As filed with the Securities and Exchange Commission on February 4, 2000
REGISTRATION NO. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NETWORK-1 SECURITY SOLUTIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 11-3027591
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(State or other (I.R.S. employer
jurisdiction of incorporation) identification number)
1601 TRAPELO ROAD, RESERVOIR PLACE
WALTHAM, MASSACHUSETTS 02451
(781) 522-3400
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(Address, including zip code, and telephone number,
including area code, of Registrant's
principal executive offices)
AVI A. FOGEL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NETWORK-1 SECURITY SOLUTIONS, INC.
1601 TRAPELO ROAD, RESERVOIR PLACE
WALTHAM, MASSACHUSETTS 02451
(781) 522-3400
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(Address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
SAM SCHWARTZ, ESQ.
SOLOVAY EDLIN & EISEMAN, P.C.
845 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 752-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1993, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: |_| __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering: |_| __________
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: |_|
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CALCULATION OF REGISTRATION FEE (2)
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PROPOSED
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TITLE OF SHARES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) FEE
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Common Stock, par value $.01 per
share........................... 3,278,296 shares $12.96875 $42,515,401.25 $11,224.07
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(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 promulgated under the
Securities Act, based on the average of the bid and asked prices for the shares reported on the Nasdaq Stock
Market's SmallCap Market on February 1, 2000.
(2) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as amended, this Registration Statement
includes an indeterminate number of additional shares of Common Stock as may from time to time become issuable
upon the exercise of certain options by reason of stock splits, stock dividends and other similar transactions.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not seeking an offer to buy these securities in
any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS--SUBJECT TO COMPLETION, DATED
FEBRUARY 4, 2000
PROSPECTUS
NETWORK-1 SECURITY SOLUTIONS, INC.
3,278,296 SHARES OF COMMON STOCK
o The shares of common stock offered by this prospectus are being sold by
the selling stockholders.
o We will not receive any proceeds from the sale of these shares. We will
receive proceeds from the exercise of warrants and options and those
proceeds will be used for our general corporate purposes.
o Our common stock is traded on the Nasdaq Stock Market's SmallCap Market
under the symbol "NSSI."
o On February 2, 2000, the closing bid price for our common stock was
$14.375.
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK.
YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE HEADING "RISK
FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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___________, 2000
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TABLE OF CONTENTS
PAGE
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Summary......................................................................1
Risk Factors.................................................................5
Where You Can Find More Information.........................................10
Incorporation of Certain Documents by Reference.............................10
Note Regarding Forward Looking Statements...................................11
Use of Proceeds.............................................................12
Selling Stockholders........................................................12
Plan of Distribution........................................................21
Legal Matters...............................................................23
Experts.....................................................................23
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities...............................................23
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SUMMARY
THE COMPANY
Network-1 Security Solutions, Inc. develops, markets, licenses and
supports a family of network security software products designed to provide
comprehensive security to computer networks, including Internet based systems
and internal networks and computing resources. Our CYBERWALLPLUS(TM) family of
security software products can reside anywhere on the enterprise network and
provides multiple layers of defense to protect data from both external attack as
well as access abuse by such "trusted insiders" as employees, subcontractors or
consultants. Our CYBERWALLPLUS(TM) suite of products was first introduced in
March 1999 and evolved from our prior FIREWALL/PLUS suite of security software
products. We also offer our customers a full range of consulting services in
network security and network design and support in order to build, maintain and
enhance customer relationships and increase the demand for our software
products.
The CYBERWALLPLUS(TM) family of security solutions is designed to
protect against Internet and Intranet based security threats and to address
security needs that arise from within internal networks that often utilize other
network transport protocols besides TCP/IP (the Internet network transport
protocol). We have positioned our CYBERWALLPLUS(TM) products as an enabling
technology designed to capitalize on the significant network security
opportunity within the explosive E-Business marketplace. Our CYBERWALLPLUS(TM)
family of network security products operates on the Microsoft Windows NT
operating system platform. CYBERWALLPLUS'(TM) filter engine software technology,
with its unique ability to handle and filter all commonly used network transport
protocols, provides organizations with a highly secure and flexible security
solution. Additionally, unlike most firewall solutions which focus on an
enterprise's connection to the Internet, the CYBERWALLPLUS(TM) solution can be
deployed throughout the enterprise. It can be deployed at the perimeter to
control access to and from the Internet, between internal networks as well as on
application servers and desktop PCs.
