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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
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Pursuant to Section 13 of the
Securities Exchange Act of 1934
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NETWORK-1 SECURITY SOLUTIONS, INC.
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(Exact Name of Registrant as Specified in Charter)
DELAWARE 1-14896 13-3027591
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(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
1601 TRAPELO ROAD, RESERVOIR PLACE
WALTHAM, MASSACHUSETTS 02451
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(Address of Principal Executive Offices) (Zip Code)
781-522-3400
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(Registrant's Telephone Number)
DECEMBER 22, 1999
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(Date of Report -- Date of
Earliest Event Reported)
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Item 5. Other Events
On December 22, 1999, Network-1 Security Solutions, Inc. (the
"Registrant") entered into a Securities Purchase Agreement with respect to a
$3.0 million private offering of preferred stock, warrants and notes purchased
by thirty-nine (39) investors including affiliates of Wheatley Partners II,
L.P., the Company's largest stockholder, Corey M. Horowitz, a principal
stockholder and Chairman of the Board of Directors of the Registrant, and Avi A.
Fogel, President, Chief Executive Officer and a director of the Company.
In accordance with the terms of the Securities Purchase Agreement, an
aggregate of 491,803 shares of Series D Preferred Stock were issued to investors
at a price of $3.05 per share (equal to a 20% discount of the average thirty
(30) closing price for the Company's Common Stock through December 6, 1999)
together with five-year warrants to purchase the same number of shares of Common
Stock at an exercise price of $3.00 per share. The exercise price of the
warrants are subject to adjustment depending on the product revenue (exclusive
of revenue from consulting services) achieved by the Company during the three
month period ended March 31, 2000 so that beginning at a product revenue level
of less than $500,000 the exercise price shall be adjusted to $1.00 and
increasing $.25 for each $250,000 increase in product revenue above $500,000
(except for product revenue between $2,250,000 and $3,249,999 for which the
exercise price shall remain at $3.00), up to a maximum $4.00 exercise price for
product revenue equal to or greater than $4.0 million. In addition, the Company
issued to investors promissory notes in the aggregate principal amount of $1.5
million at an interest rate of 8% per annum. Each share of Series D Preferred
Stock is convertible into one share of Common Stock, subject to adjustment. The
promissory notes will be convertible into Series D Preferred Stock and warrants
(upon the same terms described above) subject to stockholder approval. The
Company has agreed to file a Form S-3 Registration Statement to register the
Common Stock underlying the Series D Preferred Stock, warrants and notes
(assuming conversion of the Series D Preferred Stock and warrants underlying the
notes) within 45 days of the closing date.
Item 7. Financial Statements and Exhibits
Item 7(c) Exhibits.
Exhibit Description
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3.1 Certificate of Designation of Series D Preferred Stock
10.28 Securities Purchase Agreement, dated December 22, 1999,
between the Company and the investors including form of
Certificate of Designation of Series D Preferred Stock
(Exhibit A), form of Warrant (Exhibit B) and form of
Promissory Note (Exhibit C).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
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Avi A. Fogel,
President and
Chief Executive Officer
Date: January 5, 2000
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Exhibit Index
Exhibit Description
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3.1 Certificate of Designation of Series D Preferred Stock
10.28 Securities Purchase Agreement, dated December 22, 1999,
between the Company and the investors including form of
Certificate of Designation of Series D Preferred Stock
(Exhibit A), form of Warrant (Exhibit B) and form of
Promissory Note (Exhibit C).
EXHIBIT 3.1
CERTIFICATE OF DESIGNATION
OF SERIES D PREFERRED STOCK
OF
NETWORK-1 SECURITY SOLUTIONS, INC.
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Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
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The undersigned, being the President and Chief Executive
Officer of Network-1 Security Solutions, Inc. ("Corporation"), hereby certifies
in accordance with the provisions of Section 151 of the General Corporation Law
of the State of Delaware that the Board of Directors of the Corporation duly
adopted the following resolution on December 16, 1999:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation by the provisions of the
Corporation's Certificate of Incorporation, this Board of Directors hereby
creates, from the 5,000,000 shares of preferred stock, par value $0.01 per share
(the "Preferred Stock"), of the Corporation authorized to be issued pursuant to
the Certificate of Incorporation, a series of the Preferred Stock having the
following terms and designations:
Section 1. Designation and Amount. The shares of such series having a
par value of $0.01 per share shall be designated as "Series D Convertible
Preferred Stock" (the "Series D Preferred Stock") and the number of shares
constituting such series shall be 1,250,000. The relative rights, preferences
and limitations of the Series D Preferred Stock shall be in all respects
identical, share for share, to the Common Stock of the Corporation, except as
otherwise provided herein.
Section 2. Dividends. The holders of Series D Preferred Stock shall be
entitled to receive dividends and other distributors, when, as and if declared
by the Board of Directors out of funds legally available therefor. If at any
time the Corporation declares any dividend or other distribution on its Common
Stock (other than a dividend payable solely in shares of Common Stock) and there
are shares of its Series D Preferred Stock issued and outstanding, then a
dividend or other distribution shall also be declared on the Series D Preferred
Stock payable at the same time and on the same terms and conditions, entitling
each holder of Series D Preferred Stock to receive the dividend or distribution
such holder would have received had such holder converted the Series D Preferred
Stock as of the record date for determining stockholders entitled to receive
such dividend or distribution.
Section 3. Voting Rights. Except as otherwise provided by the General
Corporation Law of the State of Delaware, the Series D Preferred Stock and the
Common Stock of the Corporation shall vote as one class, with the holder of each
share of Series D Preferred Stock
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entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of Series D Preferred Stock could have been converted as
of the record date for determining the stockholders having notice of and to vote
at such meeting.
Section 4. Reacquired Shares. Any shares of the Series D Preferred
Stock redeemed or purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock, unless otherwise provided for in the
Certificate of Incorporation of the Corporation, and may be reissued as part of
a new series of Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions or restrictions on issuance
set forth herein.
Section 5. Liquidation, Dissolution or Winding Up.
(a) Upon the liquidation, dissolution or winding up of the Corporation,
no distribution shall be made (i) to the holders of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the Series D
Preferred Stock unless, prior thereto, the holders of Series D Preferred Stock
shall have received a liquidation preference of $3.05 per share (the
"Liquidation Preference Amount"), plus an amount equal to unpaid dividends
thereon, if any, to the date of such payment or (ii) to the holders of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series D Preferred Stock, except distributions made ratably
on the Series D Preferred Stock and all other such parity stock in proportion to
the total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. For purposes of this Certificate, each
of (1) the sale, conveyance, exchange or transfer of all or substantially all of
the property and assets of the Corporation, or (2) the consolidation or merger
of the Corporation with or into any other corporation, in which the stockholders
of the Corporation immediately prior to such event do not own a majority of the
outstanding shares of the surviving corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation; provided, however,
that a holder may elect to convert his shares of Series D Preferred Stock
immediately prior to any such event pursuant to Section 6 below.
(b) In the event of a liquidation, dissolution or winding up of the
Corporation within the meaning of subsection (a) above, then in connection with
each such event the Corporation shall send to the holders of the Series D
Preferred Stock at least twenty days' prior written notice of the date when such
event shall take place.
(c) For purposes of this Certificate the term "junior stock" shall mean
the Common Stock and any other class or series of shares of the Corporation
hereafter authorized over which Series D Preferred Stock has preference or
priority in the payment of dividends or in the distribution of assets on any
liquidation, dissolution or winding up of the Corporation.
(d) The Series D Preferred Stock shall rank senior to all current and
future issuances of Preferred Stock by the Corporation. The Corporation may not
issue any shares of capital stock or preferred stock that is senior or equal in
any respect to the Series D Preferred Stock without the consent of the holders
of a majority of the outstanding shares of Series D Preferred Stock.
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(e) Upon any liquidation, dissolution or winding up of the Corporation,
and after full payment as provided in Section 5(a) above, the holders of Series
D Preferred Stock shall not be entitled to any further participation in any
distribution of assets by the Corporation.
Section 6. Conversion.
(a) Subject to the provisions for adjustments hereinafter set forth,
each share of the Series D Preferred Stock shall be convertible at the option of
the holder thereof, at any time, in the manner hereinafter set forth, into a
number of fully paid and nonassessable shares of Common Stock of the Corporation
computed by multiplying the number of such shares of Series D Preferred Stock to
be converted by the Liquidation Preference Amount (such amount to be adjusted
proportionately in the event the shares of Series D Preferred Stock are adjusted
into a lesser number or subdivided into a greater number) and dividing the
result by the Conversion Price. The Conversion Price per share of Series D
Preferred Stock shall initially be $3.05 which price shall be subject to
adjustment as provided herein. In addition, each share of Series D Preferred
Stock shall automatically be converted into such number of fully paid and
nonassessable shares of Common Stock of the Corporation upon the consummation of
an underwritten public offering, after the date hereof, pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale by the Corporation of shares of its Common Stock to the
public (a "Qualified Transaction").
(b) The Conversion Price shall be adjusted from time to time as
follows:
(i) If the Corporation at any time subdivides (by stock split,
stock dividend, recapitalization or otherwise) its outstanding shares of Common
Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be
proportionately increased.
(ii) If the Corporation shall consolidate or merge into or
with another corporation, or if the Corporation shall sell or convey to any
other person or persons all or substantially all the property of the
Corporation, or if the Corporation shall effect a capital reorganization or
reclassification of its Common Stock, then each holder of Series D Preferred
Stock then outstanding shall have the right thereafter to convert each share of
Series D Preferred Stock held by him into the kind and amount of shares of
stock, other securities, cash, and property receivable upon such consolidation,
merger, sale, conveyance, reorganization or reclassification by a holder of the
number of shares of Common Stock into which such share of Series D Preferred
Stock might have been converted immediately prior to such consolidation, merger,
sale, conveyance, reorganization or reclassification and shall have no other
conversion rights. In any such event, effective provision shall be made, in the
certificate or articles of incorporation of the resulting or surviving
corporation or otherwise or in any contracts of sale and conveyance so that, so
far as appropriate and as nearly as reasonably may be, the provisions set forth
herein for the protection of the conversion rights of the shares of Series D
Preferred Stock shall thereafter be made applicable. Such adjustments shall be
made successively whenever any event listed above shall occur.
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(iii) If, after the date of the original issuance of shares
of Series D Preferred Stock, the Corporation issues, grants or sells any
Additional Stock as hereinafter defined (other than as set forth below) for a
consideration per share less than Conversion Price, then upon such issue or sale
the Conversion Price will be reduced in order to increase the number of shares
of Common Stock into which the Series D Preferred Stock is convertible to that
price per share determined by multiplying the Conversion Price in effect
immediately prior to such issuance or sale by a fraction (x) the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to the issuance or sale of such Common Stock, plus the number of shares of
Common Stock issuable upon conversion of all of the shares of Series D Preferred
Stock outstanding immediately prior to the issuance or sale of such Common
Stock, plus the number of shares of Common Stock which the aggregate
consideration (if any) received by the Corporation in such issuance or sale
would purchase at the then effective Conversion Price, and (y) the denominator
of which shall be the number of shares of Common Stock outstanding immediately
prior to the issuance or sale of such Common Stock, plus the number of shares of
Common Stock issuable upon conversion of all of the shares of Series D Preferred
Stock outstanding immediately prior to the issuance or sale of such Common
Stock, plus the number of such shares of Common Stock so issued or sold;
provided, however, that additional shares of Common Stock issued or sold without
consideration shall be deemed to have been issued or sold for $.01 per share.
