SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant |X|
Filed by a party other than the Registrant | |
Check the appropriate box:
| | Preliminary proxy statement | | Confidential, for Use of
the Commission Only
(as permitted by Rule
|X| Definitive proxy statement 14a-6(e)(2))
| | Definitive additional materials
| | Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
NETWORK-1 SECURITY SOLUTIONS, INC.
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
|X| No fee required.
| | Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
| | Fee paid previously with preliminary materials.
| | Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or
schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
1601 TRAPELO ROAD, RESERVOIR PLACE
WALTHAM, MASSACHUSETTS 02451
---------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 25, 1999
----------------------------------------------------
To the Stockholders of Network-1 Security Solutions, Inc.:
Notice is hereby given that the Annual Meeting of Stockholders of
Network-1 Security Solutions, Inc., a Delaware corporation (the "Company"), will
be held at its executive offices located at 1601 Trapelo Road, Reservoir Place,
Waltham, Massachusetts, on Friday, June 25, 1999 at 10:00 A.M., local time, for
the following purposes:
1. To elect directors;
2. To amend the Company's Amended and Restated 1996 Stock Option
Plan to increase the number of shares available for issuance
thereunder by 750,000 shares to an aggregate of 1,800,000
shares; and
3. To transact such other business as may properly come before
the meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on May 21, 1999
as the record date for the meeting. Only holders of record of shares at that
time will be entitled to notice of, and to vote at, the meeting or any
adjournments thereof.
Management requests all stockholders to sign and date the enclosed form
of proxy and return it in the postage paid, self-addressed envelope provided for
your convenience. Please do this whether or not you plan to attend the meeting.
Should you attend, you may, if you wish, withdraw your proxy and vote your
shares in person.
By Order of the Board of Directors,
Robert M. Russo
Secretary
Waltham, Massachusetts
May 25, 1999
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
---------------------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD FRIDAY, JUNE 25, 1999
---------------------------------------
This Proxy Statement is furnished by the Board of Directors of Network-1
Security Solutions, Inc. (the "Company") in connection with the solicitation of
proxies to be voted at the Annual Meeting of Stockholders, which will be held at
the Company's offices located at 1601 Trapelo Road, Reservoir Place, Waltham,
Massachusetts, on June 25, 1999, at 10:00 A.M., local time, and at all
adjournments thereof.
Any stockholder giving a proxy will have the right to revoke it at any
time prior to the time it is voted. A proxy may be revoked by written notice to
the Company, Attention: Secretary, by execution of a subsequent proxy or by
attendance and voting in person at the Annual Meeting of Stockholders.
Attendance at the meeting will not automatically revoke the proxy. All shares
represented by effective proxies will be voted at the Annual Meeting of
Stockholders, or at any adjournment thereof. Unless otherwise specified in the
proxy, shares represented by proxies will be voted (i) FOR the election of the
nominees for director listed below, and (ii) FOR an amendment to the Company's
Amended and Restated 1996 Stock Option Plan to increase the number of shares
available for issuance thereunder by 750,000 shares to an aggregate of 1,800,000
shares.
The Company's executive offices are located at 1601 Trapelo Road,
Reservoir Place, Waltham, Massachusetts, and its phone number is (781) 522-3400.
On or about May 28, 1999 this Proxy Statement and the accompanying form of
proxy, together with a copy of the Annual Report on Form 10-KSB of the Company
for the fiscal year ended December 31, 1998, including financial statements, are
to be mailed to each stockholder of record at the close of business on May 21,
1999 (the "Record Date").
VOTING SECURITIES
Only stockholders of record at the close of business on the Record Date
are entitled to vote at the meeting. As of the Record Date, the Company had
issued and outstanding and entitled to vote 4,372,375 shares of common stock,
par value $0.01 per share (the "Common Stock") and 562,836 shares of Series C
Preferred Stock (the "Preferred Stock"). Each share of Common Stock and
Preferred Stock entitles the holder thereof to one vote. A majority of the
outstanding shares of voting stock constitutes a quorum. If a share is
represented for any purpose at the meeting, it is deemed to be present for all
other matters. Abstentions and shares held of record by a broker or its nominee
("Broker Shares") that are voted on any matter are included in determining the
number of votes present. Broker Shares that are not voted on any matter will not
be included in determining whether a quorum is present. The election of each
nominee for director, as set forth in Proposal No. 1 below and the approval of
the amendment to the Company's Stock Option Plan, as set forth in Proposal No. 2
below, each requires the affirmative vote of a majority of the shares entitled
to vote present in person or by proxy.
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
The Company's Board of Directors consists of six members. All six
directors are to be elected at the Annual Meeting to constitute the Board of
Directors of the Company, to hold office until the next Annual Meeting of
Stockholders and until the election and qualification of their respective
successors. If no other choice is specified in the accompanying proxy, the
persons named therein have advised management that it is their present intention
to vote the proxy for the election of the nominees set forth below. Each of the
nominees is presently a director of the Company. Should any of such nominees
become unable to accept nomination or election, it is intended that the persons
named in the accompanying proxy will vote for the election of such other person
as management may recommend in the place of such nominee.