Every day, more and more companies are turning to E-Business and
extranets as a way to obtain a competitive edge and broaden their markets. The
E-Business revolution is helping companies reduce costs, increase responsiveness
and provide empowerment through immediate knowledge. However, by tying together
previous separate company network's, "islands of isolation," and by inviting
customers, partners and suppliers onto their networks, companies have found that
what were once closed and secure enterprise networks are now becoming open
networks.
Within these new open networks, the traditional perimeters and network
boundaries have disappeared. We do not believe traditional perimeter security
devices such as firewalls can effectively secure all of a network's resources
which have embraced E-Business. Our CYBERWALLPLUS(TM) family of products is
designed to solve this problem by protecting data where it resides - between the
internal network segments and inside the server itself - finally allowing
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corporations to leverage the promise of electronic business, while ensuring the
safety of strategic data assets.
We are currently pursuing an aggressive growth strategy focusing our
efforts on marketing our CyberwallPLUS(TM) family of network security products.
Key elements of our strategy are to:
o Provide comprehensive network security solutions by developing,
marketing and supporting a family of network security products designed
to address a broad range of security issues confronting computer
networks and computing, including protecting data throughout an
enterprise, such as between the internal network segments and inside
servers.
o Emphasize the distinguishing characteristics of the CYBERWALLPLUS(TM)
technology, which can reside anywhere on the enterprise network, and
inspect, detect and protect access to sensitive corporate data for a
multitude of network protocols. Unlike traditional firewalls, which
protect organizations from external attacks, cyberwalls protect
networks from abuses by those with "inside access" as well.
o Implement a marketing plan which includes a multi-channel
distribution strategy which emphasizes establishing and maintaining
third-party distributor relationships with systems integrators, VARs,
OEMs and resellers in the United States and internationally.
o Increase sales of CYBERWALLPLUS(TM) by leveraging relationships with
consulting clients.
Since our inception, we have incurred significant losses. Our future
success is largely dependent upon our CYBERWALLPLUS(TM) family of software
products achieving broad market acceptance. We may not be able to successfully
implement our marketing strategy, achieve significant revenues and market
acceptance of our CYBERWALLPLUS(TM) family of software products, or achieve
profitable operations. See "Risk Factors."
Network-1 was incorporated under the laws of the State of Delaware in
July 1990. Our executive offices are located at 1601 Trapelo Road, Reservoir
Place, Waltham, Massachusetts 02451 and our telephone number at that address is
(781) 522-3400. Our web site can be found at http://www.network-1.com.
RECENT DEVELOPMENTS
On December 22, 1999, we signed a Securities Purchase Agreement for
the private sale of $3,000,000 of preferred stock, warrants and notes to a group
of 39 investors. In
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this transaction we issued 491,803 shares of our Series D Preferred Stock at
$3.05 per share and warrants to purchase 491,803 shares of our common stock at
an exercise price of $3.00 per share, subject to certain adjustments. We also
issued convertible promissory notes in the principal amount of $1.5 million at
an interest rate of 8% per year. Subject to stockholder approval, the promissory
notes are convertible into an additional 491,803 shares of our Series D
Preferred Stock (up to 570,492 shares if you include potential interest under
such notes) and warrants to purchase an additional 491,803 shares of our common
stock (up to 570,492 shares if you include potential interest under such notes)
at an exercise price of $3.00 per share, subject to certain adjustments. Each
share of our Series D Preferred Stock is convertible into one share of our
common stock, subject to certain adjustments.
The resale by the selling stockholders of the shares of our common
stock underlying the Series D Preferred Stock and the warrants has been
registered under the Securities Act of 1933, as amended, and such shares of
common stock may be freely sold.
The following is a summary of material terms of the promissory notes
and warrants issued in the financing:
CONVERTIBLE PROMISSORY NOTES
The principal amount of the notes, along with the accrued interest, is
due on December 22, 2001. The notes have an interest rate of 8% per annum.
An "event of default" under the notes will occur if, among other
things, we (1) fail to pay interest or principal when due, or (2) breach any of
our representations or warranties under the Securities Purchase Agreement. Upon
an event of default, the entire indebtedness and accrued interest may become
immediately due and payable. We may prepay any amount outstanding under the
notes at any time beginning May 22, 2001.
Subject to stockholders' approval, as described below, all or any part
of the principal amount of the notes may be converted into shares of our Series
D Preferred Stock and five-year warrants to purchase shares of our common stock.