"Additional Stock" shall mean Common Stock or options, warrants or other rights
to acquire or securities convertible into or exchangeable for shares of Common
Stock, including shares held in the Corporation's treasury, and shares of Common
Stock issued upon the exercise of any options, rights or warrants to subscribe
for shares of Common Stock and shares of Common Stock issued upon the direct or
indirect conversion or exchange of securities for shares of Common Stock, except
as provided in subsection (b)(iv) below:
(iv) Notwithstanding anything to the contrary contained in
subsection (b)(iii) above, no adjustment will be made to the Conversion Price by
reason of the issuance of shares of Common Stock (1) upon conversion of the
Series D Preferred Stock or Notes, or exercise of the Warrants issued in
accordance with the Securities Purchase Agreement, dated December ___, 1999,
between the Corporation and the Investors, (2) as a dividend or distribution on
the Series D Preferred Stock, (3) to strategic partners, lenders, vendors and
financial institutions up to an aggregate of 457,812, (4) upon exercise of
outstanding options and warrants to purchase an aggregate of 800,886 as of the
date of this Certificate and (5) to employees, officers, directors or
consultants of the Corporation pursuant to the Corporation's Stock Option Plan
or any other benefit plan.
(c) In the event that at any time, as a result of an adjustment made
pursuant to this Section 6, the holder of a share of Series D Preferred Stock
thereafter converted shall become entitled to receive any shares of capital
stock or other securities of the Corporation other than shares of its Common
Stock, thereafter the number of such other shares of capital stock or other
securities so receivable upon conversion of Series D Preferred Stock 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 shares of the
Corporation's Common Stock contained in this Section 6, and the provisions of
this Certificate with respect to shares of the Corporation's Common Stock shall
apply, to the extent applicable, on like terms to any such other shares of
capital stock or warrants or other securities.
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(d) If any adjustment in the number of shares of Common Stock into
which each share of the Series D Preferred Stock may be converted as required
pursuant to this Section 6 would result in an increase or decrease of less than
1% in the number of shares of Common Stock into which each share of the Series D
Preferred Stock is then convertible, the amount of any such adjustment shall be
carried forward, and adjustment with respect thereto shall be made at the time
of and together with any subsequent adjustment which, together with such amount
and any other amount or amounts so carried forward, shall aggregate at least 1%
of the number of shares of Common Stock into which each share of the Series D
Preferred Stock is then convertible. All calculations under this Section 6 (d)
shall be made to the nearest one-hundredth of a share.
(e) The Board of Directors may, but shall not be required to, increase
the number of shares of Common Stock into which each share of the Series D
Preferred Stock may be converted, in addition to the adjustment required by this
Section 6, as shall be determined by it (as evidenced by a resolution of the
Board of Directors) to be advisable in order to avoid or diminish any income
deemed to be received by any holder of the Common Stock or Series D Preferred
Stock resulting from any dividend or distribution of stock or issuance of rights
or warrants to purchase or subscribe for stock or from any event treated as such
for federal income tax purposes.
(f) (i) The holder of any shares of the Series D Preferred Stock may
exercise his or its option to convert such shares into shares of Common Stock by
surrendering for such purpose to the Corporation, at its principal office or at
such other office or agency maintained by the Corporation for that purpose, a
certificate or certificates representing the shares of Series D Preferred Stock
to be converted accompanied by a written notice stating that such holder elects
to convert all or a specified whole number of such shares in accordance with the
provisions of this Section 6 and specifying the name or names in which such
holder wishes the certificate or certificates for shares of Common Stock to be
issued. In case such notice shall specify a name or names other than that of
such holder, such notice shall be accompanied by payment of all transfer taxes
payable upon the issuance of shares of Common Stock in such name or names. As
promptly as practicable, and in any event within five business days after the
surrender of such certificates and the receipt of such notice relating thereto
and, if applicable, payment of all transfer taxes, the Corporation shall deliver
or cause to be delivered (x) certificates representing the number of validly
issued, fully paid and nonassessable shares of Common Stock of the Corporation
to which the holder of the Series D Preferred Stock so converted shall be
entitled and (y) if less than the full number of shares of the Series D
Preferred Stock evidenced by the surrendered certificate or certificates is
being converted, a certificate of like tenor, for the number of shares evidenced
by such surrendered certificate or certificates less the number of shares
converted. Such conversions shall be deemed to have been made at the close of
business on the date of giving of such notice and of such surrender of the
certificate or certificates representing the shares of the Series D Preferred
Stock to be converted so that the rights of the holder thereof shall cease
except for the right to receive Common Stock of the Corporation in accordance
herewith, and the converting holder shall be treated for all purposes as having
become the record holder of such Common Stock of the Corporation at such time.
(ii) Upon the consummation of a Qualified Transaction, the
conversion of Series D Preferred Stock into Common Stock will be automatically
reflected in the books of the Corporation. The holders of the Series D Preferred
Stock will surrender a certificate or
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certificates representing the shares of Series D Preferred Stock to be converted
and provide a written notice as set forth in (i) above.
(g) Upon conversion of any shares of the Series D Preferred Stock, the
holder thereof shall not be entitled to receive any accumulated, accrued or
unpaid dividends in respect of the shares so converted, provided that such
holder shall be entitled to receive dividends on such shares of the Series D
Preferred Stock declared prior to such conversion if such holder held such
shares on the record date fixed for the determination of holders of the Series D
Preferred Stock entitled to receive payment of such dividend.
(h) The Corporation shall at all times reserve and keep available out
of its authorized Common Stock the full number of shares of Common Stock or
other securities issuable upon the conversion of all outstanding shares of the
Series D Preferred Stock.
Section 7. Adjustments for Consolidation, Merger, etc. Prior to the
consummation of a consolidation or merger or a sale of substantially all of the
property of the Corporation as described in Section 6 (b)(ii) hereof, each
corporation, including this Corporation, which may be required to deliver any
stock, securities, cash or other property to the holders of shares of the Series
D Preferred Stock shall assume, by written instrument delivered to each transfer
agent of the Series D Preferred Stock, the obligation to deliver to such holder
such shares of stock, securities, cash or other property to which, in accordance
with the provisions of Section 6, such holder may be entitled and each such
corporation shall have furnished to each such transfer agent or person acting in
a similar capacity, including the Corporation, an opinion of counsel for such
corporation, stating that such assumption agreement is legal, valid and binding
upon such corporation.
Section 8. Reports as to Adjustments. Whenever the number of shares of
Common Stock into which the shares of the Series D Preferred Stock are
convertible is adjusted as provided in Section 6, the Corporation shall (a)
promptly compute such adjustment and furnish to each transfer agent or person
acting in a similar capacity, for the Series D Preferred Stock, a certificate,
signed by a principal financial officer of the Corporation, setting forth the
number of shares of Common Stock into which each share of Series D Preferred
Stock is convertible as a result of such adjustment and the computation thereof
and when such adjustment will become effective and (b) promptly mail to the
holders of record of the outstanding shares of the Series D Preferred Stock a
notice stating that the number of shares into which the shares of Series D
Preferred Stock are convertible has been adjusted and setting forth the new
number of shares into which each share of the Series D Preferred Stock is
convertible as a result of such adjustment and when such adjustment will become
effective.
Section 9. Waiver. Any right or privilege of the Series D Preferred
Stock (including without limitation any rights related to the conversion thereof
and to adjustments of the Conversion Price) may be waived (either generally or
in a particular instance and either retroactively or prospectively) by and only
by the written consent of the holders of a majority of the Series D Preferred
Stock then outstanding and any such waiver shall be binding upon each holder of
Series D Preferred Stock.
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Section 10. Notices of Corporate Action. In the event of:
(a) any taking by the Corporation of a record of the holders of its
Common Stock for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right or warrant to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right;
(b) any capital reorganization, reclassification or recapitalization
of the Corporation, any consolidation or merger involving the Corporation and
any other person (other than a consolidation or merger with a wholly-owned
subsidiary of the Corporation, provided that the Corporation is the surviving or
the continuing corporation and no change occurs in the Common Stock), or any
transfer of all or substantially all of the assets of the Corporation to any
other person; or
(c) any voluntary or involuntary dissolution, liquidation or winding up
of the Corporation;
then, and in each such case, the Corporation shall cause to be mailed to each
transfer agent for the shares of the Series D Preferred Stock and to the holders
of record of the outstanding shares of the Series D Preferred Stock, at least 20
days (or 10 days in case of any event specified in clause (a) above) prior to
the applicable record or effective date hereinafter specified, a notice stating
(i) the date or expected date on which any such record is to be taken for the
purpose of such dividend, distribution or right or, (ii) the date or expected
date to which any such reorganization, reclassification, recapitalization,
consolidation, merger, transfer, dissolution, liquidation or winding up is to
take place and the time, if any such time is to be fixed, as of which the
holders of record of Common Stock shall be entitled to exchange their shares of
Common Stock for the securities or other property deliverable upon such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding up. Such notice shall also state
whether such transaction will result in any adjustment in the number of shares
of Common Stock into which each share of the Series D Preferred Stock shall be
convertible upon such adjustment and when such adjustment will become effective.
The failure to give any notice required by this Section 10, or any defect
therein, shall not affect the legality or validity of any such action requiring
such notice.
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WITNESS WHEREOF, the Corporation has caused this Certificate
to be duly executed on its behalf, as of this 16th day of December, 1999.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
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Avi A. Fogel, President and Chief
Executive Officer
ATTEST:
/s/ Murray Fish
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Murray Fish
Chief Financial Officer and Secretary
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EXHIBIT 10.28
SECURITIES PURCHASE AGREEMENT
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AGREEMENT, dated as of December 22, 1999, by and between Network-1
Security Solutions, Inc. (the "Company"), a Delaware corporation with principal
offices at 1601 Trapelo Road, Waltham, MA 02451, and the Investors signatory
hereto (collectively, the "Investors").
WHEREAS, each of the Investors and the Company desire that the
Investors purchase (i) up to an aggregate of 491,803 shares of Series D
Preferred Stock (the "Preferred Stock") at a purchase price of $3.05 per share,
(ii) warrants to purchase up to 491,803 shares of Common Stock, at an exercise
price of $3.00 per share, subject to adjustment (the "Warrants") and (iii) two
year promissory notes in the aggregate principal amount of $1,500,000 (the
"Notes"), on the terms and subject to the conditions set forth herein. The
shares of Common Stock issuable upon conversion of the Preferred Stock, exercise
of the Warrants and the conversion and/or exercise of the Preferred Stock and
Warrants issuable upon conversion of the Notes, are collectively referred to
herein as the "Underlying Securities".
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I.
