As filed with the Securities and Exchange Commission on March 21, 2000
REGISTRATION NO. 333-96189
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NETWORK-1 SECURITY SOLUTIONS, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 11-3027591
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(State or other jurisdiction (I.R.S. employer
of incorporation) identification number)
1601 TRAPELO ROAD, RESERVOIR PLACE
WALTHAM, MASSACHUSETTS 02451
(781) 522-3400
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(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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AVI A. FOGEL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NETWORK-1 SECURITY SOLUTIONS, INC.
1601 TRAPELO ROAD, RESERVOIR PLACE
WALTHAM, MASSACHUSETTS 02451
(781) 522-3400
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(Address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
SAM SCHWARTZ, ESQ.
BENJAMIN S. REICHEL, ESQ.
SOLOVAY EDLIN & EISEMAN, P.C.
845 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 752-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1993, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: |_| __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering: |_| __________
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: |_|
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CALCULATION OF REGISTRATION FEE (2)
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PROPOSED
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TITLE OF SHARES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share........................... 3,278,296 shares $12.96875 $42,515,401.25 $11,224.07
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 promulgated under the Securities Act, based on the average of
the bid and asked prices for the shares reported on the Nasdaq Stock
Market's SmallCap Market on February 1, 2000.
(2) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended, this Registration Statement includes an indeterminate number of
additional shares of Common Stock as may from time to time become issuable
upon the exercise of certain options and warrants by reason of stock
splits, stock dividends and other similar transactions.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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PROSPECTUS
NETWORK-1 SECURITY SOLUTIONS, INC.
3,278,296 SHARES OF COMMON STOCK
o The shares of common stock offered by this prospectus are being sold
by the selling stockholders.
o We will not receive any proceeds from the sale of these shares. We
will receive proceeds from the exercise of warrants and options and
those proceeds will be used for our general corporate purposes.
o Our common stock is traded on the Nasdaq Stock Market's SmallCap
Market under the symbol "NSSI" and is listed on the Boston Stock
Exchange under the symbol "NWT".
o On March 16, 2000, the closing bid price for our common stock was
$16.00.
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE
HEADING "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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March 21, 2000
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TABLE OF CONTENTS
PAGE
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Summary.......................................................................1
Risk Factors..................................................................6
Where You Can Find More Information..........................................11
Incorporation of Certain Documents by Reference..............................12
Note Regarding Forward Looking Statements....................................12
Use of Proceeds..............................................................13
Selling Stockholders.........................................................13
Plan of Distribution.........................................................23
Legal Matters................................................................24
Experts......................................................................24
Disclosure of Commission Position on Indemnification for Securities
Act Liabilities..............................................................24
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SUMMARY
THE COMPANY
Network-1 Security Solutions, Inc. develops, markets, licenses and
supports a family of network security software products designed to provide
comprehensive security to computer networks, including Internet based systems
and internal networks and computing resources. Our CYBERWALLPLUS(TM) family of
security software products can reside anywhere on the enterprise network and
provides multiple layers of defense to protect data from both external attack as
well as access abuse by such "trusted insiders" as employees, subcontractors or
consultants. Our CYBERWALLPLUS(TM) suite of products was first shipped in March
1999 and evolved from our prior FIREWALL/PLUS suite of security software
products.
The CYBERWALLPLUS(TM) family of security solutions is designed to
protect against Internet and Intranet basED security threats and to address
security needs that arise from within internal networks that often utilize other
network transport protocols besides TCP/IP (the Internet network transport
protocol). We have positioned our CYBERWALLPLUS(TM) products as an enabling
technology designed to capitalize on the significant network securiTY
opportunity within the explosive E-Business marketplace. Our CYBERWALLPLUS(TM)
family of network security producTS operates on the Microsoft Windows NT
operating system platform. The filter engine software technology of
CYBERWALLPLUS(TM), with its unique ability to handle and filter all commonly
used network transport protocols, providES organizations with a highly secure
and flexible security solution. Additionally, unlike most firewall solutions
which focus on an enterprise's connection to the Internet, the CYBERWALLPLUS(TM)
solution can be deployed throughoUT the enterprise. It can be deployed at the
perimeter to control access to and from the Internet, between internal networks
as well as on application servers and desktop PCs.
Every day, more and more companies are turning to E-Business and
extranets as a way to obtain a competitive edge and broaden their markets. The
E-Business revolution is helping companies reduce costs, increase responsiveness
and provide empowerment through immediate knowledge. However, by tying together
previous separate company networks and by inviting customers, partners and
suppliers onto their networks, companies have found that what were once closed
and secure enterprise networks are now becoming open networks.
Within these new open networks, the traditional perimeters and network
boundaries have disappeared. We do not believe traditional perimeter security
devices such as firewalls can effectively secure all of a network's resources
which have embraced E-Business. Our CYBERWALLPLUS(TM) family of products is
designed to solve this problEM by protecting data where it resides - between the
internal network segments and inside the server itself - finally allowing
corporations to leverage the promise of electronic business, while ensuring the
safety of strategic data assets.
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We are currently pursuing an aggressive growth strategy focusing our
efforts on marketing our CyberwallPLUS(TM) family of network security products.
Key elements of our strategy are to:
o Focus on securing e-Business networks by replacing perimeter
"chokepoint" firewalls with web server embedded firewalls and intrusion
prevention software from the Company (CyberwallPLUS - SV);
o Emphasize the need for internal network security to secure e-Business
networks. Internal network security is an important element of an
effective multi-layer defense strategy to protect against external
attacks, as the CSI/FBI 1999 Computer Security study indicates that
approximately 30% of the organizations with perimeter firewalls were
breached by outsiders. In addition, Internal network security is
critical to protect enterprise resources from unwelcomed "insider"
access. The same CSI/FBI 1999 study found that 56% of all breaches were
from those with "insider" access;
o Implement a marketing plan specifically targeted to create product
interest and demand among security, network and system administrators
in organizations of all sizes. Elements of the plan include
co-marketing agreements with major complementary suppliers, such as
Entrust Technologies, Inc., RSA Security, Inc., Oracle Corporation and
Citrix Systems, Inc., targeted email distribution, newsletter
sponsorships, trade shows and VAR recruiting activities; and
o Implement a sales plan which includes a multi-channel distribution
strategy, emphasizing selling direct to end customers and establishing
and maintaining third-party resale relationships with OEMs, systems
integrators and VARs in the United States and internationally.
Since our inception, we have incurred significant losses. Our future
success is largely dependent upon our CYBERWALLPLUS(TM) family of software
products achieving broad market acceptance. We may not be able to successfulLY
implement our marketing strategy, achieve significant revenues and market
acceptance of our CYBERWALLPLUS(TM) family OF software products, or achieve
profitable operations. See "Risk Factors."
Network-1 was incorporated under the laws of the State of Delaware in
July 1990. Our executive offices are located at 1601 Trapelo Road, Reservoir
Place, Waltham, Massachusetts 02451 and our telephone number at that address is
(781) 522-3400. Our web site can be found at http://www.network-1.com.
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RECENT DEVELOPMENTS
DECEMBER 1999 PRIVATE FINANCING
On December 22, 1999, we signed a Securities Purchase Agreement for the
private sale of $3,000,000 of preferred stock, warrants and notes to a group of
39 investors. In this transaction we issued 491,803 shares of our Series D
Preferred Stock at $3.05 per share and warrants to purchase 491,803 shares of
our common stock at an exercise price of $3.00 per share, subject to certain
adjustments based on the level of product revenue we achieve during the three
month period ended March 31, 2000 (so that beginning at product revenue of less
than $500,000 the exercise price shall be adjusted to $1.00 and increasing to a
maximum exercise price of $4.00 for product revenue equal to or greater than
$4,000,000). We also issued promissory notes in the principal amount of $1.5
million at an interest rate of 8% per year. Subject to stockholder approval, the
promissory notes are convertible into an additional 491,803 shares of our Series
D Preferred Stock (up to 570,492 shares if you include potential interest
through maturity of such notes) and warrants to purchase an additional 491,803
shares of our common stock (up to 570,492 shares if you include potential
interest through maturity of such notes) at an exercise price of $3.00 per
share, subject to the same adjustments noted above with respect to the product
revenue we achieve during the three month period ended March 31, 2000. Each
share of our Series D Preferred Stock is convertible into one share of our
common stock, subject to certain adjustments.
The resale by the selling stockholders of the shares of our common
stock underlying the Series D Preferred Stock and the warrants has been
registered under the Securities Act of 1933, as amended, and such shares of
common stock may be freely sold.
The following is a summary of material terms of the promissory notes
and warrants issued in the financing:
CONVERTIBLE PROMISSORY NOTES
The principal amount of the notes, along with the accrued interest, is
due on December 22, 2001. The notes have an interest rate of 8% per annum.
An "event of default" under the notes will occur if, among other
things, we (1) fail to pay interest or principal when due, or (2) breach any of
our representations or warranties under the Securities Purchase Agreement. Upon
an event of default, the entire indebtedness and accrued interest may become
immediately due and payable. We may prepay any amount outstanding under the
notes at any time beginning May 22, 2001.
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Subject to stockholders' approval, as described below, all or any part
of the principal amount of the notes may be converted into shares of our Series
D Preferred Stock and five-year warrants to purchase shares of our common stock.
If a holder of a note elects to convert it, the holder will receive the number
of shares of our Series D Preferred Stock and warrants determined by dividing
the principal amount of that portion of the note being converted (plus accrued
and unpaid interest) by $3.05. The conversion price and the number of shares
received upon conversion may be adjusted in the event of a stock split,
dividend, recapitalization, reorganization, merger, consolidation or sale of our
assets, or the issuance by us of shares of our common stock at a price less than
the then adjusted conversion price.
We are required to seek stockholder approval for the conversion of the
notes at our next annual meeting of stockholders which is scheduled to be held
on April 28, 2000. If the conversion feature of the notes is approved by the
stockholders, we will incur an interest charge of $1.5 million upon such
approval related to the excess of the market value of our common stock (on the
closing date of the December financing) issuable upon conversion of our Series D
Preferred Stock and exercise of the warrants underlying the notes.
If the stockholders do not approve the conversion, then the notes will
not be convertible and the interest rate on the notes will increase to 12% per
annum.
SERIES D PREFERRED STOCK
Holders of shares of our Series D Preferred Stock may convert such
shares into an equal number of shares of our common stock at any time, subject
to adjustment in the event of our merger or consolidation, reclassification of
our securities or a stock split, subdivision or combination of our securities.
The Series D Preferred Stock is entitled to vote on all matters which
stockholders are entitled to vote together with the holders of our common stock.
Each share of Series D Preferred Stock is entitled to the number of votes equal
to the number of shares of our common stock into which such shares may be
converted.