DIRECTORS
Set forth below for each nominee is his name, age, the year in which he
became a director of the Company, his principal occupations during the last five
years and any additional directorships in publicly-held companies. The
information is as of May 25, 1999.
Avi A. Fogel, age 44, has served as a director since May 1998. Mr.
Fogel has also served as President and Chief Executive Officer of the Company
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 the Company's initial
public offering in November 1998, 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 in
pre-incorporation activities related to CommHome. 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, age 42, has served as a director since inception of
the Company (July 1990). Mr. Hancock, co-founded the Company and has served as
its Chief Technology Officer since May 1998. From inception until May 1998, Mr.
Hancock served as Executive Vice President and Secretary. 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.
Corey M. Horowitz, age 44, 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 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.
Barry Rubenstein, age 56, has served as a director of the Company since
July 1998. During the period March 1996 until July 1998, Mr. Rubenstein served
as a member of the Company's advisory board. Since June 1994, Mr. Rubenstein has
served as President, a director and a shareholder of InfoMedia Associates, Ltd.,
which is a general partner of the 21st Century Communications Partners, L.P. and
affiliated partnerships. Mr. Rubenstein also serves as Chief Executive Officer
of Wheatley Partners, L.L.C., the general partner of Wheatley Partners, L.P. and
a general partner of Wheatley Foreign Partners, L.P. He is also a general
partner of Applewood Associates, L.P., Seneca Ventures and Woodland Venture
Fund, each of which is an investment partnership. Prior to his experience as an
investor, Mr. Rubenstein served as a co-founder of several technology companies,
including Applied Digital Data Systems, Inc., Cheyenne Software, Inc. and
Novell, Inc. Mr. Rubenstein also serves as a director of Infonautics, Inc., The
Millbrook Press, Inc. and Source Media, Inc.
2
<PAGE>
Irwin Lieber, age 59, has served as a director of the Company since
July 1998. During the period March 1996 until July 1998, Mr. Lieber served as a
member of the Company's advisory board. Since 1979, he has served as Chairman
and Chief Executive Officer of GeoCapital LLC, an investment advisory firm which
he founded. Mr. Lieber is also a general partner of Applewood Associates, L.P.,
and a principal of 21st Century Communications, L.P., each of which is an
investment partnership. Mr. Lieber also serves as President 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.
Marcus J. Ranum, age 36, 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 1996. From October 1994 to February 1996, Mr.
Ranum 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, Mr. Ranum 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.
OTHER EXECUTIVE OFFICERS OF THE COMPANY
Robert P. Olsen, age 45, 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, age 47, 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.
Robert M. Russo, age 48, co-founded the Company and has served as Vice
President of Professional Services since Janaury 1999 and Secretary since May
1998. From May 1998 to January 1999, Mr. Russo served as Vice President of
Business Development. 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.
Joseph A. Donohue, age 44, 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 from July 1993
to July 1994. From April 1987 to July 1993, Mr. Donohue was employed by Stratus
Computer, Inc. in various engineering positions.
Lance Westbrook, age 43, has served as Vice President of North American
Sales since November 1998. From May 1998 to October 1998, Mr. Westbrook served
as Director of Channel Sales for Cross Worlds Software, Inc., an enterprise
software vendor. From December 1993 to February 1998, he was employed by Sybase,
Inc., having held the positions of Director, Alliance Sales and Services from
January 1997 to February 1998, Manager, Partner Market Development from January
1996 to December 1996, and Manager, Channel Sales from December 1993 to December
1995. From December 1992 to December 1993, Mr. Westbrook served as Director of
Sales for IGM Communications, a vendor of network data storage solutions.
3
<PAGE>
Joseph D. Harris, age 42, has served as Vice President of International
Sales since August 1998. From November 1996 until August 1998, Mr. Harris served
as Vice President of Sales and Managing Director - Asia Pacific of Proginet
Corporation, a developer of cross-platform database technologies. From October
1990 until November 1996, Mr. Harris served as President and Chief Executive
Officer of KnowledgeNet Incorporated, a company also engaged in development of
cross-platform database technologies, which he founded. Mr. Harris also served
as Director of Architecture for System Software Associates, Inc., a developer of
business planning software, from January 1988 to October 1990.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
In August 1998, the Board of Directors established an Audit Committee,
consisting of Irwin Lieber, Marcus Ranum and Avi Fogel, and a Compensation
Committee, consisting of Corey M. Horowitz and Barry Rubenstein. The Audit
Committee reviews the qualifications of the Company's independent auditors,
makes recommendations to the Board of Directors regarding the selection of
independent auditors, reviews the scope, fees and results of any audit, and
reviews non-audit services and related fees provided by the independent
auditors. The Compensation Committee is 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 Company's
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.
During the past fiscal year, the Company's Board of Directors held four
meetings. The Board of Directors' Compensation Committee met four times during
the past fiscal year. The Audit Committee did not meet during the past fiscal
year. No incumbent director failed to participate in at least 75% of all
meetings of the Board of Directors and the committees on which he served during
the past fiscal year. The Company has compensated each director, who is not also
an employee of the Company, by granting to each such outside director stock
options to purchase 20,000 shares of Common Stock, at an exercise price equal to
the closing price of the Company's Common Stock on the date of grant, with the
option shares vesting over a one year period in equal quarterly amounts. 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. No additional amounts are
payable for committee participation or special assignments.