Issuance of Preferred Stock, Warrants and Notes
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I.1 Agreement to Purchase and Sell. At the Closing provided for in
Section I.2, the Company will issue and sell to each Investor and, subject to
the terms and conditions of this Agreement, each Investor will purchase from the
Company (i) the Preferred Stock which shall have such rights, powers and
preferences as set forth in the Certificate of Designation attached as Exhibit
"A" hereto, (ii) Warrants in the form of Exhibit "B" hereto, and (iii) Notes in
the form of Exhibit "C" hereto, in the amounts opposite such Investor's name and
in consideration for payment by each Investor to the Company of the purchase
price as indicated on Schedule 1.1 hereto (the "Purchase Price").
I.2 The Closing. The closing of the issuance of the Preferred Stock,
Warrants and Notes (the "Closing") shall take place at the offices of Solovay
Edlin & Eiseman, P.C., 845 Third Avenue, New York, New York 10022 on the date
that this Agreement is executed by the parties hereto (the time and date of the
Closing being hereto referred to as the "Closing Date"). On the Closing Date
there will be delivered to the Investors the Preferred Stock, Warrants and Notes
to be purchased by them on the Closing Date in accordance with Schedule 1.1
hereto against delivery by the Investors of checks payable to the order of the
Company (or wire transfers) in the full amount of the Purchase Price.
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ARTICLE II.
Representations, Warranties, and Agreements of the Company
The Company represents and warrants to, and agrees with, the
Investors as follows:
II.1 Corporate Organization and Qualification. The Company is a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction of incorporation, and is qualified to transact business
and is in good standing as a foreign corporation in every jurisdiction in which
its ownership, leasing, licensing, or use of property or assets or the conduct
of its business makes such qualification necessary, except in such jurisdictions
where the failure to be so qualified or in good standing would not have a
material adverse effect on the business, results of operations, financial
condition, or prospects of the Company. The Company has no subsidiaries except
for Network-1 Acquisition Corp. and has no investment, whether by way of
ownership of stock or other securities or by loan, advance, or otherwise, in any
other corporation, partnership, firm, association, or other business entity. The
Company has all required power and authority to own its property and to carry on
its business as now conducted and proposed to be conducted.
II.2 Validity of Transaction. The Company has all requisite power and
authority to execute, deliver, and perform this Agreement and the agreements set
forth in the Preferred Stock (Certificate of Designation attached as Exhibit "A"
hereto), Warrants and Notes, and to issue the Preferred Stock, Warrants and
Notes to the Investors. All necessary corporate proceedings of the Company have
been duly taken to authorize the execution, delivery, and performance of this
Agreement, the Preferred Stock, Warrants and Notes and to authorize the issuance
and sale of the Preferred Stock, Warrants and Notes, and upon conversion of the
Preferred Stock and Notes, and exercise of the Warrants, the Underlying
Securities to the Investors. This Agreement, the Preferred Stock, Warrants and
Notes have been duly authorized, executed, and delivered by the Company, are the
legal, valid, and binding obligations of the Company, and are enforceable as to
the Company in accordance with their respective terms, except as may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium, or other
similar laws or by legal or equitable principles relating to or limiting
creditors' rights generally or as rights to indemnification may be limited by
applicable securities laws. Except as to filings which may be required under
applicable state securities regulations which will be made by the Company, no
consent, authorization, approval, order, license, certificate, or permit of or
from, or declaration or filing with, any Federal, state, local, or other
governmental authority or of any court or other tribunal is required by the
Company in connection with the transactions contemplated hereby. No consent of
any party to any contract, agreement, instrument, lease, license, arrangement,
or understanding to which the Company is a party, or by which any of its
properties or assets is bound, is required for the execution, delivery, or
performance by the Company of this Agreement, the Preferred Stock, Warrants or
the Notes, and the execution, delivery, and performance of this Agreement, the
Preferred Stock, Warrants and Notes by the Company will not violate, result in a
breach of, conflict with, or (with or without the giving of notice or the
passage of time or both) entitle any party to terminate or call a default under
any such contract, agreement, instrument, lease, license, arrangement, or
understanding, or violate or result in a breach of any term of the Certificate
of Incorporation or By-laws of the Company, or violate, result in a breach of,
or conflict with any law, rule, regulation, order, judgment, or decree binding
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on the Company or to which any of its operations, business, properties, or
assets is subject. The registration rights granted to the Investors pursuant to
Article IV hereof do not violate any of the terms and conditions of the
registration rights previously granted by the Company to other holders of the
Company's securities. The shares of Common Stock issuable upon conversion of the
Preferred Stock and Notes (assuming further conversion of the Preferred Stock
and Warrants underlying the Notes), or exercise of the Warrants are duly
authorized, have been reserved for issuance upon conversion of the Preferred
Stock and Notes (assuming further conversion of the Preferred Stock and Warrants
underlying the Notes), and, upon exercise of the Warrants in accordance with the
terms thereof, will be validly issued, fully paid, and nonassessable, will not
have been issued in violation of any preemptive right of stockholders or rights
of first refusal, and the Investors will have good title to the Underlying
Securities, free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders agreements and voting trusts.
II.3 Capitalization. The authorized capital stock of the Company
consists of 25,000,000 shares of Common Stock and 5,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"), of which 1,250,000
shares have been designated Series D Convertible Preferred Stock, having the
designations, dividend rights, voting powers, conversion rights, rights on
liquidation or dissolution, and other preferences or other special rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Designation attached as Exhibit A hereto. Immediately prior to
the Closing, the Company shall have 4,935,211 shares of Common Stock and no
shares of Preferred Stock outstanding. All issued and outstanding shares of
Common Stock and Preferred Stock have been validly issued and are fully paid and
nonassessable and have not been issued in violation of any Federal or state
securities laws. Except for the obligation of the Company to issue (a) the
Underlying Securities upon conversion of the Preferred Stock and Notes, and upon
exercise of the Warrants, (b) upon the exercise of the options and warrants
which are currently outstanding to purchase 800,886 shares of Common Stock
(excluding any options issued under the Company's Stock Option Plan), and (c)
upon the exercise of options to purchase 1,452,931 shares of Common Stock issued
under the Company's Stock Options Plan, there are not, as of the date hereof,
any outstanding or authorized subscriptions, options, warrants, calls, rights,
commitments, or any other agreements obligating the Company to issue (i) any
additional shares of its capital stock or (ii) any securities convertible into,
or exercisable or exchangeable for, or evidencing the right to subscribe for,
any shares of its capital stock. Other than the Company's Stock Option Plan, the
Company has not adopted or authorized any plan for the benefit of its officers,
employees, or directors which require or permit the issuance, sale, purchase, or
grant of any shares of the Company's capital stock, any securities convertible
into, or exercisable or exchangeable for, or evidencing the right to subscribe
for any shares of the Company's capital stock, or any phantom shares or any
stock appreciation rights. The Company is under no obligation (contingent or
otherwise) to purchase or otherwise acquire or retire any shares of its capital
stock, except as may be provided with respect to options outstanding under the
Stock Option Plan.
II.4 SEC Filings. The Company has filed all forms, reports, statements
and other documents required to be filed with (i) the Securities and Exchange
Commission (the "SEC") including, without limitation, (A) all Annual Reports on
Form 10-KSB, (B) all Quarterly Reports on Form 10-QSB, (C) all Reports on Form
8-K, (D) all other reports or registration statements and (E) all amendments and
supplements to all such reports and registration statements (collectively
referred to
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as the "SEC Reports") and (ii) any other applicable state securities authorities
(all such forms, reports, statements and other documents in (i) and (ii) of this
Section II.4 being referred to herein, collectively, as the "Reports"). The
Reports (i) were prepared in all material respects in accordance with the
requirements of applicable law (including, with respect to the SEC Reports, the
Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of
1934, as the case may be, and the rules and regulations of the SEC thereunder
applicable to such SEC Reports) and (ii) did not at the time they were filed
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. In addition, since the last Report and except as disclosed in
Company press releases, there have been no material events involving the Company
that require disclosure under the securities laws.
ARTICLE III.
Representations, Warranties, and Agreements of the Investors
------------------------------------------------------------
Each of the Investors, severally and not jointly, represents and
warrants to, and agrees with, the Company as follows:
III.1 Organization. Such Investor (if not an individual) is duly
organized under the laws of the state of its jurisdiction of organization and
has full power and authority to enter into this Agreement and to consummate the
transactions set forth herein. All necessary proceedings have been duly taken to
authorize the execution, delivery, and performance of this Agreement by such
Investor (if not an individual).
III.2 Accredited Investor. Such Investor and, to the knowledge of such
Investor, each limited partner of such Investor in the case of an Investor which
is a limited partnership, and each partner of such Investor in the case of a
Investor which is a general partnership, is an "accredited investor," as that
term is defined in Rule 501 of Regulation D promulgated under the Securities
Act. Such Investor, the shareholders of the general partner of such Investor, if
any, and each of the limited partners of such Investor, if any, have had
substantial experience in investing in private transactions like this one, are
capable of evaluating the merits and risks of an investment in the Company, and
have had a full opportunity to discuss the business, management, and financial
affairs of the Company with the Company's management. Such Investor has received
all requested documents from the Company and has had a full opportunity to ask
questions of, and receive answers from, the officers of the Company.
III.3 Investment Intent. Such Investor is acquiring the Preferred
Stock, Warrants, and Notes and the Underlying Securities for its or his own
account for investment and not with a view to, or for sale in connection with,
any public distribution thereof in violation of the Securities Act. Such
Investor understands that none of the shares of Preferred Stock, Warrants, Notes
or the Underlying Securities have been registered for sale under the Securities
Act or qualified under applicable state securities laws and that the shares of
Preferred Stock, Warrants and Notes and the Underlying Securities are being
offered and sold to such Investor pursuant to one or more exemptions. Such
Investor understands that it or he must bear the economic risk of its or his
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investment in the Company for an indefinite period of time, as the Preferred
Stock, Warrants and Notes and the Underlying Securities cannot be sold unless
subsequently registered under the Securities Act and qualified under state
securities laws, unless an exemption from such registration and qualification is
available.
III.4 Transfer of Securities. Such Investor will not sell or otherwise
dispose of any Preferred Stock, Warrants and Notes or Underlying Securities
unless (a) a registration statement with respect thereto has become effective
under the Securities Act and such Preferred Stock, Warrants and Notes and
Underlying Securities have been qualified under applicable state securities laws
or (b) there is presented to the Company notice of the proposed transfer and, if
it so requests, a legal opinion reasonably satisfactory to the Company that such
registration and qualification is not required; provided, however, that no such
registration or qualification or opinion of counsel shall be necessary for a
transfer by such Investor (i) to any entity controlled by, or under common
control with, such Investor (ii) to a partner or officer of such Investor, (iii)
to a partner or officer of the general partner of such Investor, or (iv) to the
spouse, lineal descendants, estate, or a trust for the benefit of any of the
foregoing or (an "Investor Affiliate"), provided the transferee agrees in
writing to be subject to the terms hereof to the same extent as if he were such
Investor. Such Investor consents that any transfer agent of the Company may be
instructed not to transfer any Preferred Stock, Warrants, Notes or Underlying
Securities unless it receives satisfactory evidence of compliance with the
foregoing provisions, and that there may be endorsed upon any certificate (or
other instrument) representing such securities (and any certificates issued in
substitution therefor) the following legend calling attention to the foregoing
restrictions on transferability of such shares, stating in substance:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR QUALIFIED UNDER ANY STATE SECURITIES LAW."
