whole or in part by either party without the
prior written consent of the other party, except either party may assign this
Agreement without the other's prior written consent to an Affiliated Entity, or
in the event of a merger or other reorganization involving such party, or sale
of all or substantially all of such party's assets. For purposes hereof,
Affiliated Entity shall be defined as entity controlled by, or under common
control with, such party. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the parties hereto and their successors and
assigns.
(e) Governing Law. This Agreement will be governed and interpreted in
accordance with the laws of the State of New York without reference to conflicts
of law principles.
(f) Relationship of Parties. Neither party will have and will not
represent that it has, any power, right or authority to bind the other party or
to assume or create any obligation or responsibility, express or implied, on
behalf of the other party or in the other party's name,
10
<PAGE>
except as herein expressly provided. Nothing stated in this Agreement shall be
construed as constituting TIS and Network-1 as partners or as creating the
relationship of principal/agent, employer/employee or franchise/franchisee
between the parties.
(g) Attorneys' Fees. In the event that any legal action is required in
order to enforce or interpret any of the provisions of this Agreement, the
prevailing party in such action shall recover all reasonable costs and expenses,
including attorneys' fees, incurred in connection therewith.
(h) Further Actions. At any time and from time to time, each party
agrees without further consideration, to take such action and to execute and
deliver such documents as may be reasonably necessary to effectuate the purposes
of this Agreement.
(i) Waiver. The failure of either party to enforce any provision of
this Agreement shall not be deemed a waiver of that or any other provision of
this Agreement.
(j) Force Majeure. Except for the obligation to make payments as
provided herein, nonperformance of either party shall be excused to the extent
the performance is rendered impossible by strike, fire, flood, governmental acts
or orders or restrictions, failure of suppliers, or any other reason where
failure to perform is beyond the reasonable control of and is not caused by the
negligence of the nonperforming party.
(k) Severability. If any of the provisions of this Agreement are found
or deemed by a court of competent jurisdiction to be invalid or unenforceable,
they shall be severable from the remainder of the Agreement and shall not cause
the invalidity or unenforceability of the Agreement.
(l) Notices. Notices to either party shall be in writing and shall be
deemed delivered when served in person or three business days after being
deposited in the United States mail, first-class certified mail, postage
prepaid, return receipt requested, or one business day after being dispatched by
a nationally recognized one-day express courier service addressed as follows:
To Network-1: Network-1 Software & Technology, Inc.
909 Third Avenue, 9th Floor
New York, New York 10022 Attn:
Robert Russo, President
with a copy to: Bizar Martin & Taub, LLP
1350 Avenue of the Americas, 29th Floor
New York, New York 10019
Attn: Sam Schwartz, Esq.
To TIS: Trusted Information Systems, Inc.
11
<PAGE>
15204 Omega Drive
Rockville, Maryland 20850
Attn: Jeffrey H. Schneider, Esq.
with a copy to: Kenneth A. Mendelson, Esq.
Trusted Information Systems
3060 Washington Road (Route 97)
Gleenwood, Maryland 21738
(m) Entire Agreement. This Agreement constitutes the entire agreement
between the parties pertaining to the subject matter hereof, and, with the
exception of the Non-Disclosure Agreement, dated April 7, 1997, between the
parties, supersedes in its entirety any and all written or oral agreements or
understandings previously existing between the parties with respect to such
subject matter. Each party acknowledges that it is not entering into this
Agreement on the basis of any representations not expressly contained herein.
Any amendments or modifications of this Agreement must be in writing and signed
by both parties hereto.
(n) All section headings herein are inserted for convenience only and
shall not modify or affect the construction or interpretation of any provision
of this Agreement.
(o) Counterparts. This Agreement may be executed in two or more
counterparts, each of which when so executed shall be deemed an original, and
all of which together shall constitute one and the same instrument.
12
<PAGE>
IN WITNESS WHEREOF the parties have entered into this Agreement as of
the date first set forth above.
Network-1 Software & Technology, Inc.
By: /s/ Robert Russo
--------------------
Printed Name:Robert Russo
---------------
Title: President
---------------------
Trusted Information Systems, Inc.
By: /s/ Jeffrey H. Schneider
---------------------------
Printed Name:Jeffrey H. Schneider
---------------------------
Title: Director of Contracts
---------------------------
Effective Date: June 5, 1997
13
<PAGE>
Exhibit A
List of TIS Gauntlet Firewall Products
- --------------------------------------------------------------------------------
IGINL Gauntlet Internet Firewall for WinNT
- --------------------------------------------------------------------------------
GPEF Gauntlet PC Extender for Win3.1/Win.11
- --------------------------------------------------------------------------------
GPEG Gauntlet PC Extender for Win95
- --------------------------------------------------------------------------------
GHNTL Gauntlet Internet Firewall System NT
- --------------------------------------------------------------------------------
As of 6/4/97
<PAGE>
Exhibit B
Description of NDIS SHIM
Network-1 is providing TIS with the full source code and "Make" files for a
Microsoft Windows-NT NDIS Shim and the source code to install the Shim on the
Windows-NT operating system. The NDIS Shim is an intermediate NDIS driver
that "binds" to all Ethernet Adapters and to which all protocol stacks "bind"
to the Shim. The installation code will seemlessly add the Shim to the NDIS
bindery via the Network Control Panel Applet with a Microsoft standard
OEMSETUP.INI file. The Shim will allow all packets received from the adapters
or protocol stacks (regardless of protocol) to be passed to a queuing driver
so that the packet can be processed at a later time. It will also allow
another driver to send packets to it for writing to the network adapters or
to the protocol stacks. Network-1 is also providing TIS with the full source
code and "Make" files for a Microsoft Windows-NT intermediate driver. *
The source code for installing this driver is also included.
Network-1 is also providing TIS with the full Source Code and "Make" files for
another Microsoft Windows-NT driver. *
* This material has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities and Exchange
Commission.
<PAGE>
Exhibit C
TIS COMPETITORS
1. Altivista Internet Software Inc.
2. ANS Communications
3. Borderware
4. Check Point Software Technologies Inc.
5. Cyberguard Corp.
6. Cycon Technologies
7. Global Internet Software Group Inc.
8. Global Technology Associates Inc.
9. IBM
10. Milkyway Networks Corp.
11. NEC Technologies Inc.
12. Netguard Ltd.
13. Raptor Systems Inc.
14. Seattle Software Labs Inc.
15. Secure Computing Corp.
16. Sidewinder
17. Sun Microsystems Inc.
18. Technologies Inc.
19. Ukiah Software Inc.
As of 6/4/97
<PAGE>
EXHIBIT D
END USER LICENSE
GAUNTLET(R) SOFTWARE LICENSE AGREEMENT
1. NOTICE. TRUSTED INFORMATION SYSTEMS ("TIS") IS WILLING TO HAVE ITS
GAUNTLET(R) SOFTWARE ("SOFTWARE") LICENSED TO YOU ONLY ON THE CONDITION THAT YOU
ACCEPT ALL OF THE TERMS CONTAINED IN THIS LICENSE AGREEMENT. PLEASE READ THIS
LICENSE AGREEMENT CAREFULLY. BY USING THIS SOFTWARE YOU AGREE TO BE BOUND BY THE
TERMS OF THIS AGREEMENT. IF YOU DO NOT AGREE TO THESE TERMS WE ARE UNWILLING TO
LICENSE THE SOFTWARE TO YOU AND YOU SHOULD NOT RUN THIS SOFTWARE. IN SUCH CASE,
PROMPTLY RETURN THE SOFTWARE AND ALL OTHER MATERIAL IN THE PACKAGE ALONG WITH
PROOF OF PAYMENT TO TIS OR TO THE AUTHORIZED RESELLER FROM WHICH YOU OBTAINED
THE SOFTWARE FOR A FULL REFUND OF THE PRICE YOU PAID.
2. Ownership and License. This is a license agreement and NOT an agreement for
sale. TIS continues to own the copy of the Gauntlet(R) Software which is to be
delivered under this license agreement ("Agreement") and all other copies that
you are authorized by this Agreement to make. Your rights to use the Software
are specified in this Agreement, and TIS retains all rights not expressly
granted to you in this Agreement. Nothing in this Agreement constitutes a waiver
of TIS' rights under U.S. Copyright law or any other federal or state law. In
this license agreement, "the Software" refers to the executable modules, the
help files, the configuration scripts, configuration files, and any similar
files provided hereunder.
3. Permitted Uses. You are granted the following rights to the Software:
(a) Right to Install and Use. You may install and use the Software on any
single machine at any single location. Your use of the Software on that
machine is limited to protecting the number of machines (tiered users)
specified in your purchase order. If you desire to have a "hot standby
computer," you may install the Software on another, unconnected system. If
you wish to use the Software on more than one connected machine, you must
obtain a license for an additional copy of the Software for each
additional computer on which you want to use it;
(b) Right to Copy. You may copy the Software for backup or archival
purposes, and you may make an unlimited number of copies of the
documentation, provided that TIS' copyright notice appears on each copy
and provided that the documentation is copied in its entirety;
4. Prohibited Uses. You may not, without prior written permission from TIS:
(a) Use, copy, modify, merge, or distribute, transfer copies of the
Software or documentation except as specifically permitted in this
Agreement;
(b) Reverse engineer the Software, in whole or in part, by any means,
including, but not limited to, decompiling, disassembling, reverse
computing, or any similar operation or technique;
(c) Use any backup or archival copies of the Software (or allow someone
else to use such copies) for any purpose other than to replace the
original copy in the event it is destroyed or becomes defective;
(d) Sublicense, lend, lease, or rent the Software; or
(e) Publish any results of benchmark tests run on the Oracle SQL*Net
Application technology which may be provided hereunder.
5. Limited Warranty. TIS makes the following limited warranties [to the original
consumer licensee of the Software], for a period of thirty (30) calendar days
from the date you acquired the Software from TIS or TIS' authorized reseller:
(a) Media. The disks and documentation in this package will be free from
defects in materials and workmanship under normal use. If the disks or
documentation fail to conform to this warranty, you may, as your sole and
exclusive remedy, obtain a replacement free of charge if you return the
defective disk(s) or documentation to TIS or TIS' authorized reseller with
a dated proof of purchase.
(b) Software. If the Software fails to operate in accordance with TIS'
published specifications current at the time of the granting of this
license, you may, as your sole and exclusive remedy, return all of the
Software and the documentation to TIS or the authorized reseller from whom
you acquired it, along with a dated proof of purchase, specifying the
problem, and TIS will provide you with a new copy of the Software or a
full refund at TIS' election.
<PAGE>
6. WARRANTY DISCLAIMER. TIS DOES NOT WARRANT THAT THIS SOFTWARE WILL MEET YOUR
REQUIREMENTS OR THAT ITS OPERATION WILL BE UNINTERRUPTED OR ERROR-FREE. TIS
EXCLUDES AND EXPRESSLY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES NOT STATED
HEREIN, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
(a) Some states do not allow the exclusion of implied warranties, so the
above exclusion may not apply to you. This warranty gives you specific
legal rights, and you may also have other legal rights, which vary from
state to state.
7. LIMITATION OF LIABILITY. IF THE SOFTWARE BEING LICENSED TO YOU HEREUNDER
CONTAINS THE ORACLE SQL*NET APPLICATION PROXY, IN NO EVENT SHALL TIS BE LIABLE
TO YOU FOR ANY DAMAGES ARISING FROM YOUR USE OF ORACLE'S SQL*NET APPLICATION
PROXY WHETHER DIRECT, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL (INCLUDING LOSS OF
PROFITS). WITH THE EXCEPTION OF DAMAGES ARISING FROM YOUR USE OF ORACLE'S
SQL*NET APPLICATION PROXY, TIS' LIABILITY TO YOU FOR ANY LOSSES SHALL BE LIMITED
TO DIRECT DAMAGES, AND SHALL NOT EXCEED THE AMOUNT YOU ORIGINALLY PAID FOR THE
SOFTWARE. IN NO EVENT WILL TIS BE LIABLE TO YOU FOR ANY INDIRECT, SPECIAL,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOSS OF PROFITS) EVEN IF TIS HAD
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
(a) Some jurisdictions do not allow these limitations or exclusions, so
they may not apply to you.
8. United States Government Restricted Rights. The enclosed Software and
documentation are provided with Restricted Rights unless provided pursuant to 18
C.F.R. 252.227-7202. Use, reproduction or disclosure by the U.S. Government or
any agency or instrumentality thereof is subject to restrictions as set forth in
subdivision (c)(1)(ii) of the Rights in Technical Data and Computer Software
clause at 48 C.F.R. 252.227-7014, or in subdivision (c)(1) and (2) of the
Commercial Computer Software Restricted Rights Clause at 48 C.F.R. 52-227-19, as
applicable. Contractor Manufacturer is Trusted Information Systems,
Incorporated, 3060 Washington Road, Glenwood, MD 21738.
9. Export Controls. You agree that you will not directly or indirectly transfer
the Software or documentation to any country to which such transfer would be
prohibited by the U.S. Export Administration Act, the regulations issued
thereunder, or any other export control statute or regulation.
10. Governing Law. This agreement is to be construed under the laws of the State
of Maryland, USA, exclusive of conflict of laws provisions. This Agreement is
not to be governed by the 1980 United Nations Convention on Contracts for the
International Sale of Goods, as amended.
11. Termination. This license and your right to use this Software automatically
terminate if you fail to comply with any provisions of this Agreement, destroy
the copies of the Software in your possession, or voluntarily return the
Software to TIS or TIS' authorized reseller. Upon termination you will destroy
all copies of the Software and documentation. Otherwise, the restrictions on
your rights to use the Software will expire upon expiration of the copyright to
the Software.
12. Miscellaneous Provisions. This is the entire agreement between us relating
to the contents of this package, and supersedes any prior purchase order,
communications, advertising, or representations concerning the contents of this
package. No change or modification of this Agreement will be valid unless it is
in writing, and is signed by TIS.
13. Third Party Beneficiary. If the software being licensed to you hereunder
contains the Oracle SQL*Net Application Proxy, then, to the extent permitted by
law, the Oracle Corporation is hereby designated as a third party beneficiary of
this license.
14. Canadian Transactions. If you acquired this Software in Canada, you agree to
the following:
(a) The parties hereto have expressly required that the present Agreement
and its Exhibits be drawn up in the English Language. / Les parties aux
presentes ont expressment exige que la presente convention et ses Annexes
soient redigees en langue anglaise.
If you have any questions about this Agreement, write TIS at:
[email protected]
or
Trusted Information Systems, Inc.
15204 Omega Drive
Rockville, MD 20850
Attention: Gauntlet Administration
Phone Number 888-FIREWALL (or, outside of the U.S. or Canada, 301.527.9500)
<PAGE>
EXHIBIT E
EMPLOYEE AGREEMENT REGARDING
CONFIDENTIALITY AND INVENTIONS
This Agreement is intended to set forth in writing my responsibility to
Trusted Information Systems, Inc. ("TIS"). I recognize that TIS is engaged in a
continuous program of research, development, and production respecting its
business, present and future. As part of my employment with TIS, I have certain
obligations relating to the business interests of TIS, confidential and
proprietary information, and inventions which I develop during that employment.
As part of the conditions of employment by TIS, I acknowledge and agree
that:
1. Effective Date. This agreement ("Agreement") shall be effective as of
_____________, 19___.
2. TIS Proprietary Information.
2.1 Confidentiality. I will maintain in confidence and will not disclose
or use, either during or after the term of my employment, any
proprietary or confidential information or know-how belonging to TIS
(referred to herein as "Proprietary Information"), whether or not in
written form, except to the extent required to perform duties on
behalf of TIS. Proprietary Information includes any information, not
generally known in the relevant trade or industry, which was
obtained from TIS, or which was learned, discovered, developed,
conceived, originated or prepared by me in the scope of my
employment. Such Proprietary Information includes, but is not
limited to, software, technical and business information relating to
TIS' inventions or products, research and development, production
processes, machines and equipment, finances, customers, marketing,
as well as production, marketing and future business plans, and any
other information which is identified as confidential by TIS. Upon
termination of my employment or at the request of my supervisor
before termination, I will deliver to TIS all written and tangible
material in my possession incorporating the Proprietary Information
or otherwise relating to TIS' business.
2.2 Third-Party Proprietary Information. I recognize that TIS has
received and will receive confidential or proprietary information
from third parties, subject to a duty on TIS' part to maintain the
confidentiality of such information and to use it only for certain
limited purposes. My obligations with respect to TIS Proprietary
Information shall also extend to confidential and/or proprietary
information belonging to customers and suppliers of TIS who may have
disclosed such information to me as the result of my status as an
employee of TIS. I will not use such third-party information for the
benefit of anyone other than TIS or such third party, or in any
manner inconsistent with TIS' agreement with such third party.
3. Inventions.
3.1 Definition of Inventions. As used in this Agreement, the term
"Inventions" means any new or useful art, discovery, contribution,
finding or improvement whether or not patentable, and all related
know-how. Inventions include, but are not limited to, all designs,
discoveries, algorithms, formulae, processes, manufacturing
techniques, computer software, inventions and improvements.