Holders of our Series D Preferred Stock shall receive dividends and
other distributions, when, as and if declared by our Board of Directors out of
funds legally available therefor. Holders of our Series D Preferred Stock shall
be entitled to equivalent dividends and distributions as those paid on shares of
our common stock. The holders of our Series D Preferred Stock will be entitled
to a liquidation preference of $3.05 plus any declared but unpaid dividends
before any payments are made to holders of our common stock in the event of our
liquidation, dissolution or winding up.
WARRANTS
At any time until December 22, 2004, the holder of a warrant is
entitled to purchase the number of shares of our common stock listed in such
warrant, at a price of $3.00 per share, which may be adjusted based on the level
of certain product revenues we achieve during the three-month
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period ending March 31, 2000 (so that beginning at product revenue of less than
$500,000 the exercise price shall be adjusted to $1.00 and increasing to a
maximum exercise price of $4.00 for product revenue equal to or greater than
$4,000,000). The exercise price and the number of shares received upon exercise
may also be adjusted in the event of a stock split, dividend, recapitalization,
reorganization, merger, consolidation or sale of our assets, or the issuance by
us of shares of our common stock at a price less than the then adjusted exercise
price.
SALE OF PROFESSIONAL SERVICES BUSINESS
On February 9, 2000, we entered into an Asset Purchase Agreement with
Exodus Communications, Inc. pursuant to which we sold our professional services
business for an aggregate consideration of $4.0 million in cash, of which $1.3
million is held in escrow subject to certain conditions described below. We have
accounted for this transaction as a sale of a discontinued operation.
In connection with this sale, seven (7) employees of our professional
services business agreed to become employees of Exodus. Such employees include
Dr. William Hancock, our former Chief Technology Officer and Robert Russo, our
former Vice President of Professional Services. Dr. Hancock will continue to
serve on our Board of Directors.
The $1.3 million of the purchase price held in escrow includes (i)
$1,000,000 conditioned upon the transferred employees remaining employed by
Exodus for at least one (1) year from the closing of the sale, and (ii) $300,000
conditioned upon Exodus securing a minimum of $300,000 of purchase orders or
commitments for consulting services from certain of our customers within ninety
(90) days of the closing.
In connection with such sale, we have agreed not to offer any
professional or consulting services competitive with those services offered by
Exodus for a period of two (2) years from the closing of such sale.
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RISK FACTORS
THE SHARES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS BEFORE MAKING AN INVESTMENT DECISION.
WE HAVE A HISTORY OF LOSSES AND IF WE DO NOT ACHIEVE PROFITABLY, WE MAY
NOT BE ABLE TO CONTINUE OUR BUSINESS IN THE FUTURE.
We have incurred substantial operating losses since our inception, which has
resulted in an accumulated deficit of $21,693,000 as of December 31, 1999. For
the fiscal years ended December 31, 1999 and 1998, we incurred net losses of
$6,946,000 and $5,777,000, respectively. We have financed our operations
primarily through the sales of equity and debt securities. Our expense levels
are high and our revenues are difficult to predict. We anticipate incurring
additional losses until we increase our client base and revenues. We may never
achieve or sustain significant revenues or profitability. If we are unable to
achieve increased revenues, we will continue to have losses and may not be able
to continue our operations.
WE COULD BE REQUIRED TO CUT BACK OR STOP OPERATIONS IF WE ARE UNABLE TO
RAISE OR OBTAIN NEEDED FUNDING.
Our ability to continue operations will depend on our positive cash
flow, if any, from future operations or our ability to raise additional funds
through equity or debt financing. In December 1999, we consummated a private
financing of $3.0 million of equity and debt in order to obtain the working
capital necessary to continue to finance our operations and execute our business
plan. See "Recent Developments." Although we anticipate that future revenues and
our current cash balance will be sufficient to fund our operations and capital
requirements until approximately January 2001, we cannot give you any assurance
that we will not need additional funds before such time. We have no current
arrangements for additional financing and we may not be able to obtain
additional financing on commercially reasonable terms, if at all. We could be
required to cut back or stop operations if we are unable to raise or obtain
funds when needed.
WE HAVE HAD A LIMITED OPERATING HISTORY AS A SOFTWARE PRODUCT COMPANY
AND LACK ANY SUBSTANTIAL REVENUE.
We have a limited operating history as a software product company and have made
only limited sales of our products. Our total revenues for software licenses for
the years ended December 31, 1999 and 1998 were $260,000 and $569,000,
respectively.
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THE RECENT SALE OF OUR PROFESSIONAL SERVICES BUSINESS WILL HAVE AN
ADVERSE EFFECT ON CASH FLOW AND REVENUES.
In February 2000, we sold our professional services business to Exodus
Communications Inc. for $4.0 million in cash, of which $1.3 million is held in
escrow subject to certain conditions. As part of the transaction with Exodus, we
agreed not to offer any professional or consulting services for two (2) years
following the closing. The professional services business accounted for 77% and
62% of our total revenues during the fiscal years ended December 31, 1999 and
1998, respectively. Accordingly, our future cash flow from operations is likely
to be materially adversely effected from the sale of our professional services
business until, if ever, we generate sufficient revenue from the licensing of
our software products.
OUR REVENUES DEPEND ON SALES OF OUR CYBERWALLPLUS PRODUCTS AND WE ARE
UNCERTAIN WHETHER THERE WILL BE BROAD MARKET ACCEPTANCE OF THESE PRODUCTS.
Our revenue growth for the foreseeable future is dependent upon
increased sales of our CYBERWALLPLUS family of software products. Since the
introduction of our predecessor line of security products (FIREWALL/PLUS) in
June 1995 through December 31, 1999, license revenue from all software products
has been $2,922,000 including a non-refundable pre-paid royalty of $500,000 in
1997. Since the introduction of our CYBERWALLPLUS suite of products in January
1999 through December 31, 1999, license revenue from our CYBERWALLPLUS products
was only $195,000. Our future financial performance will depend upon the
successful introduction and customer acceptance of our CYBERWALLPLUS products as
well as the development of new and enhanced versions of this product. Revenue
from products such as CYBERWALLPLUS depend on a number of factors, including the
influence of market competition, technological changes in the network security
market, our ability to design, develop and introduce enhancements on a timely
basis and our ability to successfully establish and maintain distribution
channels. If we fail to achieve broad market acceptance of our CYBERWALLPLUS
products, it would have a material adverse effect on our business, operating
results and financial condition.
INABILITY TO ENTER INTO STRATEGIC RELATIONSHIPS WITH INDIRECT CHANNEL
PARTNERS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
As part of our sales and marketing efforts, we are seeking to develop strategic
relationships with indirect channel partners, such as original equipment
manufacturers and resellers. We have limited financial, personnel and other
resources to undertake extensive marketing activities ourselves. Therefore, our
prospects will depend on our ability to develop and maintain strategic marketing
relationships with indirect channel partners and their ability to market and
distribute our products. If we are unable to enter into and maintain such
arrangements or if such arrangements do not result in the successful
commercialization of our products, then this could have a material adverse
effect on our business, operating results and financial condition.
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WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE NETWORK SECURITY
MARKET.
The network security market is characterized by intense competition and
rapidly changing business conditions, customer requirements and technologies.
The principal competitive factors affecting the market for network security
products include security effectiveness, scope of product offerings, name
recognition, product features, distribution channels, price, ease of use and
customer service and support. Most of our current and potential competitors have
longer operating histories, greater name recognition, larger installed customer
bases and possess substantially greater financial, technical and marketing and
other competitive resources than us. As a result, our competitors may be able to
adapt more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the promotion and sale of their
products than we may. In addition, certain of our competitors may determine for
strategic reasons to consolidate, to substantially lower the price of their
network security products or to bundle their products with other products, such
as hardware or other enterprise software products. Our current and potential
competitors may develop products that may be more effective than our current or
future products or that render our products obsolete or less marketable.
Increased competition for network security products may result in price
reductions and reduced gross margins and may adversely effect our ability to
gain market share, any of which would adversely affect the Company's business,
operating results and financial condition.
OUR OPERATING RESULTS MAY FLUCTUATE QUARTERLY AND IF THEY WERE BELOW
THE EXPECTATIONS OF INVESTORS AND ANALYSTS, THE PRICE OF OUR STOCK WOULD LIKELY
BE ADVERSELY EFFECTED.
We anticipate significant quarterly fluctuations in our operations in
the future, since our results are dependent on the volume and timing of orders,
which are difficult to predict. Customers' purchasing patterns and budgeting
cycles, as well as the introduction of new products, may also cause our
operating results to fluctuate. Therefore, comparing quarterly operating results
may not be meaningful and should not be relied on. Also, our operating results
may be below analysts' and investors' expectations in some future quarters,
which would likely have a material adverse effect on our common stock's price.
WE ARE DEPENDENT ON A FEW KEY PERSONNEL AND WE NEED TO ATTRACT AND
RETAIN HIGHLY QUALIFIED TECHNICAL, SALES, MARKETING, DEVELOPMENT AND MANAGEMENT
PERSONNEL.
Our success is largely dependent on the continued service of key
technical and senior management personnel. The loss of the services of one or
more of our key employees, in particular Avi A. Fogel, our President and Chief
Executive Officer, or Robert P. Olsen, our Vice President of Marketing and
Sales, could have a material adverse effect on our business, operating results
and financial condition. We have employment agreements with Messrs. Fogel and
Olsen that expire in
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May 2002 and May 2001, respectively.
Our success will also depend on our ability to attract, train and
retain highly qualified technical, sales, marketing, development and managerial
personnel. There is considerable and often intense competition for the services
of such personnel. We may not be able either to retain our existing personnel or
acquire additional qualified personnel as and when needed. If we are unable to
hire and retain such personnel, our business, operating results and financial
condition could be materially adversely affected.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY,
WHICH COULD RESULT IN LOWER REVENUES AND/OR PROFITS.
We do not hold any patents and rely on copyright and trade secret laws,
non-disclosure agreements and contractual provisions to protect our proprietary
technology. These methods afford only limited protection. Despite the
precautions we take, unauthorized parties may attempt to copy or otherwise
obtain and use our proprietary technologies, ideas, know-how and other
proprietary information without authorization or may independently develop
technologies similar or superior to our technologies. Policing unauthorized use
of our products may be difficult and costly. Also, the laws of some foreign
countries do not protect our proprietary rights as much as the laws of the
United States. We are unable to predict whether our means of protecting our
proprietary rights will be adequate.
We believe that our technologies have been developed independent of
others. Nevertheless, third parties may assert infringement claims against us
and our technologies may be determined to infringe on the intellectual property
rights of others. We could become liable for damages, be required to modify our
technologies or obtain a license if our technologies are determined to infringe
upon the intellectual property rights of others. We may not be able to modify
our technologies or obtain a license in a timely manner, if required, or have
the financial or other resources necessary to defend an infringement action. We
would be materially adversely effected if we fail to do any of the foregoing.