The Company shall, upon the request of any holder of Preferred Stock, Warrants
or Notes and the surrender of such securities, issue a new stock certificate,
Warrants or Note without such legend if (A) the Note, Warrants or stock
evidenced by such certificate has been effectively registered under the
Securities Act and qualified under any applicable state securities law and sold
by the holder thereof in accordance with such registration and qualification, or
(B) such holder shall have delivered to the Company a legal opinion reasonably
satisfactory to the Company to the effect that the restrictions set forth herein
are no longer required or necessary under the Securities Act or any applicable
state law.
III.5 Authorization. All actions on the part of such Investor necessary
for the authorization, execution, delivery, and performance by such Investor of
this Agreement have been taken. This Agreement has been duly authorized,
executed, and delivered by such Investor, is the legal, valid, and binding
obligations of such Investor, and are enforceable as to such Investor in
accordance with their respective terms, except as may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium, or other similar laws or by
legal or equitable principles
5
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relating to or limiting creditors' rights generally or as rights to
indemnification may be limited by applicable securities laws.
III.6 Qualified Small Business. The Company shall make all filings and
reports required under Section 1202(d)(1)(c) of the Internal Revenue Code of
1986, as amended, and any related Treasury regulations.
III.7 Finder or Broker. Neither such Investor nor any person acting on
behalf of such Investor has negotiated with any finder, broker, intermediary, or
similar person in connection with the transactions contemplated herein.
ARTICLE IV
Registration of Securities
--------------------------
IV.1 Registration. IV.1.(a) The Company agrees to include an aggregate
of 1,967,212 shares of Common Stock (as appropriately adjusted for any stock
splits, stock dividends or similar events) for which (i) the Preferred Stock may
be converted, (ii) the Warrants may be exercised (iii) and (iii) into which the
Notes may be converted (assuming the further conversion of the Preferred Stock
and exercise of the Warrants underlying the Notes and exclusive of interest
payments with respect to the Notes) (the "Registrable Securities") in a
registration statement (the "Registration Statement") which shall be filed as
promptly as practicable following the Closing but in no event later than
forty-five (45) days after the Closing Date. The Company will use its reasonable
best efforts to have the Registration Statement declared effective as promptly
as practicable thereafter but in no event later than ninety (90) days after the
Closing Date and shall keep the Registration Statement effective in order to
permit a public offering and sale of the Registrable Securities thereunder. If
the Registration Statement covering the Registrable Securities required to be
filed by the Company pursuant to this Section IV.1 hereof has not been filed
within forty-five (45) days from the Closing Date and/or has not been declared
effective by one hundred and twenty (120) days following the Closing Date, then
the Company will make payments to each Investor as liquidated damages for such
failure and not as a penalty, which payment shall be equal to one percent (1%)
of the Purchase Price for the Preferred Stock, Warrants and Notes purchased
hereunder for each forty-five (45) day period until the Registration Statement
has been filed and/or declared effective, which shall be pro rated for such
periods less than forty-five (45) days. The liquidated damages shall be paid by
the Company in cash upon demand. The Company shall also use its best efforts to
register or qualify all of the Registrable Securities under such other
securities or blue sky laws of such States of the United States of America where
an exemption is not available and as the Investors shall reasonably request.
IV.1.(b) The Company may require, and the Investors hereby
agree, to furnish the Company such information regarding the Investor and the
distribution of the Registrable Securities as the Company may from time to time
reasonably request in writing.
IV.1.(c) The Company will use its reasonable best efforts to
keep the Registration Statement effective in order to permit a public offering
and sale of any Registrable Securities registered
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thereunder until the earlier of (i) the date that all of the Registrable
Securities have been sold pursuant to the Registration Statement and (ii) the
date that the Investors may sell all such securities under the provisions of
Rule 144.
IV.1.(d) If the Company shall inform the Investors in writing
that in the good faith judgement of the Company's Board of Directors (based on
advice received by the Company's counsel) the sale or transfer of shares of
Registrable Securities by the Investor would, at such time, require the
disclosure of material information that the Company has a bona fide business
purpose for preserving as confidential or the Company would be required to
provide information required by the SEC or the Securities Act (or the rules and
regulations promulgated thereunder), such as pro forma financial information,
that at such time the Company would be unable to provide, the Company may
postpone or suspend effectiveness of the Registration Statement and the
Investors will not sell Registrable Securities; provided, that in no event shall
the Company prohibit the Investors' disposition of Registrable Securities for
more than 30 consecutive days or more than 60 days in any 12 month period.
IV.1.(e) The Company shall (a) promptly notify the Investors
upon discovery that, or upon the happening of any event as a result of which,
the prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, in the light of the circumstances under which they were made,
and (b) at the request of the Investors, promptly prepare and furnish to the
Investors a reasonable number of copies of a supplement to or an amendment of
such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made. The Investors agree that,
upon receipt of any notice from the Company of the happening of any event of the
kind described in this Section IV.1(e), the Investor will forthwith discontinue
disposition of Registrable Securities pursuant to the Registration Statement
until the receipt by the Investors of the copies of the supplemented or amended
prospectus and, if so directed by the Company, will promptly deliver to the
Company (at the Company's expense) all copies, other than permanent file copies,
then in the Investors' possession of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice; provided, that in no
event shall the Company prohibit the Investors' disposition of Registrable
Securities for more than 30 consecutive days or more than 60 days in any 12
month period.
IV.1.2. Expenses. The Company will pay all Registration
Expenses (as defined below) in connection with the Registration Statement.
"Registration Expenses" means all costs, fees and expenses incident to the
Company's performance of or compliance with its obligation to register the
Registrable Securities, including, without limitation, all registration, filing
and NASD fees, all fees and expenses of complying with securities or blue sky
laws, the fees and disbursements of counsel for the Company and of its
independent public accountants, the fees and disbursements of counsel to the
Investors for the review of the Registration Statement prior to filing with the
SEC, and any fees and disbursements customarily paid by issuers or sellers of
securities (excluding any underwriting discounts or commissions or transfer
taxes with respect to the Registrable Securities and the fees and disbursements
of more than one counsel for the Investors).
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<PAGE>
IV.1.3 (a) Indemnification by the Company. The Company will, and hereby
does, indemnify and hold harmless, the Investors and (to the extent applicable)
their directors, officers, affiliates, agents, representatives, successors and
assigns from and against any losses, claims, damages or liabilities to which the
Investors may become subject under the Securities Act or otherwise, including,
without limitation, the fees and expenses of legal counsel, insofar as such
losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any preliminary prospectus, final prospectus or
summary prospectus contained therein, or any amendment or supplement thereto, or
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances in which they were made not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and the Company will promptly reimburse the Investors for any legal
or any other expenses reasonably incurred by the Investors in connection with
investigating or defending any such loss, claim, liability, action or
proceeding; provided, that the Company shall not be liable in any such case to
the extent that any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company through an instrument duly
executed by or on behalf of the Investors specifically stating that it is for
use in the preparation thereof. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Investors and
shall survive the transfer of the Registrable Securities by the Investors.
(b) Indemnification by the Investors. The Investors hereby
agree to indemnify and hold harmless (in the same manner and to the same extent
as set forth in Section IV.1.3(a) above) the Company, and its directors,
officers, employees, agents and representatives, with respect to any untrue
statement or alleged untrue statement of a material fact contained in or any
omission or alleged omission to state therein a material fact in the
Registration Statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, if such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company through an instrument duly executed by or on behalf of the Investor
specifically stating that it is for use in the preparation of the Registration
Statement, preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement; provided, however, that the liability of the Investors
under this Section IV.1.3(b) shall be limited to the amount of net proceeds
received by the Investors in the offering giving rise to such liability. Such
indemnity shall remain in full force and effect, regardless of any investigation
made by or on behalf of the Company or any such director, officer, employee,
agent or representative and shall survive the transfer of such securities by
such seller.
(c) Notices of Claims. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in this Section IV.1.3, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
give written notice to the latter of the commencement of such action; provided,
however, that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its
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obligations under this Section IV.1.3, except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, the indemnifying
party shall be entitled to participate in and to assume the defense thereof,
jointly with any other indemnifying party similarly notified to the extent that
it may wish, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that if the indemnified
party reasonably believes it is advisable for it to be represented by separate
counsel because there exists a conflict of interest between its interests and
those of the indemnifying party with respect to such claim, or there exist
defenses available to such indemnified party which may not be available to the
indemnifying party, or if the indemnifying party shall fail to assume
responsibility for such defense, the indemnified party may retain counsel
satisfactory to it and the indemnifying party shall pay all fees and expenses of
such counsel. No indemnifying party shall be liable for any settlement of any
action or proceeding effected without its written consent, which consent shall
not be unreasonably withheld or delayed. No indemnifying party shall, without
the consent of the indemnified party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release from
all liability in respect to such claim or litigation or which requires action
other than the payment of money by the indemnifying party. Each indemnified
party shall furnish such information regarding itself or the claim in question
as an indemnifying party may reasonably request in writing and as shall be
reasonably requested in connection with the defense of such claim and litigation
resulting therefrom.
IV.1.4 Contribution. If the indemnification provided for in Section
IV.1.3 shall for any reason be held by a court of competent jurisdiction to be
unavailable to an indemnified party in respect of any loss, claim, damage or
liability, or any action in respect thereof, then, in lieu of the amount paid or
payable under Section IV.1.3(a) or IV.1.3(b) hereof, the indemnified party and
the indemnifying party shall contribute to the aggregate losses, claims, damages
and liabilities (including legal or other expenses reasonably incurred in
connection with investigating the same), (a) in such proportion as is
appropriate to reflect the relative fault of the Company and the Investors in
connection with the statement or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable consideration (the relative fault of the Company and such Investors to
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Investors
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission) or (b) if the
allocation provided by clause (a) above is not permitted by applicable law, in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Investors from the offering of the securities
covered by the Registration Statement. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. In addition, no person shall be obligated to
contribute hereunder any amounts in payment of any settlement of any action or
claim effected without such person's consent, which consent shall not be
unreasonably withheld or delayed.
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IV.1.5 Other Indemnification. Indemnification and contribution similar
to that specified in the preceding sections of this Article IV (with appropriate
modifications) shall be given by the Company and the Investors with respect to
any required registration or other qualification of securities under any federal
or state law, rule or regulation of any governmental authority other than the
Securities Act.
ARTICLE V.
Additional Provisions
---------------------
V.1 Indemnification. In addition to the indemnification provided for in
Section IV.1.3 and IV.1.5, each of the parties hereto (the "Indemnifying Party")
shall, to the fullest extent permitted under applicable law, indemnify and hold
the other including (to the extent applicable) their officers, directors,
affiliates, agents, representatives and successors and assigns (the "Indemnified
Party") harmless against any losses, claims, damages, liabilities, actions,
judgments, causes of action, costs or expenses including without limitation,
interest, penalties and attorneys' fees and expenses asserted against, resulting
from, imposed upon or incurred or suffered by an Indemnified Party as a result
of, arising out of or relating to any breach of a representation, warranty,
covenant or agreement contained in this Agreement. All procedural and operating
terms of such indemnification shall be as set forth in Section IV.1.3.