1
<PAGE>
3.2 Disclosure and Assignment of Inventions.
(a) I will promptly disclose and describe to TIS all Inventions
which I may solely or jointly conceive, develop, or reduce to
practice during the period of my employment with TIS (i) which
relate to TIS' business or actual or demonstrably anticipated
research or development, (ii) which were developed, in whole
or part, on TIS' time or with the use of any of TIS'
equipment, supplies, facilities or trade secret information,
or (iii) which resulted from any work I performed for TIS
(referred to herein as "TIS Inventions"). I hereby assign to
TIS all my right, title and interest worldwide in TIS
Inventions and in all intellectual property rights based on
TIS Inventions. However, I do not assign or agree to assign
any Inventions which were made by me prior to my employment
with TIS, which Inventions, if any, are identified on Exhibit
A to this Agreement. Exhibit A contains no confidential
information. I have no rights in any Inventions other than the
Inventions specified in Exhibit A. If no such list is
attached, I have no such Inventions or I grant an irrevocable,
non-exclusive, royalty-free, worldwide license to TIS to make,
use and sell Inventions developed by me prior to my employment
with TIS.
3.3 Non-Assignable Inventions. This Agreement does not apply to an
Invention which qualifies fully as a non-assignable Invention under
the provisions of Section 2870 of the California Labor Code.
4. Moral Rights. TIS retains moral rights for work done while at TIS. "Moral
Rights" means any personal rights which an author may have under
applicable law which are separate and apart from the proprietary aspect of
copyright, including, but not limited to, rights to identification of
authorship, rights of approval on modifications or limitation on
subsequent modification, and rights to cause or suppress publication.
5. TIS Materials. Upon termination of my employment with TIS or at any other
time upon TIS' request I will promptly deliver to TIS all documents and
other materials furnished to me by TIS or prepared by me for TIS. I will
retain no copies of TIS' or other proprietary material.
6. Competitive Employment. During the term of my employment with TIS, I will
not engage in any employment, consulting, or other activity in any
business competitive with TIS without TIS' written consent.
7. Non-Solicitation. During the term of my employment with TIS and for a
period of two (2) years thereafter, I will not solicit or cause others to
solicit any employees of TIS to terminate their employment with TIS.
8. Acts to Secure Proprietary Rights.
8.1 Further Acts. I agree to perform, during and after my employment,
all acts deemed necessary or desirable by TIS to permit and assist
it, at its expense, in perfecting and enforcing the full benefits,
enjoyment, rights and title throughout the world in the TIS
Inventions. Such acts are intended primarily to include, but are not
limited to, execution of documents and assistance or cooperation in
the registration and enforcement of patents and copyrights or in
other legal proceedings.
2
<PAGE>
8.2 Appointment of Attorney-In-Fact: In the event that TIS is unable for
any reason whatsoever to secure my signature to any lawful document
required to apply for or enforce any patent, copyright or other
applications with respect to any TIS Inventions (including
improvements, renewals, extensions, continuations, divisions or
continuations in part thereof), I hereby irrevocably appoint TIS and
its duly authorized officers and agents as my agents and
attorneys-in-fact to execute and file any such application and to do
all other lawfully permitted acts to further the prosecution,
issuance and enforcement of patents, copyrights or other rights
therein with the same legal force and effect as if executed by me.
9. No Conflicting Obligation. My performance of this Agreement and as an
employee of TIS does not and will not breach any agreement to keep in
confidence proprietary information, knowledge or data acquired by me prior
to my employment with TIS. I will not disclose to TIS, or induce TIS to
use, any confidential or proprietary information or material belonging to
any previous employer or other person or entity. I am not a party to any
other agreement which will interfere with my full compliance with this
Agreement. I will not enter into any agreement in conflict with the
provisions of this Agreement.
10. Survival. Notwithstanding the termination of my employment, Sections 2, 3,
7 and 8 shall survive such termination. This Agreement does not in any way
restrict my right or the right of TIS to terminate my employment at any
time.
11. Specific Performance. A breach of any of the promises or agreements
contained herein will result in irreparable and continuing damage to TIS
for which there will be no adequate remedy at law, and TIS shall be
entitled to injunctive relief and/or a decree for specific performance,
and such other relief as may be proper.
12. Waiver. The waiver by TIS of a breach of any provision of this Agreement
by me will not operate or be construed as a waiver of any other
subsequent breach by me.
13. Severability. If any part of this Agreement is found invalid or
unenforceable, that part will be amended to achieve as nearly as possible
the same economic effect as the original provision and the remainder of
the Agreement will remain in full force.
14. Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Maryland as applied to agreements
entered into and to be performed entirely within Maryland and Maryland
residents.
15. Choice of Forum/Attorney Fees. The panics hereby submit to the
jurisdiction of the United States District Court for the District of
Maryland and the Maryland State courts in any litigation arising out of
the Agreement. If court proceedings are required to enforce any provision
or to remedy any breach of this Agreement, the prevailing party shall be
entitled to an award of reasonable and necessary expenses of litigation,
including reasonable attorney's fees.
16. Entire Agreement. This Agreement, including all exhibits to this
Agreement, constitutes the entire agreement between the parties relating
to this subject matter and supersedes all prior or simultaneous
representations, discussions, negotiations, and agreements, whether
written or oral. This Agreement
3
<PAGE>
may be amended or modified only with the written consent of both me and
TIS. No oral waiver, amendment or modification will be effective under any
circumstances whatsoever.
17. Assignment. This Agreement may be assigned by TIS. I may not assign or
delegate my duties under this Agreement without TIS' prior written
approval. This Agreement shall be binding upon my heirs, successors, and
permitted assignees.
EMPLOYEE:
Date:
------------------------------- --------------------------------------
Signature
--------------------------------------
Printed Name
Witnessed by:
Date: TRUSTED INFORMATION SYSTEMS, INC.
-------------------------------
By
--------------------------------------
Title
--------------------------------------
4
<PAGE>
LIMITED EXCLUSION NOTIFICATION
THIS IS TO NOTIFY you in accordance with Section 2870 of the California
Labor code that the above Agreement between you and TIS does not require you to
assign to TIS, any invention for which no equipment, supplies, facility or trade
secret information of TIS was used and which was developed entirely on your own
time, and (a) which does not relate (1) to the business of TIS or (2) to TIS'
actual or demonstrably anticipated research or development, or (b) which does
not result from any work performed by you for TIS. This limited exclusion does
not apply to any patent or invention covered by a contract between TIS and the
United States or any of its agencies requiring full title to such patent or
invention to be in the United States.
I ACKNOWLEDGE RECEIPT of a copy of this notification.
--------------------------------------
Signature
--------------------------------------
Printed Name of Employee
--------------------------------------
Date
Witnessed by:
TRUSTED INFORMATION SYSTEMS, INC.
- ------------------------------------
Representative
Dated
-------------------------------
5
<PAGE>
Exhibit 10.13
Software Distribution Agreement
This Software Distribution Agreement (the "Agreement") is made and
entered into this 26th day of September, 1997 by and between Trusted
Information Systems, Inc., a Delaware corporation with offices at 15204 Omega
Drive, Rockville, Maryland 20850 ("TIS") and Network-1 Software & Technology,
Inc., a Delaware corporation with its principal offices at 909 Third Avenue,
9th Floor, New York, New York 10022 ("Network-1").
1. Definitions. As used in this Agreement:
(a) "Confidential Information" shall mean confidential or other
proprietary information that is disclosed by either party to the other under
this Agreement including, without limitation, software, code and designs,
product specifications and other confidential business information.
Confidential information shall not include information which (i) is or
becomes public knowledge without any action by or involvement of a party;
(ii) has been independently developed other than pursuant to this Agreement;
(iii) constitutes residuals (the "Residuals") as such term is defined in
paragraph 6 of the Non-Disclosure Agreement, dated April 7, 1997, between
Network-1 and TIS; (iv) is disclosed by a party with the prior written
approval of the other party; or (v) is disclosed pursuant to any judicial or
government order provided that such party gives the other party sufficient
prior notice to contest such order.
(b) "Derivative Work" means any work which is based upon one or
more pre-existing works such as a revision, modification, translation,
abridgement, condensation, expansion, collection, compilation or any other
form in which such pre-existing work may be recast, transformed or adopted,
and which, in the absence of this Agreement or other authorizations by the
owner of the pre-existing work, would constitute a copyright infringement.
Derivative Work does not include Residuals.
(c) "Effective Date" shall mean the date identified on the
signature page of this Agreement as the effective date.
(d) "End User(s)" means any person or entity which is granted a
sublicense by Network-1, in accordance with this Agreement, to use the
Licensed Product as a component of the Network-1 FireWall/Plus Product.
(e) "Network-1 FireWall/Plus Product" shall mean the firewall
software product(s) and other software products developed by and for and
owned by Network-1 for use on Microsoft based operating systems (including
Windows/NT and Windows 95) as set forth on Exhibit A (including any
unilateral amendments provided by Network-1 to TIS) and any Updates or
Upgrades relating to such products.
(f) "Network-1 FireWall/Licensed Product" shall mean the Network-1
FireWall/Plus Product which includes the Licensed Product as a component.
<PAGE>
(g) "Intellectual Property Rights" shall mean all forms of
intellectual property rights and protections that may be obtained for or may
pertain to, the Licensed Product, Confidential Information and marks and may
include without limitation:
(i) all right, title and interest in and to all Letters Patent
and all filed, pending or potential applications for Letters Patent,
including any reissue, reexamination, division, continuation or
continuations-in-part applications throughout the world now or
hereafter filed;
(ii) all right, title and interest in and to all trade secret
rights and equivalent rights arising under the common law, state law,
federal law and laws of foreign countries;
(iii) all right, title and interest in and to all mask works,
copyrights, other literary property or authors rights, whether or not
protected by copyright or as a mask work, under common law, state law,
federal law and laws of foreign countries; and
(iv) all right, title and interest in and to all proprietary
indicia, trademarks, tradenames, symbols, logos and/or brand names
under common law, state law, federal law and laws of foreign
countries.
(h) "Licensed Product" means TIS' software proxies for Enterprise
Firewall platform and associated software as defined in Exhibit B, as it may
be amended from time to time by mutual agreement of the parties.
(i) "Net Receipts" shall mean the actual gross receipts less
sales, use, excise, value added or other similar taxes and allowances for
returns, defects and replacements received by Network-1 from distribution of
the Network-1 FireWall/Licensed Product. If the Network-1 FireWall/Licensed
Product is distributed with other products that do not contain the Network-1
FireWall/Licensed Product in a bundle for a single price, the Net Receipts
attributable to the Network-1 FireWall/Licensed Product will be determined by
pro rating the receipts from the sale or license of the package according to
the suggested retail prices, or if no suggested retail price is announced,
the values established by Network-1 for the separate works contained in the
package, whether or not such products are distributed separately, provided
that such values are reasonably related to the values or cost of the separate
products. Net Receipts will not include any receipts from copies of the
Network-1 FireWall/Licensed Product which are distributed by Network-1 to
previous purchasers of the Network-1 FireWall/Licensed Product as back-up,
replacement or update copies for which Network-1 does not receive its
standard payment. No Royalties will be credited or paid to TIS with respect
to any receipts from copies of the Network-1 FireWall/Licensed Product
supplied for promotional purposes (as well as evaluation purposes) to the
press, trade, sales representatives or potential customers for the Network-1
FireWall/Licensed Product. Amounts received by Network-1 as deposits or
advances will not be deemed to have been received until shipment of the
Network-1 FireWall/Licensed Product to the End User making the deposit or
advance has been made against such deposit or advance.
2
<PAGE>
Partial payment of an invoice will be pro-rated over all products included in
the invoice. Amounts received by Network-1 in foreign currencies will be
deemed converted into U.S. dollars at the exchange rate on the date of actual
payment.
(j) "Royalties" shall mean the royalties payable with respect to
distribution of the Network-1 FireWall/Licensed Product as described in
Section 6 hereof.
(k) "Source Code" shall mean program code applicable to the
Licensed Product, expressed in the form suitable for modification by humans
as well as any Updates and Upgrades as defined herein and any and all
applicable related documentation.
(l) "Specifications" shall mean the published Specifications
applicable to the Licensed Product that are in effect as of the date the
Licensed Product is delivered to Network-1. During the term, if TIS
substantially amends its specifications, TIS shall inform Network-1 of the
revised Specifications.
(m) "Term" shall mean the period beginning on the Effective Date
and terminating on the date this Agreement is terminated under Section 13
hereof.
(n) "Update" means the release of the Licensed Product which is a
minor release or bug fix or an error correction.
(o) "Upgrade" means a new revision of the Licensed Product that
includes enhancements which increase performance or increase functionality
for which TIS charges a license fee.
2. Grant of License.
(a) Subject to the terms and conditions set forth in this
Agreement, TIS hereby grants to Network-1 a worldwide, perpetual (subject to
termination as provided in Section 13), non-exclusive license to (i)
incorporate and/or bundle the Licensed Product only with the Network-1
FireWall/Plus Product and to market, distribute, and sublicense the Licensed
Product solely as a component of the Network-1 FireWall/Plus Product; and
(ii) to use the License Product for testing, demonstration, training,
promotional and evaluation purposes by its personnel, end users, resellers
and distributors.
(b) If TIS should make any Updates or Upgrades to the Licensed
Product, TIS shall make (at no additional cost to Network-1) the same
available to Network-1 under the terms and conditions of this Agreement.
(c) Network-1 may not modify, enhance or otherwise change the
Licensed Product except to the extent required to integrate the Licensed
Product with the Network-1 FireWall/Plus Product. Any such permissible
modification, enhancement or change to the Licensed Product by Network-1
shall be the exclusive property of Network-1 (the "Network-1 Modifications")
and Network-1 will automatically grant TIS, a worldwide, fully paid-up, non-
3
<PAGE>
exclusive, perpetual, irrevocable license to market, sublicense, use and
distribute the Network-1 Modifications except that TIS may not sublicense,
distribute or otherwise provide the Network-1 Modifications to direct
competitors of Network-1 as listed on Exhibit C hereto (Exhibit C may be
amended by Network-1 upon consent of TIS which shall not be unreasonably
withheld).
(d) Network-1 agrees to allow TIS to enforce its rights under any
agreement Network-1 may have with any third party or End User to protect any
confidentiality and proprietary property of TIS included in the Licensed
Product.
(e) Network-1 shall not market, distribute or sublicense the
Licensed Product to any party deemed a competitor of TIS as set forth on
Exhibit D hereto (the "TIS Competitor"). In the event of a merger or sale of
substantially all of the assets of Network-1 with or to any TIS Competitor,
TIS shall have the right to terminate this Agreement upon six (6) months
notice. In addition, at no time shall any TIS Competitor have access to the
Source Code as provided in Section 3 hereof without the express written
consent of TIS.
(f) Network-1 shall not market, distribute or sublease the
Licensed Product to any Original Equipment Manufacturer without first
obtaining the written consent of TIS.
(g) Except as otherwise provided herein, Network-1 shall not copy
the Licensed Product in whole or in part, except as reasonably necessary for
archival backup purposes and for use by Network-1 of the Licensed Product as
permitted under this Agreement. Network-1 agrees to reproduce on all
documentation relating to the Network-1 FireWall/Licensed Product,
proprietary trademark or copyright markings as follows: "The
[Describe proxies actually used from Exhibit B] Software Proxies are a
product of Trusted Information Systems, Inc."
(h) TIS, at its sole discretion, shall have the right to modify
the Licensed Product at any time during the Term provided that TIS provides
Network-1 with Beta source code relating to such modification as soon as it
is available and gives Network-1 thirty (30) days prior notice of such
change, including any revised or additional Specifications.
(i) All licenses to End Users, whether granted by Network-1
directly or through a distributor, shall contain Network-1's standard
license, a copy of which is attached hereto as Exhibit E.
(j) Nothing in this Agreement shall obligate Network-1 to
incorporate the Licensed Product with the Network-1 FireWall/Plus Product and
Network-1 may offer its Network-1 FireWall/Plus Product without the Licensed
Product at anytime hereafter subject to Network-1's obligation to pay TIS the
Minimum Royalty Payment set forth in paragraph 6(b) herein and TIS' right of
termination as provided in paragraph 13(b) hereof.
3. Source Code Escrow.
TIS has deposited in escrow with Network-1 the Source Code which
shall be maintained in escrow by Network-1 in a secure environment at its
office location at 878
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<PAGE>
Greenview Drive, Grand Prairie, Texas 75050 (or such other location Network-1
provides TIS upon 30 days prior notice). Network-1 shall employ such
procedures with respect to the Source Code that are no less restrictive than
the strictest procedures used by it to protect its own confidential and
proprietary source code which procedures shall be no less than reasonable
care. Network-1 shall allow a limited number of its employees and
consultants (a list of consultants who have had access to the Source Code as
of the date hereof is attached hereto as Schedule 1 and after the date hereof
a list of consultants will be provided to TIS prior to access) to have access
to the Source Code provided such employees or consultants execute
confidentiality agreements in the form annexed hereto as Exhibit F, and only
for the following purposes: (i) integrating the Licensed Product with
Network-1 FireWall/Plus Product and (ii) maintenance and bug fixes.