If a holder of a note elects to convert it, the holder will receive the number
of shares of our Series D Preferred Stock and warrants determined by dividing
the principal amount of that portion of the note being converted (plus accrued
and unpaid interest) by $3.05. The conversion price and the number of shares
received upon conversion may be adjusted in the event of a stock split,
dividend, recapitalization, reorganization, merger, consolidation or sale of our
assets, or the issuance by us of shares of our common stock at a price less than
the then adjusted conversion price.
We are required to seek stockholder approval for the conversion of the
notes at our next annual meeting of stockholders, or upon the written request of
holders of more than 50% of the principal amount of outstanding indebtedness
issued pursuant to the Securities Purchase Agreement, whichever comes first. If
the stockholders do not approve the conversion, then the notes will not be
convertible and the interest rate on the notes will increase to 12% per annum.
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WARRANTS
At any time until December 22, 2004, the holder of a warrant is
entitled to purchase the number of shares of our common stock listed in such
warrant, at a price of $3.00 per share, which may be adjusted based on the level
of certain revenues we achieve during the three-month period ending March 31,
2000. The exercise price and the number of shares received upon exercise may
also be adjusted in the event of a stock split, dividend, recapitalization,
reorganization, merger, consolidation or sale of our assets, or the issuance by
us of shares of our common stock at a price less than the then adjusted exercise
price.
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RISK FACTORS
THE SHARES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS BEFORE MAKING AN INVESTMENT DECISION.
WE HAVE A HISTORY OF LOSSES AND IF WE DO NOT ACHIEVE PROFITABILITY WE
MAY NOT BE ABLE TO CONTINUE OUR BUSINESS IN THE FUTURE.
We have incurred substantial operating losses since our inception,
which has resulted in an accumulated deficit of approximately $18,347,000 as of
September 30, 1999. For the nine months ended September 30, 1999 and the fiscal
years ended December 31, 1998 and 1997, we incurred losses of $5,100,000,
$5,777,000 and $2,390,000, respectively. We have financed our operations
primarily through the sales of equity and debt securities. Our expense levels
are high and our revenues are difficult to predict. We anticipate incurring
additional losses until we increase our client base and revenues. We may never
achieve or sustain significant revenues or profitability. If we are unable to
achieve increased revenues, we will continue to have losses and may not be able
to continue our operations.
WE COULD BE REQUIRED TO CUT BACK OR STOP OPERATIONS IF WE ARE UNABLE TO
RAISE OR OBTAIN NEEDED FUNDING.
Our ability to continue operations will depend on our positive cash
flow, if any, from future operations or our ability to raise additional funds
through equity or debt financing. In December 1999, we consummated a private
financing of $3.0 million of equity and debt in order to obtain the working
capital necessary to continue to finance our operations and execute our business
plan. See "Recent Developments." Although we anticipate that future revenues and
our current cash balance will be sufficient to fund our operations and capital
requirements until approximately May 2000, we cannot give you any assurance that
we will not need additional funds before such time. We have no current
arrangements for additional financing and we may not be able to obtain
additional financing on commercially reasonable terms, if at all. We could be
required to cut back or stop operations if we are unable to raise or obtain
funds when needed.
WE HAVE HAD A LIMITED OPERATING HISTORY AS A SOFTWARE PRODUCT COMPANY
AND LACK ANY SUBSTANTIAL REVENUE.
We have a limited operating history as a software product company and
have made only limited sales of our products. Our total revenues for software
licenses for the year ended December 31, 1998 and for the nine months ended
September 30, 1999 were $569,000 and $186,000, respectively. The majority of our
revenues to date have been derived from consulting services.
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OUR REVENUES DEPEND ON SALES OF OUR CYBERWALLPLUS(TM) PRODUCTS AND WE
ARE UNCERTAIN WHETHER THERE WILL BE BROAD MARKET ACCEPTANCE OF THESE PRODUCTS.
Our revenue growth for the foreseeable future is largely dependent upon
increased sales of our CYBERWALLPLUS(TM) family of software products. Since the
introduction of our predecessor line of security producTS (Firewall/Plus) in
June 1995 through September 30, 1999, license revenue from software products has
been $2,848,000 including a non-refundable pre-paid royalty of $500,000 in 1997.
Since the introduction of our CYBERWALLPLUS(TM) suite of products in January
1999 through September 30, 1999, license revenue from oUR CYBERWALLPLUS(TM)
products was only $127,000. Our future financial performance will depend upon
the successfUL introduction and customer acceptance of our CYBERWALLPLUS(TM)
products as well as the development of new aND enhanced versions of this
product. Revenue from products such as CYBERWALLPLUS(TM) depend on a number of
factorS, including the influence of market competition, technological changes in
the network security market, our ability to design, develop and introduce
enhancements on a timely basis and our ability to successfully establish and
maintain distribution channels. If we fail to achieve broad market acceptance of
our CYBERWALLPLUS(TM) products, IT would have a material adverse effect on our
business, operating results and financial condition.