WE CAN BE EXPOSED TO NUMEROUS POTENTIAL LIABILITY CLAIMS FOR DAMAGES
AND, IF OUR INSURANCE DOESN'T ADEQUATELY COVER LOSSES, THIS COULD HAVE A
MATERIAL ADVERSE EFFECT ON US.
Since our products are used to prevent unauthorized access to and
attacks on critical enterprise information, we may be exposed to potential
liability claims for damage caused as a result of an actual or alleged failure
of an installed product. We cannot assure you that the provisions in our license
agreements designed to limit our exposure will be enforceable. Our personnel
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often gain access to confidential and proprietary client information. Any
unauthorized use or disclosure of such information could result in a claim for
substantial damages. We can give no assurances that our insurance policies will
be sufficient to cover potential claims or that adequate levels of coverage will
be available in the future at a reasonable cost.
POSSIBLE DELISTING OF OUR SECURITIES FROM NASDAQ SYSTEM; RISKS RELATING
TO LOW-PRICED STOCKS.
Our common stock is listed on the Nasdaq SmallCap Market under the
symbol "NSSI." In order to continue to be listed on Nasdaq, however, we must
comply with certain maintenance standards. In the event of a delisting, an
investor could find it more difficult to dispose of or to obtain accurate
quotations as to the market value of our common stock.
In addition, if our common stock were to become delisted from trading
on Nasdaq and the trading price of the common stock were to fall below $5.00 per
share, our common stock could be considered a penny stock. SEC regulations
generally define a penny stock to be an equity security that is not listed on
Nasdaq or a national securities exchange and that has a market value of less
than $5.00 per share, subject to certain exceptions. The SEC regulations would
require broker-dealers to deliver to a purchaser of our common stock a
disclosure schedule explaining the penny stock market and the risks associated
with it. Various sales practice requirements are also imposed on broker-dealers
who sell penny stocks to persons other than established customers and accredited
investors (generally institutions). Broker-dealers must also provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and monthly account statements disclosing
recent price information for the penny stock held in the customer's account. If
our common stock is no longer traded on Nasdaq and becomes subject to the
regulations applicable to penny stocks, investors may find it more difficult to
obtain timely and accurate quotes and execute trades in our common stock.
THE SIGNIFICANT NUMBER OF OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
OUTSTANDING MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK.
As of February 28, 2000, there are outstanding (i) options and warrants
to purchase an aggregate of 2,338,255 shares of our common stock at exercise
prices ranging from $1.50 to $10.00, (ii) 491,803 shares of Series D Convertible
Preferred Stock which are convertible at any time into an equal number of shares
of our common stock and (iii) debt in the principal amount of $1,500,000 which,
subject to stockholder approval, can be converted into 491,803 shares of our
Series D Preferred Stock (up to 570,492 shares if you include potential interest
through the maturity of promissory notes) and warrants to purchase 491,803
shares of our common stock (up to 570,492 shares if you include potential
interest through the maturity of the promissory notes) at an exercise
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price of $3.00 per share, subject to adjustment depending upon product revenue
achieved during the three (3) month period ended March 31, 2000. To the extent
that outstanding options, warrants or convertible debt are exercised or
converted, your percentage ownership will be diluted and any sales in the public
market of the common stock underlying such options, warrants or convertible debt
may adversely affect prevailing market prices for our common stock.
WE HAVE A SIGNIFICANT AMOUNT OF AUTHORIZED BUT UNISSUED PREFERRED
STOCK, WHICH MAY AFFECT THE LIKELIHOOD OF A CHANGE OF CONTROL IN OUR COMPANY.
As of the date of this prospectus, our Board of Directors has the
authority, without further action by the stockholders, to issue 5,000,000 shares
of preferred stock (of which only 491,803 shares of Series D Preferred Stock are
outstanding as of the date hereof) on such terms and with such rights,
preferences and designations as the Board may determine. Such terms may include
restricting dividends on our common stock, dilution of the voting power of our
common stock or impairing the liquidation rights of the holders of our common
stock. Issuance of such preferred stock, depending on the rights, preferences
and designations thereof, may have the effect of delaying, deterring or
preventing a change in control. In addition, certain "anti-takeover" provisions
in Delaware law may restrict the ability of out stockholders to authorize a
merger, business combination or change of control.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC has prescribed rates for copying. You may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Our SEC filings are also available to you on the SEC's Internet site at
http://www.sec.gov.
This prospectus is part of a Registration Statement on Form S-3 (the
"Registration Statement") filed by us with the SEC under the Securities Act and
therefore omits certain information in the Registration Statement. We have also
filed exhibits with the Registration Statement that are not included in this
prospectus, and you should refer to the applicable exhibit for a complete
description of any statement referring to any document. You can inspect a copy
of the Registration Statement and its exhibits, without charge, at the SEC's
Public Reference Room, and can copy such material upon paying the SEC's
prescribed rates.
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<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information we incorporate by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede the information in this
prospectus. Accordingly, we incorporate by reference the documents listed below
and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act:
1. our Annual Report on Form 10-KSB for the year ended December
31, 1999 (filed March 21, 2000);
2. our Current Report on Form 8-K (filed January 5, 2000);
3. our Current Report on Form 8-K (filed February 16, 2000); and
4. the description of our common stock incorporated by reference
in our Registration Statement on Form 8-A (filed October 9,
1998), as amended on November 3, 1998.
We will provide at no cost to each person to whom this prospectus is
delivered, upon written or oral request, a copy of any of these filings. You
should direct such requests to us at 1601 Trapelo Road, Reservoir Place,
Waltham, Massachusetts 02451, Attention: Murray Fish, Chief Financial Officer,
telephone number (781) 522-3400.
You should rely only on the information and representations provided in
this prospectus or on the information incorporated by reference in this
prospectus. Neither we nor the selling stockholders have authorized anyone to
provide you with different information. Neither we nor the selling stockholders
are making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front of this document.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Forward-looking statements are statements that include information based
upon beliefs of our management, as well as assumptions made by and information
available to our management. Statements containing terms such as "believes,"
"expects," "anticipates," "intends" or similar words are intended to identify
forward-looking statements.
Our management, based upon assumptions they consider reasonable, has
compiled these forward-looking statements. Such statements reflect our current
views with respect to future events. These statements involve known and unknown
risks and uncertainties that may cause our actual results in future periods to
differ materially from what is currently anticipated. We make
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<PAGE>
cautionary statements in certain sections of this prospectus, including under
"Risk Factors." You should read these cautionary statements as being applicable
to all related forward-looking statements wherever they appear in this
prospectus, the materials referred to in this prospectus or the materials
incorporated by reference into this prospectus.
You are cautioned that no forward-looking statement is a guarantee of
future performance and you should not place undue reliance on any
forward-looking statement. Such statements speak only as of the date of this
prospectus and we are not undertaking any obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this prospectus or to reflect the occurrence of unanticipated
events.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our
common stock by the selling stockholders. All proceeds from the sale of such
shares will be for the accounts of the selling stockholders. We will receive
approximately $7,154,150 in proceeds (up to approximately $7,390,000 if interest
on the notes is converted and the underlying warrants are exercised) equal to
the exercise price of the warrants and options, if the holders of the warrants
and options exercise such securities into shares of common stock. In calculating
the amounts in the previous sentence, we assumed that the exercise price of the
warrants issued in the December 1999 financing was not adjusted from the current
$3.00. Any proceeds that we may receive upon exercise of the warrants and
options will be used for working capital purposes.
SELLING STOCKHOLDERS
The following table sets forth information, as of February 28, 2000,
with respect to the common stock beneficially owned by each selling stockholder.
The selling stockholders are not obligated to sell any of the shares offered by
this prospectus. The number of shares sold by each selling stockholder may
depend on a number of factors, such as the market price of our common stock.
We are registering 3,278,296 shares of our common stock for resale by
the selling stockholders in accordance with registration rights previously
granted to them. We agreed to file a registration statement under the Securities
Act with the SEC, of which this prospectus is a part, with respect to the resale
of:
o an aggregate of 336,007 shares that we may issue to certain individuals
and entities that had provided services to us upon their exercise of
warrants we issued between April 4, 1994 and July 1, 1998;
o 170,000 shares that we may issue to Whale Securities Co., L.P. upon the
exercise of warrants we issued for underwriting services they provided in
our initial public offering consummated on November 17, 1998;
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<PAGE>
o 294,879 shares that we may issue to Avi Fogel, our President and Chief
Executive Officer, upon the exercise of options we granted to him on May
18, 1998;
o 206,933 shares that we issued to Pisces Investors, L.P. in connection with
a private placement in April 4, 1994;
o 145,887 shares that we issued to Security Partners, L.P. in connection
with the conversion of outstanding indebtedness on March 21, 1996;
o an aggregate of 491,803 shares that we may issue upon conversion of the
Series D Preferred Stock issued in December 1999;
o an aggregate of 491,803 shares that we may issue upon the exercise of
warrants issued in connection with the Series D Preferred Stock offering;
o an aggregate of 491,803 shares that we may issue upon conversion of the
Series D Preferred Stock underlying the promissory notes issued in the
Series D Preferred Stock offering;
o up to an aggregate of 78,689 additional shares that we may issue upon
conversion of the Series D Preferred Stock underlying the potential
interest under such promissory notes;
o an aggregate of 491,803 shares that we may issue upon the exercise of
warrants underlying the promissory notes issued in the Series D Preferred
Stock offering; and
o up to an aggregate of 78,689 additional shares that we may issue upon the
exercise of the warrants underlying the potential interest under such
promissory notes.
The number of shares shown in the following table as being offered by
the selling stockholders do not include such presently indeterminate number of
additional shares of our common stock that may be issuable as a result of stock
splits, stock dividends and similar transactions. Pursuant to Rule 416 under the
Securities Act, however, such shares are included in the Registration Statement
of which this prospectus is a part.
The selling stockholders may sell any or all of their shares listed
below from time to time. Accordingly, we cannot estimate how many shares the
selling stockholders will own upon consummation of any such sales. Also, the
selling stockholders may have sold, transferred or otherwise disposed of all or
a portion of their shares since the date on which the information was provided,
in transactions exempt from the registration requirements of the Securities Act.
Except as indicated in this prospectus, none of the selling
stockholders has had a material relationship with us within the past three years
other than as a result of the ownership of our securities.
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<PAGE>
<TABLE><CAPTION>
NUMBER OF SHARES NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY NUMBER OF BENEFICIALLY OWNED OUTSTANDING
OWNED PRIOR TO SHARES BEING AFTER COMMON STOCK
NAME OFFERING(1) OFFERED OFFERING(1)(2) AFTER OFFERING(1)
- ----- -------- ------- -------------- ---------
<S> <C> <C> <C> <C>
Barry Rubenstein 1,640,185 (3) 313,828 1,326,357 24.8%
Wheatley Partners II, L.P.