4. Marketing and Distribution of the Licensed Product.
Network-1 will be responsible for and have sole discretion (except
as otherwise expressly provided herein) with respect to determining and
implementing all or any marketing strategies, policies or programs relating
to the distribution of the Licensed Product by Network-1 as provided herein,
including, without limitation, methods of marketing, pricing, packaging,
labeling and identification, protection, advertising, terms and conditions of
sale and/or license, collection of end users' names, scope and expense of
marketing, and use of warranty or user registration procedures. Network-1
shall have the right to distribute the Licensed Product in accordance with
the terms of this Agreement in a variety of forms, and by any variety of
methods, in its sole discretion.
5. Delivery and Acceptance.
(a) Delivery. TIS has delivered the Licensed Product to Network-1
and will provide all Updates and Upgrades to Network-1's designated
representatives of which Network-1 will advise TIS in writing. Network-1 has
evaluated the Licensed Product and the Licensed Product is hereby deemed
accepted by Network. Except as set forth in Section 6 hereof, Network-1
shall not be required to make any payments to TIS with respect to the
Licensed Product.
6. Royalty Payments.
(a) Royalty Payments. Network-1 shall pay to TIS Royalties of *%
of the Net Receipts derived from distribution of the Network-1
FireWall/Licensed Product. Network-1 agrees that in no event shall the
Royalties payable to TIS hereunder be less than $* per unit of Network-1
FireWall/Licensed Product sold by Network-1 in accordance with the terms of
this Agreement. The Royalties shall be paid to TIS by Network-1 on a
quarterly basis, within thirty (30) days following the end of each calendar
quarter.
* This material has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities and Exchange
Commission.
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<PAGE>
(b) Minimum Royalty Payment. For the period ending March 30,
1999, Network-1 agrees to pay to TIS total Royalties of a minimum of $100,000
pursuant to Section 6(a) herein (the "Minimum Royalty Payment") regardless of
the Net Receipts derived from distribution of Network 1 FireWall/Licensed
Product. In the event the Minimum Royalty Payment has not been paid by April
30, 1999 (for the period ending March 30, 1999), Network-1 shall be obligated
to make an additional payment to TIS by May 15, 1999 in an amount equal to
the difference between the Minimum Royalty Payment and the Royalties paid to
TIS for the period ending March 30, 1999. In the event the Minimum Royalty
Payment is not paid by Network-1 as provided herein, Network-1 shall be in
breach of this Agreement and TIS shall have the right to terminate this
Agreement in accordance with Section 13(c) hereof. Any such termination
shall not relieve Network-1 of its obligation to pay TIS the Minimum Royalty
Payment.
(c) Reports of Royalties. Network-1 shall deliver to TIS, along
with its payment of Royalties due for each quarter, a written report showing,
in reasonable detail, its calculation of Royalties payable with respect to
such calendar quarter. Network-1 shall maintain such books and records as are
necessary to properly calculate the amount of Royalties to be paid pursuant
to this Agreement. A certified public accountant to be chosen by TIS, and
approved by Network-1 (which approval shall not be unreasonably withheld),
may, upon reasonable notice and during normal business hours, but no more
often than once each year, inspect the records of Network-1 on which such
reports are based. Any information revealed in such inspections shall be
confidential and not disclosed to anyone, except to the extent necessary to
identify to TIS, Network-1 or any fact finder in any action instituted to
enforce the terms of this Agreement, any inaccuracy which may be found in the
amount of Royalties due to TIS or except as otherwise provided by law. The
fees and expenses of the independent certified public accountant shall be
paid by TIS, unless the inspection uncovers an underpayment for the
evaluation period in question in excess of 5% of the amount actually paid by
Network-1 during the period of the audit, in which case the fees and expenses
of the certified public accountant shall be paid by Network-1.
7. Support. TIS shall provide Network-1 with technical support
in connection with integration of the Licensed Product with the Network-1
FireWall/Plus Product which shall include (i) up to one (1) week on-site
support for purposes of integration of the Licensed Product with the
Network-1 FireWall/Plus Product, (ii) support for bug fixes related to the
Licensed Product and (iii) support for modifications to the Licensed Product
caused by operating system changes provided that the Licensed Product is then
currently offered by TIS on such operating system. Except as otherwise
provided herein, following Network-1's release of the Network-1
FireWall/Licensed Product, any technical support provided by TIS to Network-1
on site shall be billed at TIS's standard rates of $2,000 per day.
8. Intellectual Property Rights. Except as otherwise
specifically provided in this Agreement, Network-1 hereby acknowledges that
TIS and its licensors (as their interests may appear) retain all Intellectual
Property Rights (including, without limitation, any and all related patents,
trademarks, copyrights or proprietary or trade secret rights) in the Licensed
Product and Confidential Information, including, without limitation, all
corrections, modifications and other
6
<PAGE>
Derivative Works to the Licensed Product. Except for the Network-1
Modifications, Network-1 hereby assigns to TIS all Intellectual Property
Rights it may hereafter possess in the Licensed Product and Confidential
Information and all Derivative Works and agrees (i) to execute all documents,
and take all actions, that may be necessary to confirm such rights, and (ii)
to retain all proprietary marks, legends and patent and copyright notices
that appear on the Licensed Product or Confidential Information delivered to
Network-1 by TIS and all whole or partial copies thereof.
9. Confidentiality. Network-1 agrees to observe complete
confidentiality with respect to the Confidential Information, not to disclose
or permit any third party or entity access to, the Confidential Information
(or any portion thereof) without the prior written approval of TIS (except
such disclosure which is required to perform any obligations under this
Agreement) and to insure that any employees, or any third parties who receive
access to the Confidential Information, are advised of the confidential and
proprietary nature thereof and are prohibited from copying, utilizing or
otherwise revealing the Confidential Information in any manner not already
permitted under this Agreement or the Non-Disclosure Agreement between the
parties, dated April 7, 1997. Without limiting the foregoing, Network-1
agrees to employ with regard to the Confidential Information, procedures no
less restrictive than the strictest procedures used by it to protect its own
confidential and proprietary information which procedures shall be no less
than reasonable care.
10. Warranties. TIS represents and warrants that (i) the Licensed
Product is, and the Upgrades and Updates will be, the original creation of
TIS, TIS is the sole and exclusive owner of the Licensed Product, and will be
the sole and exclusive owner of the Upgrades and Updates (except as otherwise
disclosed to Network-1) and, TIS has the rights to grant licenses therefor as
granted to TIS under this Agreement, (ii) the grant to and the exercise by
Network-1 of any and all rights set forth in this Agreement and TIS's
disclosures to Network-1 pursuant to this Agreement do not, and will not,
violate the U.S. patent rights, copyrights, trade secret rights, trademark
rights or other proprietary contractual or other rights of any third party,
(iii) for a period of ninety (90) days following the first use of the
Licensed Product by an End User, the Licensed Product and Upgrades will
substantially conform to and operate as described in applicable
Specifications, and (iv) TIS has full power and authority to enter into this
Agreement and to grant the rights and obligations set forth herein and this
Agreement is enforceable in accordance with its terms.
11. Disclaimer. EXCEPT FOR THE EXPRESS WARRANTIES STATED IN
SECTION 10 HEREIN, TIS DISCLAIM(S) ALL EXPRESS OR IMPLIED WARRANTIES WITH
RESPECT TO THE LICENSED PRODUCT FURNISHED HEREUNDER, INCLUDING, WITHOUT
LIMITATION, ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
12. Indemnification.
(a) By TIS. TIS agrees to indemnify, hold harmless and defend
Network-1, its officers, directors, employees, contractors, licensors and
agents, from any claims, liabilities,
7
<PAGE>
damages, costs and expenses (including reasonable attorneys' fees and costs
of suit) to the extent they arise out of (i) a material breach of this
Agreement by TIS, (ii) a breach of any of the representations and warranties
set forth in Section 10 hereof or any other representations set forth in this
Agreement and (iii) any claims of infringement of any U.S. copyright, patent
or trade secret or other proprietary rights, arising from the Licensed
Product and any modification, enhancement or misuse of the Licensed Product
by TIS. If TIS receives notice of an alleged infringement, TIS shall use its
best efforts, subject to commercial reasonableness, to either obtain the
right to continued use of the Licensed Product, or to modify the Licensed
Product so that it is no longer infringing.
(b) By Network-1. Network-1 agrees to indemnify, hold harmless
and defend TIS, its officers, directors, employees, contractors, licensors
and agents, from any claims, liabilities, damages, costs and expenses
(including reasonable attorneys' fees and costs of suit) to the extent they
arise out of (i) a material breach by Network-1 of the terms and provisions
of this Agreement, and (ii) any claim of infringement of any U.S. copyright,
patent or trade secret or other proprietary rights relating to the Network-1
FireWall/Plus Product excluding any such claim relating to the Licensed
Product.
(c) Indemnification Conditions. Promptly after receipt by TIS or
Network-1 of notice of any claim that may affect the Licensed Product or the
commencement of any action, proceeding, or investigation in respect of which
indemnity or reimbursement may be sought as provided above, such party (the
"Indemnitee") shall notify the party from whom indemnification is claimed
(the "Indemnitor"), but the failure of such Indemnitee to notify the
Indemnitor with respect to a particular action, proceeding or investigation
shall not relieve the Indemnitor from any obligation or liability (i) which
it may have pursuant to this Agreement if the Indemnitor is not substantially
prejudiced by the failure to notify or (ii) which it may have otherwise than
pursuant to this Agreement. The Indemnitor shall promptly assume the defense
of the Indemnitee with counsel reasonably satisfactory to the Indemnitee, and
the fees and expenses of such counsel shall be at the sole cost and expense
of the Indemnitor. The Indemnitee will cooperate with the Indemnitor in the
defense of any action, proceeding or investigation for which the Indemnitor
assumes the defense. Notwithstanding the foregoing, the Indemnitee shall
have the right to employ separate counsel in any action, proceeding, or
investigation and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of the Indemnitee unless (i)
the Indemnitor has agreed to pay such fees and expenses, (ii) the Indemnitor
shall have failed promptly to assume the defense of such action, proceeding
or investigation and employ counsel reasonably satisfactory to the
Indemnitee, or (iii) in the reasonable judgment of the Indemnitee there may
be one or more defenses available to the Indemnitee which are not available
to the Indemnitor with respect to such action, claim, or proceeding, in which
case the Indemnitor shall not have the right to assume the defense of such
action, proceeding or investigation on behalf of the Indemnitee. The
Indemnitor shall not be liable for the settlement by the Indemnitee of any
action, proceeding or investigation effected without its consent, which
consent shall not be unreasonably withheld. The Indemnitor shall not enter
into any settlement in any action, suit or proceeding to which the Indemnitee
is a party, unless such settlement includes a general release of the
Indemnitee with no payment by the Indemnitee of consideration.
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13. Term and Termination.
(a) Term of Agreement. Subject to the foregoing limitation, this
Agreement shall continue perpetually, unless terminated in accordance with
the provisions of Section 13 below.
(b) Termination. Network-1 may terminate this Agreement effective
at the end of any calendar year beginning with the year ended December 31,
1998 by giving TIS prior written notice at any-time during the month of
October preceding such year end. TIS may terminate this Agreement upon
thirty (30) days prior notice if for any two consecutive calendar quarters
after December 31, 1998, Network-1 does not pay TIS minimum Royalties of $*
per quarter, payment to be provided in accordance with the terms of this
Agreement. In addition, if at any time after December 31, 1998, Network-1
does not offer the Licensed Product as part of any Network-1
FireWall/Licensed Plus Product for any ninety (90) day period, TIS shall have
the right to terminate this Agreement upon thirty (30) days prior notice.
(c) Termination Upon Breach. Each party shall have the right to
terminate this Agreement provided (i) such party provides thirty (30) days
prior notice to the other party; (ii) the other party is in a material breach
of any of the terms of this Agreement; and (iii) the prior breach is not
cured within such thirty (30) day period. Any such notice shall provide, in
reasonable detail, a description of the alleged breach and the requested cure
of that breach.
(d) Effect of Termination. In the event of a termination of this
Agreement pursuant to this Section 13, Network-1 shall have the right, for a
period of 180 days, to distribute its existing inventory of the Network-1
FireWall/Licensed Product pursuant to the terms of this Agreement. Any such
termination shall not affect the rights of any End User that has purchased
the Network-1 FireWall/Licensed Product from Network-1 in accordance with the
terms of this Agreement prior to its termination. Upon termination of this
Agreement, for any reason, Network-1 will return to TIS all copies of the
Licensed Product or certify to TIS that Network-1 has destroyed all such
copies, except that Network-1 may retain one (1) copy of the object code for
the Licensed Product solely for the purpose of supporting its existing
licensees.
14. Limitation of Liability. EXCEPT FOR PAYMENTS DUE PURSUANT TO
SECTION 6 HEREIN AND THE INDEMNIFICATION PROVISIONS OF SECTION 12 HEREOF, IN
NO EVENT SHALL EITHER PARTY (OR ITS LICENSORS) BE LIABLE FOR ANY LOSS
REVENUES OR PROFITS OR OTHER SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES
ARISING OUT OF THIS AGREEMENT OR RELATED TO THE LICENSED PRODUCT, EVEN IF THE
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
15. General Provisions.
* This material has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities and Exchange
Commission.
9
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(a) Export Compliance. The rights and obligations of Network-1
shall be subject to such United States laws and regulations as shall from
time to time govern the license and delivery of technology abroad by persons
subject to the jurisdiction of the United States, including the Export
Administration Act of 1979, as amended, any successor legislation to the
Export Administration Act of 1979, and the Export Administration regulations
issued by the Department of Commerce, International Trade Administration,
Office of Export Administration. Network-1 agrees that it shall not,
directly or indirectly, export, reexport or transship the Licensed Product or
any parts or copies thereof in such manner as to violate such laws and
regulations in effect from time to time.
(b) Publicity. Neither party shall, without first obtaining the
written consent of the other party, which consent shall not be unreasonably
withheld, announce this Agreement in a press release or other promotional
material. In addition, neither party shall disclose the terms and conditions
of this Agreement to any third party, except as may be required (i) to
implement and enforce the terms of this Agreement, or (ii) by legal procedure
or by law or (iii) by Network-1 in connection with an Initial Public Offering
("IPO"). In the case of clause (iii) above, Network-1 may, for the sole
purpose of initiating or affecting its IPO, disclose the full terms and
conditions of this Agreement only to its legal counsel, its investment
bankers, its investment bankers' legal counsel, securities regulatory
authorities and potential investors who are bound by a confidentiality
agreement covering the terms and conditions of this Agreement as Confidential
Information of Network-1 and TIS. In addition, Network-1 may disclose in a
prospectus for an IPO such material information concerning this Agreement as
the attorneys who advise Network-1 on matters relating to the Securities Act
of 1933, as amended, shall advise is necessary to be disclosed in such
prospectus. A copy of the proposed IPO prospectus disclosure shall be
provided to TIS and TIS shall not unreasonably withhold its consent to such
disclosure.
(c) Equitable Relief. Each party acknowledges that any breach of
its obligations under this Agreement with respect to the grant of the license
hereunder, Intellectual Proprietary Rights or Confidential Information will
cause the other party irreparable injury for which there are inadequate
remedies at law, and that such party will be entitled to seek equitable
relief with respect to any such breach in addition to all other remedies
provided by this Agreement or available at law.
(d) Successors and Assigns. Except as otherwise provided herein,
this Agreement may not be assigned in whole or in part by either party
without the prior written consent of the other party, except either party may
assign this Agreement without the other's prior written consent to an
Affiliated Entity, or in the event of a merger or other reorganization
involving such party, or sale of all or substantially all of such party's
assets. For purposes hereof, Affiliated Entity shall be defined as an entity
controlled by, or under common control with, such party. This Agreement
shall be binding upon, inure to the benefit of, and be enforceable by, the
parties hereto and their successors and assigns.
(e) Governing Law. This Agreement will be governed and
interpreted in accordance with the laws of the State of New York without
reference to conflicts of law principles.
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(f) Relationship of Parties. Neither party will have and will not
represent that it has, any power, right or authority to bind the other party
or to assume or create any obligation or responsibility, express or implied,
on behalf of the other party or in the other party's name, except as herein
expressly provided. Nothing stated in this Agreement shall be construed as
constituting Network-1 and TIS as partners or as creating the relationship of
principal/agent, employer/employee or franchise/franchisee between the
parties.
(g) Attorneys' Fees. In the event that any legal action is
required in order to enforce or interpret any of the provisions of this
Agreement, the prevailing party in such action shall recover all reasonable
costs and expenses, including attorneys' fees, incurred in connection
therewith.
(h) Further Actions. At any time and from time to time, each
party agrees without further consideration, to take such action and to
execute and deliver such documents as may be reasonably necessary to
effectuate the purposes of this Agreement.
(i) Waiver. The failure of either party to enforce any provision
of this Agreement shall not be deemed a waiver of that or any other provision
of this Agreement.
(j) Force Majeure. Except for the obligation to make payments as
provided herein, nonperformance of either party shall be excused to the
extent the performance is rendered impossible by strike, fire, flood,
governmental acts or orders or restrictions, failure of suppliers, or any
other reason where failure to perform is beyond the reasonable control of and
is not caused by the negligence of the nonperforming party.