INABILITY TO ENTER INTO STRATEGIC RELATIONSHIPS WITH INDIRECT CHANNEL
PARTNERS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
As part of our sales and marketing efforts, we are seeking to develop
strategic relationships with indirect channel partners, such as original
equipment manufacturers and resellers. We have limited financial, personnel and
other resources to undertake extensive marketing activities ourselves.
Therefore, our prospects will depend on our ability to develop and maintain
strategic marketing relationships with indirect channel partners and their
ability to market and distribute our products. If we are unable to enter into
and maintain such arrangements or if such arrangements do not result in the
successful commercialization of our products, then this could have a material
adverse effect on our business, operating results and financial condition.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE NETWORK SECURITY
MARKET.
The network security market in general is characterized by intense
competition and rapidly changing business conditions, customer requirements and
technologies. The principal competitive factors affecting the market for network
security products include security effectiveness, scope of product offerings,
name recognition, product features, distribution channels, price, ease of use
and customer service and support. Most of our current and potential competitors
have longer operating histories, greater name recognition, larger installed
customer bases and possess substantially greater financial, technical and
marketing and other competitive resources than us. As a result, our competitors
may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to
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the promotion and sale of their products than we may. In addition, certain of
our competitors may determine for strategic reasons to consolidate, to
substantially lower the price of their network security products or to bundle
their products with other products, such as hardware or other enterprise
software products. Our current and potential competitors may develop products
that may be more effective than our current or future products or that render
our products obsolete or less marketable. Increased competition for network
security products may result in price reductions and reduced gross margins and
may adversely effect our ability to gain market share, any of which would
adversely affect the Company's business, operating results and financial
condition.
OUR OPERATING RESULTS MAY FLUCTUATE QUARTERLY AND IF THEY WERE BELOW
THE EXPECTATIONS OF INVESTORS AND ANALYSTS, THE PRICE OF OUR STOCK WOULD LIKELY
BE ADVERSELY AFFECTED.
We anticipate significant quarterly fluctuations in our operations in
the future, since our results are dependent on the volume and timing of orders,
which are difficult to predict. Customers' purchasing patterns and budgeting
cycles, as well as the introduction of new products, may also cause our
operating results to fluctuate. Therefore, comparing quarterly operating results
may not be meaningful and should not be relied on. Also, our operating results
may be below analysts' and investors' expectations in some future quarters,
which would likely have a material adverse effect on our common stock's price.
WE ARE DEPENDENT ON A FEW KEY PERSONNEL AND WE NEED TO ATTRACT AND
RETAIN HIGHLY QUALIFIED TECHNICAL, SALES, MARKETING, DEVELOPMENT AND MANAGEMENT
PERSONNEL.
Our success is largely dependent on the continued service of key
technical and senior management personnel. The loss of the services of one or
more of our key employees, in particular Avi A. Fogel, our President and Chief
Executive Officer, or Robert P. Olsen, our Vice President of Marketing, could
have a material adverse effect on our business, operating results and financial
condition. We have employment agreements with Messrs. Fogel and Olsen that
expire in May 2002 and May 2001, respectively.
Our success will also depend on our ability to attract, train and
retain highly qualified technical, sales, marketing, development and managerial
personnel. There is considerable and often intense competition for the services
of such personnel. We may not be able either to retain our existing personnel or
acquire additional qualified personnel as and when needed. If we are unable to
hire and retain such personnel, our business, operating results and financial
condition could be materially adversely affected.
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WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY,
WHICH COULD RESULT IN LOWER REVENUES AND/OR PROFITS.
We do not hold any patents and rely on copyright and trade secret laws,
non-disclosure agreements and contractual provisions to protect our proprietary
technology. These methods afford only limited protection. Despite the
precautions we take, unauthorized parties may attempt to copy or otherwise
obtain and use our proprietary technologies, ideas, know-how and other
proprietary information without authorization or may independently develop
technologies similar or superior to our technologies. Policing unauthorized use
of our products may be difficult and costly. Also, the laws of some foreign
countries do not protect our proprietary rights as much as the laws of the
United States. We are unable to predict whether our means of protecting our
proprietary rights will be adequate.