V.2 Communications. All notices or other communications hereunder shall
be in writing and shall be given by registered or certified mail (postage
prepaid and return receipt requested), by an overnight courier service which
obtains a receipt to evidence delivery, or by telex or facsimile transmission
(provided that written confirmation of receipt is provided), addressed as set
forth below:
If to the Company:
Network-1 Security Solutions, Inc.
1601 Trapelo Road
Waltham, MA 02451
Attention: Avi 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 Investors, at their respective addresses as set forth on
Schedule 1.1 hereto, or such other address as any party may designate to the
other in accordance with the aforesaid procedure. All notices and other
communications sent by overnight courier service shall be deemed to have been
given as of the next business day after delivery thereof to such courier
service, those given by telex or facsimile transmission shall be deemed given
when sent, and all notices and other communications sent by mail shall be deemed
given as of the third business day after the date of deposit in the United
States mail.
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V.3 Successors and Assigns. The Company may not sell, assign, transfer,
or otherwise convey any of its rights or delegate any of its duties under this
Agreement, except to a corporation which has succeeded to substantially all of
the business and assets of the Company and has assumed in writing its
obligations under this Agreement, and this Agreement shall be binding on the
Company and such successor. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the Investors and their successors and
assigns.
V.4 Amendments and Waivers. Neither this Agreement nor any term hereof
may be changed or waived (either generally or in a particular instance and
either retroactively or prospectively) absent the written consent each party
hereto.
V.5 Survival of Representations, etc. The representations, warranties,
covenants, and agreements made herein or in any certificate or document executed
in connection herewith shall survive the execution and delivery of this
Agreement and the issuance and delivery of the Preferred Stock, Warrants, Notes
and Underlying Securities to the Investors.
V.6 Delays or Omissions; Waiver. No delay or omission to exercise any
right, power, or remedy accruing to either the Company or the Investors upon any
breach or default by the other under this Agreement shall impair any such right,
power, or remedy nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring.
V.7 Entire Agreement. This Agreement (together with the exhibits
attached hereto) contains the entire understanding of the parties with respect
to their respective subject matter and all prior negotiations, discussions,
commitments, and understandings heretofore had between them with respect thereto
are merged herein and therein.
V.8. Expenses. The Company shall, at the Closing and upon receipt of an
invoice, reimburse reasonable fees and expenses of Swidler Berlin Shereff
Friedman, LLP, counsel to affiliates of Wheatley Partners II, L.P. and Corey M.
Horowitz, provided that the aggregate of such fees (exclusive of disbursements)
shall not exceed $10,000.
V.9 Headings. All article and section headings herein are inserted for
convenience only and shall not modify or affect the construction or
interpretation of any provision of this Agreement.
V.10 Counterparts; Governing Law. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, without giving effect to conflict of laws.
V.11 Further Actions. At any time and from time to time, each party
agrees, without further consideration, to take such actions and to execute and
deliver such documents as may be reasonably necessary to effectuate the purposes
of this Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed on the date
hereinabove set forth.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
--------------------------------
Avi A. Fogel
President and Chief Executive Officer
INVESTORS:
Woodland Venture Fund
By: /s/ Barry Rubenstein
--------------------------------
Barry Rubenstein, General Partner
Seneca Ventures
By: /s/ Barry Rubenstein
--------------------------------
Barry Rubenstein, General Partner
Woodland Partners
By: /s/ Barry Rubenstein
--------------------------------
Barry Rubenstein, General Partner
/s/ Corey M. Horowitz
--------------------------------
Corey M. Horowitz
MLPF&S as Custodian FBO
Emanuel R. Pearlman, IRA
By: /s/ Emanuel R. Pearlman
--------------------------------
Emanuel R. Pearlman, IRA
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/s/ Avi A. Fogel
--------------------------------
Avi A. Fogel
/s/ Irwin Lieber
--------------------------------
Irwin Lieber
/s/ Barry Fingerhut
--------------------------------
Barry Fingerhut
Applegreen Partners
By: /s/ Jon Lieber
--------------------------------
Jon Lieber, General Partner
Brookwood Partners, L.P.
By: /s/ Barry Rubenstein
--------------------------------
Barry Rubenstein, General Partner
/s/ Eli Oxenhorn
--------------------------------
Eli Oxenhorn
/s/ Seth Oxenhorn
--------------------------------
Seth Oxenhorn
/s/ Abby Oxenhorn
--------------------------------
Abby Oxenhorn
/s/ Maurice Shamah
--------------------------------
Maurice Shamah
GER Family Partners, Ltd.
By: /s/ Gerald Reich
--------------------------------
Gerald Reich, General Partner
13
<PAGE>
/s/ Alan Silverman
--------------------------------
Alan Silverman
/s/ Phil Bloom
--------------------------------
Phil Bloom
Dalewood Associates, L.P.
By: /s/ David Nussbaum
--------------------------------
David Nussbaum
/s/ David Thalheim
--------------------------------
David Thalheim
/s/ Richard Rosenstock
--------------------------------
Richard Rosenstock
/s/ Gordon Freeman
--------------------------------
Gordon Freeman
/s/ Gerald Josephson
--------------------------------
Gerald Josephson
/s/ Larry Altman
--------------------------------
Larry Altman
/s/ Jeffrey Rubenstein
--------------------------------
Jeffrey Rubinstein
/s/ Stephen S. Wien
--------------------------------
Stephen S. Wien
14
<PAGE>
Gyenes & Co.
By: /s/ Andrew Gyenes
--------------------------------
Andrew Gyenes, General Partner
Sandler Co-Investment Partners, L.P.
By: Sandler Capital Management,
General Partner
By: MJDM Corp., a General Partner
By: /s/ Edward G. Grinacoff
--------------------------------
Edward G. Grinacoff, President
/s/ Scott Zelnick
--------------------------------
Scott Zelnick
/s/ Patrick McBrien
--------------------------------
Patrick McBrien
/s/ Brad Zelnick
--------------------------------
Brad Zelnick
/s/ William Walters
--------------------------------
William Walters
/s/ Jack Erlanger
--------------------------------
Jack Erlanger
MW PARTNERSHIP
By: /s/ Morris Wolfson
--------------------------------
Morris Wolfson, General Partner
/s/ Aaron Wolfson
--------------------------------
Aaron Wolfson
15
<PAGE>
/s/ Abraham Wolfson
--------------------------------
Abraham Wolfson
New Dimensions Trading Limited
By: /s/ Chana Edelstein
--------------------------------
Chana Edelstein, Director
/s/ Rebecca Rubenstein
--------------------------------
Rebecca Rubenstein
/s/ Brian Rubenstein
--------------------------------
Brian Rubenstein
Levitin Family Charitable Trust
By: /s/ Eli Levitin
--------------------------------
Eli Levitin, Trustee
16
<PAGE>
SCHEDULES AND EXHIBITS
----------------------
Schedule1.1 Investors, Number of Shares of Preferred Stock, Number of
Warrants, Principal Amount of Promissory Note, and Purchase
Price
Exhibit A: Form of Certificate of Designation for Series D Preferred Stock
Exhibit B: Form of Warrant
Exhibit C: Form of Promissory Note
17
<PAGE>
SCHEDULE 1.1
<TABLE>
<CAPTION>
Name and Address Number of Shares of Number of Principal Amount of Purchase
of Investor Preferred Stock Warrants Promissory Note Price
----------- --------------- -------- --------------- -----
<S> <C> <C> <C> <C>
Woodland Venture Fund 32,787 32,787 $100,000 $200,000
68 Wheatley Road
Brookville, New York 11545
Attn: Barry Rubenstein, General Partner
Seneca Ventures 16,393 16,393 $ 50,000 $100,000
68 Wheatley Road
Brookville, New York 11545
Attn: Barry Rubenstein, General Partner
Woodland Partners 16,393 16,393 $ 50,000 $100,000
68 Wheatley Road
Brookville, New York 11545
Attn: Barry Rubenstein, General Partner
Irwin Lieber 16,393 16,393 $ 50,000 $100,000
c/o GEO Capital
767 Fifth Avenue, 45th Floor
New York, New York 10153
Avi A. Fogel 8,197 8,197 $ 25,000 $ 50,000
43 Newbrook Circle
Chestnut Hill, Massachusetts 02467
Corey M. Horowitz 40,984 40,984 $125,000 $250,000
885 Third Avenue, Suite 2900
New York, New York 10022
MLPF&S as Custodian FBO 4,098 4,098 $ 12,500 $ 25,000
Emanuel R. Pearlman, IRA
405 Park Avenue, Suite 1005
New York, New York 10022
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Shares Number of Principal Amount Purchase
of Investor of Preferred Stock Warrants of Promissory Note Price
----------- ------------------ -------- ------------------ -----
<S> <C> <C> <C> <C>
Barry Fingerhut 16,393 16,393 $ 50,000 $100,000
c/o GEO Capital
767 Fifth Avenue, 45th Floor
New York, New York 10153
Applegreen Partners 4,098 4,098 $ 12,500 $ 25,000
c/o Jon Lieber, General Partner
GEO Capital
767 Fifth Avenue, 45th Floor
New York, New York 10153
Brookwood Partners, L.P. 16,393 16,393 $ 50,000 $100,000
68 Wheatley Road
Brookville, New York 11545
Attn: Barry Rubenstein, General Partner
Eli Oxenhorn 16,393 16,393 $ 50,000 $100,000
56 The Intervale
Roslyn, New York 11576
Seth Oxenhorn 4,098 4,098 $ 12,500 $ 25,000
c/o Eli Oxenhorn
56 The Intervale
Roslyn, New York 11576
Abby Oxenhorn 4,098 4,098 $ 12,500 $ 25,000
c/o Eli Oxenhorn
56 The Intervale
Roslyn, New York 11576
Maurice Shamah 8,197 8,197 $ 25,000 $ 50,000
Baby Fair Incorporated
36-11 Fourteenth Avenue
Brooklyn, New York 11218
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Shares Number of Principal Amount Purchase
of Investor of Preferred Stock Warrants of Promissory Note Price
----------- ------------------ -------- ------------------ -----
<S> <C> <C> <C> <C>
GER Family Partners, Ltd. 16,393 16,393 $ 50,000 $100,000
Gerald Reich, General Partner
Portfolio Strategy Group
One Rockefeller Plaza
New York, New York 10014
Alan Silverman 16,393 16,393 $ 50,000 $100,000
One Old Country Road, Suite 390
Carle Place, New York 11514
Phil Bloom 24,590 24,590 $ 75,000 $150,000
18-70 211 Street
Bayside, New York 11360
Dalewood Associates, L.P. 16,393 16,393 $ 50,000 $100,000
c/o David Nussbaum
GKN Securities Corp.