(k) Severability. If any of the provisions of this Agreement are
found or deemed by a court of competent jurisdiction to be invalid or
unenforceable, they shall be severable from the remainder of the Agreement
and shall not cause the invalidity or unenforceability of the Agreement.
(l) Notices. Notices to either party shall be in writing and
shall be deemed delivered when served in person or three business days after
being deposited in the United States mail, first-class certified mail,
postage prepaid, return receipt requested, or one business day after being
dispatched by a nationally recognized one-day express courier service
addressed as follows:
To TIS: Trusted Information Systems, Inc.
15204 Omega Drive
Rockville, Maryland 20850
Attn: Jeffrey H. Schneider, Esq.
with a copy to: Kenneth A. Mendelson, Esq.
Trusted Information Systems
3060 Washington Road
(Route 97)
Gleenwood, Maryland 21738
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To Network-1: Network-1 Software & Technology, Inc.
909 Third Avenue, 9th Floor
New York, New York 10022
Attn: Robert Russo, President
with a copy to: Bizar Martin & Taub, LLP
1350 Avenue of the Americas,
29th Floor
New York, New York 10019
Attn: Sam Schwartz, Esq.
(m) Entire Agreement. This Agreement constitutes the entire
agreement between the parties pertaining to the subject matter hereof, and,
with the exception of the Non-Disclosure Agreement, dated April 7, 1997,
between the parties, supersedes in its entirety any and all written or oral
agreements or understandings previously existing between the parties with
respect to such subject matter. Each party acknowledges that it is not
entering into this Agreement on the basis of any representations not
expressly contained herein. Any amendments or modifications of this
Agreement must be in writing and signed by both parties hereto.
(n) All section headings herein are inserted for convenience only
and shall not modify or affect the construction or interpretation of any
provision of this Agreement.
(o) Counterparts. This Agreement may be executed in two or more
counterparts, each of which when so executed shall be deemed an original, and
all of which together shall constitute one and the same instrument.
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IN WITNESS WHEREOF the parties have entered into this Agreement as
of the date first set forth above.
Trusted Information Systems, Inc.
By: /s/ Jeffrey H. Schneider
----------------------------------
Printed Name: Jeffrey H. Schneider
------------------------
Title: Director of Contracts
-----------------------------------
Network-1 Software & Technology, Inc.
By: /s/ Robert Russo
------------------------------
Printed Name: Robert Russo
--------------------
Title: President
-----------------------------------
Effective Date: September 26, 1997
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<PAGE>
EXHIBIT A
FireWall/Plus Enterprise
<PAGE>
EXHIBIT B
LICENSED PRODUCTS
The following proxies and libraries have been provided by TIS to Network-1:
Proxies
o http,
o ahttp,
o ftp,
o authserver,
o logserver
Libraries
o the authentication libraries
o firewall library
o the NT-specific firewall library, and
o the Unix emulation library
<PAGE>
EXHIBIT C
NETWORK-1 COMPETITORS
In addition to entities which sell/license a generic firewall, the following is
a list of competitors of Network-1:
1. Altivista Internet Software Inc.
2. ANS Communications
3. Border Network Technologies Inc.
4. Check Point Software Technology Inc.
5. Cisco Systems, Inc.
6. Digital Equipment Corporation
7. Cyberguard Corp.
8. Cycon Technologies
9. Global Internet Software Group Inc.
10. Global Technology Associates Inc.
11. IBM
12. Microsoft Corporation
13. Milkyway Networks Corp.
14. Network Systems Corporation
15. NEC Technologies
16. Netguard Ltd.
17. Raptor Systems Inc.
18. Seattle Software Labs Inc.
19. Secure Computing Corp.
20. Sidewinder
21. Sun Microsystems Inc.
22. Technologies Inc.
23. Ukiah Software Inc.
24. Data General
25. Hewlett Packard
26. Radguard
27. V-One Corp.
<PAGE>
EXHIBIT D
TIS COMPETITORS
In addition to entities which sell/license a generic firewall, the following is
a list of TIS' competitors:
1. Altivista Internet Software Inc.
2. ANS Communications
3. Boarderware
4. Check Point Software Technologies Inc.
5. Cyberguard Corp.
6. Cycon Technologies
7. Global Internet Software Group Inc.
8. Global Technology Associates Inc.
9. IBM
10. Milkyway Networks Corp.
11. NEC Technologies Inc.
12. Netguard Ltd.
13. Raptor Systems Inc.
14. Seattle Software Labs Inc.
15. Secure Computing Corp.
16. Sidewinder
17. Sun Microsystems Inc.
18. Technologies Inc.
19. Ukiah Software Inc.
20. Data General
21. Digital Equipment Corp.
22. Hewlett Packard
23. Radguard
24. V-One Corp.
<PAGE>
NETWORK-1 SOFTWARE AND TECHNOLOGY, INC. SOFTWARE LICENSE AGREEMENT
BEFORE OPENING THIS CD JEWEL CASE, PLEASE READ THE FOLLOWING TERMS AND
CONDITIONS OF THIS AGREEMENT CAREFULLY. THIS IS A LEGAL AGREEMENT BETWEEN
YOU AND NETWORK-1 SOFTWARE AND TECHNOLOGY, INC. ("NETWORK-1") AND THE
TERMS OF THIS AGREEMENT GOVERN YOUR USE OF THIS SOFTWARE. OPENING THIS
JEWEL CASE OR USE OF THE ENCLOSED MATERIALS WILL CONSTITUTE YOUR
ACCEPTANCE OF THE TERMS AND CONDITIONS OF THIS AGREEMENT. IF YOU DO NOT
AGREE TO THE TERMS OF THIS LICENSE, PROMPTLY RETURN THE UNOPENED JEWEL
CASE CONTAINING THE SOFTWARE TO THE PLACE WHERE YOU OBTAINED IT.
1. Grant of License. The application, demonstration, system and other
software accompanying this License, whether on disk, in read only memory
or on any other media (the "Software") and the related documentation are
licensed to you by Network-1. In consideration of payment of the license
fee, Network-1 as Licensor, grants to you, as Licensee, a non-exclusive
right to use and display this copy of the Software on a single computer
(i.e., a single CPU) only at one location at any time. To "use" the
Software means that the Software is either loaded in the temporary memory
(i.e., RAM) of a computer or installed on the permanent memory of a
computer (i.e., hard disk, CD ROM, etc.). You may use at one time as many
copies of the Software as you have licenses for. You may install the
Software on a common storage device shared by multiple computers, provided
that if you have more computers having access to the common storage device
than the number of licensed copies of the Software, you must have some
software mechanism which locks-out any concurrent users in excess of the
number of licensed copies of the Software (an additional license is not
needed for the one copy of Software stored on the common storage device
accessed by multiple computers).
2. Ownership of Software. As Licensee, you own the disk or other physical
media on which the Software is originally or subsequently recorded or
fixed, but Network-1 retains title and ownership of the Software, both as
originally recorded and all subsequent copies made of the Software
regardless of the form or media in or on which the original or copies may
exist. This License does not constitute a sale of the original Software or
any copy.
3. Restrictions. The Software contains copyrighted material, trade secrets,
and other proprietary material. Except as permitted by applicable
legislation, you may not decompile, reverse engineer, disassemble or
otherwise reduce the Software to a human-perceivable form. You may not
modify, network, rent, lease, loan, distribute or create derivative works
based on the Software in whole or in part.
4. Transfer Restrictions. This Software is licensed to only you, the
Licensee, and may not be transferred to anyone else without the prior
written consent of Network-1. Any authorized transferee of the Software
shall be bound by the terms and conditions of this Agreement. In no event
may you transfer, assign, rent, lease, sell or otherwise dispose of the
Software on a temporary or permanent basis except as expressly provided
herein.
5. Export Law Assurances. You agree and certify that neither the Software nor
any other technical data received from Network-1, nor the direct product
thereof, will be exported outside the United States except as authorized
and as permitted by the laws and regulations of the United States and the
laws and regulations of the jurisdiction in which you obtained the
Software.
6. Termination. This License is effective until terminated. This License will
terminate automatically without notice from Network-1 if you fail to
comply with any provision of this License. Upon termination you shall
destroy the written materials and all copies of the Software, including
modified copies, if any.
7. Government End Users. If the Software is supplied to the United States
Government, the Software is classified as "restricted computer software"
as defined in the clause 52.227-19 of the Federal Acquisition Regulations
System ("FAR"). The United States Government's rights to the Software are
as provided in Clause 52.227-19 of the FAR.
8. Limited Warranty on Media. Network-1 warrants the media on which the
Software is recorded to be free from defects in materials and workmanship
under normal use for a period of ninety (90) days from the date of
purchase as evidenced by a copy of the receipt. The entire liability of
Network-1 and your exclusive remedy will be replacement of the media not
meeting Network-l's limited warranty and which is returned to Network-1 or
a Network-1 authorized representative with a copy of the receipt.
Network-1 will have no responsibility to replace media damaged by
accident, abuse or misapplication. ANY IMPLIED WARRANTIES ON THE MEDIA,
INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, ARE LIMITED IN DURATION TO NINETY (90) DAYS FROM THE
DATE OF DELIVERY. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS AND YOU
MAY ALSO HAVE OTHER RIGHTS WHICH VARY BY JURISDICTION. THE TERMS OF THIS
DISCLAIMER DO NOT LIMIT OR EXCLUDE ANY LIABILITY FOR DEATH OR PERSONAL
INJURY CAUSED BY NETWORK-1'S NEGLIGENCE.
VI.B.2
<PAGE>
9. Disclaimer of Warranty on Software (for the purposes of paragraphs 9 and
10 hereof, Network-1, the directors, officers, employees, agents and
representatives of Network-1, and Network-1's Licensors are collectively
referred to as "Network-1"). You expressly acknowledge and agree that use
of the Software is at your sole risk. The Software and related
documentation are provided "AS IS" and without warranty of any kind.
NETWORK-1 EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE. NETWORK-1 DOES NOT WARRANT THAT THE
FUNCTIONS CONTAINED IN THE SOFTWARE WILL MEET YOUR REQUIREMENTS, OR THAT
THE OPERATION OF THE SOFTWARE WILL BE UNINTERRUPTED OR ERROR-FREE, OR THAT
DEFECTS IN THE SOFTWARE WILL BE CORRECTED. FURTHERMORE, NETWORK-1 DOES NOT
WARRANT OR MAKE ANY REPRESENTATIONS REGARDING THE USE OR THE RESULTS OF
THE USE OF THE SOFTWARE OR RELATED DOCUMENTATION IN TERMS OF THEIR
CORRECTNESS, ACCURACY, RELIABILITY OR OTHERWISE. NO ORAL OR WRITTEN
INFORMATION OR ADVICE GIVEN BY NETWORK-1 OR A NETWORK-1 AUTHORIZED
REPRESENTATIVE SHALL CREATE A WARRANTY OR IN ANY WAY INCREASE THE SCOPE OF
THIS WARRANTY. SHOULD THE SOFTWARE PROVE DEFECTIVE, YOU (AND NOT NETWORK-1
OR A NETWORK-1 AUTHORIZED REPRESENTATIVE) ASSUME THE ENTIRE COST OF ALL
NECESSARY SERVICING, REPAIR OR CORRECTION. SOME JURISDICTIONS DO NOT ALLOW
THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE EXCLUSION MAY NOT APPLY
TO YOU. THE TERMS OF THIS DISCLAIMER AND) THE LIMITED WARRANTY IN
PARAGRAPH 8 DO NOT LIMIT OR EXCLUDE ANY LIABILITY FOR DEATH OR PERSONAL
INJURY CAUSED BY NETWORK-1'S NEGLIGENCE.
10. Limitations of Liability. UNDER NO CIRCUMSTANCE INCLUDING NEGLIGENCE,
SHALL NETWORK-1 BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL
DAMAGES THAT RESULT FROM THE USE OR INABILITY TO USE THE SOFTWARE OR
RELATED DOCUMENTATION, EVEN IF NETWORK-1 OR A NETWORK-1 AUTHORIZED
REPRESENTATIVE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. SOME
JURISDICTIONS DO NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR
INCIDENTAL OR CONSEQUENTIAL DAMAGES SO THE ABOVE LIMITATION OR EXCLUSION
MAY NOT APPLY TO YOU. In no event shall Network-1's total liability to you
for all damages, losses and causes of action (whether in contract, tort
(including negligence) or otherwise) exceed the amount paid by you for the
Software.
11. Controlling Law and Severability. This License shall be governed by and
construed in accordance with the laws of the United States and the State
of New York, as applied to agreements entered into and to be performed
entirely within New York between New York residents. Each party hereto
irrevocably agrees that the New York State Supreme Court, County of New
York and the United States District Court for the Southern District of New
York shall have exclusive jurisdiction to settle any dispute and/or
controversy of whatever nature arising out of or relating to the
Licensee's use of the Software and/or related documentation, and that
accordingly any suit, act or proceeding arising out of or relating to such
matters shall be brought in such courts and, to this end, each party
hereto irrevocably agrees to submit to the jurisdiction of such courts and
irrevocably waives any objection which it may have now or hereafter to
such exclusive jurisdiction. If for any reason a court of competent
jurisdiction finds any provision of this License, or portion thereof, to
be unenforceable, that provision of this License shall be enforced to the
maximum extend permissible so as to effect the intent of the parties, and
the remainder of this License shall continue in full force and effect.
12. Complete Agreement. This License constitutes the entire agreement between
the parties with respect to the use of the Software and related
documentation, and supersedes all prior or contemporaneous understandings
or agreements, written or oral, regarding such subject matter. No
amendment to or modification of this License will be binding unless in
writing and signed by a duly authorized representative of Network-l.
<PAGE>
EXHIBIT F
CONFIDENTIALITY AGREEMENT
This Agreement is intended to set forth in writing my responsibility
to NETWORK-1 Software & Technology Inc. ("Network-1") in connection with certain
confidential and proprietary information provided to NETWORK-1 by Trusted
Information Systems, Inc. ("TIS"), as follows:
1. As a condition to my having access to source code (the "Source
Code") relating to certain software proxies provided by TIS to Network-1, in
accordance with the Software Distribution Agreement, dated September, 1997,
I agree that I will observe complete confidentiality with respect to the Source
Code, and will not disclose the Source Code or any information related thereto
to any third party except to the extent required to perform duties on behalf of
Network-1.
2. Upon termination of my employment or consulting relationship with
Network-1, I will deliver to NETWORK-1 all written and tangible materials in my
possession relating to the Source Code or any other proprietary information
relating to Network-1's business.
3. I acknowledge that irreparable injury would be sustained by
NETWORK-1 in the event of a violation by me of this Agreement and by reason
therefore, I agree that if I violate this Agreement, the Company shall be
entitled, in addition to all other legal and equitable remedies available to the
Company, to an injunction to be issued by any Court of competent jurisdiction
restraining me from committing or continuing any violation of this Agreement.
4. This Agreement will be deemed to have been made and delivered in
New York City and will be governed as to validity, interpretation, construction,
effect and in all other
<PAGE>
respects by the internal laws of the State of New York without giving effect to
conflict of laws. In addition, I (i) agree that any legal suit, action, or
proceeding arising out of or relating to this Agreement shall be instituted
exclusively in New York State Supreme Court, County of New York, or the United
States District Court for the Southern District of New York, (ii) waive any
objection to the venue of any such suit, action, or proceeding and the right to
assert that such forum is not a convenient forum, (iii) irrevocably consent to
the jurisdiction of the New York State Supreme Court, County of New York, or the
United States District Court for the Southern District of New York in any suit,
action, or proceeding. I further agree to accept or acknowledge the service of
any and all process which may be served in any such suit, action, or proceeding
brought in New York Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York and agree that service of
process upon me by certified mail to my address shall be deemed in every respect
effective service of process upon me or in any suit action or proceeding.
This Agreement contains the entire understanding of the parties with
respect to the subject matter hereof and supercedes all prior understandings,
whether written or oral, with respect to the subject matter hereof. This
Agreement shall only be amended by written agreement duly executed by the
parties hereto.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
date first written above.
-------------------------------------
Employee/Consultant
Address
------------------------------
NETWORK-1 SOFTWARE & TECHNOLOGY INC.
By:
----------------------------------
2
<PAGE>
SCHEDULE 1
CONSULTANTS
Brad Barton
Joe Goltz
<PAGE>
Exhibit 10.14
AVENTAIL CORPORATION
RESELLER AGREEMENT
(Domestic)
This agreement dated this 17th day of April, 1998("Agreement Date") is made and
entered into by and between Network-1 Software & Technology, Inc. ("RESELLER")
whose principal place of business is located at: 909 Third Ave. New York, NY
10024 and Aventail Corporation ("AVENTAIL") whose place of business is located
at 117 S. Main Street, Suite 400, Seattle, WA 98104.
AVENTAIL and RESELLER agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms, whenever initially
capitalized, shall have the following meanings:
(a) Product. "Product" shall mean the object code form of each AVENTAIL
software product listed in the attached Exhibit A, including without limitation
all software components of such product and its corresponding Documentation
(whether in electronic or printed form). Products further include the object
code form of all Product Releases, Version Releases, Update Releases and Error
Corrections made generally available by AVENTAIL to its RESELLERs during the
Term of this Agreement. The software components of products as licensed under
this Agreement are in object code form only.