We believe that our technologies have been developed independent of
others. Nevertheless, third parties may assert infringement claims against us
and our technologies may be determined to infringe on the intellectual property
rights of others. We could become liable for damages, be required to modify our
technologies or obtain a license if our technologies are determined to infringe
upon the intellectual property rights of others. We may not be able to modify
our technologies or obtain a license in a timely manner, if required, or have
the financial or other resources necessary to defend an infringement action. We
would be materially adversely affected if we fail to do any of the foregoing.
WE CAN BE EXPOSED TO NUMEROUS POTENTIAL LIABILITY CLAIMS FOR DAMAGES
AND, IF OUR INSURANCE DOESN'T ADEQUATELY COVER LOSSES, THIS COULD HAVE A
MATERIAL ADVERSE EFFECT ON US.
Since our products are used to prevent unauthorized access to and
attacks on critical enterprise information, we may be exposed to potential
liability claims for damage caused as a result of an actual or alleged failure
of an installed product. We cannot assure you that the provisions in our license
agreements designed to limit our exposure will be enforceable. In addition, our
consulting engagements often involve development, implementation and maintenance
of networking systems that are critical to the operations of a client's
business. Our failure to meet a client's expectations in the performance of our
services could harm our reputation or result in a claim for damages. Our
personnel often gain access to confidential and proprietary client information.
Any unauthorized use or disclosure of such information could result in a claim
for substantial damages. We can give no assurances that our insurance policies
will be sufficient to cover potential claims or that adequate levels of coverage
will be available in the future at a reasonable cost.
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POSSIBLE DELISTING OF OUR SECURITIES FROM NASDAQ SYSTEM; RISKS RELATING
TO LOW-PRICED STOCKS.
Our common stock is listed on the Nasdaq SmallCap Market under the
symbol "NSSI." In order to continue to be listed on Nasdaq, however, we must
comply with certain maintenance standards. In the event of a delisting, an
investor could find it more difficult to dispose of or to obtain accurate
quotations as to the market value of our common stock.
In addition, if our common stock were to become delisted from trading
on Nasdaq and the trading price of the common stock were to fall below $5.00 per
share, our common stock could be considered a penny stock. SEC regulations
generally define a penny stock to be an equity security that is not listed on
Nasdaq or a national securities exchange and that has a market value of less
than $5.00 per share, subject to certain exceptions. The SEC regulations would
require broker-dealers to deliver to a purchaser of our common stock a
disclosure schedule explaining the penny stock market and the risks associated
with it. Various sales practice requirements are also imposed on broker-dealers
who sell penny stocks to persons other than established customers and accredited
investors (generally institutions). Broker-dealers must also provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and monthly account statements disclosing
recent price information for the penny stock held in the customer's account. If
our common stock is no longer traded on Nasdaq and becomes subject to the
regulations applicable to penny stocks, investors may find it more difficult to
obtain timely and accurate quotes and execute trades in our common stock.
THE SIGNIFICANT NUMBER OF OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
OUTSTANDING MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK.
As of the date of this prospectus, there are outstanding (1) options
and warrants to purchase an aggregate of 2,743,747 shares of our common stock at
exercise prices ranging from $1.50 to $9.66, (2) 491,803 shares of Series D
Convertible Preferred Stock which are convertible at any time into an equal
number of shares of our common stock and (3) debt in the principal amount of
$1,500,000 which, subject to stockholder approval, can be converted into 491,803
shares of our Series D Preferred Stock (up to 570,492 shares if you include
potential interest under the promissory notes) and warrants to purchase 491,803
shares of our common stock (up to 570,492 shares if you include potential
interest under the promissory notes) at an exercise price of $3.00 per share,
subject to adjustment. To the extent that outstanding options, warrants or
convertible debt are exercised or converted, your percentage ownership will be
diluted and any sales in the public market of the common stock underlying such
options, warrants or convertible debt may adversely affect prevailing market
prices for our common stock.
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WE HAVE A SIGNIFICANT AMOUNT OF AUTHORIZED BUT UNISSUED PREFERRED
STOCK, WHICH MAY AFFECT THE LIKELIHOOD OF A CHANGE OF CONTROL IN OUR COMPANY.