Woodland Venture Fund
Seneca Ventures
Woodland Partners
Irwin Lieber 1,369,425 (4) 115,236 1,254,189 23.3%
Barry Fingerhut 1,291,271 (5) 65,572 1,225,699 22.9%
Jonathan Lieber 1,214,155 (6) 16,392 1,197,763 22.4%
Applegreen Partners
Corey M. Horowitz 1,146,189 (7) 641,692 504,497 9.4%
CMH Capital Management Corp.
Pisces Investors, L.P.
Security Partners, L.P.
Avi A. Fogel 451,769 (8) 327,667 124,102 2.3%
Whale Securities Co., L.P. 170,000 (9) 170,000 0 0
Gerald Josephson 131,148 (10) 131,148 0 0
Eli Oxenhorn 115,236 (11) 115,236 0 0
New Dimensions Trading Limited 98,360 (12) 98,360 0 0
Phil Bloom 98,360 (12) 98,360 0 0
Dalewood Associates, L.P. 65,572 (13) 65,572 0 0
Alan Silverman 65,572 (13) 65,572 0 0
Aaron Wolfson 65,572 (13) 65,572 0 0
GER Family Partners, Ltd. 65,572 (13) 65,572 0 0
Gordon Freeman 65,572 (13) 65,572 0 0
Rebecca Rubenstein 58,100 (18) 58,100 0 0
Brian Rubenstein 54,796 (19) 54,796 0 0
</TABLE>
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<TABLE><CAPTION>
<S> <C> <C> <C> <C>
MW Partnership 49,180 (14) 49,180 0 0
Jeffrey Rubinstein 42,624 (15) 42,624 0 0
Jim McNeil 37,248 (16) 37,248 0 0
David Thalheim 32,788 (17) 32,788 0 0
Abraham Wolfson 32,788 (17) 32,788 0 0
Gyenes & Co. 32,788 (17) 32,788 0 0
Jack Erlanger 32,788 (17) 32,788 0 0
Larry Altman 32,788 (17) 32,788 0 0
Maurice Shamah 32,788 (17) 32,788 0 0
Richard Rosenstock 32,788 (17) 32,788 0 0
Sandler Co-Investment Partners, LP 32,788 (17) 32,788 0 0
Stephen S. Wien 32,788 (17) 32,788 0 0
William Walters 32,788 (17) 32,788 0 0
MLPF&S as Custodian FBO
Emanuel R. Pearlman, IRA 21,392 (20) 16,392 5,000 *
Abby Oxenhorn 16,392 (21) 16,392 0 0
Levitin Family Charitable Trust 16,392 (21) 16,392 0 0
Patrick McBrien 16,392 (21) 16,392 0 0
Seth Oxenhorn 16,392 (21) 16,392 0 0
Scott Zelnick 16,392 (21) 16,392 0 0
Alan Kaufman 9,312 (22) 9,312 0 0
Brad Zelnick 6,556 (23) 6,556 0 0
Venture Strategies, Inc. 6,207 (24) 6,207 0 0
Sam Schwartz 5,728 (25) 2,328 3,400 *
Irving Bizar 2,328 (26) 2,328 0 0
Malcolm Taub 2,328 (26) 2,328 0 0
Roy Martin 2,328 (26) 2,328 0 0
</TABLE>
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- ------------------
* Less than 1%
(1) Percentage of beneficial ownership is calculated assuming 5,350,753
shares of common stock were outstanding. Ownership after this offering
assumes that the selling stockholder sold all of the shares it is
offering in this prospectus. Beneficial ownership is determined in
accordance with the rules of the SEC and the footnotes to this table,
and generally includes voting or investment power with respect to
securities. Therefore, more than one person may be deemed to
beneficially own the same shares. Shares of common stock that are
subject to options, warrants or convertible securities that are
exercisable or convertible within 60 days are deemed outstanding for
computing the percentage of the person holding such option or warrant
but are not deemed outstanding for computing the percentage of any
other person. For purposes of calculating shares deemed outstanding
pursuant to the previous sentence, (a) we have deemed as outstanding
491,803 shares of Series D Preferred Stock and warrants to purchase
491,803 shares of our common stock, which are issuable upon conversion
of outstanding promissory notes issued by us in the aggregate principal
amount of $1,500,000 and (b) we have not deemed as outstanding any
shares of Series D Preferred Stock or warrants to purchase shares of
our common stock which would be issuable upon conversion of the
interest on such notes. The conversion of such promissory notes is
subject to approval by our stockholders at a duly held stockholders'
meeting scheduled to be held on April 28, 2000.
(2) Beneficial ownership of shares held by the selling stockholder after
this offering will depend on the number of securities sold by the
selling stockholder in this offering.
(3) Includes (i) 36,250 shares of common stock subject to currently
exercisable stock options held by Mr. Rubenstein, (ii) 49,898 shares of
common stock subject to currently exercisable warrants held by Mr.
Rubenstein (which shares are being registered hereby), (iii) 1,194,659,
41,128 and 23,280 shares of common stock held by Wheatley Partners II,
L.P., Woodland Venture Fund and Seneca Ventures, respectively, (iv)
32,787, 16,393, and 16,393 and 234 shares of common stock subject to
currently exercisable warrants held by Woodland Venture Fund, Seneca
Ventures, Woodland Partners and Marilyn Rubenstein, respectively (which
shares are being registered hereby), (v) 32,787, 16,393, 16,393, 234
and 234 shares of common stock issuable upon conversion of Series D
Preferred Stock held by Woodland Venture Fund, Seneca Ventures,
Woodland Partners, Barry Rubenstein and
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<PAGE>
Marilyn Rubenstein, respectively (which shares are being registered
hereby), (vi) 32,787, 16,393, 16,393, 234 and 234 shares of common
stock subject to warrants underlying certain promissory notes held by
Woodland Venture Fund, Seneca Ventures, Woodland Partners, Barry
Rubenstein and Marilyn Rubenstein, respectively (which shares are being
registered hereby) and (vii) 32,787, 16,393, 16,393, 234 and 234 shares
of common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes held by Woodland Venture Fund,
Seneca Ventures, Woodland Partners, Barry Rubenstein and Marilyn
Rubenstein, respectively (which shares are being registered hereby).
Barry Rubenstein and Woodland Services Corp. are the general partners
of Woodland Venture Fund and Seneca Ventures. Barry Rubenstein is the
President and sole director of Woodland Services Corp. Barry Rubenstein
is the general partner of Woodland Partners and a general partner of
Wheatley Partners II, L.P. Marilyn Rubenstein is the wife of Barry
Rubenstein. Does not include 11,250 shares of common stock subject to
stock options held by Mr. Rubenstein which are not currently
exercisable. Mr. Rubenstein disclaims beneficial ownership of the
shares of common stock held by Wheatley Partners II, L.P., except to
the extent of his equity interest therein. The address of Barry
Rubenstein is 68 Wheatley Road, Brookville, New York 11545. The address
for Wheatley Partners II, L.P., Woodland Venture Fund, Seneca Ventures
and Woodland Partners. is c/o Barry Rubenstein, 68 Wheatley Road,
Brookville, New York 11545.
(4) Includes (i) 36,250 shares of common stock subject to currently
exercisable stock options held by Mr. Lieber, (ii) 66,057 shares of
common stock subject to currently exercisable warrants held by Mr.
Lieber (which shares are being registered hereby), (iii) 16,393 shares
of common stock issuable upon conversion of Series D Preferred Stock
held by Mr. Lieber (which shares are being registered hereby), (iv)
16,393 shares of common stock subject to warrants underlying certain
promissory notes held by Mr. Lieber (which shares are being registered
hereby), (v) 16,393 shares of common stock issuable upon conversion of
Series D Preferred Stock underlying certain promissory notes held by
Mr. Lieber (which shares are being registered hereby), and (vi)
1,194,659 shares of common stock held by Wheatley Partners II, L.P., of
which Mr. Lieber is a general partner. Does not include 11,250 shares
of common stock subject to stock options held by Mr. Lieber which are
not currently exercisable. Mr. Lieber disclaims beneficial ownership of
the shares of common stock held by Wheatley Partners II, L.P., except
to the extent of his equity interest therein.
(5) Includes (i) 16,393 shares of common stock subject to currently
exercisable warrants held by Mr. Fingerhut (which shares are being
registered hereby), (ii) 16,393 shares of common stock issuable upon
conversion of Series D Preferred Stock held by Mr. Fingerhut (which
shares are being registered hereby), (iii) 16,393 shares of common
stock subject to warrants underlying certain promissory notes held by
Mr. Fingerhut (which shares are being registered hereby), (iv) 16,393
shares of common stock issuable upon conversion of Series D Preferred
Stock underlying certain promissory notes held by Mr. Fingerhut (which
shares are being registered hereby) and (v) 1,194,659 shares of common
stock held by Wheatley Partners II, L.P., of which Mr. Fingerhut is a
general partner. Mr. Fingerhut disclaims beneficial ownership of the
shares of common stock held by Wheatley Partners II, L.P., except to
the extent of his equity interest therein.
(6) Includes (i) 4,098 shares of common stock subject to currently
exercisable warrants held by Applegreen Partners (which shares are
being registered hereby), (ii) 4,098 shares of common stock issuable
upon conversion of Series D Preferred Stock held by Applegreen Partners
(which shares are being registered hereby), (iii) 4,098 shares of
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<PAGE>
common stock subject to warrants underlying certain promissory notes
held by Applegreen Partners (which shares are being registered hereby),
(iv) 4,098 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes held by Applegreen
Partners (which shares are being registered hereby) and (v) 1,194,659
shares of common stock held by Wheatley Partners II, L.P., of which Mr.
Lieber is a general partner. Mr. Lieber is a partner of Applegreen
Partners. Mr. Lieber disclaims beneficial ownership of the shares of
common stock held by Wheatley Partners II, L.P. and of Applegreen
Partners, except to the extent of his equity interest therein. The
address of Applegreen Partners is c/o GeoCapital, LLC, 767 Fifth
Avenue, New York, New York 10153.
(7) Includes (i) 382,752 shares of common stock held by Mr. Horowitz, (ii)
33,750 shares of common stock subject to currently exercisable stock
options held by Mr. Horowitz, (iii) 206,933 shares of common stock held
by Pisces Investors, L.P., a limited partnership whose general partner
is CMH Capital Management Corp., a corporation whose sole stockholder
and officer is Mr. Horowitz (which shares are being registered hereby),
(iv) 145,887 shares of common stock owned by Security Partners, L.P., a
limited partnership whose general partner is CMH and one of whose
limited partners is Mr. Horowitz (which shares are being registered
hereby), (v) 87,995 shares of common stock held by CMH, (vi) 124,936
shares of common stock subject to currently exercisable warrants held
by CMH (which shares are being registered hereby), (vii) 40,984 shares
of common stock subject to currently exercisable warrants held by Mr.