(b) Product Release. "Product Release" shall mean a release of any
Product which is designated by AVENTAIL as a change in the digit(s) to the left
of the decimal point in such Product's version number [(x).xx] (e.g., SOCKS
Version 5 Core Server).
(c) Version Release. "Version Release" shall mean a release of any
Product which is designated by AVENTAIL as a change in the tenths digit in such
Product's version number [x.(x)x] (e.g., SOCKS Version 5.1 Core Server).
(d) Update Release. "Update Release" shall mean a release of any
Product which is designated by AVENTAIL as a change in the digit(s) to the right
of the tenths digit in such Product's version number [x.x(x)] (e.g., SOCKS
Version 5.11 Core Server).
(e) Error Correction. "Error Correction" shall mean a change to the
Product which is in a form that allows its application to or insertion in the
Product in order to establish substantial conformity with the Product
specifications.
(f) End User. "End User" shall mean an individual or entity that
licenses a Product for its own use and not for further distribution or
sublicensing.
(g) Reseller. "Reseller" shall mean an entity which acquires a Product
for further distribution to a End User and not for its own use.
(h) Term. "Term" shall mean the initial term of this Agreement as set
forth in Section 3 and any renewals or extensions thereof.
<PAGE>
Aventail Corporation International Distribution Agreement
(i) Documentation. "Documentation" means the written descriptions of a
Product's features, functions and operation furnished by AVENTAIL as a part of
the Products either in electronic or written form.
(j) Territory. "Territory" means the geographic area specified in
Exhibit B, within which RESELLER may distribute Products.
(k) Other Terms. All other initially capitalized terms shall have the
meanings hereinafter ascribed to them.
2. APPOINTMENT
AVENTAIL hereby appoints RESELLER as a non-exclusive RESELLER for the Products
identified in Exhibit A. Such appointment is restricted to the Territory
identified in Exhibit B, and RESELLER shall not distribute or otherwise supply
Products directly or indirectly outside such Territory AVENTAIL hereby
authorizes RESELLER to distribute copies of the Products to Resellers and End
Users in the Territory, subject to the terms and conditions of this Agreement.
3. TERM OF AGREEMENT
This Agreement shall take effect as of the Agreement Date set forth above.
Subject to earlier termination as provided in Section 7 or elsewhere in this
Agreement, the Agreement shall remain in force for a period that ends one (1)
year from the Agreement Date and, except as provided in Section 7 (d), shall
automatically renew as of such date unless terminated in writing by either party
at least forty-five (45) days prior to expiration.
4. AVENTAIL RESPONSIBILITIES
(a) Order Fulfillment. AVENTAIL shall use commercially reasonable
efforts promptly to fill firm orders from RESELLER. Such fulfillment obligation
is subject to (i) RESELLER's compliance with credit and/or payment arrangements
with respect to RESELLER which are acceptable to AVENTAIL as determined by
AVENTAIL from time to time, and (ii) provision by RESELLER of all information
required to fulfill an order.
(b) Demonstration and Internal Use Copies. AVENTAIL shall provide a
limited number of copies of Products to RESELLER at no charge for purposes of
RESELLER's internal use and customer demonstrations. AVENTAIL shall deliver such
copies promptly following the Agreement Date.
(c) Training. AVENTAIL shall provide RESELLER at no charge technical
and sales training on the Products to assist RESELLER in its Product marketing
and it's training and support of Resellers and End Users. The contents,
scheduling and other details concerning the provision of such training shall be
determined by AVENTAIL in its sole discretion after consultations with RESELLER.
(d) Technical support. Aventail will use reasonable efforts to provide
back-up technical support to RESELLER with an average response time of 4 hours.
From time to time Aventail will provide direct support to RESELLER's End Users.
(e) Promotion and Recognition of Authorized RESELLERS. AVENTAIL shall
acknowledge and promote RESELLER as an authorized RESELLER of the Products on
AVENTAIL's Web site and in any AVENTAIL marketing materials and activities which
incorporate details concerning AVENTAIL RESELLER in the Territory.
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Aventail Corporation International Distribution Agreement
5. RESELLER OBLIGATIONS
(a) Participation in Business Review. Representatives from AVENTAIL
channel management and RESELLER executive and/or channel management shall meet
at least two (2) times per year to review the status of our mutual business and
to conduct joint-planning of upcoming marketing programs and events. All details
regarding the time, manner, place and specific agenda for such meetings shall be
mutually determined in good faith by the parties. Each party shall cover its own
travel and other expenses with respect to participating in such meetings.
(b) Minimum Requirements. RESELLER shall meet the mutually agreed upon
minimum annual performance levels specified in Exhibit C.
(c) Marketing. RESELLER shall actively promote, market, and demonstrate
the Products to potential End Users located in the Territory. RESELLER shall
ensure that its sales force and technical sales support engineers are
sufficiently trained in the features, functionality and use of the Products to
carry out such marketing and sales training activities. Further, RESELLER shall
maintain a presence on the World Wide Web with Products reasonably displayed.
(d) Further License Restrictions. RESELLER shall also adhere to the
following terms and conditions in exercising its rights and undertaking
activities under this Agreement:
(i) Use of Trademarks. RESELLER shall use and is hereby
authorized to use the same Product names and other trademarks as
AVENTAIL uses to market and identify the Products from time to time.
RESELLER shall use the appropriate trademark symbol (as provided to it
by AVENTAIL from time to time) whenever it first uses a Product name or
other AVENTAIL trademark in any advertisement, brochure or other
materials prepared by RESELLER. When reasonably feasible, RESELLER
shall include a written statement in such materials which acknowledges
AVENTAIL's ownership of such Product names and trademarks. RESELLER
shall furnish to AVENTAIL an advance copy of each advertisement,
brochure or other material containing any AVENTAIL trademarks for
AVENTAIL's advance review and approval and shall not use or promptly
cease using any material to which AVENTAIL objects. RESELLER shall not
use the word "AVENTAIL" as part of RESELLER's corporate or trade name
or trademarks unless it first obtains the prior written consent of
AVENTAIL. Upon request, RESELLER shall advise and assist AVENTAIL in
registering or otherwise protecting AVENTAIL's trademarks and Products
in the Territory including without limitation, by assisting in the
execution and filing of registration documentation.
(ii) Compliance with Laws. RESELLER shall comply with all
applicable laws, regulations, rules, orders and other requirements, now
or hereafter in effect, of any applicable governmental authority, in
its performance of this Agreement and its distribution and use of the
Products. RESELLER shall, at its own expense, obtain and arrange for
maintenance in full force and effect of all governmental approvals,
consents, licenses, authorizations, declarations, filings, and
registrations as may be necessary or advisable for the performance of
all of the terms and conditions of the Agreement, including, but not
limited to, foreign exchange approvals, import licenses, fair trade
approvals and all other approvals which may be required to realize the
purposes of this Agreement. Notwithstanding the foregoing, RESELLER
shall not provide any confidential information of AVENTAIL or its third
party suppliers to any governmental authority or other entity for any
reason except with the prior express written consent of AVENTAIL.
(iii) Export Restrictions. Product(s) and related user
documentation provided under this Agreement may be subject to the
export control laws and regulations of the United States. RESELLER
agrees that neither RESELLER nor its End User customers intend to or
will, directly or indirectly, (a) export, reexport or transmit such
Product(s) or documentation to any country to which export, reexport or
transmission is restricted by any applicable U. S. law or regulation,
unless an appropriate license, exemption, or similar authorization has
been obtained to the satisfaction of AVENTAIL from such governmental
entity as may have jurisdiction over such export or transmission; or
(b) provide such Product(s) or documentation in any manner to any
person whom
3
<PAGE>
Aventail Corporation International Distribution Agreement
RESELLER or its customers knows or has reason to know will
utilize them in the design, development or production of nuclear,
chemical or biological weapons. RESELLER agrees to defend, indemnify,
and hold harmless AVENTAIL from and against any claim, loss, liability
expense or damage (including fines or legal fees) incurred by AVENTAIL
with respect to any of RESELLER's export or reexport activities
contrary to the restriction set forth hereinabove.
(e) End User Licensing Provisions. AVENTAIL in its sole discretion
shall establish the terms of the end user license agreements ("EULAs") which
shall govern End Users' rights to the Products, and will provide the terms of
such licenses, including revisions thereto, to RESELLER from time to time as
part of the Products. RESELLER acknowledges that the Products shall be
distributed to End Users subject to the terms of the applicable EULA in its
original English language form (or any other language that AVENTAIL may elect)
as provided by AVENTAIL to RESELLER. RESELLER shall make commercially reasonable
efforts to prevent distribution of Products to any entity or person who intends
to copy, reproduce or otherwise use the Products in violation of the EULA. Upon
AVENTAIL's written request, RESELLER shall assist AVENTAIL in preventing,
investigating, and prosecuting any unauthorized copying of the Products by
individuals, corporations, or other entities. RESELLER agrees to promptly inform
AVENTAIL of any unauthorized copying or copies which come to RESELLER's
attention.
(i) Packaged-Product Licensing. RESELLER acknowledges that
"Break the Seal" licensing is used by AVENTAIL, and that for such
licensing to afford AVENTAIL adequate protection under the law,
RESELLER must provide Products to its Resellers and End Users in
unopened and unmodified packages as shipped to RESELLER by AVENTAIL.
RESELLER shall cooperate in good faith with AVENTAIL to implement any
other licensing method which AVENTAIL may elect to use during the Term.
(ii) No Additional Warranties To Be Made By RESELLER. Neither
RESELLER nor any of its employees or agents shall have any right to
make any other representation, warranty, or promise, which is not
contained on the Product label, documentation, packaging or authorized
in writing by AVENTAIL.
(f) RESELLER Support for End Users. RESELLER will offer all of its
Reseller customers all necessary technical and marketing training with respect
to the Products, including without limitation their installation, initial
end-user training, and after-sales telephone and other support. RESELLER will
further offer all of its End User customers technical training with respect to
the Products, including without limitation installation support and ongoing
telephone and other support. RESELLER shall be entitled to charge reasonable
fees for all such training and support services. RESELLER shall clearly notify
End User customers that RESELLER, and not AVENTAIL, is responsible for making
technical support available to them for the Products, and that AVENTAIL is not
responsible for providing any support whatsoever directly to the End User,
except as provided in 4 (d). In the event a End User customer of RESELLER
contacts AVENTAIL for Product support, AVENTAIL shall refer such End User to
RESELLER, and RESELLER shall use best efforts to respond or cause the
appropriate Reseller to respond to any such support request within one (1)
business day of receipt of notice of the same directly or indirectly from
AVENTAIL. RESELLER acknowledges that failure to render sufficient Product
support to End Users, or to cause Resellers to provide sufficient Product
support to their End User customers, may result, at AVENTAIL's option, in
termination of this Agreement or an increase in the fees charged to RESELLER for
the Products and/or Maintenance Services.
(g) Reservation of Proprietary Rights; Limitations. The Products
contain or comprise valuable patent, copyright, trade secret, trademark, title
and other proprietary rights of AVENTAIL and its suppliers. Except for the
license rights expressly granted within this Agreement, AVENTAIL reserves all
such proprietary rights, including without limitation modification, translation,
rental and source code rights. No title to or ownership of any Product or
proprietary rights related to the Products are transferred to RESELLER under
this Agreement. RESELLER will not infringe, violate or contest AVENTAIL's or its
suppliers' proprietary rights related to any Product, including without
limitation by reverse engineering, reverse compiling, reverse assembling, or
making any copies of AVENTAIL's Products for any purpose without AVENTAIL's
express written authorization, except to the extent expressly authorized by
applicable local law the application of which cannot be excluded by contractual
agreement.
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Aventail Corporation International Distribution Agreement
6. COMMERCIAL TERMS
(a) Purchase Orders. RESELLER shall order Products from AVENTAIL by
submitting a written purchase order and a completed copy of the Order
information form included in Exhibit D . Such written orders may be submitted to
AVENTAIL via mail, facsimile or, where available, electronic mail, or other such
means as may be determined by AVENTAIL from time to time. Such orders may be
accepted by AVENTAIL via written acceptance notification to RESELLER or by the
shipment of Products to RESELLER.
(b) Pricing. The license fees payable by RESELLER to AVENTAIL for all
Products are shown in Exhibit E to this Agreement. AVENTAIL may from time to
time change its reseller price list for the Products; provided, however, that no
such change will apply to RESELLER before the expiration of thirty (30) days
after notice of the change is given to RESELLER. Firm proposals made by RESELLER
to prospective Resellers or End Users will be granted an exception from price
increases until the published expiration date of RESELLER's proposal or ninety
(90) days after the date of notice to RESELLER, whichever is sooner.
(c) Payment Terms. Unless otherwise specified by AVENTAIL, payments
from RESELLER for all orders shall be due and payable within thirty (30) days
after the date of AVENTAIL's invoice for the Products or services provided. All
monetary amounts are specified and shall be paid in the lawful currency of the
United States of America. Any amounts outstanding not paid when due will be
assessed a finance charge of the lesser of one and one-half percent (1-1/2%) per
month or the maximum rate permissible under applicable law.
(d) Delivery. AVENTAIL will deliver the Products ordered by RESELLER
FOB AVENTAIL's shipping location in Seattle, Washington using a delivery service
of AVENTAIL's choice. RESELLER will reimburse AVENTAIL for all shipping charges,
premiums for freight insurance, inspection fees, duties, imposts, assessments,
and other costs incurred by AVENTAIL to transport the Product to the shipping
destination.
(e) Taxes. The license fees, charges and other amounts specified in
this Agreement are exclusive of all import, export, value added, excise, sales,
use and similar taxes. RESELLER shall be liable for all such taxes regardless of
whether or not the same are separately stated by AVENTAIL. RESELLER's liability
hereunder shall not extend to taxes based on possession of Products prior to
delivery or to income or corporate excise taxes assessed against AVENTAIL.
RESELLER additionally agrees that in the event it is required to make any tax
withholdings on any payments to AVENTAIL, it shall immediately pay to AVENTAIL
an additional amount such that, following such additional payment, AVENTAIL
receives the same amount from RESELLER that it would have received had no
withholding been made.
(f) Approval of Payment Terms. All payment terms specified in this
agreement shall be subject to AVENTAIL's continuing approval, which may be
revoked, made subject to revised conditions, or otherwise revised from time to
time by AVENTAIL at its sole discretion. Without limiting the generality of the
foregoing, AVENTAIL may require RESELLER to provide advance payment by sight
draft, letters of credit, guarantees, or such other methods or assurances of
payment.
7. TERMINATION
(a) Termination by AVENTAIL. In addition to its other remedies under
law or this Agreement and in addition to its other rights of termination under
this Agreement, AVENTAIL may terminate this Agreement and the licenses granted
to RESELLER hereunder in the event that RESELLER defaults in performing any
obligation under this Agreement and such default continues unremedied for a
period of thirty (30) days following written notice of default. Notwithstanding
the foregoing, AVENTAIL may terminate this Agreement immediately upon written
notice to RESELLER in the event of a breach by RESELLER of its confidentiality
obligations or the reverse engineering
5
<PAGE>
Aventail Corporation International Distribution Agreement
prohibitions in this Agreement, or in the event RESELLER becomes insolvent,
enters bankruptcy, reorganization, composition or other similar proceedings
under applicable laws, whether voluntary or involuntary, admits in writing its
inability to pay its debts, or makes or attempts to make an assignment for the
benefit of creditors.
(b) Termination by RESELLER. RESELLER may terminate this Agreement with
or without cause at any time upon ninety (90) days prior written notice of
termination to AVENTAIL. Upon such termination, RESELLER will have no right to
receive a refund of any payments previously made to AVENTAIL, whether or not
they have been applied against actual Products or services received.
(c) Termination of Grant by AVENTAIL In the event that AVENTAIL loses
access or license to critical components or technology which are imbedded as
part of the Products, and AVENTAIL cannot replace such components or technology
within an economically viable period of time, as determined by AVENTAIL, then
AVENTAIL reserves the right to terminate RESELLERS' grant to sell those Products
which are affected immediately upon written notice.
(d) Effect of Expiration or Termination. Upon the expiration of the
Term or other termination of this Agreement, RESELLER shall immediately cease to
market and distribute Products, including without limitation through its
existing Resellers. RESELLER may continue to use any copies of Products and
other development tools it may have licensed for its own use from AVENTAIL
solely for the purpose of supporting Resellers and End Users which acquired
Products from RESELLER prior to such termination or expiration.
(e) Survival. Sections 1, 5(d), (e), (f), 7, 8, 9, 10 and 11 shall
survive any termination of this Agreement.
8. WARRANTIES AND REMEDIES
(a) Warranties. AVENTAIL warrants to RESELLER that upon delivery by
AVENTAIL: (a) the diskettes or other physical media upon which a Product is
furnished will be free from defects in materials and workmanship; and (b) when
installed and operated in accordance with the Documentation, the Products will
perform substantially in accordance with the specifications set forth in the
published Documentation at the time of delivery.