One State Street Plaza, 23rd Floor
New York, New York 10004
David Thalheim 8,197 8,197 $ 25,000 $ 50,000
Gaines Berland
1055 Stewart Avenue
Bethpage, New York 11714
Richard Rosenstock 8,197 8,197 $ 25,000 $ 50,000
Gaines Berland
1055 Stewart Avenue
Bethpage, New York 11714
MW Partnership 12,295 12,295 $ 37,500 $ 75,000
Morris Wolfson, General Partner
One State Street Plaza, 29th Floor
New York, New York 10004
Aaron Wolfson 16,393 16,393 $ 50,000 $ 100,000
One State Street Plaza, 29th Floor
New York, New York 10004
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Shares Number of Principal Amount Purchase
of Investor of Preferred Stock Warrants of Promissory Note Price
----------- ------------------ -------- ------------------ -----
<S> <C> <C> <C> <C>
Abraham Wolfson 8,197 8,197 $ 25,000 $ 50,000
One State Street Plaza, 29th Floor
New York, New York 10004
New Dimensions Trading Limited 24,590 24,590 $ 75,000 $ 150,000
Chana Edelstein, Director
One State Street Plaza, 29th Floor
New York, New York 10004
Gordon Freeman 16,393 16,393 $ 50,000 $100,000
22 Van Buren Court
Cresskill, New Jersey 07626
Gerald Josephson 32,787 32,787 $100,000 $200,000
Harbourside Apt. 3
Closter Drive, POB N732
Paradise Island
Nassau, Bahamas
Larry Altman 8,197 8,197 $ 25,000 $ 50,000
2 Expressway Plaza
Roslyn Heights, New York 11577
Jeffrey Rubinstein 10,656 10,656 $ 32,500 $ 65,000
Magic Textiles
261 Fifth Avenue, 14th Floor
New York, New York 10016-7601
Stephen S. Wien 8,197 8,197 $ 25,000 $ 50,000
2528 NW 63rd Street
Boca Raton, Florida 33496
Gyenes & Co. 8,197 8,197 $ 25,000 $ 50,000
Andrew Gyenes, General Partner
110 West 40th Street, Suite 2103
New York, New York 10018
Sandler Co-Investment Partners, LP 8,197 8,197 $ 25,000 $ 50,000
Edward G. Grinacoff, President
767 Fifth Avenue, 45th Floor
New York, New York 10153
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Shares Number of Principal Amount Purchase
of Investor of Preferred Stock Warrants of Promissory Note Price
----------- ------------------ -------- ------------------ -----
<S> <C> <C> <C> <C>
Scott Zelnick 4,098 4,098 $ 12,500 $ 25,000
Lehman Brothers
3 World Financial Center, 21st Floor
New York, New York 10285-2100
Patrick McBrien 4,098 4,098 $ 12,500 $ 25,000
Lehman Brothers
3 World Financial Center, 21st Floor
New York, New York 10285-2100
Jack Erlanger 8,197 8,197 $ 25,000 $ 50,000
Federated Management
39 Broadway, 32nd Floor
New York, New York 10006
Brad Zelnick 1,639 1,639 $ 5,000 $ 10,000
425 Riverside Drive, Apt 10D
New York, New York 10025
William Walters 8,197 8,197 $ 25,000 $ 50,000
Whale Securities
650 Fifth Avenue, 5th Floor
New York, New York 10019
Rebecca Rubenstein 6,559 6,559 $ 20,000 $ 40,000
300 East 75th Street Apt. 15D
New York, New York 10021
Brian Rubenstein 5,740 5,740 $ 17,500 $ 35,000
36 Barstow Road, Apt. 2K
Great Neck, New York 11021
Levitin Family Charitable Trust 4,098 4,098 $ 12,500 $ 25,000
Eli Levitin, Trustee
1222 East 22nd Street
Brooklyn, New York 11210
Total 491,803 491,803 $1,500,000 $3,000,000
------------------------- --------------- ------------------------- -------------
</TABLE>
22
<PAGE>
EXHIBIT "A"
-----------
CERTIFICATE OF DESIGNATION
OF SERIES D PREFERRED STOCK
OF
NETWORK-1 SECURITY SOLUTIONS, INC.
------------------------
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
------------------------
The undersigned, being the President and Chief Executive
Officer of Network-1 Security Solutions, Inc. ("Corporation"), hereby certifies
in accordance with the provisions of Section 151 of the General Corporation Law
of the State of Delaware that the Board of Directors of the Corporation duly
adopted the following resolution on December 16, 1999:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation by the provisions of the
Corporation's Certificate of Incorporation, this Board of Directors hereby
creates, from the 5,000,000 shares of preferred stock, par value $0.01 per share
(the "Preferred Stock"), of the Corporation authorized to be issued pursuant to
the Certificate of Incorporation, a series of the Preferred Stock having the
following terms and designations:
Section 1. Designation and Amount. The shares of such series having a
par value of $0.01 per share shall be designated as "Series D Convertible
Preferred Stock" (the "Series D Preferred Stock") and the number of shares
constituting such series shall be 1,250,000. The relative rights, preferences
and limitations of the Series D Preferred Stock shall be in all respects
identical, share for share, to the Common Stock of the Corporation, except as
otherwise provided herein.
Section 2. Dividends. The holders of Series D Preferred Stock shall be
entitled to receive dividends and other distributors, when, as and if declared
by the Board of Directors out of funds legally available therefor. If at any
time the Corporation declares any dividend or other distribution on its Common
Stock (other than a dividend payable solely in shares of Common Stock) and there
are shares of its Series D Preferred Stock issued and outstanding, then a
dividend or other distribution shall also be declared on the Series D Preferred
Stock payable at the same time and on the same terms and conditions, entitling
each holder of Series D Preferred Stock to receive the dividend or distribution
such holder would have received had such holder converted the Series D Preferred
Stock as of the record date for determining stockholders entitled to receive
such dividend or distribution.
Section 3. Voting Rights. Except as otherwise provided by the General
Corporation Law of the State of Delaware, the Series D Preferred Stock and the
Common Stock of the Corporation shall vote as one class, with the holder of each
share of Series D Preferred Stock
<PAGE>
entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of Series D Preferred Stock could have been converted as
of the record date for determining the stockholders having notice of and to vote
at such meeting.
Section 4. Reacquired Shares. Any shares of the Series D Preferred
Stock redeemed or purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock, unless otherwise provided for in the
Certificate of Incorporation of the Corporation, and may be reissued as part of
a new series of Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions or restrictions on issuance
set forth herein.
Section 5. Liquidation, Dissolution or Winding Up.
(a) Upon the liquidation, dissolution or winding up of the Corporation,
no distribution shall be made (i) to the holders of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the Series D
Preferred Stock unless, prior thereto, the holders of Series D Preferred Stock
shall have received a liquidation preference of $3.05 per share (the
"Liquidation Preference Amount"), plus an amount equal to unpaid dividends
thereon, if any, to the date of such payment or (ii) to the holders of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series D Preferred Stock, except distributions made ratably
on the Series D Preferred Stock and all other such parity stock in proportion to
the total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. For purposes of this Certificate, each
of (1) the sale, conveyance, exchange or transfer of all or substantially all of
the property and assets of the Corporation, or (2) the consolidation or merger
of the Corporation with or into any other corporation, in which the stockholders
of the Corporation immediately prior to such event do not own a majority of the
outstanding shares of the surviving corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation; provided, however,
that a holder may elect to convert his shares of Series D Preferred Stock
immediately prior to any such event pursuant to Section 6 below.
(b) In the event of a liquidation, dissolution or winding up of the
Corporation within the meaning of subsection (a) above, then in connection with
each such event the Corporation shall send to the holders of the Series D
Preferred Stock at least twenty days' prior written notice of the date when such
event shall take place.
(c) For purposes of this Certificate the term "junior stock" shall mean
the Common Stock and any other class or series of shares of the Corporation
hereafter authorized over which Series D Preferred Stock has preference or
priority in the payment of dividends or in the distribution of assets on any
liquidation, dissolution or winding up of the Corporation.
(d) The Series D Preferred Stock shall rank senior to all current and
future issuances of Preferred Stock by the Corporation. The Corporation may not
issue any shares of capital stock or preferred stock that is senior or equal in
any respect to the Series D Preferred Stock without the consent of the holders
of a majority of the outstanding shares of Series D Preferred Stock.
2
<PAGE>
(e) Upon any liquidation, dissolution or winding up of the Corporation,
and after full payment as provided in Section 5(a) above, the holders of Series
D Preferred Stock shall not be entitled to any further participation in any
distribution of assets by the Corporation.
Section 6. Conversion.
(a) Subject to the provisions for adjustments hereinafter set forth,
each share of the Series D Preferred Stock shall be convertible at the option of
the holder thereof, at any time, in the manner hereinafter set forth, into a
number of fully paid and nonassessable shares of Common Stock of the Corporation
computed by multiplying the number of such shares of Series D Preferred Stock to
be converted by the Liquidation Preference Amount (such amount to be adjusted
proportionately in the event the shares of Series D Preferred Stock are adjusted
into a lesser number or subdivided into a greater number) and dividing the
result by the Conversion Price. The Conversion Price per share of Series D
Preferred Stock shall initially be $3.05 which price shall be subject to
adjustment as provided herein. In addition, each share of Series D Preferred
Stock shall automatically be converted into such number of fully paid and
nonassessable shares of Common Stock of the Corporation upon the consummation of
an underwritten public offering, after the date hereof, pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale by the Corporation of shares of its Common Stock to the
public (a "Qualified Transaction").
(b) The Conversion Price shall be adjusted from time to time as
follows:
(i) If the Corporation at any time subdivides (by stock split,
stock dividend, recapitalization or otherwise) its outstanding shares of Common
Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision will be proportionately reduced, and if
the Corporation at any time combines (by reverse stock split or otherwise) its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be
proportionately increased.
(ii) If the Corporation shall consolidate or merge into or
with another corporation, or if the Corporation shall sell or convey to any
other person or persons all or substantially all the property of the
Corporation, or if the Corporation shall effect a capital reorganization or
reclassification of its Common Stock, then each holder of Series D Preferred
Stock then outstanding shall have the right thereafter to convert each share of
Series D Preferred Stock held by him into the kind and amount of shares of
stock, other securities, cash, and property receivable upon such consolidation,
merger, sale, conveyance, reorganization or reclassification by a holder of the
number of shares of Common Stock into which such share of Series D Preferred
Stock might have been converted immediately prior to such consolidation, merger,
sale, conveyance, reorganization or reclassification and shall have no other
conversion rights. In any such event, effective provision shall be made, in the
certificate or articles of incorporation of the resulting or surviving
corporation or otherwise or in any contracts of sale and conveyance so that, so
far as appropriate and as nearly as reasonably may be, the provisions set forth
herein for the protection of the conversion rights of the shares of Series D
Preferred Stock shall thereafter be made applicable. Such adjustments shall be
made successively whenever any event listed above shall occur.