Horowitz (which shares are being registered hereby), (viii) 40,984
shares of common stock issuable upon conversion of Series D Preferred
Stock held by Mr. Horowitz (which shares are being registered hereby),
(ix) 40,984 shares of common stock subject to warrants underlying
certain promissory notes held by Mr. Horowitz (which shares are being
registered hereby) and (x) 40,984 shares of common stock issuable upon
conversion of Series D Preferred Stock underlying certain promissory
notes held by Mr. Horowitz (which shares are being registered hereby).
Does not include 3,750 shares of 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.
(8) Includes (i) 256,191 shares of common stock subject to currently
exercisable stock options (of which 165,132 shares are being registered
hereby), (ii) 129,747 shares of common stock subject to stock options
which are not currently exercisable (which shares are being registered
hereby), (iii) 8,197 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (iv)
8,197 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (v) 8,197
shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (vi)
8,197 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby). The address of Mr. Fogel is
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<PAGE>
c/o Network-1 Security Solutions, Inc., 1601 Trapelo Road, Reservoir
Place, Waltham, Massachusetts 02451.
(9) Whale Securities Co., L.P. served as the underwriter in our initial
public offering in November 1998. Represents shares underlying
underwriter's warrants held in the name of Whale for the accounts of
certain current and former equity owners, lenders and employees of
Whale. Does not include shares held by any customer account or trading
account of Whale.
(10) Includes (i) 32,787 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
32,787 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (iii)
32,787 shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (iv)
32,787 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby).
(11) Includes (i) 66,057 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
16,393 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (iii)
16,393 shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (iv)
16,393 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby).
(12) Includes (i) 24,590 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
24,590 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (iii)
24,590 shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (iv)
24,590 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby).
(13) Includes (i) 16,393 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
16,393 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (iii)
16,393 shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (iv)
16,393 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby).
(14) Includes (i) 12,295 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
12,295 shares of common stock issuable upon
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<PAGE>
conversion of Series D Preferred Stock (which shares are being
registered hereby), (iii) 12,295 shares of common stock subject to
warrants underlying certain promissory notes (which shares are being
registered hereby) and (iv) 12,295 shares of common stock issuable upon
conversion of Series D Preferred Stock underlying certain promissory
notes (which shares are being registered hereby).
(15) Includes (i) 10,656 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
10,656 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (iii)
10,656 shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (iv)
10,656 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby).
(16) Includes 37,248 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby).
(17) Includes (i) 8,197 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
8,197 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (iii) 8,197
shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (iv)
8,197 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby).
(18) Includes (i) 14,525 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
14,525 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (iii)
14,525 shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (iv)
14,525 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby).
(19) Includes (i) 13,699 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
13,699 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (iii)
13,699 shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (iv)
13,699 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby).
(20) Includes (i) 5,000 shares of common stock subject to currently
exercisable options owned by Emanuel R. Pearlman, (ii) 4,098 shares of
common stock subject to warrants (which
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<PAGE>
shares are being registered hereby), (iii) 4,098 shares of common stock
issuable upon conversion of Series D Preferred Stock (which shares are
being registered hereby), (iv) 4,098 shares of common stock subject to
warrants underlying certain promissory notes (which shares are being
registered hereby) and (v) 4,098 shares of common stock issuable upon
conversion of Series D Preferred Stock underlying certain promissory
notes (which shares are being registered hereby). Does not include
15,000 shares of common stock subject to options not currently
exercisable.
(21) Includes (i) 4,098 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
4,098 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (iii) 4,098
shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (iv)
4,098 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby).
(22) Includes 9,312 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby).
(23) Includes (i) 1,639 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), (ii)
1,639 shares of common stock issuable upon conversion of Series D
Preferred Stock (which shares are being registered hereby), (iii) 1,639
shares of common stock subject to warrants underlying certain
promissory notes (which shares are being registered hereby) and (iv)
1,639 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes (which shares are
being registered hereby).
(24) Includes 6,207 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby).
(25) Includes (i) 2,328 shares of common stock subject to currently
exercisable warrants (which shares are being registered hereby), and
(ii) 3,400 shares of common stock subject to currently exercisable
stock options. Does not include 6,600 shares of common stock subject to
stock options which are not currently exercisable. This selling
stockholder is a member of the law firm of Solovay Edlin & Eiseman,
P.C., our outside legal counsel.
(26) Includes 2,328 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby).
22
<PAGE>
PLAN OF DISTRIBUTION
This prospectus relates to the offer and sale by the selling
stockholders of:
o an aggregate of 506,007 shares of our common stock that we may issue
upon the exercise of outstanding warrants issued for certain
services;
o 294,879 shares of our common stock that we may issue upon the
conversion of outstanding options;
o an aggregate of 352,820 shares of our common stock that we issued to
Pisces Investors, L.P. and Security Partners, L.P.;
o an aggregate of 983,606 shares of our common stock that we may issue
upon the exercise of outstanding warrants and conversion of
outstanding shares of Series D Preferred Stock issued by us in a
private placement;
o an aggregate of 983,606 shares of our common stock that we may issue
upon the exercise of warrants and the conversion of shares of Series
D Preferred Stock underlying outstanding promissory notes; and
o up to an aggregate of 157,378 additional shares of our common stock
that we may issue upon the exercise of warrants and the conversion of
shares of Series D Preferred Stock underlying the potential interest
under such promissory notes.
The selling stockholders may sell the shares in transactions in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale. The selling stockholders may sell the shares through public or
private transactions at prevailing market prices, at prices related to such
prevailing market prices or at privately negotiated prices. The selling
stockholders may also sell shares pursuant to Rule 144 of the Securities Act, if
applicable.
The selling stockholders may use underwriters or broker-dealers to sell
the shares. Such underwriters and broker-dealers may receive compensation in the
form of discounts or commissions from the selling stockholders, or they may
receive commissions from the purchasers of shares for whom they acted as agents,
or both (which compensation as to a particular broker-dealer might be in excess
of customary commissions). The selling stockholders and any underwriter or
broker-dealer who participates in the distribution of the shares may be deemed
to be "underwriters" within the meaning of the Securities Act, and any
commissions received by them and any profit on the resale of the shares
purchased by them may be deemed to be underwriting discounts or commissions
under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the shares may not simultaneously engage in
market-making activities with respect to our common stock for a certain period
of time, except under certain limited circumstances. Also, without limiting the
foregoing, each selling stockholder and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
rules and regulations thereunder (including Regulation M), which provisions may
limit the timing of purchases and sales of shares of our common stock by such
selling stockholder.
23
<PAGE>
At the time a selling stockholder makes an offer to sell shares, to the
extent required by the Securities Act, a prospectus will be delivered. If a
supplemental prospectus is required, one will be delivered setting forth the
number of shares being offered and the terms of the offering, including the
names of any underwriters, dealers or agents, the purchase price paid by any
underwriter for the shares, and any discounts or commissions.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and complied with.
We have agreed to pay substantially all of the expenses incident to the
registration, offering and sale of the shares to the public, excluding the
commissions or discounts of underwriters, broker-dealers or agents.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
us by Solovay Edlin & Eiseman, P.C., New York, New York. Sam Schwartz, a member
of that firm, owns warrants and options to purchase 12,328 shares of our common
stock as of the date of this prospectus.
EXPERTS
The financial statements on Form 10-KSB for the year ended December 31,
1999 incorporated by reference in this registration statement have been audited
by Richard A. Eisner & Company, LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or persons controlling us, we
have been advised that it is the SEC's opinion that such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
24
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
3,278,296 SHARES
OF
COMMON STOCK
------------------
PROSPECTUS
-----------------
MARCH 21, 2000
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the
offering described in the Registration Statement, all of which will be borne by
the Company.
SEC registration fee....................................... $ 11,224.07
Legal fees and expenses*................................... $ 12,500.00
Accounting fees and expenses*.............................. $ 1,000.00
------------
TOTAL.................................... $ 24,724.07
============
* Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporations Law (the "DGCL")
contains provisions entitling the Company's directors and officers to
indemnification from judgments, fines, amounts paid in settlement, and
reasonable expenses (including attorneys' fees) as the result of an action or
proceeding in which they may be involved by reason of having been a director or
officer of the Company. In its Certificate of Incorporation, the Company has
included a provision that limits, to the fullest extent now or hereafter
permitted by the DGCL, the personal liability of its directors to the Company or
its stockholders for monetary damages arising from a breach of their fiduciary
duties as directors. Under the DGCL as currently in effect, this provision
limits a director's liability except where such director (i) breaches his duty
of loyalty to the Company or its stockholders, (ii) fails to act in good faith
or engages in intentional misconduct or a knowing violation of law, (iii)
authorizes payment of an unlawful dividend or stock purchase or redemption as
provided in Section 174 of the DGCL, or (iv) obtains an improper personal
benefit. This provision does not prevent the Company or its stockholders from
seeking equitable remedies, such as injunctive relief or rescission. If
equitable remedies are found not to be available to stockholders in any
particular case, stockholders may not have any effective remedy against actions
taken by directors that constitute negligence or gross negligence.
The Certificate of Incorporation also includes provisions to the effect
that (subject to certain exceptions) the Company shall, to the maximum extent
permitted from time to time under the law of the State of Delaware, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent that such indemnification and advancement of expenses is permitted under
such law, as it may from time to time be in effect. In addition, the Bylaws
require the Company to indemnify, to the full extent permitted by law, any
director, office, employee or agent of the
II-1
<PAGE>
Company for acts which such person reasonably believes are not in violation of
the Company's corporate purposes as set forth in the Certificate of
Incorporation. At present, the DGCL provides that, in order to be entitled to
indemnification, an individual must have acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the Company's best
interests.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to any charter, provision, by-law, contract, arrangement,
statute or otherwise, the Company has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
ITEM 16. EXHIBITS
NO. DESCRIPTION
- --- -----------
3.1 Certificate of Incorporation, as amended (includes Form of Certificate
of Designations of Series C Preferred Stock). Previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-59617), declared effective by the SEC in November
1998 (the "1998 Registration Statement"), and incorporated herein by
reference.
3.2 Certificate of Designations of Series D Preferred Stock.. Previously
filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed
January 4, 2000 (the "Form 8-K"), and incorporated herein by reference.
3.3 By-laws, as amended. Previously filed as Exhibit 3.2 to the 1998
Registration Statement and incorporated herein by reference.
4.1 Form of Common Stock certificate. Previously filed as Exhibit 4.1 to
the 1998 Registration Statement and incorporated herein by reference.
4.2 Warrant issued as of November 17, 1998 to Whale Securities Co., L.P.
Previously filed as Exhibit 1.2 to the 1998 Registration Statement and
incorporated herein by reference.
4.3* Form of Warrant previously issued for services rendered.
5.1* Opinion of Solovay Edlin & Eiseman, P.C. regarding legality of
securities being registered.