4
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes compensation paid to the Company's Chief
Executive Officer and to each of its executive officers who received
compensation in excess of $100,000 for services rendered in all capacities to
the Company during each of the years ended December 31, 1998 and December 31,
1997. None of the Company's other employees received in excess of $100,000 in
compensation during the year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
SHARES
YEAR ENDED OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION(1) DECEMBER 31 SALARY ($) BONUS ($) COMPENSATION(2) OPTIONS(#)
- --------------------------- ----------- ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Avi A. Fogel 1998 $128,192(3) $24,986 - 383,343
President & Chief Executive
Officer
Robert Russo 1998 $153,746(4) $5,000 - 25,000
President and Chief
Operating Officer, Vice 1997 $145,000(5) - - -
President of Professional
Services
William Hancock 1998 $160,000 - - 25,000
Chief Technology Officer,
Executive Vice President 1997 $160,000(6) - - -
Robert P. Olsen 1998 $94,154(7) $14,992 - 94,362
Vice President of Product
Management
Peter Mearsheimer 1997 $155,000(8) - - 21,728(9)
Vice President of Sales
</TABLE>
- ---------------------------
(1) Does not include the following executive officers who were initially
employed by the Company beginning May 1998 through November 1998 and
are each currently receiving an annual salary of $120,000: Murray P.
Fish, Chief Financial Officer; Joseph A. Donohue, Vice President of
Engineering; Lance Westbrook, Vice President of North American Sales
and Joseph D. Harris, Vice President of International Sales.
(2) The Company has concluded that the aggregate amount of perquisites
and other personal benefits paid to each of the executive officers
listed above did not exceed the lesser of ten percent (10%) of such
officer's annual salary and bonus for each fiscal year indicated or
$50,000.
(3) Mr. Fogel was first employed as President and Chief Executive Officer
in May 1998 and served as a consultant to the Company from March 1998
to May 1998. Mr. Fogel received $33,000 as a consultant.
Mr. Fogel's annual base salary during 1998 was $150,000.
(4) Mr. Russo served as President and Chief Operating Officer until May
1998 at which time he became Vice President of Business Development.
In January 1999, Mr. Russo became Vice President of Professional
Services. Includes $19,925 of deferred salary.
5
<PAGE>
(5) Includes $51,692 of deferred salary.
(6) Includes $6,154 of deferred salary.
(7) Mr. Olsen was first employed as the Company's Vice President of
Product Management in May 1998 and served as a consultant to the
Company from March 1998 to May 1998. Mr. Olsen received $18,000 as a
consultant. Mr. Olsen's annual base salary during 1998 was $120,000.
(8) Includes $5,962 of deferred salary. Effective August 1998, Mr.
Mearsheimer was no longer employed by the Company.
(9) Expired by their terms.
OPTION GRANTS IN 1998
The following stock options were granted to the Company's executive
officers during the year ended December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SHARES OPTIONS GRANTED TO EXERCISE
UNDERLYING EMPLOYEES PRICE PER EXPIRATION
OPTIONS GRANTED(3) IN 1998(1) SHARE (2) DATE
------------------ ---------- --------- ----
<S> <C> <C> <C> <C>
Avi A. Fogel 294,879 28.4% $2.42 5/18/2003
88,464 8.5% $6.00 10/22/2008
Robert Russo 25,000 2.4% $6.00 10/22/2008
William Hancock 25,000 2.4% $6.00 10/22/2008
Robert P. Olsen 58,976 5.7% $5.60 5/18/2008
35,386 3.4% $6.00 10/22/2008
Murray P. Fish 58,500 5.6% $5.60 5/19/2008
35,685 3.4% $6.00 10/22/2008
Joseph Donohue 62,500(4) 6.0% $6.00 7/31/2008
31,250 3.0% $6.00 10/22/2008
Joseph Harris 40,000(5) 3.9% $6.00 8/24/2008
25,000 2.4% $6.00 10/22/2008
Lance Westbrook 65,000 6.3% $6.00 11/1/2008
</TABLE>
- ---------------------------
(1) The number of options granted to employees during the year ended December
31, 1998 used to compute this percentage excludes options to purchase
65,184 shares of Common Stock due to the termination of such options
pursuant to their terms and options to purchase 13,104 shares of Common
Stock which were converted to non-qualified options. Also includes 141,365
options that were originally issued to employees at exercise prices per
share ranging from $6.44 to $8.00 per share which were repriced to an
exercise price per share of $6.00.
(2) All options were granted at an exercise price equal to the fair market
value of the Company's Common Stock at the date of grant, as determined by
the Board of Directors, except for options to purchase 294,879 shares of
Common Stock at an exercise price of $ 2.42 per share granted to Avi A.
Fogel on May 18, 1998.
The fair market value per share of Common Stock on May 18, 1998 was $5.60.
(3) No options of the Company were exercised by such persons during the year
ended December 31, 1998.
(4) Represents options that were originally issued in July 1988 at an exercise
price per share of $7.20 and were repriced to an exercise price per share
of $6.00. Such options vested as to 34% of the underlying shares on the
date of grant (July 1998) and 22% of such shares on each of the first
three anniversaries thereafter.