As of the date of this prospectus, our Board of Directors has the
authority, without further action by the stockholders, to issue 5,000,000 shares
of preferred stock (of which only 491,803 shares of Series D Preferred Stock are
outstanding as of the date hereof) on such terms and with such rights,
preferences and designations as the Board may determine. Such terms may include
restricting dividends on our common stock, dilution of the voting power of our
common stock or impairing the liquidation rights of the holders of our common
stock. Issuance of such preferred stock, depending on the rights, preferences
and designations thereof, may have the effect of delaying, deterring or
preventing a change in control. In addition, certain "anti-takeover" provisions
in Delaware law may restrict the ability of out stockholders to authorize a
merger, business combination or change of control.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC has prescribed rates for copying. You may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Our SEC filings are also available to you on the SEC's Internet site at
http://www.sec.gov.
This prospectus is part of a Registration Statement on Form S-3 (the
"Registration Statement") filed by us with the SEC under the Securities Act and
therefore omits certain information in the Registration Statement. We have also
filed exhibits with the Registration Statement that are not included in this
prospectus, and you should refer to the applicable exhibit for a complete
description of any statement referring to any document. You can inspect a copy
of the Registration Statement and its exhibits, without charge, at the SEC's
Public Reference Room, and can copy such material upon paying the SEC's
prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information we incorporate by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede the information in this
prospectus. Accordingly, we incorporate by reference the documents listed below
and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act:
1. our Annual Report on Form 10-KSB for the year ended December 31,
1998 (filed April 14, 1999);
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2. our Quarterly Report on Form 10-QSB for the quarter ended March 31,
1999 (filed May 13, 1999);
3. our Quarterly Report on Form 10-QSB for the quarter ended June 30,
1999 (filed August 13, 1999);
4. our Quarterly Report on Form 10-QSB for the quarter ended September
30, 1999 (filed November 15, 1999);
5. our Current Report on Form 8-K (filed January 5, 2000); and
6. the description of our common stock incorporated by reference in
our Registration Statement on Form 8-A (filed October 9, 1998), as
amended on November 3, 1998.
We will provide at no cost to each person to whom this prospectus is
delivered, upon written or oral request, a copy of any of these filings. You
should direct such requests to us at 1601 Trapelo Road, Reservoir Place,
Waltham, Massachusetts 02451, Attention: Murray Fish, Chief Financial Officer,
telephone number (781) 522-3400.
You should rely only on the information and representations provided in
this prospectus or on the information incorporated by reference in this
prospectus. Neither we nor the selling stockholders have authorized anyone to
provide you with different information. Neither we nor the selling stockholders
are making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front of this document.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Forward-looking statements are statements that include information based
upon beliefs of our management, as well as assumptions made by and information
available to our management. Statements containing terms such as "believes,"
"expects," "anticipates," "intends" or similar words are intended to identify
forward-looking statements.
Our management, based upon assumptions they consider reasonable, has
compiled these forward-looking statements. Such statements reflect our current
views with respect to future events. These statements involve known and unknown
risks and uncertainties that may cause our actual results in future periods to
differ materially from what is currently anticipated. We make cautionary
statements in certain sections of this prospectus, including under "Risk
Factors." You should read these cautionary statements as being applicable to all
related forward-looking statements wherever they appear in this prospectus, the
materials referred to in this prospectus or
11
<PAGE>
the materials incorporated by reference into this prospectus.
You are cautioned that no forward-looking statement is a guarantee of
future performance and you should not place undue reliance on any
forward-looking statement. Such statements speak only as of the date of this
prospectus and we are not undertaking any obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this prospectus or to reflect the occurrence of unanticipated
events.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our
common stock by the selling stockholders. All proceeds from the sale of such
shares will be for the accounts of the selling stockholders. We will receive
approximately $7,154,150 in proceeds (up to approximately $7,390,000 if interest
on the notes is converted) equal to the exercise price of the warrants and
options, if the holders of the warrants and options exercise such securities
into shares of common stock. Any proceeds that we may receive upon exercise of
the warrants and options will be used for working capital purposes.
SELLING STOCKHOLDERS
The following table sets forth information, as of February 3, 2000,
with respect to the common stock beneficially owned by each selling stockholder.
The selling stockholders are not obligated to sell any of the shares offered by
this prospectus. The number of shares sold by each selling stockholder may
depend on a number of factors, such as the market price of our common stock.