3
<PAGE>
(iii) If, after the date of the original issuance of shares of
Series D Preferred Stock, the Corporation issues, grants or sells any Additional
Stock as hereinafter defined (other than as set forth below) for a consideration
per share less than Conversion Price, then upon such issue or sale the
Conversion Price will be reduced in order to increase the number of shares of
Common Stock into which the Series D Preferred Stock is convertible to that
price per share determined by multiplying the Conversion Price in effect
immediately prior to such issuance or sale by a fraction (x) the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to the issuance or sale of such Common Stock, plus the number of shares of
Common Stock issuable upon conversion of all of the shares of Series D Preferred
Stock outstanding immediately prior to the issuance or sale of such Common
Stock, plus the number of shares of Common Stock which the aggregate
consideration (if any) received by the Corporation in such issuance or sale
would purchase at the then effective Conversion Price, and (y) the denominator
of which shall be the number of shares of Common Stock outstanding immediately
prior to the issuance or sale of such Common Stock, plus the number of shares of
Common Stock issuable upon conversion of all of the shares of Series D Preferred
Stock outstanding immediately prior to the issuance or sale of such Common
Stock, plus the number of such shares of Common Stock so issued or sold;
provided, however, that additional shares of Common Stock issued or sold without
consideration shall be deemed to have been issued or sold for $.01 per share.
"Additional Stock" shall mean Common Stock or options, warrants or other rights
to acquire or securities convertible into or exchangeable for shares of Common
Stock, including shares held in the Corporation's treasury, and shares of Common
Stock issued upon the exercise of any options, rights or warrants to subscribe
for shares of Common Stock and shares of Common Stock issued upon the direct or
indirect conversion or exchange of securities for shares of Common Stock, except
as provided in subsection (b)(iv) below:
(iv) Notwithstanding anything to the contrary contained in
subsection (b)(iii) above, no adjustment will be made to the Conversion Price by
reason of the issuance of shares of Common Stock (1) upon conversion of the
Series D Preferred Stock or Notes, or exercise of the Warrants issued in
accordance with the Securities Purchase Agreement, dated December ___, 1999,
between the Corporation and the Investors, (2) as a dividend or distribution on
the Series D Preferred Stock, (3) to strategic partners, lenders, vendors and
financial institutions up to an aggregate of 457,812, (4) upon exercise of
outstanding options and warrants to purchase an aggregate of 800,886 as of the
date of this Certificate and (5) to employees, officers, directors or
consultants of the Corporation pursuant to the Corporation's Stock Option Plan
or any other benefit plan.
(c) In the event that at any time, as a result of an adjustment made
pursuant to this Section 6, the holder of a share of Series D Preferred Stock
thereafter converted shall become entitled to receive any shares of capital
stock or other securities of the Corporation other than shares of its Common
Stock, thereafter the number of such other shares of capital stock or other
securities so receivable upon conversion of Series D Preferred Stock 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 shares of the
Corporation's Common Stock contained in this Section 6, and the provisions of
this Certificate with respect to shares of the Corporation's Common Stock shall
apply, to the extent applicable, on like terms to any such other shares of
capital stock or warrants or other securities.
4
<PAGE>
(d) If any adjustment in the number of shares of Common Stock into
which each share of the Series D Preferred Stock may be converted as required
pursuant to this Section 6 would result in an increase or decrease of less than
1% in the number of shares of Common Stock into which each share of the Series D
Preferred Stock is then convertible, the amount of any such adjustment shall be
carried forward, and adjustment with respect thereto shall be made at the time
of and together with any subsequent adjustment which, together with such amount
and any other amount or amounts so carried forward, shall aggregate at least 1%
of the number of shares of Common Stock into which each share of the Series D
Preferred Stock is then convertible. All calculations under this Section 6 (d)
shall be made to the nearest one-hundredth of a share.
(e) The Board of Directors may, but shall not be required to, increase
the number of shares of Common Stock into which each share of the Series D
Preferred Stock may be converted, in addition to the adjustment required by this
Section 6, as shall be determined by it (as evidenced by a resolution of the
Board of Directors) to be advisable in order to avoid or diminish any income
deemed to be received by any holder of the Common Stock or Series D Preferred
Stock resulting from any dividend or distribution of stock or issuance of rights
or warrants to purchase or subscribe for stock or from any event treated as such
for federal income tax purposes.
(f) (i) The holder of any shares of the Series D Preferred Stock
may exercise his or its option to convert such shares into shares of Common
Stock by surrendering for such purpose to the Corporation, at its principal
office or at such other office or agency maintained by the Corporation for that
purpose, a certificate or certificates representing the shares of Series D
Preferred Stock to be converted accompanied by a written notice stating that
such holder elects to convert all or a specified whole number of such shares in
accordance with the provisions of this Section 6 and specifying the name or
names in which such holder wishes the certificate or certificates for shares of
Common Stock to be issued. In case such notice shall specify a name or names
other than that of such holder, such notice shall be accompanied by payment of
all transfer taxes payable upon the issuance of shares of Common Stock in such
name or names. As promptly as practicable, and in any event within five business
days after the surrender of such certificates and the receipt of such notice
relating thereto and, if applicable, payment of all transfer taxes, the
Corporation shall deliver or cause to be delivered (x) certificates representing
the number of validly issued, fully paid and nonassessable shares of Common
Stock of the Corporation to which the holder of the Series D Preferred Stock so
converted shall be entitled and (y) if less than the full number of shares of
the Series D Preferred Stock evidenced by the surrendered certificate or
certificates is being converted, a certificate of like tenor, for the number of
shares evidenced by such surrendered certificate or certificates less the number
of shares converted. Such conversions shall be deemed to have been made at the
close of business on the date of giving of such notice and of such surrender of
the certificate or certificates representing the shares of the Series D
Preferred Stock to be converted so that the rights of the holder thereof shall
cease except for the right to receive Common Stock of the Corporation in
accordance herewith, and the converting holder shall be treated for all purposes
as having become the record holder of such Common Stock of the Corporation at
such time.
(ii) Upon the consummation of a Qualified Transaction, the
conversion of Series D Preferred Stock into Common Stock will be automatically
reflected in the books of the Corporation. The holders of the Series D Preferred
Stock will surrender a certificate or
5
<PAGE>
certificates representing the shares of Series D Preferred Stock to be converted
and provide a written notice as set forth in (i) above.
(g) Upon conversion of any shares of the Series D Preferred Stock, the
holder thereof shall not be entitled to receive any accumulated, accrued or
unpaid dividends in respect of the shares so converted, provided that such
holder shall be entitled to receive dividends on such shares of the Series D
Preferred Stock declared prior to such conversion if such holder held such
shares on the record date fixed for the determination of holders of the Series D
Preferred Stock entitled to receive payment of such dividend.
(h) The Corporation shall at all times reserve and keep available out
of its authorized Common Stock the full number of shares of Common Stock or
other securities issuable upon the conversion of all outstanding shares of the
Series D Preferred Stock.
Section 7. Adjustments for Consolidation, Merger, etc. Prior to the
consummation of a consolidation or merger or a sale of substantially all of the
property of the Corporation as described in Section 6 (b)(ii) hereof, each
corporation, including this Corporation, which may be required to deliver any
stock, securities, cash or other property to the holders of shares of the Series
D Preferred Stock shall assume, by written instrument delivered to each transfer
agent of the Series D Preferred Stock, the obligation to deliver to such holder
such shares of stock, securities, cash or other property to which, in accordance
with the provisions of Section 6, such holder may be entitled and each such
corporation shall have furnished to each such transfer agent or person acting in
a similar capacity, including the Corporation, an opinion of counsel for such
corporation, stating that such assumption agreement is legal, valid and binding
upon such corporation.
Section 8. Reports as to Adjustments. Whenever the number of shares of
Common Stock into which the shares of the Series D Preferred Stock are
convertible is adjusted as provided in Section 6, the Corporation shall (a)
promptly compute such adjustment and furnish to each transfer agent or person
acting in a similar capacity, for the Series D Preferred Stock, a certificate,
signed by a principal financial officer of the Corporation, setting forth the
number of shares of Common Stock into which each share of Series D Preferred
Stock is convertible as a result of such adjustment and the computation thereof
and when such adjustment will become effective and (b) promptly mail to the
holders of record of the outstanding shares of the Series D Preferred Stock a
notice stating that the number of shares into which the shares of Series D
Preferred Stock are convertible has been adjusted and setting forth the new
number of shares into which each share of the Series D Preferred Stock is
convertible as a result of such adjustment and when such adjustment will become
effective.
Section 9. Waiver. Any right or privilege of the Series D Preferred
Stock (including without limitation any rights related to the conversion thereof
and to adjustments of the Conversion Price) may be waived (either generally or
in a particular instance and either retroactively or prospectively) by and only
by the written consent of the holders of a majority of the Series D Preferred
Stock then outstanding and any such waiver shall be binding upon each holder of
Series D Preferred Stock.
6
<PAGE>
Section 10. Notices of Corporate Action. In the event of:
(a) any taking by the Corporation of a record of the holders of its
Common Stock for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right or warrant to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right;
(b) any capital reorganization, reclassification or recapitalization of
the Corporation, any consolidation or merger involving the Corporation and any
other person (other than a consolidation or merger with a wholly-owned
subsidiary of the Corporation, provided that the Corporation is the surviving or
the continuing corporation and no change occurs in the Common Stock), or any
transfer of all or substantially all of the assets of the Corporation to any
other person; or
(c) any voluntary or involuntary dissolution, liquidation or winding up
of the Corporation;
then, and in each such case, the Corporation shall cause to be mailed to each
transfer agent for the shares of the Series D Preferred Stock and to the holders
of record of the outstanding shares of the Series D Preferred Stock, at least 20
days (or 10 days in case of any event specified in clause (a) above) prior to
the applicable record or effective date hereinafter specified, a notice stating
(i) the date or expected date on which any such record is to be taken for the
purpose of such dividend, distribution or right or, (ii) the date or expected
date to which any such reorganization, reclassification, recapitalization,
consolidation, merger, transfer, dissolution, liquidation or winding up is to
take place and the time, if any such time is to be fixed, as of which the
holders of record of Common Stock shall be entitled to exchange their shares of
Common Stock for the securities or other property deliverable upon such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding up. Such notice shall also state
whether such transaction will result in any adjustment in the number of shares
of Common Stock into which each share of the Series D Preferred Stock shall be
convertible upon such adjustment and when such adjustment will become effective.
The failure to give any notice required by this Section 10, or any defect
therein, shall not affect the legality or validity of any such action requiring
such notice.
7
<PAGE>
WITNESS WHEREOF, the Corporation has caused this Certificate
to be duly executed on its behalf, as of this ___ day of December, 1999.
NETWORK-1 SECURITY SOLUTIONS, INC.
By:
-------------------------------
Avi A. Fogel, President and
Chief Executive Officer
ATTEST:
- -----------------------
Murray Fish
Chief Financial Officer and Secretary
8
<PAGE>
EXHIBIT "B"
-----------
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
December___, 1999
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: December ___, 1999
THIS IS TO CERTIFY that, for value received, _______________
or its or his 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 fifth anniversary of the Commencement Date (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.
1. Purchase Price
--------------
The purchase price for the Shares purchasable hereunder (the
"Purchase Price") shall be equal to $3.00 per Share, subject to adjustment as
hereinafter described.
<PAGE>
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 Nasdaq Stock Market's Small Cap
Market ("NSM")or a similar service if NNM or NSM are not reporting such
information; (iii) if the Common Stock is not listed or admitted for trading on
any national securities exchange, NNM or 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
in whole or in part to, (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.