6
<PAGE>
(5) Represents options that were originally issued in August 1998 at an
exercise price of $8.00 per share and were repriced to an exercise price
per share of $6.00. Such options vested as to 25% of the underlying shares
on the date of grant (August 98) and 25% of such shares on each of the
first three anniversaries thereafter.
REPRICING OF OPTIONS
On October 22, 1998, in exchange for outstanding options covering
141,365 shares of the Company's Common Stock (the "Old Options"), which were
granted pursuant to the Stock Option Plan, the Company granted new options
covering 141,365 shares of the Company's Common Stock (the "New Options"), with
exercise prices equal to $6.00 per share (the fair market value per share on the
date of the grant), pursuant to the Stock Option Plan. Concurrently with the
repricing of options issued to Joseph Donohue and Joseph Harris, certain other
holders of options had their respective options repriced in the same manner. The
Compensation Committee of the Board of Directors determined that it was
appropriate to reprice the Old Options because the anticipated initial public
offering price per share of the Company's Common Stock was decreased from $8.00
per share to $6.00 per share in October 1998. The Compensation Committee of the
Board of Directors believed that by awarding Messrs. Donohue and Harris (and the
other optionholders) New Options with exercise prices at $6.00 per share (the
fair market value per share on the date of the grant) they will be fairly
compensated for their efforts and further motivated to achieve the Company's
success. The Compensation Committee of the Board of Directors also believes that
exchanging "out-of-the-money" options is a cost-effective method of retaining
key employees and preserving the important motivating effect that stock options
have.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 AND 1998 FISCAL YEAR-END OPTION
VALUES
No options were exercised by an executive officer of the Company during
the year ended December 31, 1998. The following table sets forth information
relating to the fiscal year-end value of unexercised options held by executive
officers on an aggregated basis:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT 12/31/98 (#) AT FISCAL YEAR-END ($)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE (1)
---- ----------- ------------- ----------- -----------------
<S> <C> <C> <C> <C>
Avi A. Fogel 130,337 253,006 $440,387 $854,869
Robert Russo 8,500 16,500 $ 5,313 $ 10,313
William Hancock 8,500 16,500 $ 5,313 $ 10,313
Robert P. Olsen 32,083 62,279 $ 28,073 $ 54,494
Murray P. Fish 32,023 62,162 $ 27,970 $ 54,295
Joseph Donohue 31,875 61,875 $ 19,922 $ 38,672
Joseph Harris 16,250 48,750 $ 10,156 $ 30,469
Lance Westbrook 16,250 48,750 $ 10,156 $ 30,469
</TABLE>
- ------------------------
(1) Options are "in-the-money" if the market price of the Common Stock on
December 31, 1998 ($6.625) exceeded the exercise price of such options.
The value of such options is calculated by determining the difference
between the aggregate market price of the Common Stock underlying the
options on December 31, 1998 and the aggregate exercise price of such
options.
7
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
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 annual cash bonus of up to $50,000 as
determined by the Compensation Committee of 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 to 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
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 be entitled to receive the lesser of six
months base salary or the base salary for the balance 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 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 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 up to $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 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 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 the
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
8
<PAGE>
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 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 July 31, 1998, the Company entered into an employment agreement with
Joseph A. Donohue pursuant to which Mr. Donohue agreed to serve as the Company's
Vice President of Engineering 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. In
connection with his employment, Mr. Donohue received an incentive stock option
to purchase 62,500 shares of the Company's Common Stock at an exercise price of
$6.00 per share. The options granted to Mr. Donohue 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. Donohue'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. Donohue 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 August 24, 1998, the Company entered into an employment agreement
with Joseph D. Harris pursuant to which Mr. Harris agreed to serve as the
Company's Vice President of International Sales 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. In connection with his employment, Mr. Harris received an
incentive stock option to purchase 40,000 shares of the Company's Common Stock
at an exercise price of $6.00 per share. The options granted to Mr. Harris
vested as to 25% of the shares covered thereby upon execution of the agreement
and vest as to 25% on each of the first three anniversaries thereafter, subject
to acceleration upon a change of control of the Company. In the event Mr.
Harris' 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. Harris 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 December 12, 1998, the Company entered into an employment agreement
with Lance Westbrook pursuant to which he agreed to serve as the Company's Vice
President of North American Sales 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. In
connection with his employment, Mr. Westbrook received an incentive stock option
to purchase 65,000 shares of the Company's Common Stock at an exercise price of
$6.00 per share. The options granted to Mr. Westbrook vested as to 25% of the
shares covered thereby upon execution of the agreement and vest as to 25% on
each of the first three anniversaries thereafter, subject to acceleration upon a
change of control of the Company. In the event Mr. Westbrook' 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. Westbrook 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.
9
<PAGE>
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's shares of Common Stock as of May 21, 1999 by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director, (iii) each of the
executive officers of the Company, and (iv) all executive officers and directors
of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
---------------- ------------------ ---------------------
<S> <C> <C>
Applewood Associates, L.P. (2) 1,194,659 24.2%
Corey M. Horowitz(3) 963,503 19.0
CMH Capital Management Corp.
Pisces Investors, L.P.
Security Partners, L.P.