We are registering 3,278,296 shares of our common stock for resale by
the selling stockholders in accordance with registration rights previously
granted to them. We agreed to file a registration statement under the Securities
Act with the SEC, of which this prospectus is a part, with respect to the resale
of:
o an aggregate of 336,007 shares that we may issue to certain individuals and
entities that had provided services to us upon their exercise of warrants
we issued between April 4, 1994 and July 1, 1998;
o 170,000 shares that we may issue to Whale Securities Co., L.P. upon the
exercise of warrants we issued for underwriting services they provided in
our initial public offering consummated on November 17, 1998;
o 294,879 shares that we may issue to Avi Fogel, our President and Chief
Executive Officer, upon the exercise of options we granted to him on May
18, 1998;
o 206,933 shares that we issued to Pisces Investors, L.P. in connection with
a private placement in April 4, 1994;
o 145,887 shares that we issued to Security Partners, L.P. in connection with
the conversion of
12
<PAGE>
outstanding indebtedness on March 21, 1996;
o an aggregate of 491,803 shares that we may issue upon conversion of the
Series D Preferred Stock issued in December 1999;
o an aggregate of 491,803 shares that we may issue upon the exercise of
warrants issued in connection with the Series D Preferred Stock offering;
o an aggregate of 491,803 shares that we may issue upon conversion of the
Series D Preferred Stock underlying the promissory notes issued in the
Series D Preferred Stock offering;
o up to an aggregate of 78,689 additional shares that we may issue upon the
conversion of the Series D Preferred Stock underlying the potential
interest under such promissory notes;
o an aggregate of 491,803 shares that we may issue upon the exercise of
warrants underlying the promissory notes issued in the Series D Preferred
Stock offering; and
o up to an aggregate of 78,689 additional shares that we may issue upon the
exercise of the warrants underlying the potential interest under such
promissory notes.
The number of shares shown in the following table as being offered by
the selling stockholders do not include such presently indeterminate number of
additional shares of our common stock that may be issuable as a result of stock
splits, stock dividends and similar transactions. Pursuant to Rule 416 under the
Securities Act, however, such shares are included in the Registration Statement
of which this prospectus is a part.
The selling stockholders may sell any or all of their shares listed
below from time to time. Accordingly, we cannot estimate how many shares the
selling stockholders will own upon consummation of any such sales. Also, the
selling stockholders may have sold, transferred or otherwise disposed of all or
a portion of their shares since the date on which the information was provided,
in transactions exempt from the registration requirements of the Securities Act.
Except as indicated in this prospectus, none of the selling
stockholders has had a material relationship with us within the past three years
other than as a result of the ownership of our securities.
13
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY NUMBER OF BENEFICIALLY OWNED OUTSTANDING
OWNED PRIOR TO SHARES BEING AFTER COMMON STOCK
NAME OFFERING(1) OFFERED OFFERING(1)(2) AFTER OFFERING(1)
- ----- -------- ------- -------------- ---------
<S> <C> <C> <C> <C>
Barry Rubenstein 1,667,845 (3) 377,528 1,290,317 25.98%
Wheatley Partners II, L.P.
Woodland Venture Fund
Seneca Ventures
Woodland Partners
Brookwood Partners, L.P.
Irwin Lieber 1,364,425 (4) 115,236 1,249,189 25.15%
Barry Fingerhut 1,291,271 (5) 65,572 1,225,699 24.84%
Jonathan Lieber 1,214,155 (6) 16,392 1,197,763 24.27%
Applegreen Partners
Corey M. Horowitz 1,143,689 (7) 641,692 501,997 10.11%
CMH Capital Management Corp.
Pisces Investors, L.P.
Security Partners, L.P.
Avi A. Fogel 360,710 (8) 327,667 33,043 *
Whale Securities Co., L.P. 170,000 (9) 170,000 0 0
Gerald Josephson 131,148 (10) 131,148 0 0
Eli Oxenhorn 115,236 (11) 115,236 0 0
New Dimensions Trading Limited 98,360 (12) 98,360 0 0
Phil Bloom 98,360 (12) 98,360 0 0
Dalewood Associates, L.P. 65,572 (13) 65,572 0 0
Alan Silverman 65,572 (13) 65,572 0 0
Aaron Wolfson 65,572 (13) 65,572 0 0
GER Family Partners, Ltd. 65,572 (13) 65,572 0 0
Gordon Freeman 65,572 (13) 65,572 0 0
MW Partnership 49,180 (14) 49,180 0 0
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Jeffrey Rubenstein 42,624 (15) 42,624 0 0
Jim McNeil 37,248 (16) 37,248 0 0
David Thalheim 32,788 (17) 32,788 0 0