(b) Remedy. If the Product fails to comply with the warranties set
forth in Section 9 (a), AVENTAIL will use reasonable efforts to either correct
the noncompliance (e.g., by furnishing an Error Correction for the noncompliant
Product) or, at AVENTAIL's option, refund to RESELLER all or an equitable
portion of the license fee paid by RESELLER to AVENTAIL for such Product in full
satisfaction of RESELLER's claim relating to such noncompliance and terminate
RESELLER's rights to such Product under this Agreement, provided that: RESELLER
notified AVENTAIL of the noncompliance within ninety (90) days after delivery of
the Product to a Reseller or End User; and AVENTAIL is able to reproduce the
noncompliance.
(c) Warranty Limitations. AVENTAIL does not warrant that the Product is
free from all bugs, errors and omissions. The warranties set forth in Section
9(a) apply only to the latest release of the Product made available by AVENTAIL
to RESELLER. Such warranties do not apply to any noncompliance resulting from
use or combination of the Product with any products, goods, services or other
items furnished by anyone other than AVENTAIL, any modification made by RESELLER
or any other person, or any Product which AVENTAIL determines has been subject
to misuse, neglect, improper installation, repair, alteration, or damage either
by RESELLER or any third party.
(d) Disclaimer And Release. THE WARRANTIES MADE IN THIS SECTION 9 MAY
BE ASSERTED BY RESELLER ONLY AND NOT BY RESELLER'S CUSTOMERS. THE WARRANTIES OF
AVENTAIL AND THE REMEDIES OF RESELLER SET FORTH IN THIS SECTION 9 ARE EXCLUSIVE
AND IN SUBSTITUTION FOR, AND RESELLER HEREBY WAIVES, RELEASES AND DISCLAIMS, ALL
OTHER WARRANTIES, OBLIGATIONS AND LIABILITIES OF AVENTAIL AND ALL OTHER
REMEDIES, RIGHTS AND CLAIMS AGAINST AVENTAIL, EXPRESS OR IMPLIED, ARISING BY LAW
OR OTHERWISE, WITH RESPECT TO THE PRODUCTS, DOCUMENTATION, SERVICES AND ANY
OTHER ITEMS SUBJECT TO THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO: (A) ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
6
<PAGE>
Aventail Corporation International Distribution Agreement
PARTICULAR PURPOSE; (B) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE,
COURSE OF DEALING OR USAGE OF TRADE; (C) ANY OBLIGATION, LIABILITY, RIGHT,
REMEDY OR CLAIM IN TORT, NOTWITHSTANDING ANY FAULT, NEGLIGENCE, STRICT LIABILITY
OF AVENTAIL; AND (D) ANY OBLIGATION, LIABILITY, REMEDY, RIGHT OR CLAIM FOR
INFRINGEMENT.
(e) Release. Except as specifically otherwise provided in this
Agreement, RESELLER releases and shall defend, indemnify and hold harmless
AVENTAIL from and against any and all claims, losses, harm, costs, liabilities,
damages and expenses (including, but not limited to, reasonable attorney's fees)
arising out of or in connection with any act, omission, representation,
warranty, fault, negligence or strict liability of RESELLER or anyone acting on
RESELLER's behalf in its performance of this Agreement.
9. LIMITATION OF LIABILITY
(a) Force Majeure. Neither party shall be liable to the other for
failure or delay in the performance of a required obligation if such failure or
delay is caused by strike, riot, fire, flood, natural disaster, or other similar
cause beyond such party's control, provided that such party gives prompt written
notice of such condition and resumes its performance as soon as possible, and
provided further that the other party may terminate this Agreement and all
licenses granted hereunder if such condition continues for a period of ninety
(90) days, or, if the affected party has previously invoked this force majeure
provision one or more times during the Term, if such condition continues for a
period of thirty (30) days. The foregoing provisions do not apply to RESELLER's
obligation to pay monies to AVENTAIL, nor to AVENTAIL's right to retain any
prepaid fees payable by RESELLER.
(b) Dollar Limitations. AVENTAIL's LIABILITY (WHETHER IN CONTRACT,
WARRANTY, TORT OR OTHERWISE; AND NOTWITHSTANDING ANY FAULT, NEGLIGENCE,
REPRESENTATION, STRICT LIABILITY OR PRODUCT LIABILITY OF AVENTAIL) WITH REGARD
TO ANY PRODUCT, DOCUMENTATION, SERVICES OR OTHER ITEMS SUBJECT TO THIS AGREEMENT
SHALL IN NO EVENT EXCEED THE TOTAL COMPENSATION PAID BY RESELLER TO AVENTAIL
UNDER THIS AGREEMENT.
(c) No Consequential Damages. IN NO EVENT WILL AVENTAIL OR ITS
SUPPLIERS HAVE ANY OBLIGATION OR LIABILITY (WHETHER IN CONTRACT, WARRANTY, TORT
OR OTHERWISE; AND NOTWITHSTANDING ANY FAULT, NEGLIGENCE, REPRESENTATION, STRICT
LIABILITY OR PRODUCT LIABILITY OF AVENTAIL) FOR ANY DAMAGES SUSTAINED BY
RESELLER OR ANY OTHER PERSON ARISING FROM OR OTHERWISE RELATED TO ANY LOSS OF
USE OR ANY FAILURE OR INTERRUPTION IN THE OPERATION OF ANY PRODUCT OR OTHER
ITEMS, FOR ANY COVER OR FOR ANY INCIDENTAL, DIRECT, INDIRECT OR CONSEQUENTIAL
DAMAGES OR LIABILITIES (INCLUDING, BUT NOT LIMITED TO, ANY LOSS OF REVENUE,
PROFIT OR BUSINESS) EVEN IF AVENTAIL OR ITS EMPLOYEES AND REPRESENTATIVES HAVE
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
10. THIRD PARTY RIGHTS, NOTICES AND DISCLAIMERS
(a) Terms Defined. As used in this Section 11, "Development Code and
Development Documentation" refer to the Product in source code form (to which
RESELLER has rights only if and to the extent specified in Exhibit A). "Code and
Documentation" refers to the Product in object code or source code form and all
accompanying documentation. The provisions of this Section 11 are included
pursuant to AVENTAIL's obligations to its third party suppliers.
(b) Third Party Trade Secrets. RESELLER agrees that the Development
Code and Development Documentation contain confidential information of NEC USA,
Inc., ("NEC") and embody trade secrets developed by NEC at substantial cost and
expense. RESELLER shall hold Development Code and Development Documentation in
confidence for NEC. RESELLER shall employ reasonable secrecy precautions, at
least as protective as the precautions is uses to protect its own proprietary
computer programs, to protect the Development Code and Development Documentation
from unauthorized copying, use or disclosure. RESELLER shall allow access to the
Development Code
7
<PAGE>
Aventail Corporation International Distribution Agreement
and Development Documentation only to employees and contractors of RESELLER who
have a need to know information contained in the Development Code and
Development Documentation, and upon whom RESELLER has imposed a legal duty to
protect Development Code and Development Documentation from unauthorized
copying, use, or disclosure. RESELLER agrees to use its best efforts to prevent,
prosecute and enjoin an actual or threatened unauthorized copying, use or
disclosure of Development Code and Development Documentation.
(c) Disclaimer of Warranties. Code provided under this Sublicense may
contained or be derived from portions of the Code and Documentation provided by
NEC USA, Inc. under license to AVENTAIL. AVENTAIL has assumed responsibility for
the selection of such Code and Documentation and its use in producing and
licensing the Product(s). NEC USA, Inc., DISCLAIMS ALL WARRANTIES WITH RESPECT
TO THE USE OF SUCH CODE OR DOCUMENTATION IN AN PRODUCT(S) DEVELOPED BY RESELLER,
INCLUDING, WITHOUT, LIMITATION, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE.
(d) Proprietary Rights. RESELLER understands and agrees that this
Agreement is being entered into by AVENTAIL under the terms and conditions of a
License Agreement with NEC USA, Inc., and that AVENTAIL cannot sublicense any
code or documentation from NEC USA, Inc. outside of the terms of such License
Agreement or in a manner inconsistent therewith. In regard to such License
Agreement, RESELLER and AVENTAIL agree that, to the extent that this Agreement
or any modification thereof conflicts with the terms and conditions of the
License Agreement, RESELLER shall negotiate with good faith with AVENTAIL to
modify or amend this Agreement to eliminate such conflict and to ensure
AVENTAIL's full compliance with the License Agreement.
11. MISCELLANEOUS
(a) Notices. Any notice or other communication under this Agreement
given by either party to the other will be deemed to be properly given if given
in writing and delivered in person or by facsimile, if acknowledged received by
return facsimile, or if mailed, properly addressed and stamped with the required
postage, to the intended recipient at its address specified in this Agreement.
Either party may from time to time change its address for notices under this
paragraph by giving the other party notice of the change in accordance with this
paragraph.
(b) Independent Contractors. RESELLER is, and shall at all times act
as, an independent contractor and not as an employee, agent, partner or joint
venturer, or franchisee of AVENTAIL. RESELLER is not entitled to, and shall not
attempt to, create or assume any obligation, express or implied, on behalf of
AVENTAIL. This Agreement shall not be interpreted as or construed as creating or
evidencing any association, joint venture, partnership or franchise relationship
between the parties or as imposing any partnership or franchise obligation or
liability on any party.
(c) Assignment. RESELLER will not assign (directly, by operation of law
or otherwise) this Agreement or any of its rights under this Agreement without
the prior written consent of AVENTAIL. Subject to the foregoing limitation, this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
(d) Nonwaiver. Any failure of AVENTAIL to insist upon or enforce
performance by RESELLER of any of the provisions of this Agreement or to
exercise any rights or remedies under this Agreement, applicable law or
otherwise will not be interpreted or construed as a waiver or relinquishment of
AVENTAIL's rights to assert or rely upon such provision, right or remedy in that
or any other instance.
(e) Severability. If any provision of this Agreement shall be held by a
court of competent jurisdiction to be illegal, invalid or unenforceable, then
all other provisions and their application shall not be affected and shall be
fully enforceable without regard to the invalid or unenforceable provision; and
if any provision in this Agreement is so determined to be unenforceable in
equity because of its scope, duration, geographical area or other factor, then
the court making that determination shall have the power to reduce or limit such
scope, duration, area or other factor, and such provision shall be then
enforceable in equity in its reduced or limited form.
8
<PAGE>
Aventail Corporation International Distribution Agreement
(f) Confidentiality. RESELLER expressly undertakes to retain in
confidence the terms and conditions of this Agreement, and all information and
know-how transmitted to it by AVENTAIL and make no use of such information and
know-how except as may be required (i) to implement and enforce the terms of
this Agreement, or (ii) by legal procedure or by law or (iii) by RESELLER in
connection with an Initial Public Offering ("IPO") or a private placement of its
securities ("Private Offering"). In the case of clause (iii) above, RESELLER
may, for the sole purpose of initiating or affecting its IPO or Private
Offering, disclose the full terms and conditions of this Agreement only to its
legal counsel, its investment bankers, its investment bankers' legal counsel,
securities regulatory authorities and potential investors who are bound by a
confidentiality agreement covering the terms and conditions of this Agreement as
confidential information of AVENTAIL and RESELLER. In addition, RESELLER may
disclose in a prospectus for an IPO or a private placement memorandum or similar
offering document for a Private Offering, such material information concerning
this Agreement as the attorneys who advise RESELLER on matters relating to the
Securities Act of 1933, as amended, shall advise is necessary to be disclosed in
such prospectus or offering document. A copy of the proposed IPO prospectus or
offering document disclosure shall be provided to AVENTAIL.
(g) Entire Agreement. This Agreement, and the Exhibits attached hereto,
constitutes the entire agreement and supersedes any and all prior agreements
between AVENTAIL and RESELLER relating to the subject matter of this Agreement.
AVENTAIL will not be bound by, and specifically objects to, any term, condition
or other provision which is different from or in addition to the provisions of
this Agreement (whether or not it would materially alter this Agreement) and
which is proffered by RESELLER in any purchase order, receipt, acceptance,
confirmation, correspondence or otherwise.
(h) Amendments. No waiver or amendment of this Agreement will be valid
unless set forth in a written instrument referencing this Agreement and signed
by AVENTAIL and RESELLER.
(i) Governing Law. This Agreement shall be construed and controlled by
the laws of the State of Washington, and RESELLER consents to jurisdiction and
venue in the state and federal courts sitting in the State of Washington.
(j) Attorneys' Fees. If either AVENTAIL or RESELLER employs attorneys
to enforce any rights arising out of or relating to this Agreement, the
prevailing party shall be entitled to recover its reasonable attorneys' fees,
costs and other expenses.
(k) Controlling Language. This Agreement is executed in the English
language which shall be the sole and controlling language used in interpreting
or construing its meaning.
IN WITNESS WHEREOF, EACH OF THE PARTIES HAS EXECUTED THIS AGREEMENT BELOW:
AVENTAIL: RESELLER:
AVENTAIL CORPORATION NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
Signature: /s/ Chris Dukelow Signature: /s/ Robert Russo
--------------------------- ---------------------------
Printed Name: Chris Dukelow Printed Name: /s/ Robert Russo
------------------------ ------------------------
Title: CFO Title: President
------------------------------- -------------------------------
9
<PAGE>
Aventail Corporation International Distribution Agreement
EXHIBIT A -
LICENSED PRODUCTS
Server Products
Aventail Internet Policy Manager
Aventail VPN Server
Client Products
Aventail AutoSOCKS
Aventail VPN Client
Authorized Platforms RESELLER is permitted to sell Products for the following
platforms only:
CLIENT PLATFORMS
Microsoft NT workstation Version 4.0 or greater
Microsoft Windows 3.1 and Win95
Any supported Unix Client Workstation
SERVER PLATFORMS
Microsoft NT (Intel platforms) Version 4.0 or greater
Any supported Unix Platforms
10
<PAGE>
Aventail Corporation International Distribution Agreement
EXHIBIT B -
TERRITORY
a) Territory The following geographic area constitutes the Territory:
North America
11
<PAGE>
Aventail Corporation International Distribution Agreement
EXHIBIT C -
MINIMUM REQUIREMENTS
Minimum sales requirement for the term of the agreement shall be :
None
EXHIBIT D -
PRODUCT ORDER FORM
12
<PAGE>
Aventail Corporation International Distribution Agreement
13
<PAGE>
Aventail Corporation International Distribution Agreement
EXHIBIT E -
RESELLER LICENSE FEES
1. Pricing shall be as follows for the first $* of cumulative revenue to
AVENTAIL from RESELLER. Prices below are f.o.b. Seattle, WA as of the Order
Date and subject to change.
<TABLE>
<CAPTION>
Product Connections PRICE/EACH
------- ----------- ----------
<S> <C> <C>
AVENTAIL IPM Per/Server
25 $ *
50 $*
100 $*
250 $*
500 $*
500+ $*
AVENTAIL VPN Per /Server
25 $*
50 $*
100 $*
250 $*
500 $*
500+ $*
AVENTAIL AutoSOCKS Units Per Client
LESS THAN 25 $*
25-49 $*
50-99 $*
100-249 $*
250-499 $*
500+ $*
AVENTAIL VPN CLIENT Units Per Client
LESS THAN 25 $*
25-49 $*
50-99 $*
100-249 $*
250-499 $*
500+ $*
</TABLE>
* This material has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities and Exchange
Commission.
14
<PAGE>
Aventail Corporation International Distribution Agreement
2. Pricing shall be as follows upon achieving cumulative revenue to AVENTAIL
from RESELLER of $*. Prices below are f.o.b. Seattle, WA as of the Order Date
and subject to change.
<TABLE>
<CAPTION>
Product Connections PRICE/EACH
------- ----------- ----------
<S> <C> <C>
AVENTAIL IPM Per/Server
25 $*
50 $*
100 $*
250 $*
500 $*
500+ $*
AVENTAIL VPN Per /Server
25 $*
50 $*
100 $*
250 $*
500 $*
500+ $*
AVENTAIL AutoSOCKS Units Per Client
LESS THAN 25 $*
25-49 $*
50-99 $*
100-249 $*
250-499 $*
500+ $*
AVENTAIL VPN CLIENT Units Per Client
LESS THAN 25 $*
25-49 $*
50-99 $*
100-249 $*
250-499 $*
500+ $*
</TABLE>
* This material has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Securities and Exchange
Commission.
15
<PAGE>
Exhibit 10.15
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
909 Third Avenue
New York, New York 10022
January 31, 1997
Mr. Robert Russo
Mr. William Hancock
c/o Network-1 Software & Technology, Inc.
909 Third Avenue
New York, New York 10022
Re: Transfer of Shares
Dear Messrs. Russo and Hancock:
This letter agreement sets forth the mutual agreements of Network-1
Software & Technology, Inc. with each of Robert Russo ("Russo") and William
Hancock ("Hancock") with respect to the transfer and surrender to the
Company by Russo of 63,000 shares of common stock, par value $.01 per share,
of the Company (the "Common Stock") and by Hancock of 87,000 shares of Common
Stock, on the terms and conditions set forth below. Each of the parties
hereto acknowledges that the transactions described herein are being entered
into as a condition to the closing of the transactions contemplated under a
certain Securities Purchase Agreement, dated as of even date herewith, by and
among the Company and certain investors.