Robert Russo(4) 312,674 6.3
William Hancock(5) 243,557 4.9
Avi A. Fogel(6) 228,253 4.4
Barry Rubenstein(7) 160,112 3.2
Irwin Lieber(8) 87,944 1.8
Robert P. Olsen(9) 53,390 1.1
Murray P. Fish(10) 44,893 *
Joseph A. Donohue(11) 31,875
*
Joseph D. Harris(12) 16,250 *
Lance Westbrook(13) 16,250 *
Marcus Ranum(14) 20,000 *
All officers and directors as a group 2,178,701 38.9
(12 persons)
</TABLE>
- -------------------------------------
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named
in the above 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 hereof upon the exercise of
options, warrants or convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants
and convertible securities held by such person (but not those held by
any other person) and which are exercisable within 60 days have been
exercised and converted. Assumes a base of 4,935,211 shares of Common
Stock outstanding (including 562,836 shares of Common Stock issuable
upon conversion of outstanding shares of Series C Preferred Stock),
before any consideration is given to outstanding
10
<PAGE>
options and warrants. Except as otherwise indicated, the address for
each beneficial owner is care of Network-1 Security Solutions, Inc.,
1601 Trapelo Road, Reservoir Place, Waltham, Massachusetts 02451.
(2) Includes 382,696 shares of Common Stock issuable upon conversion of
Series C Preferred Stock held by Applewood Associates, L.P.
("Applewood"). Does not include (i) 31,040, 23,280, 31,040, 4,656 and
3,104 shares of Common Stock owned by Barry Rubenstein, Irwin Lieber,
Barry Fingerhut, Seth Lieber and Jonathan Lieber, respectively, each of
whom is a general partner of Applewood and (ii) an aggregate of 129,328
shares of Common Stock subject to currently exercisable warrants and
options held by Barry Rubenstein (64,664 shares) and Irwin Lieber
(64,664 shares). Each of Messrs. Rubenstein, I. Lieber, Fingerhut, S.
Lieber and J. Lieber disclaims beneficial ownership of the shares held
by Applewood, except to the extent of their equity interest therein.
Applewood's business address is 80 Cuttermill Road, Great Neck, New
York 11021.
(3) Includes (i) 374,906 shares of Common Stock held by Mr. Horowitz, (ii)
7,846 shares of Common Stock issuable upon conversion of Series C
Preferred Stock held by Mr. Horowitz, (iii) 15,000 shares of Common
Stock subject to currently exercisable stock options issued to Mr.
Horowitz, (iv) 206,933 shares of Common 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, (v) 145,887 shares of Common Stock owned by
Security Partners, L.P. (CMH is the general partner of Security
Partners, L.P. and Mr. Horowitz is a limited partner), (vi) 55,320
shares of Common Stock held by CMH, (vii) 32,675 shares of Common Stock
issuable upon conversion of Series C Preferred Stock held by CMH and
(viii) 124,936 shares of Common Stock subject to currently exercisable
warrants held by CMH. Does not include 5,000 shares Common Stock
subject to stock options which are not currently exercisable. 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
885 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., 885 Third Avenue, New York, New York 10022.
(4) Includes 8,500 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Russo pursuant to the Stock Option Plan.
Does not include 16,500 shares of Common Stock subject to stock options
which are not currently exercisable.
(5) Includes 8,500 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Hancock pursuant to the Stock Option Plan.
Does not include 16,500 shares of Common Stock subject to stock options
which are not currently exercisable.
(6) Includes 195,210 shares of Common Stock subject to currently
exercisable stock options. Does not include 188,133 shares subject to
stock options which are not currently exercisable.
(7) Includes (i) 64,664 shares of Common Stock subject to currently
exercisable stock options owned by Mr. Rubenstein, and (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 President and sole director of Woodland Services
Corp. Does not include (i) 811,963 shares of Common Stock held by
Applewood, of which Mr. Rubenstein is a general partner, (ii) 382,696
shares of Common Stock issuable upon conversion of Series C Preferred
Stock held by Applewood and (iii) 5,000 shares of Common Stock subject
to stock options which are not currently exercisable. Mr. Rubenstein
disclaims beneficial ownership of the shares of Common Stock held by
Applewood, except to the extent of his equity interest therein. The
address of Barry Rubenstein is 68 Wheatley Road, Brookville, New York
11545. The address of Woodland Venture Fund and Seneca Ventures is c/o
Barry Rubenstein, 68 Wheatley Road, Brookville, New York 11545.
(8) Includes 64,664 shares of Common Stock subject to currently exercisable
stock options owned by Mr. Lieber. Does not include (i) 811,963 shares
of Common Stock held by Applewood, of which Mr. Lieber is a general
partner, (ii) 382,696 shares of Common Stock issuable upon conversion
of Series C Preferred Stock held by Applewood and (iii) 5,000 shares of
Common Stock subject to stock options which are not currently
exercisable. Mr. Lieber disclaims beneficial ownership of the shares of
Common Stock held by Applewood, except to the
11
<PAGE>
extent of his equity interest therein. The address of Irwin Lieber is
767 Fifth Avenue, 45th Floor, New York, New York 10153.
(9) Includes 45,057 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Olsen pursuant to the Stock Option Plan.
Does not include 49,305 shares of Common Stock subject to stock options
which are not currently exercisable.