10.1 Securities Purchase Agreement, dated as of December 22, 1999, between
the Company and the investors listed therein. Previously filed as
Exhibit 10.28 to the Form 8-K and incorporated herein by reference.
10.2 Form of Convertible Promissory Note, dated December 22, 1999, made by
the Company in favor of the holder listed thereon. Previously filed as
Exhibit C to Exhibit 10.28 to the Form 8-K and incorporated herein by
reference.
II-2
<PAGE>
10.3 Form of Warrant, dated December 22, 1999, issued by the Company to the
holder listed thereon. Previously filed as Exhibit B to Exhibit 10.28
to the Form 8-K and incorporated herein by reference.
21.1 List of the Company's subsidiaries. Previously filed as Exhibit 21.1 to
the 1998 Registration Statement and incorporated herein by reference.
23.1* Consent of Richard A. Eisner & Company, LLP, independent certified
public accountants.
24.1 No person has signed this Registration Statement under a power of
attorney. A power of attorney relating to the signing of amendments
hereto is incorporated in the signature pages hereof.
- --------------
* Filed herewith
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes that it will:
(a) File, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to include any
additional or changed material information on the plan of distribution.
(b) For determining liability under the Act, treat each
post-effective amendment as a new Registration Statement of the securities
offered, and the offering of securities at that time to be the initial BONA FIDE
offering.
(c) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of this
offering.
(2) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
(3) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective.
II-3
<PAGE>
(b) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and the offering of such securities at that time as the initial BONA FIDE
offering of those securities.
II-4
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waltham, State of
Massachusetts.
Dated: March 21, 2000
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
---------------------------------
Avi A. Fogel, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE> <CAPTION>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
/s/ Avi A. Fogel President, Chief Executive Officer March 21, 2000
- ------------------------------------ and Director (principal executive officer)
Avi A. Fogel
/s/ Murray P. Fish Chief Financial Officer (principal financial March 21, 2000
- ------------------------------------ officer and principal accounting officer)
Murray P. Fish
* Director March 21, 2000
- ------------------------------------
William H. Hancock
* Chairman of the Board of Directors March 21, 2000
- ------------------------------------
Corey M. Horowitz
</TABLE>
* signed by Murray P. Fish, as attorney-in-fact
II-5
<PAGE>
INDEX TO EXHIBITS
NO. DESCRIPTION
- --- -----------
3.1 Certificate of Incorporation, as amended (includes Form of Certificate
of Designations of Series C Preferred Stock). Previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-59617), declared effective by the SEC in November
1998 (the "1998 Registration Statement"), and incorporated herein by
reference.
3.2 Certificate of Designations of Series D Preferred Stock.. Previously
filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed
January 4, 2000 (the "Form 8-K"), and incorporated herein by reference.
3.3 By-laws, as amended. Previously filed as Exhibit 3.2 to the 1998
Registration Statement and incorporated herein by reference.
4.1 Form of Common Stock certificate. Previously filed as Exhibit 4.1 to
the 1998 Registration Statement and incorporated herein by reference.
4.2 Warrant issued as of November 17, 1998 to Whale Securities Co., L.P.
Previously filed as Exhibit 1.2 to the 1998 Registration Statement and
incorporated herein by reference.
4.3* Form of Warrants previously issued for services rendered.
5.1* Opinion of Solovay Edlin & Eiseman, P.C. regarding legality of
securities being registered.
10.1 Securities Purchase Agreement, dated as of December 22, 1999, between
the Company and the investors listed therein. Previously filed as
Exhibit 10.28 to the Form 8-K and incorporated herein by reference.
10.3 Form of Convertible Promissory Note, dated December 22, 1999, made by
the Company in favor of the holder listed thereon. Previously filed as
Exhibit C to Exhibit 10.28 to the Form 8-K and incorporated herein by
reference.
10.3 Form of Warrant, dated December 22, 1999, issued by the Company to the
holder listed thereon. Previously filed as Exhibit B to Exhibit 10.28
to the Form 8-K and incorporated herein by reference.
21.1 List of the Company's subsidiaries. Previously filed as Exhibit 21.1 to
the 1998 Registration Statement and incorporated herein by reference.
23.1* Consent of Richard A. Eisner & Company, LLP, independent certified
public accountants.
24.1 No person has signed this Registration Statement under a power of
attorney. A power of attorney relating to the signing of amendments
hereto is incorporated in the signature pages hereof.
- --------------
* Filed herewith
II-6
EXHIBIT 4.3
-----------
NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR UNDER ANY STATE SECURITIES LAW
AND MAY NOT BE TRANSFERRED
IN VIOLATION OF SUCH ACT OR LAWS, THE RULES AND
REGULATIONS THEREUNDER OR THE PROVISIONS
OF THIS WARRANT CERTIFICATE
__________________
WARRANTS TO PURCHASE AN AGGREGATE OF ____________ SHARES
OF COMMON STOCK OF
NETWORK-1 SECURITY SOLUTIONS, INC.
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
ISSUED TO
_____________________________
DATED: _______________
THIS IS TO CERTIFY that, for value received, _______________ ,
or his or its registered assigns (herein collectively referred to as the
"Warrantholder"), is entitled to the number of Warrants (the "Warrants") set
forth above, each of which represents the right, upon the due exercise hereof,
at any time commencing on the date hereof (the "Commencement Date") and ending
on _______________ (the "Expiration Date"), to purchase from Network-1 Security
Solutions, Inc., a Delaware corporation (the "Company"), one share of common
stock, par value $.01 per share (the "Common Stock"), of the Company upon
surrender hereof, with the form of election to purchase included herein (the
"Election to Purchase") completed and duly executed, at the office of the
Company, and upon simultaneous payment therefor of an exercise price per share
equal to the Purchase Price (as defined in Section 1 below) in cash and/or check
payable to the order of the Company. The number of shares of Common Stock
issuable upon exercise of the Warrants (individually, a "Share" and
collectively, the "Shares") and the Purchase Price therefor are subject to
adjustment as provided herein.
<PAGE>
1. Purchase Price
The purchase price for the Shares purchasable hereunder (the "Purchase
Price") shall be equal to $__________ per Share, subject to adjustment as
hereinafter described.
2. Definition of Market Price
Unless otherwise provided herein, for purposes of any computations made
hereunder, "Market Price" per share of Common Stock on any date shall be: (i) if
the Common Stock is listed or admitted for trading on any national securities
exchange, the last reported sales price as reported on such national securities
exchange; (ii) if the Common Stock is not listed or admitted for trading on any
national securities exchange, the average of the last reported closing bid and
asked quotation for the Common Stock as reported on the Nasdaq Stock Market's
National Market ("NNM") or a similar service if NNM is not reporting such
information; (iii) if the Common Stock is not listed or admitted for trading on
any national securities exchange or NNM or quoted by the Nasdaq Stock Market's
SmallCap Market ("NSM") or a similar service, the average of the last reported
bid and asked quotation for the Common Stock as quoted by a market maker in the
Common Stock (or if there is more than one market maker, the bid and asked
quotation shall be obtained from two market makers and the average of the lowest
bid and highest asked quotation shall be the "Market Price"); or (iv) if the
Common Stock is not listed or admitted for trading on any national securities
exchange or NNM or quoted by NSM and there is no market maker in the Common
Stock, the fair market value of such shares as determined in good faith by the
Board of Directors of the Company.
3. Transfer
The Warrants may not be transferred, sold or assigned except to, in
whole or in part (i) any entity controlled by, or under common control with, the
Warrantholder, (ii) the spouse, lineal descendants, estate or a trust for the
benefit of any of the foregoing, or (iii) by operation of law.
4. Issuance of Shares
Subject to the restrictions set forth in Section 5 below, upon
surrender of the Warrants and payment of the Purchase Price as aforesaid, the
Company shall issue and deliver with all reasonable dispatch the certificate(s)
for the Shares to or upon the written order of the Warrantholder and in such
name or names as the Warrantholder may designate. Such certificate(s) shall
represent the number of Shares issuable upon the exercise of the Warrants,
together with a cash amount in respect of any fraction of a Share otherwise
issuable upon such exercise.
Certificates representing the Shares shall be deemed to have been
issued and the person so designated to be named therein shall be deemed to have
become a holder of record of such Shares as of the date of the surrender of the
Warrants and payment of the Purchase Price as aforesaid; notwithstanding that
the transfer books for the Shares or other classes of stock purchasable upon the
exercise of the Warrants shall then be closed or the certificate(s) for the
Shares in respect
<PAGE>
of which the Warrants is then exercised shall not then have been actually
delivered to the Warrantholder. As soon as practicable after each such exercise
of the Warrants, the Company shall issue and deliver the certificate(s) for the
Shares issuable upon such exercise, registered as requested. The Warrants shall
be exercisable, at the election of the registered holder hereof, either as an
entirety or from time to time for part of the number of Shares specified herein,
but in no event shall fractional Shares be issued with regard to the exercise of
the Warrants. In the event that only a portion of the Warrants is exercised at
any time prior to the close of business on the Expiration Date, a new warrant
certificate shall be issued to the Warrantholder for the remaining number of
Shares purchasable pursuant hereto. The Company shall cancel the Warrants when
they are surrendered upon exercise.
Prior to due presentment for registration of transfer of the Warrants,
the Company shall deem and treat the Warrantholder as the absolute owner of the
Warrants (notwithstanding any notation of ownership or other writing on this
warrant certificate made by anyone other than the Company) for the purpose of
any exercise hereof or any distribution to the Warrantholder and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
5. Payment of Expenses, Taxes, etc. upon Exercise
The Company shall pay all documentary stamp taxes, if any, attributable
to the initial issuance of the Shares issuable upon the exercise of the
Warrants; provided, however, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any transfer involved in the
issue or delivery of any certificates for Shares in a name other than that of
the Warrantholder upon the exercise of the Warrants, and in such case the
Company shall not be required to issue or deliver any certificates for Shares
until or unless the person or persons requesting the issuance have paid to the
Company the amount of such tax or have established to the Company's satisfaction
that such tax has been paid or is not required to be paid.
6. Lost, Stolen, or Mutilated Warrant Certificate
In case this warrant certificate shall be mutilated, lost, stolen or
destroyed, the Company shall issue and deliver, in exchange and substitution for
and upon cancellation of the mutilated warrant certificate, or in lieu of and
substitution for the warrant certificate lost, stolen or destroyed, a new
warrant certificate of like tenor and representing an equivalent number of
Shares purchasable upon exercise, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction of such warrant
certificate and reasonable indemnity, if requested, also reasonably satisfactory
to the Company. No bond or other security shall be required from the original
Warrantholder in connection with the replacement by the Company of a lost,
stolen or mutilated warrant certificate.
<PAGE>
7. Covenants of Company
(a) The Company shall at all times through the Expiration Date reserve
and keep available, out of its aggregate authorized but unissued shares of
Common Stock, the number of Shares deliverable upon the exercise of the
Warrants.