Simultaneous with the execution of this letter agreement, Russo shall
surrender, transfer and assign to the Company 63,000 shares of Common Stock
and shall deliver to the Company certificates representing 63,000 shares of
Common Stock. Upon receipt of such stock certificates, the Company shall
deliver to Russo a check in the amount of $630.00 as payment in full for such
shares and shall cancel the shares so delivered.
Simultaneous with the execution of this letter agreement, Hancock shall
surrender, transfer and assign to the Company 87,000 shares of Common Stock
and shall deliver to the Company certificates representing 87,000 shares of
Common Stock. Upon receipt of such stock certificates, the Company shall
deliver to Hancock a check in the amount of $870.00 as payment in full for
such shares and shall cancel the shares so delivered.
If the foregoing accurately reflects our mutual agreement, please sign
this letter agreement in the space indicated below.
<PAGE>
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
By: /s/ Robert Russo
--------------------------------
Name: Robert Russo
Title: President
Accepted and Agreed as of the
date first above-written:
/s/ Robert Russo
- -------------------------------
Robert Russo
/s/ William Hancock
- -------------------------------
William Hancock
<PAGE>
Exhibit 10.16
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
909 Third Avenue
New York, New York 10022
September 26, 1997
Mr. Robert Russo
Mr. William Hancock
Mr. Kenneth Conquest
c/o Network-1 Software & Technology, Inc.
909 Third Avenue
New York, New York 10022
Re: Transfer of Shares
Dear Messrs. Russo, Hancock and Conquest:
This letter agreement sets forth the mutual agreements of Network-1
Software & Technology, Inc. (the "Company") with each of Robert Russo
("Russo") and William Hancock ("Hancock") and Kenneth Conquest ("Conquest")
with respect to the transfer and surrender to the Company by Russo of 181,014
shares of common stock, par value $.01 per share, of the Company (the "Common
Stock") and by Hancock of 138,712 shares of Common Stock. Each of the
parties hereto acknowledges that the transactions described herein are being
entered into as a condition to the closing of the transactions contemplated
under a certain Securities Purchase Agreements, dated as of even date
herewith, by and among the Company and Applewood Associates, L.P. and CMH
Capital Management Corp. pursuant to which such parties have loaned the
Company an aggregate of $400,000 and received warrants to purchase an
aggregate of 114,286 shares of the Company's Common Stock.
Simultaneous with the execution of this letter agreement, Russo
shall surrender, transfer and assign to the Company 181,014 shares of Common
Stock and shall deliver to the Company certificates representing 181,014
shares of Common Stock. Upon receipt of such stock certificates, the Company
shall deliver to Russo a check in the amount of $1,810.14 as payment in full
for such shares and shall cancel the shares so delivered.
Simultaneous with the execution of this letter agreement, Hancock
shall surrender, transfer and assign to the Company 138,712 shares of Common
Stock and shall deliver to the Company certificates representing 138,712
shares of Common Stock. Upon receipt of such stock certificates, the Company
shall deliver to Hancock a check in the amount of $1,387.12 as payment in
full for such shares and shall cancel the shares so delivered.
<PAGE>
Simultaneous with the execution of this letter agreement, Conquest
shall surrender, transfer and assign to the Company 16,274 shares of Common
Stock and shall deliver to the Company certificates representing 16,274
shares of Common Stock. Upon receipt of such stock certificates, the Company
shall deliver to Hancock a check in the amount of $162.74 as payment in full
for such shares and shall cancel the shares so delivered.
If the foregoing accurately reflects our mutual agreement, please
sign this letter agreement in the space indicated below.
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
By: /s/ Robert Russo
---------------------------------
Name: Robert Russo
Title: President
Accepted and Agreed as of the
date first above-written:
/s/ Robert Russo
- -----------------------------
Robert Russo
/s/ William Hancock
- -----------------------------
William Hancock
/s/ Kenneth Conquest
- -----------------------------
Kenneth Conquest
<PAGE>
Exhibit 10.17
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
909 Third Avenue
New York, New York 10022
May 14, 1998
Mr. Robert Russo
Mr. William Hancock
c/o Network-1 Software & Technology, Inc.
909 Third Avenue
New York, New York 10022
Re: Transfer of Shares
Dear Messrs. Russo and Hancock:
This letter agreement sets forth the mutual agreements of Network-1
Software & Technology, Inc. (the "Company") with each of Robert Russo
("Russo") and William Hancock ("Hancock") with respect to the transfer and
surrender to the Company by Russo of 62,500 shares of common stock, par value
$.01 per share, of the Company (the "Common Stock") and by Hancock of 37,500
shares of Common Stock. Each of the parties hereto acknowledges that the
transactions described herein are being entered into as a condition to the
closing of the transactions contemplated under a certain Securities Purchase
Agreement, dated as of even date herewith, by and among the Company and
Applewood Associates, L.P. and another party pursuant to which such parties
have loaned the Company an aggregate of $1,250,000 and received warrants to
purchase an aggregate of 375,000 shares of the Company's Common Stock.
Simultaneous with the execution of this letter agreement, Russo
shall surrender, transfer and assign to the Company 62,500 shares of Common
Stock and shall deliver to the Company certificates representing 62,500
shares of Common Stock. Upon receipt of such stock certificates, the Company
shall deliver to Russo a check in the amount of $625.00 as payment in full
for such shares and shall cancel the shares so delivered.
Simultaneous with the execution of this letter agreement, Hancock
shall surrender, transfer and assign to the Company 37,500 shares of Common
Stock and shall deliver to the Company certificates representing 37,500
shares of Common Stock. Upon receipt of such stock certificates, the Company
shall deliver to Hancock a check in the amount of $375.00 as payment in full
for such shares and shall cancel the shares so delivered.
<PAGE>
If the foregoing accurately reflects our mutual agreement, please
sign this letter agreement in the space indicated below.
NETWORK-1 SOFTWARE & TECHNOLOGY, INC.
By: /s/ Robert Russo
---------------------------------------
Accepted and Agreed as of the
date first above-written:
/s/ Robert Russo
- --------------------------------
Robert Russo
/s/ William Hancock
- --------------------------------
William Hancock
<PAGE>
Exhibit 10.18
May 14, 1998
Corey Horowitz, President
CMH Capital Management Corp.
909 Third Avenue
New York, New York 10016
Dear Corey:
This letter agreement shall confirm our agreement for CMH Capital
Management Corp. ("CMH") to receive 50,339 shares of Common Stock of Network-1
Security Solutions, Inc. ("Network-1") in full satisfaction of accrued advisory
fees of $200,000 due CMH from Network-1 pursuant to the letter agreement, dated
January 30, 1997, between Network-1 and CMH (the "CMH Letter Agreement"). In
addition, Network-1 shall have no further obligation to pay CMH monthly advisory
fees in accordance with the CMH Letter Agreement.
Very truly yours,
Network-1 Software Technology, Inc.
By: /s/ Robert Russo
-------------------------
Robert Russo, President
Agreed and Accepted:
CMH Capital Management Corp.
By: /s/ Corey M. Horowitz
----------------------------
Corey M. Horowitz, President
<PAGE>
Exhibit 10.19
EXCHANGE AGREEMENT
AGREEMENT, dated as of July 8, 1998, by and among NETWORK-1 SECURITY
SOLUTIONS, INC. (the "Company"), a Delaware corporation with offices at 909
Third Avenue, New York, New York 10022, and the securityholders signatory hereto
(collectively, the "Securityholders").
WHEREAS, as part of the recapitalization of the Company prior to its
initial public offering of its securities and at the request of the Underwriter,
Whale Securities Co., L.P., the Board of Directors of the Company has determined
that it is in the best interest of the Corporation to reduce the number of
outstanding warrants and options by exchanging such securities for shares of
Common Stock, par value $.01 per share, of the Company (the "Common Stock"),
upon the terms and subject to the conditions set forth herein;
WHEREAS, the number of shares of Common Stock to be issued in exchange for
the warrants and options to purchase up to held by the Securityholders (the
"Warrants and Options") has been determined by the Board of Directors of the
Company based upon the fair market value of such securities utilizing the Black
Scholes method of valuation;
WHEREAS, each of the Securityholders and the Company desire that the
Securityholders exchange Warrants and Options to purchase up to an aggregate of
1,271,786 shares of Common Stock for an aggregate of 961,249 shares of Common
Stock on the terms and subject to the conditions set forth herein. The Common
Stock issuable in exchange for the Warrants and Options are referred to herein
as the "Shares."
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I.
Issuance of Shares for Warrants and Options
1.1 Exchange Agreement. At the Closing provided for in Section 1.2, the
Company will issue to each Securityholder and, subject to the terms and
conditions of this Agreement, each Securityholder will exchange the Warrants and
Options for the number of Shares set forth in Exhibit A hereto (the "Exchange").
1.2 The Closing. The closing of the Exchange (the "Closing") shall take
place at the offices of Bizar Martin & Taub, LLP, 1350 Avenue of the Americas,
New York, New York on the date that this Agreement is executed by the parties
hereto (the time and date of the Closing being herein referred to as the
"Closing Date"). On the Closing Date there will be delivered to the
Securityholders the Shares on the Closing Date against delivery and cancellation
of the original Warrants or Options.
<PAGE>
ARTICLE II.
Representations, Warranties, and Agreements of the Company
The Company represents and warrants to, and agrees with, the
Securityholders as follows:
2.1 Corporate Organization and Qualification. The Company is a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction of incorporation, and is qualified to transact business
and is in good standing as a foreign corporation in every jurisdiction in which
its ownership, leasing, licensing, or use of property or assets or the conduct
of its business makes such qualification necessary, except in such jurisdictions
where the failure to be so qualified or in good standing would not have a
material adverse effect on the business, results of operations, financial
condition, or prospects of the Company. The Company has no subsidiaries and has
no investment, whether by way of ownership of stock or other securities or by
loan, advance, or otherwise, in any corporation, partnership, firm, association,
or other business entity. The Company has all required power and authority to
own its property and to carry on its business as now conducted and proposed to
be conducted.
2.2 Validity of Transaction. The Company has all requisite power and
authority to execute, deliver, and perform this Agreement, and to issue the
Shares in exchange for the Warrants and Options. All necessary corporate
proceedings of the Company have been duly taken to authorize the execution,
delivery, and performance of this Agreement, and to authorize the issuance of
the Shares for the Warrants and Options. This Agreement, has been duly
authorized, executed, and delivered by the Company, and constitutes the legal,
valid, and binding obligation of the Company, and is enforceable as to the
Company in accordance with its respective terms, except as may be limited by
applicable bankruptcy, reorganization, insolvency, moratorium, or other similar
laws or by legal or equitable principles relating to or limiting creditors'
rights generally or as rights to indemnification may be limited by applicable
securities laws. Except as to filings which may be required under applicable
state securities regulations, no consent, authorization, approval, order,
license, certificate, or permit of or from, or declaration or filing with, any
Federal, state, local, or other governmental authority or of any court or other
tribunal is required by the Company in connection with the transactions
contemplated hereby. No consent of any party to any contract, agreement,
instrument, lease, license, arrangement, or understanding to which the Company
is a party, or by which any of its properties or assets is bound, is required
for the execution, delivery, or performance by the Company of this Agreement,
and the execution, delivery, and performance of this Agreement, will not
violate, result in a breach of, conflict with, or (with or without the giving of
notice or the passage of time or both) entitle any party to terminate or call a
default under any such contract, agreement, instrument, lease, license,
arrangement, or understanding, or violate or result in a breach of any term of
the Certificate of Incorporation or By-laws of the Company, or violate, result
in a breach of, or conflict with any law, rule, regulation, order, judgment, or
decree binding on the Company or to which any of its operations, business,
properties, or assets is subject. The Shares issuable in exchange for the
Warrants and Options are duly authorized, will be validly issued, fully paid,
and nonassessable, will not have been issued in violation of any preemptive
right of stockholders or rights of first refusal, and the Securityholders will
have good title to the Shares, free and clear of
2
<PAGE>
all liens, security interests, pledges, charges, encumbrances, stockholders
agreements and voting trusts (other than any created by the Securityholders).
2.3 Capitalization. The authorized capital stock of the Company consists
of 25,000,000 shares of Common Stock and 5,000,000 shares of preferred stock,
par value $.01 per share (the "Preferred Stock"), of which 250,000 shares have
been designated Series A Redeemable Preferred Stock and 500,000 shares have been
designated Series B Convertible Preferred Stock, having the designations,
dividend rights, voting powers, conversion and redemption rights, rights on
liquidation or dissolution, and other preferences and relative, participating,
optional, or other preferences and relative, participating, optional, or other
special rights, and the qualifications, limitations or restrictions thereof, set
forth in their respective Certificates of Designations. Immediately prior to
the Closing, the Company shall have 2,652,805 shares of Common Stock and 500,000
shares of Series B Convertible Preferred Stock outstanding. All issued and
outstanding shares of Common Stock and Preferred Stock have been validly issued
and are fully paid and nonassessable and have not been issued in violation of
any Federal or state securities laws. Except for the obligation of the Company
to issue (a) securities as referenced in the Letter of Intent, dated May 14,
1998, between the Company and Whale Securities Co., L.P relating to the initial
public offering of its securities, (b) upon the exercise of the options and
warrants which are currently outstanding to purchase 2,288,036 shares of Common
Stock (including 1,271,786 shares of Common Stock subject to Warrants and
Options held by the Securityholders but excluding any options issued or to be
issued under the Company's Stock Option Plan), there are not, as of the date
hereof, any outstanding or authorized subscriptions, options, warrants, calls,
rights, commitments, or any other agreements obligating the Company to issue
(i) any additional shares of its capital stock or (ii) any securities
convertible into, or exercisable or exchangeable for, or evidencing the right to
subscribe for, any shares of its capital stock. Other than the Company's Stock
Option Plan, the Company has not adopted or authorized any plan for the benefit
of its officers, employees, or directors which require or permit the issuance,
sale, purchase, or grant of any shares of the Company's capital stock, any
securities convertible into, or exercisable or exchangeable for, or evidencing
the right to subscribe for any shares of the Company's capital stock, or any
phantom shares or any stock appreciation rights.
ARTICLE III.
Representations, Warranties, and Agreements of the Securityholders
Each of the Securityholders, severally and not jointly, represents and
warrants to, and agrees with, the Company as follows:
3.1 Organization. Such Securityholder (if not an individual) is duly
organized under the laws of the state of its jurisdiction of organization and
has full power and authority to enter into this Agreement and to consummate the
transactions set forth herein. All necessary proceedings have been duly taken
to authorize the execution, delivery, and performance of this Agreement by such
Securityholder (if not an individual).
3
<PAGE>
3.2 Accredited Investor; Access to Information. Such Securityholder and,
to the knowledge of such Securityholder, each limited partner of such
Securityholder in the case of a Securityholder which is a limited partnership,
and each partner of such Securityholder in the case of a Securityholder which is
a general partnership, is an "accredited investor," as that term is defined in
Rule 501 of Regulation D promulgated under the Securities Act. Such
Securityholder, the shareholders of the general partner of such Securityholder,
if any, and each of the limited partners of such Securityholder, if any, has had
substantial experience in private securities transactions like this one, is
capable of evaluating the merits and risks of an investment in the Company, and
has had a full opportunity to discuss the business, management, and financial
affairs of the Company with the Company's management. Such Securityholder has
received all requested documents from the Company and has had a full opportunity
to ask questions of, and receive answers from, the officers of the Company.
3.3 Investment Intent. Such Securityholder is acquiring the Shares for
its, his or her own account for investment and not with a view to, or for sale
in connection with, any public distribution thereof in violation of the
Securities Act. Such Securityholder understands that Shares have not been
registered for sale under the Securities Act or qualified under applicable state
securities laws and that the Shares are being offered and sold to such
Securityholder pursuant to one or more exemptions. Such Securityholder
understands that it, he or she must bear the economic risk of the investment in
the Company for an indefinite period of time, as the Shares cannot be sold
unless subsequently registered under the Securities Act and qualified under
state securities laws, unless an exemption from such registration and
qualification is available. Such Securityholder acknowledges that no public
market for the securities of the Company presently exists and none may develop
in the future.
3.4 Transfer of Securities. Such Securityholder will not sell or
otherwise dispose of the Shares unless (a) a registration statement with respect
thereto has become effective under the Securities Act and such Shares have been
qualified under applicable state securities laws or (b) there is presented to
the Company notice of the proposed transfer and, if it so requests, a legal
opinion reasonably satisfactory to the Company that such registration and
qualification is not required; provided, however, that no such registration or
qualification or opinion of counsel shall be necessary for a transfer by such
Securityholder (i) to any entity controlled by, or under common control with,
such Securityholder (ii) to a partner or officer of such Securityholder, (iii)
to a partner or officer of the general partner of such Securityholder, or (iv)
to the spouse, lineal descendants, estate, or a trust for the benefit of any of
the foregoing, provided the transferee agrees in writing to be subject to the
terms hereof to the same extent as if he were such Securityholder. Such
Securityholder consents that any transfer agent of the Company may be instructed
not to transfer any Shares unless it receives satisfactory evidence of
compliance with the foregoing provisions, and that there may be endorsed upon
any certificate representing such shares (and any certificates issued in
substitution therefor) the following legend calling attention to the foregoing
restrictions on transferability of such shares, stating in substance:
4
<PAGE>
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR QUALIFIED UNDER ANY STATE
SECURITIES LAW."