(10) Includes 44,893 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Fish pursuant to the Stock Option Plan.
Does not include 49,292 shares of Common Stock subject to stock options
which are not currently exercisable.
(11) Includes 31,875 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Donohue pursuant to the Stock Option Plan.
Does not include 61,875 shares of Common Stock subject to stock options
which are not currently exercisable.
(12) Includes 16,250 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Harris pursuant to the Stock Option Plan.
Does not include 48,750 shares of Common Stock subject to stock options
which are not currently exercisable.
(13) Includes 16,250 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Westbrook pursuant to the Stock Option
Plan. Does not include 48,750 shares of Common Stock subject to stock
options which are not currently exercisable.
(14) Includes 20,000 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Ranum pursuant to the Stock Option Plan.
Does not include 5,000 shares of Common Stock subject to stock options
which are not currently exercisable.
CERTAIN RELATIONSHIPS AND RELATED 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"). In connection with the February
and April 1997 Private Financings, the Company issued (i) a promissory 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 (ii) a promissory note in the principal amount
of $50,000 and warrants to purchase 6,984 shares of Common Stock to Herb
Karlitz. Barry Rubenstein, a director and a principal stockholder of the
Company, and Irwin Lieber, a director of the Company, are general partners 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 Professional Services 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, 2001, 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.
12
<PAGE>
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 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, 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 Professional
Services and Secretary of the Company, William Hancock, Chief Technology Officer
and a director of the 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 principal amount 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 $1,300,000, $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 the Company's initial public offering (until November
17, 2000), 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 pursuant 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.
On September 11, 1998, the Company entered into a merger agreement with
CommHome Systems Corp. ("CommHome"), effective upon consummation of the
Company's initial public offering on November 17, 1998 (the "Public Offering"),
pursuant to which the CommHome stockholders exchanged all of the outstanding
common stock of CommHome for 35,000 shares of Common Stock of the Company. The
Company assumed liabilities of CommHome on the effective date of the merger of
approximately $185,000, which included $55,000 and $50,000 owed to Avi A. Fogel
and Robert P. Olsen, respectively. Messrs. Fogel and Olsen received 6,875 and
6,250 shares, respectively, of the
13
<PAGE>
Company's Common Stock in full satisfaction of such indebtedness. Avi A. Fogel,
President, Chief Executive Officer and a director of the Company, was also
President and Chief Executive Officer of CommHome and owned 51% of the
outstanding shares of CommHome.
On October 1, 1998, the Company entered in an agreement with CMH to
provide financial advisory services for the three-month period ending December
31, 1998 for which CMH received 10,000 shares of Common Stock.
On October 19, 1998, Applewood loaned the Company $75,000 at an
interest rate of 10% per annum which was repaid upon consummation of the Public
Offering.
On October 20, 1998, the Company entered into an agreement, effective
upon consummation of the Public Offering, with certain of its holders of
outstanding promissory notes, including accrued interest, of $3,204,888,
pursuant to which the Company issued 562,836 shares of Series C Preferred Stock
in exchange for the cancellation of promissory notes, including accrued
interest, of $2,954,888. In accordance with the agreement, Applewood received
382,696 shares of Series C Preferred Stock in exchange for the cancellation of
promissory notes, including accrued interest, of $2,009,156, Mr. Horowitz and
CMH received an aggregate of 40,521 shares of Series C Preferred Stock in
exchange for the cancellation of promissory notes, including accrued interest,
of $212,734, Herb Karlitz received 12,260 shares of Series C Preferred Stock in
exchange for the cancellation of promissory notes, including accrued interset,
of $64,364 and Robert Graifman received 3,967 shares of Series C Preferred stock
in exchange for the cancellation of promissory notes, including accrued
interest, of $20,828. The balance of the promissory notes in the principal
amount of $250,000 was repaid from the proceeds of the Public Offering,
including indebtedness owed to Mr. Horowitz and CMH in the aggregate amount of
$56,235.
Upon consummation of the Public Offering, 333,334 shares of Series B
Preferred Stock owned by Pisces Investors, L.P. ("Pisces") and 100,000 shares of
Series B Preferred Stock owned by Security Partners, L.P. ("Security Partners")
automatically converted into 206,933 shares and 62,080 shares of Common Stock,
respectively. CMH is the general partner of Pisces and Security Partners. Mr.
Horowitz and Herb Karlitz are limited partners of Security Partners. In
addition, Robert Graifman, the brother-in-law of Mr. Horowitz, is a limited
partner of Pisces and Security Partners.
On January 13,1999, the Company entered into an agreement with Robert
Russo, Vice President of Professional Services and Secretary of the Company,
pursuant to which $71,615 of deferred salary owed to Mr. Russo was satisfied in
full by the payment of $40,000 in cash and the issuance of 5,855 shares of the
Company's Common Stock at a price per share of $5.40.
On March 10, 1999, the Company entered into an agreement with William
Hancock, Chief Technology Officer and a director, pursuant to which the Company
agreed to loan to Mr. Hancock up to $100,000, at an interest rate of 6.5% per
annum, to be used by Mr. Hancock to satisfy certain outstanding personal tax
obligations. In consideration for such loan, Mr. Hancock pledged 50,000 shares
of Common Stock of the Company as security for the repayment of the loan. As of
May 15, 1999, the Company had loaned Mr. Hancock $20,513 pursuant to the
agreement.