(b) Before taking any action which would cause an adjustment pursuant
to the terms set forth herein reducing the portion of the Purchase Price
attributable to the Shares below the then par value (if any) of such Shares, the
Company shall take any corporate action which may, in the opinion of its counsel
(which may be counsel regularly engaged by the Company), be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
Shares at the Purchase Price as so adjusted.
(c) The Company covenants that all Shares issued upon exercise of the
Warrants shall, upon issuance in accordance with the terms hereof, be fully paid
and nonassessable and free from all pre-emptive rights and taxes, liens, charges
and security interests created by the Company with respect to the issuance and
holding thereof.
(d) For so long as the Warrants are outstanding, the Company shall
notify the Warrantholder not less than 30 days prior to any cash dividend being
paid to the holders of Common Stock.
8. Rights Upon Expiration
Unless the Warrants are surrendered and payment made for the Shares as
herein provided before the close of business on the Expiration Date, this
warrant certificate will become wholly void and all rights evidenced hereby will
terminate after such time.
9. Exchange of Warrant Certificate
Subject to the provisions of Section 3 above, this warrant certificate
may be exchanged for a number of warrant certificates of the same tenor as this
warrant certificate for the purchase in the aggregate of the same number of
Shares of the Company as are purchasable upon the exercise of this warrant
certificate, upon surrender hereof at the office of the Company with written
instructions as to the denominations of the warrant certificates to be issued in
exchange.
10. Adjustment for Certain Events
(a) In case the Company shall at any time after the date the Warrants
are first issued (i) declare a dividend on the Common Stock payable in shares of
the Company's capital stock (whether in shares of Common Stock or of capital
stock of any other class), (ii) subdivide the outstanding Common Stock, (iii)
reverse split the outstanding Common Stock into a smaller number of shares, or
(iv) issue any shares of the Company's capital stock in a reclassification of
the Common
<PAGE>
Stock (including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then, in each case,
the Purchase Price in effect at the time of the record date for such dividend or
of the effective date of such subdivision, reverse split or reclassification,
and/or the number and kind of shares of capital stock issuable upon exercise of
the Warrants on such date, shall be proportionately adjusted so that the holder
of any Warrant exercised after such time shall be entitled to receive the
aggregate number and kind of securities which, if such Warrant had been
exercised immediately prior to such date, such holder would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
reverse split or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) In case the Company shall fix a record date for the making of a
distribution to all holders of Common Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of indebtedness or assets (other than cash
dividends or cash distributions payable out of earnings, consolidated earnings,
if the Company shall have one or more subsidiaries, or earned surplus, or
dividends payable in Common Stock) or rights, options or warrants to subscribe
for or purchase Common Stock, then, in each case, the Purchase Price per Share
to be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction, of
which the numerator shall be the current Market Price for a share of Common
Stock on such record date less the fair market value of the portion of the
assets or evidences of indebtedness so to be distributed or of such subscription
rights, options or warrants applicable to one share of Common Stock, and of
which the denominator shall be the current Market Price for a share of Common
Stock. In the event that the Company and the Warrantholder cannot agree as to
such fair market value, such determination of fair market value shall be made by
an appraiser who shall be mutually selected by the Company and the
Warrantholder, and the reasonable costs of such appraiser shall be borne by the
Company. Such adjustment shall be made successively whenever such a record date
is fixed, and in the event that such distribution is not so made, the Purchase
Price shall again be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(c) No adjustment in the Purchase Price shall be required unless such
adjustment would require a decrease of at least one cent ($0.01) in such price;
provided, however, that any adjustment which by reason of this Section 10(c) is
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 10 shall be made to
the nearest cent or to the nearest one-hundredth of a share, as the case may be,
but in no event shall the Company be obligated to issue fractional shares of
Common Stock or fractional portions of any securities upon the exercise of the
Warrants.
<PAGE>
(d) In the event that at any time, as a result of an adjustment made
pursuant to Section 10 hereof, the holder of any Warrant thereafter exercised
shall become entitled to receive any shares of capital stock or warrants or
other securities of the Company other than the Shares, thereafter the number of
such other shares of capital stock or warrants or other securities so receivable
upon exercise of this Warrant shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Shares contained in this Section 10, and the provisions of
this warrant certificate with respect to the Shares shall apply, to the extent
applicable, on like terms to any such other shares of capital stock or warrants
or other securities.
(e) Upon each adjustment of the Purchase Price as a result of
calculations made in this Section 10, each Warrant outstanding immediately prior
to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of Shares (calculated to
the nearest hundredth), obtained by (i) multiplying the number of Shares
purchasable upon exercise of a Warrant immediately prior to such adjustment of
the Purchase Price by the Purchase Price in effect immediately prior to such
adjustment and (ii) dividing the product so obtained by the Purchase Price in
effect immediately after such adjustment of the Purchase Price.
(f) In case of any capital reorganization of the Company or of any
reclassification of the Common Stock (other than a change in par value or from a
specified par value to no par value or from no par value to a specified par
value or as a result of subdivision or combination) or in case of the
consolidation of the Company with, or the merger of the Company into, any other
corporation (other than a consolidation or merger in which the Company is the
continuing corporation) or of the sale of the properties and assets of the
Company as, or substantially as, an entirety, each Warrant shall, after such
reorganization, reclassification, consolidation, merger or sale, be exercisable,
upon the terms and conditions specified herein, for the number of shares of
Common Stock or other capital stock or warrants or other securities or property
to which a holder of the number of shares of Common Stock purchasable (at the
time of such reorganization, reclassification, consolidation, merger or sale)
upon exercise of such Warrant would have been entitled upon such reorganization,
reclassification, consolidation, merger or sale; and in any such case, if
necessary, the provisions set forth in this Section 10(f) with respect to the
rights and interests thereafter of the registered holders of all Warrants shall
be appropriately adjusted so as to be applicable, as nearly as may reasonably
be, to any shares of Common Stock or other capital stock or warrants or other
securities or property thereafter deliverable on the exercise of the Warrants.
The subdivision, reverse split or combination of shares of Common Stock at any
time outstanding into a greater or lesser number of shares shall not be deemed
to be a reclassification of the Common Stock for the purposes of this Section
10(f).
(g) In any case in which this Section 10 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event issuing to the Warrantholder, if such Warrantholder exercised any Warrant
after such record date, shares of capital stock or warrant or other securities
of the Company, if any, issuable upon such exercise over and above the Shares
issuable, on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall
<PAGE>
deliver to the holder a due bill or other appropriate instrument evidencing such
holder's right to receive such shares of capital stock or warrants or other
securities upon the occurrence of the event requiring such adjustment.
11. Piggyback Registration Rights.
(i) The Warrantholder is hereby granted the right to "piggyback" the
Shares on each registration statement filed by the Company so long as the
registration form to be used is suitable for the registration of the Shares (a
"Piggyback Registration") (it being understood that the Form S-8 and Form S-4
may not be used for such purposes), all at the Company's cost and expense
(except commissions or discounts) PROVIDED, HOWEVER, that this paragraph (a)
shall not apply to any Shares if such Shares may then be sold within a six (6)
month period under Rule 144 (assuming the Warrantholder's compliance with the
provisions of the Rule) and the Company delivers an opinion to that effect to
the transfer agent; and PROVIDED, FURTHER, that if the offering with respect to
which a registration statement is filed is an underwritten primary or secondary
offering of the Company's securities and the managing underwriter advises the
Company in writing that in its opinion the number of securities requested to be
included in such registration exceeds the number that can be sold in such
offering without adversely affecting such underwriter's ability to effect an
orderly distribution of such securities or otherwise adversely affecting such
offering (including, without limitation, causing a diminution in the offering
price of the Company's securities) the Company will include such registration
statement: (i) first, the securities being sold for the account of the Company;
(ii) second, the number of Registrable Securities to be included that, in the
opinion of such underwriter, can be sold pro rata among the respective holders
of such securities on the basis of the amount of shares then owned by each such
holder. The Company shall give the Warrantholder at least fifteen (15) days
written notice of the intended filing date of any registration statement, other
than a registration statement filed on Form S-4 or Form S-8 and the
Warrantholder shall have seven (7) days after such receipt of such notice to
notify the Company of its intent to include the Shares in the registration
statement. The Company shall keep any registration statement onto which the
Warrantholder has "piggybacked" the Shares current and effective for a period of
up to 150 days from the date on which the Warrantholder is first entitled to
sell the total number of his Registrable Securities registered thereunder.
(ii) If, at any time after giving written notice of its intention to
register any securities and prior to the effective date of the registration
statement filed in connection with such registration, the Company shall
determine for any reason not to register or to delay registration of such
securities, the Company may, at its election, give written notice of such
determination to Warrantholder (as well as all other holders of the Registrable
Securities) and (i) in the case of a determination not to register, shall be
relieved of its obligation to register the Shares in connection with such
abandoned registration and (ii) in the case of a determination to delay such
registration of its securities, shall be permitted to delay the registration of
such Shares for the same period as the delay in registering such other Company
securities.
<PAGE>
(iii) The Company shall indemnify and hold harmless the Warrantholder
with respect to Shares to be sold pursuant to any Registration Statement
hereunder and any of such holder's officer's, directors, employees, agents,
partners, legal counsel and accountants, and each person, if any, who controls
each of the foregoing within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Securities Exchange Act 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all reasonable
attorneys' fees and other expenses reasonably incurred in investigating,
preparing, or defending against any claim whatsoever incurred by the indemnified
party in any action or proceeding between the indemnitor and indemnified party
or between the indemnified party and any third party or otherwise) to which any
of them may become subject under the Securities Act, the Exchange Act or any
other statute or at common law or otherwise under laws of foreign countries,
arising from such registration statement or based upon any untrue statement or
alleged untrue statement of a material fact contained in (i) any preliminary
prospectus, registration statement or prospectus (as from time to time each may
be amended and supplemented); (ii) in any post-effective amendment or amendments
or any new registration statement and prospectus in which is included the
Registrable Securities; or (iii) any application or other document or written
communication (collectively called "application") executed by the Company or
based upon written information furnished by the Company in any jurisdiction in
order to qualify the Registrable Securities under the securities laws thereof or
filed with the commission, any state securities commission or agency, Nasdaq or
any securities exchange; or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; unless such statement or omission is made in reliance upon, and in
strict conformity with, written information furnished to the Company with
respect to the holders expressly for the use in a preliminary prospectus,
registration statement or prospectus, or any amendment supplement thereof, or in
any application, as the case may be. The Company agrees promptly to notify the
Warrantholder of the commencement of any litigation proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the issue and sale or resale of the Shares or in connection with any such
registration statement or prospectus.