2
<PAGE>
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 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.
3
<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 Stock (including any such reclassification in
connection with a consolidation or merger in which the
4
<PAGE>
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.
5
<PAGE>
(c) The Purchase Price shall be subject to adjustment based on
revenues from product licenses, royalties and related maintenance exclusive of
revenues from professional services or consulting ("Product Revenue") achieved
by the Company during the three month period ended March 31, 2000, as follows:
PRODUCT REVENUE PURCHASE PRICE
--------------- --------------
$4,000,000 or more $4.00
$3,750,000 - 3,999,999 $3.75
$3,500,000 - 3,749,999 $3.50
$3,250,000 - 3,499,999 $3.25
$2,250,000 - 3,249,999 $3.00
$2,000,000 - 2,249,999 $2.75
$1,750,000 - 1,999,999 $2.50
$1,500,000 - 1,749,999 $2.25
$1,250,000 - 1,499,999 $2.00
$1,000,000 - 1,249,999 $1.75
$ 750,000 - 999,999 $1.50
$ 500,000 - 749,999 $1.25
$ 499,999 or less $1.00
The Purchase Prices set forth above shall be subject to adjustment as
provided herein.
(d) 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(d) 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.
(e) 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.
(f) 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
6
<PAGE>
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.
(g) 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(g) 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(g).
(h) If the Company shall, prior to the Expiration Date, issue
shares of Common Stock (whether in a single transaction or a series of
transactions, whether or not related) (except for any shares of Common Stock
issued or to be issued (1) upon conversion of the Series D Preferred Stock or
Notes, or exercise of the Warrants issued in accordance with the Securities
Purchase Agreement, dated December ___, 1999, between the Company and certain
investors (2) as a dividend or distribution on the Series D Preferred Stock, (3)
to strategic partners, lenders, vendors and financial institutions up to an
aggregate of 457,812, (4) upon exercise of outstanding options and warrants to
purchase an aggregate of 800,886 shares of Common Stock as of the date hereof
and (5) to employees, officers, directors or consultants of the Corporation
pursuant to the Corporation's Stock Option Plan or any other benefit plan) for a
purchase price or prices which are, in any instance, less than the Purchase
Price then in effect, then the Purchase Price shall be reduced to a price
(calculated to the nearest full cent) determined by dividing (A) an amount equal
to the sum of (x) the total number of shares of Common Stock outstanding
immediately prior to such issuance plus (y) the aggregate of the amount of all
consideration, if any, received by the Company upon such issuance by (B) the
total number of shares of Common Stock outstanding immediately after such
issuance; provided, however, that in no event shall the Purchase Price be
adjusted pursuant to this computation to an amount in excess of the Purchase
Price in effect immediately prior to such computation. The issuance of any other
shares of Common Stock or options or warrants for the purchase thereof may be
excluded from the operation of this Section 10(h), provided, the written consent
of a majority-in-interest of the Warrant holders has been obtained prior to such
issuance.
7
<PAGE>
(i) 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 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.
(j) In all events an adjustment, consistent with the
anti-dilutive provisions set forth in Section 10(h), shall be made in the
Purchase Price and the number of Shares issuable upon the exercise of the
Warrants if the Company issues, in exchange for cash, property or services, any
securities convertible into or exchangeable for shares of Common Stock, or
securities carrying the right to purchase shares of Common Stock or such
convertible or exchangeable securities, with a conversion, exchange or exercise
price less than the Purchase Price then in effect, with said adjustment being
based upon the conversion, exchange or exercise price of such convertible or
exchangeable securities.
11. Registration Rights
-------------------
The Warrantholder is hereby granted the same registration
rights afforded investors in the Company's Series D Preferred Stock, Warrants
and Note offering consummated as of the date hereof and as set forth in Article
IV of the Securities Purchase Agreement, dated as of the date hereof, between
the Company and the investors.
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.
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
8
<PAGE>
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
(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)
9
<PAGE>
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:
If to the Company:
Network-1 Security Solutions, Inc.
1601 Trapelo Road
Waltham, Massachusetts 02451
Attention: 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.
10
<PAGE>
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.
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
[CORPORATE SEAL]
11
<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 Trapello Road
Waltham, Massachusetts 02451
Attention: Avi A. Fogel, President and Chief Executive Officer
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: _________________________________
_________________________________
12
<PAGE>
EXHIBIT "C"
-----------
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS, IF ANY, AND MAY NOT BE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY THAT THE TRANSFER MAY BE PROPERLY MADE
UNDER AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS.
CONVERTIBLE PROMISSORY NOTE
$_________ December ____, 1999
For value received, the undersigned, NETWORK-1 SECURITY
SOLUTIONS, INC., a Delaware corporation ("Maker"), promises to pay to the order
of______________ , or his or its assigns, ("Holder"), at the office of Maker at
1601 Trapelo Road, Waltham, Massachusetts 02451 or at such other place as Holder
may designate, the principal sum of ___________($__________ ), together with
accrued interest on the unpaid balance of this Note, beginning as of the date
hereof, before or after maturity or judgment, at the rate of eight percent (8%)
per annum. The said principal sum, or the amount thereof outstanding, with
accrued interest, shall be due and payable on December ___, 2001.
If Maker shall fail to pay any amount owing to Holder under
this Note when due (whether at stated due date, upon acceleration or otherwise),
then to the extent permitted by law Maker will pay interest to Holder, payable
on demand, on the amount in default from the date such payment became due until
payment in full at the rate of 15% per annum.
This Note is one of a series of Notes issued pursuant to the
Securities Purchase Agreement, dated the date hereof, between Maker, Holder and
certain other investors (the "Purchase Agreement") and is entitled to the
benefits thereof and shall be subject to the provisions thereof.
Events of Default. The occurrence at any time of any one or
more of the following events shall constitute an "Event of Default" under this
Note: (a) Maker's failure to pay principal or interest when due under this Note;
(b) a breach of any of Maker's representations and warranties under the
Securities Purchase Agreement, dated as of the date hereof, between Maker and
certain investors including Holder (the "Purchase Agreement"); (c) the
dissolution, liquidation or termination of legal existence of Maker; (d) the
appointment of a receiver, trustee or similar judicial officer or agent to take
charge of or liquidate any property of assets of Maker, or action by any court
to take jurisdiction of all or substantially all of the property or assets of
Maker; (e) the sale of all or substantially all of Maker's property or assets;
or (f) the commencement of any proceeding under any provision of the Bankruptcy
Code of the United States, as now in existence or hereafter amended, or of any
other proceeding under any federal or state law, now existing or hereafter in
effect, relating to bankruptcy, reorganization, insolvency, liquidation or
otherwise, for the relief of
<PAGE>
debtors or readjustment of indebtedness, by or against Maker.
Effect of Default. Maker agrees that upon the occurrence of an
Event of Default, the entire indebtedness with accrued interest thereon due
under this Note shall, at the option of the Holder, be immediately due and
payable without notice. Failure to exercise such option shall not constitute a
waiver of the right to exercise the same in the event of any subsequent Event of
Default.
Prepayment. Any amount outstanding under this Note may be
prepaid, in whole or in part, by Maker at any time beginning eighteen (18)
months from the date hereof, upon thirty days written notice to Holder.
Conversion. Subject to approval by a majority vote of the
stockholders of Maker as provided below, all or any part of the principal amount
due and owing under this Note may be converted by Holder into shares of Series D
Preferred Stock, par value $.01 per share, of Maker (the "Preferred Stock")
together with an equal number of five year Warrants to purchase Common Stock
(the "Warrants") (the Preferred Stock and the Warrants being the same securities
sold by the Company to investors, including Holder, pursuant to the Purchase
Agreement) at any time and from time to time after the date hereof. The number
of shares of the Preferred Stock and Warrants to be received upon conversion
shall be determined by dividing (i) the principal amount of the portion of this
Note which is being converted, plus accrued and unpaid interest, by (ii) $3.05
(the "Conversion Price"), subject to the adjustments described below under
"Adjustments."
To exercise the right of conversion, Holder must give written
notice to Maker. Such notice shall specify the principal amount of this Note
Holder desires to convert. Holder hereby agrees to take all steps reasonably
requested by Maker to assist Maker in complying with any such conversion
request, including, without limitation, delivering this Note to Maker so that a
replacement Note reflecting a reduced principal amount may be issued to Holder
following any conversion.
At all times during which Holder has the right to convert this
Note or any portion hereof, the Company agrees to reserve and keep available an
authorized number of shares of Series D Preferred Stock and Common Stock (upon
conversion of the Preferred Stock and exercise of the Warrants) sufficient to
permit the conversion in full of this Note as well as the conversion of the
Preferred Stock and exercise of the Warrants and the Company represents and
warrants that all of the shares of Preferred Stock issued upon conversion of
this Note, and the shares of Common Stock issuable upon conversion of the
Preferred Stock and exercise of the Warrants, shall be duly and validly issued,
fully paid and nonassessable.
Stockholder Approval of Conversion. At the earlier of (i) the
Company's next annual meeting of stockholders or (ii) upon the written request
from the holders of more than 50% of the principal amount of the outstanding
debt with respect to the Notes issued pursuant to the Purchase Agreement, the
Company shall seek stockholder approval for the conversion of the Notes,
including this Note. In the event conversion of the Notes (including this Note)
is not approved by a
2
<PAGE>
majority vote of the stockholders of Maker, Holder shall have no right to
convert this Note and the interest rate of this Note shall increase to 12% per
annum beginning from the date hereof. With respect to the aforementioned
stockholder vote, Holder agrees to vote any voting stock of Maker owned by
Holder in favor of the right of conversion of the Notes as described herein
under "Conversion"; provided, that, in accordance with rules and regulations of
Nasdaq, Holder may not be permitted to vote any shares of Maker owned by Holder
that were acquired pursuant to the Purchase Agreement.
Adjustments. The number of shares of Preferred Stock and
Warrants into which this Note may be converted and the effective conversion
price shall be adjusted for the same events and in the same manner as the number
of shares of Common Stock underlying, and the conversion price of, the Preferred
Stock issued to Holder concurrently herewith pursuant to the Purchase Agreement
and as provided in Section 6(b) of the Certificate of Designation of Series D
Preferred Stock.
Notice. Any notice required to be given under this Note shall
be given in the same manner and subject to the same terms and conditions as set
forth in Article V.2 of the Purchase Agreement.
Failure by the Holder to insist upon the strict performance by
Maker of any terms and provisions herein shall not be deemed to be a waiver of
any terms and provisions herein, and the Holder shall retain the right
thereafter to insist upon strict performance by the Maker of any and all terms
and provisions of this Note or any document securing the repayment of this Note.
Maker waives diligence, demand, presentment for payment,
notice of nonpayment, protest and notice of protest, and notice of any renewals
or extensions of this Note.
This Note shall be governed by and construed in accordance
with the laws of the State of New York without regard to principles of conflicts
of law provisions. Maker hereby consents to the exclusive jurisdiction of any
State or Federal court located in New York County.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: _____________________________________
Avi A. Fogel
President and Chief Executive Officer
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