The Company believes that the aforementioned transactions with its
officers, directors and principal stockholders and their affiliates were on
terms no less favorable than could have been obtained from unaffiliated third
parties. However, prior to July 1998, the Company lacked sufficient
disinterested independent directors at the time of certain of such transactions.
All future transactions, including loans, between the Company and its officers,
directors and stockholders beneficially owning 5% or more of the Company's
outstanding voting securities, or affiliates of such persons, will be for bona
fide business purposes and will be on terms no less favorable to the Company
than could be obtained in arm's length transactions from unaffiliated third
parties. Further, all such transactions and loans and any forgiveness of
indebtedness owed by such persons to the Company must be approved by a majority
of the Company's independent directors who do not have an interest in the
transactions and who have access, at the Company's expense, to the Company's
counsel or independent legal counsel.
14
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors, and persons who own more than 10% of the Company's
outstanding Common Stock to file initial reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% stockholders are required by Commission regulations to furnish
the Company with copies of all Section 16(a) forms they file. The Company
believes that its executive officers, directors, and greater than 10%
stockholders complied during the year ended December 31, 1998 with the reporting
requirements of Section 16(a).
AMENDMENT OF THE COMPANY'S AMENDED AND RESTATED 1996 STOCK
OPTION PLAN TO INCREASE THE NUMBER OF SHARES RESERVED FOR
ISSUANCE THEREUNDER FROM 1,050,000 TO 1,800,000
(PROPOSAL NO. 2)
At the Annual Meeting, the Company's stockholders will be asked to
approve an amendment to the Company's Amended and Restated 1996 Stock Option
Plan (the "Stock Option Plan") to increase the number of shares of Common Stock
reserved for issuance under the Plan from 1,050,000 to 1,800,000.
The Board believes that in order to enable the Company to continue to
attract and retain personnel of the highest caliber, provide incentive for
officers, directors, key employees and other key persons and continue to promote
the well-being of the Company, it is in the best interest of the Company and its
stockholders to provide to officers, directors, key employees, consultants and
the other independent contractors who perform services for the Company, through
the granting of stock options, the opportunity to participate in the value
and/or appreciation in value of the Company's Common Stock. The Board has found
that the grant of options under the Stock Option Plan has proven to be a
valuable tool in attracting and retaining key employees. It believes that such
authority, in view of the substantial growth of the Company and need to continue
to grow, should be expended to increase the number of options which may be
granted under the Stock Option Plan. The Board believes that such authority will
provide the Company with significant means to attract and retain personnel and
maintain current key employees.
SUMMARY OF THE 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 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 is administered by the Compensation Committee of
the Board of Directors of the Company which currently consists of Corey M.
Horowitz and Barry Rubenstein. 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
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<PAGE>
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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE STOCK OPTION PLAN
The following is a brief summary of the Federal income tax aspects of
grants made under the Stock Option Plan based upon statutes, regulations and
interpretations in effect on the date hereof. This summary is not intended to be
exhaustive, and does not describe state or local tax consequences.
1. Incentive Stock Options. An option holder will recognize no taxable
income upon the grant or exercise of an Incentive Stock Option. Upon a
disposition of the shares after the later of two years from the date of grant
and one year from the date of exercise, (i) the option holder will recognize the
difference, if any, between the amount realized and the exercise price as
long-term capital gain or long-term capital loss (as the case may be) if the
shares are capital assets in his or her hands; and (ii) the Company will not
qualify for any deduction in connection with the grant or exercise of the
options. The excess, if any, of the fair market value of the shares on the date
of exercise of an Incentive Stock Option over the exercise price will be treated
as an item of adjustment for his or her taxable year in which the exercise
occurs and may result in an alternative minimum tax liability for the
participant. In the case of a disposition of shares in the same taxable year as
the exercise where the amount realized on the disposition is less than the fair
market value of the shares on the date of exercise, there will be no adjustment
since the amount treated as an item of adjustment, for alternative minimum tax
purposes, is limited to the excess of the amount realized on such disposition
over the exercise price which is the same amount included in regular taxable
income.
If the Common Stock acquired upon the exercise of an Incentive Stock
Option is disposed of prior to the expiration of the holding periods described
above, (i) the option holder will recognize ordinary compensation income in the
taxable year of disposition in an amount equal to the excess, if any, of the
lesser of the fair market value of the shares on the date of exercise or the
amount realized on the disposition of the shares, over the exercise price paid
for such shares; and (ii) the Company will qualify for a deduction equal to any
such amount recognized, subject to the requirements of Section 162(m) of the
Code and that the compensation be reasonable. The option holder will recognize
the excess, if any, of the amount realized over the fair market value of the
shares on the date of exercise, if the shares are capital assets in his or her
hands, as short-term or long-term capital gain, depending on the length of time
that the option holder held the shares, and the Company will not qualify for a
deduction with respect to such excess.