12. Fractional Shares
Upon exercise of the Warrants the Company shall not be required to
issue fractional shares of Common Stock or other capital stock. In lieu of such
fractional shares, the Warrantholder shall receive an amount in cash equal to
the same fraction of the (i) current Market Price of one whole Share if clause
(i), (ii) or (iii) in the definition of Market Price in Section 2 above is
applicable or (ii) book value of one whole Share as reported in the Company's
most recent audited financial statements if clause (iv) in the definition of
Market Price in Section 2 above is applicable. All calculations under this
Section 12 shall be made to the nearest cent.
<PAGE>
13. Securities Act Legend
The Warrantholder shall not be entitled to any rights of a stockholder
of the Company with respect to any Shares purchasable upon the exercise hereof,
including voting, dividend or dissolution rights, until such Shares have been
paid for in full. As soon as practicable after such exercise, the Company shall
deliver a certificate or certificates for the securities issuable upon such
exercise, all of which shall be fully paid and nonassessable, to the person or
persons entitled to receive the same; provided, however, that, if applicable,
such certificate or certificates delivered to the holder of the surrendered
Warrant shall bear a legend reading substantially as follows:
"These securities have not been registered under the Securities Act of
1933, as amended, or the securities laws of any state and may not be
sold or transferred in the absence of such registration or any
exemption therefrom under such Act and laws, if applicable. The
Company, prior to permitting a transfer of these securities, may
require an opinion of counsel or other assurances satisfactory to it as
to compliance with or exemption from such Act and laws."
14. Notice of Adjustment
(a) Upon any adjustment of the Purchase Price pursuant to Section 10
above, the Company, within 30 calendar days thereafter, shall have on file for
inspection by the Warrantholder a certificate of the Board of Directors of the
Company setting forth the Purchase Price after such adjustment, the method of
calculation thereof in reasonable detail, the facts upon which such calculations
were based and the number of Shares issuable upon exercise of a Warrant after
such adjustment in the Purchase Price, which certificate shall be conclusive
evidence of the correctness of the matters set forth therein.
(b) In case:
(i) the Company shall authorize the issuance to all holders of
Common Stock of rights, options or warrants to subscribe for or purchase capital
stock of the Company or of any other subscription rights, options or warrants;
or
(ii) the Company shall authorize the distribution to all holders of
Common Stock of evidences of its indebtedness or assets; or
(iii) of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is required, of
the conveyance or transfer of the properties and assets of the Company
substantially as an entirety or of any capital reorganization or any
reclassification of the Common Stock (other than a change in par value or from a
specified par value to no par value or from no par value to a specified par
value or as a result of a subdivision or combination); or
<PAGE>
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) the Company proposes to take any other action which would
require an adjustment of the Purchase Price pursuant to Section 10 above;
then, in each such case, the Company shall give to the Warrantholder at its
address appearing below at least 20 calendar days prior to the applicable record
date hereinafter specified in (A), (B), or (C) below, by first class mail,
postage prepaid, a written notice stating (A) the date as of which the holders
of record of shares of Common Stock entitled to receive any such rights,
options, warrants or distribution are to be determined or (B) the date on which
any such consolidation, merger, conveyance, transfer, reorganization,
reclassification, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of record of
shares of Common Stock shall be entitled to exchange such shares for securities
or other property, if any, deliverable upon such consolidation, merger,
conveyance, transfer, reorganization, reclassification, dissolution, liquidation
or winding up or (C) the date of such action which would require an adjustment
of the Purchase Price. The failure to give the notice required by this Section
14(b) or any defect therein shall not affect the legality or validity of any
such issuance, distribution, consolidation, merger, conveyance, transfer,
reorganization, reclassification, dissolution, liquidation, winding up or other
action or the vote upon any such action.
Except as provided herein, nothing contained herein shall be construed
as conferring upon the Warrantholder the right to vote on any matter submitted
to the stockholders of the Company for their vote or to receive notice of
meetings of stockholders or the election of directors of the Company or any
other proceedings of the Company, or any rights whatsoever as a stockholder of
the Company.
15. Notices
Any notice, request, demand or other communication pursuant to the
terms of the Warrants shall be in writing and shall be sufficiently given or
made when delivered or mailed by first class or registered mail,
postage-prepaid, to the following addresses:
<PAGE>
If to the Company:
Network-1 Security Solutions, Inc.
1601 Trapelo Road
Reservoir Place
Waltham, Massachusetts 02451
Attn: Avi A. Fogel, President and Chief Executive Officer
with a copy to:
Solovay Edlin & Eiseman, P.C.
845 Third Avenue, 8th Floor
New York, New York 10022
Attention: Sam Schwartz, Esq.
If to the Warrantholder, to the address of such Warrantholder provided
to the Company by such Warrantholder for the purpose of notices, or to such
other address or such other counsel as the Company or the Warrantholder may
designate by written notice to the other party.
16. Miscellaneous
(a) All the covenants and provisions herein by or for the benefit of
the Company shall bind and inure to the benefit of its successors or assigns and
all of the covenants and provisions herein for the benefit of the Warrantholder
hereof shall inure to the benefit of its successors or assigns.
(b) This warrant certificate shall be deemed to be a contract made
under the laws of the State of New York for all purposes and shall be construed
in accordance with the laws of such State.
(c) Nothing in this warrant certificate shall be construed to give any
person or corporation other than the Company and the Warrantholder and its
permitted transferees any legal or equitable right, remedy or claim under this
warrant certificate; but this warrant certificate shall be for the sole and
exclusive benefit of the Company and the Warrantholder and its permitted
transferees.
<PAGE>
IN WITNESS WHEREOF, an authorized office of the Company has
signed and delivered to the Warrantholder this warrant certificate as of the
date first written above.
NETWORK-1 SECURITY SOLUTIONS, INC.
By:___________________________________________
Avi A. Fogel,
President and Chief Executive Officer
ATTEST:
By: __________________________________
Murray P. Fish,
Chief Financial Officer and Secretary
[CORPORATE SEAL]
<PAGE>
ELECTION TO PURCHASE
(To be executed by the registered holder if such holder desires to exercise the
within Warrants)
To: Network-1 Security Solutions, Inc.
1601 Trapelo Road
Reservoir Place
Waltham, MA 02451
Attn: Murray P. Fish, Chief Financial Officer and Secretary
The undersigned hereby (1) irrevocably elects to exercise his or its rights to
purchase _____ shares of Common Stock covered by the within Warrants, (2) makes
payment in full of he Purchase Price by enclosure of a certified check, (3)
requests that certificates for such shares be issued in the name of:
Please print name, address and Social Security or Tax Identification Number:
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
and (4) if said number of shares shall not be all the shares evidenced by the
within Warrants, requests that a new warrant certificate for the balance of the
shares covered by the within Warrants be registered in the name of, and
delivered to:
Please print name and address:
- ------------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
In lieu of receipt of a fractional share of Common Stock, the
undersigned will receive a check representing payment therefor.
Dated: _____________________ _________________________________
By:_________________________________
_________________________________
[Solovay Edlin & Eiseman, P.C. Letterhead]
March 21, 2000
Network-1 Security Solutions, Inc.
1601 Trapelo Road, Reservoir Place
Waltham, Massachusetts 02451
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Network-1 Security Solutions, Inc., a
Delaware corporation (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended (the "Act"), pursuant to the
above-referenced registration statement (the "Registration Statement"), of the
offer and sale from time to time, by the selling stockholders named therein, of
3,278,296 shares of the Company's common stock, par value $.01 per share (the
"Common Stock"), consisting of (i) 997,810 shares of Common Stock issuable upon
the exercise of warrants granted by the Company to certain selling stockholders
named therein (the "Warrant Shares"), (ii) 294,879 shares of Common Stock
issuable upon the exercise of options granted by the Company to a certain
selling stockholder named therein (the "Option Shares"), (iii) 352,820 shares of
Common Stock previously issued by the Company to certain selling stockholders
named therein (the "Issued Shares"), (iv) 491,803 shares of Common Stock
issuable upon the conversion of shares of preferred stock granted by the Company
to certain selling stockholders named therein (the "Conversion Shares"), and (v)
1,140,984 shares of Common Stock issuable upon the conversion of promissory
notes and its underlying securities granted by the Company to certain selling
stockholders named therein (the "Note Shares").
In connection with this opinion, we have examined and relied upon a
copy of the Registration Statement. We have also examined originals, or copies
of originals certified to our satisfaction, of such agreements, documents,
certificates and other instruments as we have deemed relevant and necessary to
enable us to express an opinion on the matters covered hereby.
In all such examinations, we have assumed the completeness and
authenticity of all records and documents submitted to us as originals and the
conformity to original records and documents of all copies submitted to us as
reproduced or conformed copies.
<PAGE>
Network-1 Security Solutions, Inc.
March 21, 2000
Page 2 of 3 pages
Based upon the foregoing, and subject to the limitations and
assumptions heretofore and hereinafter set forth, it is our opinion that:
1. The Warrant Shares and the Option Shares, when issued in accordance
with the terms of the relative warrants and options and when certificates
representing such shares have been duly executed, countersigned and delivered to
the persons entitled thereto against payment to the Company for the exercise
price provided for in such warrants and options, will be validly issued, fully
paid and non-assessable;
2. The Issued Shares are validly issued, fully paid and non-assessable;
3. The Conversion Shares, when issued in accordance with the terms of
the relative convertible securities and when certificates representing such
shares have been duly executed, countersigned and delivered to the persons
entitled thereto, will be validly issued, fully paid and non-assessable;
4. The Note Shares, when issued in accordance with the terms of the
relative promissory notes and the underlying securities, and when certificates
representing such shares have been duly executed, countersigned and delivered to
the persons entitled thereto, will be validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion letter as an exhibit to
the Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Registration Statement. In giving such consent, we do not
hereby admit that we come within the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations thereunder.
The foregoing opinion is based on and limited to the Delaware General
Corporation Law and the relevant federal laws of the United States. We express
no opinion with respect to the laws of any other jurisdiction.
<PAGE>
Network-1 Security Solutions, Inc.
March 21, 2000
Page 3 of 3 pages
The opinions expressed herein are based upon the laws in effect on the
date hereof, and we assume no obligation to revise or supplement this opinion
should any such law be changed by legislative action, judicial decision or
otherwise.
Very truly yours,
SOLOVAY EDLIN & EISEMAN, P.C.
By: /s/ Sam Schwartz
-----------------------
Sam Schwartz
EXHIBIT 23.1
------------
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-3 No. 333-96189) and
related Prospectus of Network-1 Security Solutions, Inc. and to the
incorporation by reference therein of our report dated January 28, 2000 (with
respect to Note L, February 9, 2000; Note M, February 29, 2000 and Note C, March
14, 2000), with respect to the financial statements of Network-1 Security
Solutions, Inc. included in its Annual Report on Form 10-KSB for the year ended
December 31, 1999 filed with the Securities and Exchange Commission.
New York, New York
March 21, 2000