The Company shall, upon the request of any holder of a stock certificate bearing
the foregoing legend and the surrender of such certificate, issue a new stock
certificate without such legend if (A) the stock evidenced by such certificate
has been effectively registered under the Securities Act and qualified under any
applicable state securities law and sold by the holder thereof in accordance
with such registration and qualification, or (B) such holder shall have
delivered to the Company a legal opinion reasonably satisfactory to the Company
to the effect that the restrictions set forth herein are no longer required or
necessary under the Securities Act or any applicable state law.
3.5 Authorization. All actions on the part of such Securityholder
necessary for the authorization, execution, delivery, and performance by such
Securityholder of this Agreement have been taken. This Agreement has been duly
authorized, executed, and delivered by such Securityholder, is the legal, valid,
and binding obligation of such Securityholder, and are enforceable as to such
Securityholder in accordance with their respective terms, except as may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium, or
other similar laws or by legal or equitable principles relating to or limiting
creditors' rights generally or as rights to indemnification may be limited by
applicable securities laws.
3.6 Finder or Broker. Neither such Securityholder nor any person acting
on behalf of such Securityholder has negotiated with any finder, broker,
intermediary, or similar person in connection with the transactions contemplated
herein.
ARTICLE IV.
Additional Provisions.
4.1 Indemnification. From and after the Closing, the Company, on the one
hand, and the Securityholders (severally and not jointly), on the other hand,
shall indemnify and save harmless the other (including officer, directors,
employees, agents and representatives) against any loss, claim, liability,
expense (including reasonable attorney's fees) or other damage caused by or
arising out of (i) the breach of any representation or warranty made by any such
party or (ii) the failure by the party against whom indemnification is sought to
perform any of its covenants or agreements in this Agreement.
4.2 Communications. All notices or other communications hereunder shall
be in writing and shall be given by registered or certified mail (postage
prepaid and return receipt requested), by an overnight courier service which
obtains a receipt to evidence delivery, or by telex or facsimile transmission
(provided that written confirmation of receipt is provided), addressed as set
forth below:
5
<PAGE>
If to the Company:
Network-1 Security Solutions, Inc.
70 Walnut Street
Wellesley, MA 02181
Attention: Avi A. Fogel, President and Chief Executive Officer
With a copy to:
Bizar Martin & Taub, LLP
1350 Avenue of the Americas
29th Floor
New York, New York 10019
Attention: Sam Schwartz, Esq.
If to the Securityholders, at their respective addresses as set forth on
Exhibit A hereto, or such other address as any party may designate to the other
in accordance with the aforesaid procedure. All notices and other
communications sent by overnight courier service shall be deemed to have been
given as of the next business day after delivery thereof to such courier
service, those given by telex or facsimile transmission shall be deemed given
when sent, and all notices and other communications sent by mail shall be deemed
given as of the third business day after the date of deposit in the United
States mail.
4.3 Successors and Assigns. The Company may not sell, assign, transfer,
or otherwise convey any of its rights or delegate any of its duties under this
Agreement, except to a corporation which has succeeded to substantially all of
the business and assets of the Company and has assumed in writing its
obligations under this Agreement, and this Agreement shall be binding on the
Company and such successor. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the Securityholders and their successors and
assigns.
4.4 Amendments and Waivers. Neither this Agreement nor any term hereof
may be changed or waived (either generally or in a particular instance and
either retroactively or prospectively) absent the written consent each party
hereto.
4.5 Survival of Representations. The representations, warranties,
covenants, and agreements made herein or in any certificate or document executed
in connection herewith shall survive the execution and delivery of this
Agreement and the issuance and delivery of the Shares to the Securityholders.
4.6 Delays or Omissions; Waiver. No delay or omission to exercise any
right, power, or remedy accruing to either the Company or the Securityholders
upon any breach or default by the other under this Agreement shall impair any
such right, power, or remedy no shall it be construed to be a waiver of any such
breach or default, or any acquiescence therein or in any similar breach or
6
<PAGE>
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring.
4.7 Entire Agreement; Binding Effect. This Agreement (together with the
exhibit attached hereto) contains the entire understanding of the parties with
respect to their respective subject matter and all prior negotiations,
discussions, commitments, and understandings heretofore had between them with
respect thereto are merged herein and therein. This Agreement and the Exchange
shall be binding on each Securityholder who executes this Agreement. The
failure of any Securityholder named in Exhibit A to execute this Agreement shall
not effect the Closing of the Exchange with respect to those Securityholders who
have executed this Agreement.
4.8 Headings. All article and section headings herein are inserted for
convenience only and shall not modify or affect the construction or
interpretation of any provision of this Agreement.
4.9 Counterparts; Governing Law. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, without giving effect to conflict of laws.
4.10 Further Actions. At any time and from time to time, each party
agrees, without further consideration, to take such actions and to execute and
deliver such documents as may be reasonably necessary to effectuate the purposes
of this Agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed on the date
hereinabove set forth.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
-------------------------------------------------
Name: Avi A. Fogel
Title: President and Chief Executive Officer
SECURITYHOLDERS:
APPLEWOOD ASSOCIATES, L.P.
By: /s/ Barry Rubenstein
-------------------------------------------------
Name: Barry Rubenstein
Title: General Partner
7
<PAGE>
CMH CAPITAL MANAGEMENT CORP.
By: /s/ Corey Horowitz
-------------------------------------------------
Name: Corey Horowitz
Title: President
/s/ Corey Horowitz
----------------------------------------------------
COREY M. HOROWITZ
CAPCOR EMPLOYEE PENSION PLAN
By: /s/ Corey Horowitz
-------------------------------------------------
Name: Corey Horowitz
Title: Authorized Signatory
RAPTUR MANAGEMENT CO.
By: /s/ Steve Ackerman
-------------------------------------------------
Name: Steve Ackerman
Title: President
/s/ Douglas Lipton
----------------------------------------------------
DOUGLAS LIPTON
/s/ Lawrence Wein
----------------------------------------------------
LAWRENCE WEIN
/s/ Steven Heineman
----------------------------------------------------
STEVEN HEINEMAN
/s/ Herb Karlitz
----------------------------------------------------
HERB KARLITZ
8
<PAGE>
/s/ Charles Stevenson
----------------------------------------------------
CHARLES P. STEVENSON, JR.
/s/ Albert Kalimian
----------------------------------------------------
ALBERT KALIMIAN
NAVIGATOR FUND, L.P
By: /s/ Corey Horowitz
-------------------------------------------------
Name: Corey Horowitz
Title: Authorized Signatory
NAVIGATOR GLOBAL FUND
By: /s/ Corey Horowitz
-------------------------------------------------
Name: Corey Horowitz
Title: Authorized Signatory
/s/ Robert Graifman
----------------------------------------------------
ROBERT GRAIFMAN
MBF CAPITAL CORP.
By: /s/ Mark Fisher
-------------------------------------------------
Name:
Title:
BENTLEY ONE, LTD.
By: /s/ Gerald Josephson
-------------------------------------------------
Name: Gerald Josephson
Title:
9
<PAGE>
BARINGTON CAPITAL GROUP, L.P.
By: /s/ Marc S. Cooper
-------------------------------------------------
Name: Marc S. Cooper
Title: Vice-Chairman
GKN SECURITIES CORP.
By: /s/ Peter R. Kent
-------------------------------------------------
Name: Peter R. Kent
Title: Chief Operating Officer
/s/ David Nussbaum
----------------------------------------------------
DAVID M. NUSSBAUM
/s/ Roger Gladstone
----------------------------------------------------
ROGER GLADSTONE
/s/ Robert Gladstone
----------------------------------------------------
ROBERT GLADSTONE
/s/ Deborah S. Novick
----------------------------------------------------
DEBORAH L. SCHONDORF NOVICK
/s/ Neil Betoff
----------------------------------------------------
NEIL BETOFF
/s/ Richard Buonocore
----------------------------------------------------
RICHARD BUONOCORE
/s/ Brian K. Coventry
----------------------------------------------------
BRIAN K. COVENTRY
/s/ Andrew G. Lazarus
----------------------------------------------------
ANDREW G. LAZARUS
10
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS WARRANTS OR OF COMMON STOCK
OF SECURITYHOLDER OPTIONS TO BE EXCHANGED TO BE RECEIVED
- ----------------- ----------------------- ----------------
<S> <C> <C>
Applewood Associates, L.P. Warrants to purchase 546,250 shares 421,337
68 Wheatley Road of Common Stock (56,250 shares at
Brookville, New York 11545 an exercise price of $4.00 per
share/expires 2/24/2007; 100,000
shares at an exercise price of $3.00
per share/expires 9/26/2007; 90,000
shares at an exercise price of $3.00
per share/expires 3/2/2008; 300,000
shares at an exercise price of $3.00
per share/expires 5/14/2008)
CMH Capital Management Corp. Warrants to purchase 29,286 shares 22,664
909 Third Avenue, 9th Floor of Common Stock (14,286 shares at
New York, New York 10022 an exercise price of $3.00 per
share/expires 9/26/2007; 15,000
shares at an exercise price of $3.00
per share/expires 3/2/2008)
Corey M. Horowitz Warrants to purchase 215,000 shares 188,689
220 East 63rd Street - PH-D of Common stock (200,000 shares at
New York, New York 10021 an exercise price of $1.00 per
share/expires 11/29/2005 and 15,000
shares at an exercise price of $3.00
per share/expires 4/23/2008)
Capcor Employee Pension Plan Warrants to purchase 100,000 shares 79,545
c/o Corey M. Horowitz of Common Stock at an exercise
CMH Capital Management Corp. price of $2.00 per share/expires
909 Third Avenue, 9th Floor 11/29/2005
New York, New York 10022
Raptur Management Co. Warrants to purchase 22,500 shares 15,825
c/o Corey Horowitz of Common Stock at an exercise
CMH Capital Management Corp. price of $4.00 per share/expires
909 Third Avenue, 9th Floor 2/24/2007
New York, New York 10022
Douglas Lipton Warrants to purchase 11,250 shares 7,913
1235 Park Avenue, Apt 2B of Common Stock at an exercise
New York, New York 10128 price of $4.00 per share/expires
2/24/2007
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS WARRANTS OR OF COMMON STOCK
OF SECURITYHOLDER OPTIONS TO BE EXCHANGED TO BE RECEIVED
- ----------------- ----------------------- ----------------
<S> <C> <C>
Lawrence Wein Warrants to purchase 5,625 shares of 3,956
247 West 12th Street Common Stock at an exercise price
New York, New York 10014 of $4.00 per share/expires 2/24/2007
Steven Heineman Warrants to purchase 5,625 shares of 3,956
69 LaRue Drive Common Stock at an exercise price
Huntington, New York 11743 of $4.00 per share/expires 2/24/2007
Herb Karlitz Warrants to purchase 18,750 shares 13,808
55 Old Quarry Road of Common Stock (11,250 shares at
Englewood Drive, NJ 07631 an exercise price of $4.00 per
share/expires 4/29/2007; 7,500 shares
at an exercise price of $3.00 per
share/expires 3/2/2008)
Charles P. Stevenson, Jr Warrants to purchase 22,500 shares 15,825
c/o Corey Horowitz of Common Stock at an exercise
CMH Capital Management Corp. price of $4.00 per share/expires
909 Third Avenue, 9th Floor 2/24/2007
New York, New York 10022
Albert Kaliman Warrants to purchase 11,250 shares 7,913
P.O. Box 645 of Common Stock at an exercise
Locust Valley, NY 11560 price of $4.00 per share/expires
2/24/2007
Navigator Fund, L.P. Warrants to purchase 69,075 shares 48,929
c/o Corey Horowitz of Common Stock at an exercise
CMH Capital Management Corp. price of $4.00 per share/expires
909 Third Avenue, 9th Floor 4/29/2007
New York, New York 10022
Navigator Global Fund Warrants to purchase 9,675 shares of 6,853
c/o Corey Horowitz Common Stock at an exercise price
CMH Capital Management Corp. of $4.00 per share/expires 4/29/2007
909 Third Avenue, 9th Floor
New York, New York 10022
Robert Graifman Warrants to purchase 7,500 shares of 5,839
100 Tennyson Common Stock at an exercise price
Short Hills, NJ of $3.00 per share/expires 3/2/2008
MBF Capital Corp. Warrants to purchase 15,000 shares 11,723
12 East 49th Street of Common Stock at an exercise
New York, New York 10017 price of $3.00 per share/expires
4/23/2008
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS WARRANTS OR OF COMMON STOCK
OF SECURITYHOLDER OPTIONS TO BE EXCHANGED TO BE RECEIVED
- ----------------- ----------------------- ----------------
<S> <C> <C>
Bentley One, Ltd. Warrants to purchase 75,000 shares 58,700
Harborside Apt # 3 of Common Stock at an exercise
Cloister Drive price of $3.00 per share/expires
Paradise Island 5/14/2008
Nassau, Bahamas
P.O. Box N-732
Barington Capital Group, L.P. Options to purchase 25,000 shares of 11,110
888 7th Avenue, 17th Floor Common Stock at an exercise price
New York, New York 10019 of $4.00 per share/expires 3/14/2001
GKN Securities Corp. Options to purchase 34,650 shares of 15,399
61 Broadway Common Stock at an exercise price
New York, New York 10006 of $4.00 per share/expires 3/14/2001
David M. Nussbaum Options to purchase 14,025 shares of 6,233
GKN Securities Corp. Common Stock at an exercise price
61 Broadway of $4.00 per share/expires 3/14/2001
New York, New York 10006
Robert Gladstone Options to purchase 14,025 shares of 6,233
GKN Securities Corp. Common Stock at an exercise price
61 Broadway of $4.00 per share/expires 3/14/2001
New York, New York 10006
Roger Gladstone Options to purchase 14,025 shares of 6,233
GKN Securities Corp. Common Stock at an exercise price
61 Broadway of $4.00 per share/expires 3/14/2001
New York, New York 10006
Deborah L. Schondorf Options to purchase 2,150 shares of 955
GKN Securities Corp. Common Stock at an exercise price
61 Broadway of $4.00 per share/expires 3/14/2001
New York, New York 10006
Neil Betoff Options to purchase 375 shares of 167
GKN Securities Corp. Common Stock at an exercise price
61 Broadway of $4.00 per share/expires 3/14/2001
New York, New York 10006
Richard Buonocore Options to purchase 1,650 shares of 733
GKN Securities Corp. Common Stock at an exercise price
61 Broadway of $4.00 per share/expires 3/14/2001
New York, New York 10006
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS WARRANTS OR OF COMMON STOCK
OF SECURITYHOLDER OPTIONS TO BE EXCHANGED TO BE RECEIVED
- ----------------- ----------------------- ----------------
<S> <C> <C>
Brian K. Coventry Options to purchase 600 shares of 267
GKN Securities Corp. Common Stock at an exercise price
61 Broadway of $4.00 per share/expires 3/14/2001
New York, New York 10006
Andrew G. Lazarus Options to purchase1,000 shares of 444
GKN Securities Corp. Common Stock at an exercise price
61 Broadway of $4.00 per share/expires 3/14/2001
New York, New York 10006
- ----------------------------------------------------------------------------------------
TOTAL 1,271,786 961,249
</TABLE>
14
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated June 17, 1998 (July 8, 1998
with respect to Note J[1] and July 17, 1998 with respect to the third paragraph
of Note A), which contains an explanatory paragraph with respect to the
Company's ability to continue as a going concern, on the financial statements
of Network-1 Security Solutions, Inc. as of December 31, 1997 and 1996 and for
each of the years then ended, in its Registration Statement on Form SB-2 and to
the reference to our firm under the caption "Experts" in the Prospectus.
/s/ Richard A. Eisner & Company, LLP
New York, New York
July 21, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS OF NETWORK-1 SECURITY SOLUTIONS, INC. FOR THE YEAR ENDED
DECEMBER 31, 1997, AND FROM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 60,000 67,000
<SECURITIES> 0 0
<RECEIVABLES> 505,000 346,000
<ALLOWANCES> 70,000 60,000
<INVENTORY> 15,000 15,000
<CURRENT-ASSETS> 525,000 383,000
<PP&E> 766,000 768,000
<DEPRECIATION> 366,000 404,000
<TOTAL-ASSETS> 2,404,000 2,094,000
<CURRENT-LIABILITIES> 1,186,000 2,666,000
<BONDS> 0 0
0 0
5,000 5,000
<COMMON> 17,000 17,000
<OTHER-SE> (97,000) (594,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,404,000 2,094,000
<SALES> 1,632,000 195,000
<TOTAL-REVENUES> 2,369,000 339,000
<CGS> 497,000 177,000
<TOTAL-COSTS> 790,000 252,000
<OTHER-EXPENSES> 3,351,000 570,000
<LOSS-PROVISION> 65,000 (10,000)
<INTEREST-EXPENSE> 553,000 224,000
<INCOME-PRETAX> (2,390,000) (697,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,390,000) (697,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,390,000) (697,000)
<EPS-PRIMARY> (1.29) (0.41)
<EPS-DILUTED> (1.29) (0.41)
</TABLE>