2. Non-Qualified and Non-Plan Stock Options. With respect to
Non-Qualified and Non-Plan Stock Options (i) upon grant of the option, the
participant will recognize no income; (ii) upon exercise of the option (if the
shares are not subject to a substantial risk of forfeiture), the option holder
will recognize ordinary compensation income in an amount equal to the excess, if
any, of the fair market value of the shares on the date of exercise over the
exercise price, and the Company will qualify for a deduction in the same amount,
subject to the requirements of Section 162(m) of the Code and that the
compensation be reasonable; (iii) the Company will be required to comply with
applicable Federal income tax withholding requirements with respect to the
amount of ordinary compensation income recognized by the option holder; and (iv)
on a sale of the shares, the option holder will recognize gain or loss equal to
the difference, if any, between the amount realized and the sum of the exercise
price and the ordinary compensation income recognized. Such gain or loss will be
treated as short-term or long-term capital gain or loss if the shares are
capital assets in the participant's hands depending upon the length of time that
the participant held the shares.
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The approval of the proposed amendment to the Company's 1996 Stock
Option Plan requires the affirmative vote of a majority of the voting stock
present in person or represented by proxy at the Annual Meeting, provided a
quorum exists.
The Board believes that the Proposed Amendment to the 1996 Stock Option
Plan will help the Company attract and retain qualified officers, directors and
key employees. Accordingly, the Board believes that the Amendment to the 1996
Stock Option Plan is in the best interest of the Company and unanimously
recommends a vote FOR its approval.
GENERAL AND OTHER MATTERS
Management knows of no matter other than the matters described above
that will be presented to the meeting. However, if any other matters properly
come before the meeting, or any of its adjournments, the person or persons
voting the proxies will vote them in accordance with his or their best judgment
on such matters.
SOLICITATION OF PROXIES
The cost of proxy solicitations will be borne by the Company. In
addition to solicitations of proxies by use of the mails, some officers or
employees of the Company, without additional remuneration, may solicit proxies
personally or by telephone. The Company will also request brokers, dealers,
banks and their nominees to solicit proxies from their clients, where
appropriate, and will reimburse them for reasonable expenses related thereto.
STOCKHOLDER PROPOSALS
Any stockholder who intends to present a proposal for action at the
Company's 2000 Annual Meeting of Stockholders, and to be included in our proxy
statement relating to the 2000 Annual Meeting, must deliver such proposal to the
Company at its principal executive office, 1601 Trapelo Road, Reservoir Place,
Waltham, Massachusetts by February 1, 2000.
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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
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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.
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;
1,800,000 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
1,800,000 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,
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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 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
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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), 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
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(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.
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
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<PAGE>
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 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.
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<PAGE>
(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) 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
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<PAGE>
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 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
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<PAGE>
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
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
9
<PAGE>
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.
(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
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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 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
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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 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,
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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 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
4
<PAGE>
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 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
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<PAGE>
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 Plan, and having
read such documents, hereby signify my understanding of, and my agreement with,
their terms and conditions.
- ------------------------- ----------------------------
(Signature) (Date)
6
<PAGE>
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
<PAGE>
expiration of [ten years] from the date of its grant (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 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
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<PAGE>
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 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,
3
<PAGE>
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 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
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<PAGE>
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 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.
5
<PAGE>
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)
6
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
ANNUAL MEETING OF STOCKHOLDERS
-----------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Avi A. Fogel and Corey M. Horowitz,
and each of them, with full power of substitution and resubstitution, to vote
all shares of voting stock of Network-1 Security Solutions, Inc. (the "Company")
that the undersigned is entitled to vote at the Company's Annual Meeting of
Stockholders to be held at 1601 Trapelo Road, Reservoir Place Waltham,
Massachusetts 02451, on June 25, 1999, at 10:00 a.m. local time, and at any
adjournment or postponement thereof, hereby ratifying all that said proxies or
their substitutes or resubstitutes may do by virtue hereof, and the undersigned
authorizes and instructs said proxies to vote as follows:
1. ELECTION OF DIRECTORS: To elect Avi A. Fogel, Corey M. Horowitz, William
Hancock, Barry Rubenstein, Irwin Lieber and Marcus Ranum to the Board of
Directors of the Company.
FOR all nominees listed (except as marked to the contrary above) | |
WITHHOLD AUTHORITY to vote for all nominees | |
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME ABOVE)
2. APPROVAL OF AMENDMENT TO STOCK OPTION PLAN: To approve an amendment to the
Company's Stock Option Plan to increase the number of shares available for
issuance thereunder by 750,000 shares to an aggregate of 1,800,000 shares.
FOR | | AGAINST | | ABSTAIN | |
and in his discretion, upon any other matters that may properly come before the
meeting or any adjournment or postponement thereof.
(continued on back)
<PAGE>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1 AND 2.
PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
Receipt of the Notice of Annual Meeting and of the Proxy Statement
and Annual Report on Form 10-KSB of the Company annexed to the same is hereby
acknowledged.
Dated: ___, 1999
------------------------------------------
(Signature of Stockholder)
-------------------------------------------
(Signature of Stockholder)
Your signature should appear the same as
your name appears herein. If signing as
attorney, executor, administrator,
trustee or guardian, please indicate the
capacity in which signing. When signing
as joint tenants, all parties to the
joint tenancy must sign. When the proxy
is given by a corporation, it should be
signed by an authorized officer.