Abraham Wolfson 32,788 (17) 32,788 0 0
Gyenes & Co. 32,788 (17) 32,788 0 0
Jack Erlanger 32,788 (17) 32,788 0 0
Larry Altman 32,788 (17) 32,788 0 0
Maurice Shamah 32,788 (17) 32,788 0 0
Richard Rosenstock 32,788 (17) 32,788 0 0
Sandler Co-Investment Partners, LP 32,788 (17) 32,788 0 0
Stephen S. Wien 32,788 (17) 32,788 0 0
William Walters 32,788 (17) 32,788 0 0
Rebecca Rubenstein 26,236 (18) 26,236 0 0
Brian Rubenstein 22,960 (19) 22,960 0 0
MLPF&S as Custodian FBO
Emanuel R. Pearlman, IRA 21,392 (20) 16,392 5,000 *
Abby Oxenhorn 16,392 (21) 16,392 0 0
Levitin Family Charitable Trust 16,392 (21) 16,392 0 0
Patrick McBrien 16,392 (21) 16,392 0 0
Seth Oxenhorn 16,392 (21) 16,392 0 0
Scott Zelnick 16,392 (21) 16,392 0 0
Alan Kaufman 9,312 (22) 9,312 0 0
Brad Zelnick 6,556 (23) 6,556 0 0
Venture Strategies, Inc. 6,207 (24) 6,207 0 0
Sam Schwartz 5,728 (25) 2,328 3,400 *
Irving Bizar 2,328 (26) 2,328 0 0
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Malcolm Taub 2,328 (26) 2,328 0 0
Roy Martin 2,328 (26) 2,328 0 0
- ------------------
</TABLE>
* Less than 1%
(1) Percentage of beneficial ownership is calculated assuming 4,935,211 shares
of common stock were outstanding. Ownership after this offering assumes
that the selling stockholder sold all of the shares it is offering in this
prospectus. Beneficial ownership is determined in accordance with the rules
of the SEC and the footnotes to this table, and generally includes voting
or investment power with respect to securities. Therefore, more than one
person may be deemed to beneficially own the same shares. Shares of common
stock that are subject to options, warrants or convertible securities that
are exercisable or convertible within 60 days are deemed outstanding for
computing the percentage of the person holding such option or warrant but
are not deemed outstanding for computing the percentage of any other
person. For purposes of calculating shares deemed outstanding pursuant to
the previous sentence, (a) we have deemed as outstanding 491,803 shares of
Series D Preferred Stock and warrants to purchase 491,803 shares of our
common stock, which are issuable upon conversion of outstanding promissory
notes issued by us in the aggregate principal amount of $1,500,000 and (b)
we have not deemed as outstanding any shares of Series D Preferred Stock or
warrants to purchase shares of our common stock which would be issuable
upon conversion of the interest on such notes. The conversion of such
promissory notes is subject to approval by our stockholders at a duly held
stockholders' meeting expected to be held within 60 days of the effective
date of this Registration Statement.
(2) Beneficial ownership of shares held by the selling stockholder after this
offering will depend on the number of securities sold by the selling
stockholder in this offering.
(3) Includes (i) 31,250 shares of common stock subject to currently exercisable
stock options held by Mr. Rubenstein, (ii) 49,664 shares of common stock
subject to currently exercisable warrants held by Mr. Rubenstein (which
shares are being registered hereby), (iii) 1,194,659, 41,128 and 23,280
shares of common stock held by Wheatley Partners II, L.P., Woodland Venture
Fund and Seneca Ventures, respectively, (iv) 32,787, 16,393, 16,393 and
16,393 shares of common stock subject to currently exercisable warrants
held by Woodland Venture Fund, Seneca Ventures, Woodland Partners and
Brookwood Partners, L.P., respectively (which shares are being registered
hereby), (v) 32,787, 16,393, 16,393 and 16,393 shares of common stock
issuable upon conversion of Series D Preferred Stock held by Woodland
Venture Fund, Seneca Ventures, Woodland Partners and Brookwood Partners,
L.P., respectively (which shares are being registered hereby), (vi) 32,787,
16,393, 16,393 and 16,393 shares of common stock subject to currently
exercisable warrants underlying certain promissory notes held by Woodland
Venture Fund, Seneca Ventures, Woodland Partners and Brookwood Partners,
16
<PAGE>
L.P., respectively (which shares are being registered hereby) and (vii)
32,787, 16,393, 16,393 and 16,393 shares of common stock issuable upon
conversion of Series D Preferred Stock underlying certain promissory notes
held by Woodland Venture Fund, Seneca Ventures, Woodland Partners and
Brookwood Partners, L.P., respectively (which shares are being registered
hereby). Barry Rubenstein and Woodland Services Corp. are the general
partners of Woodland Venture Fund and Seneca Ventures. Barry Rubenstein is
the President and sole director of Woodland Services Corp. Barry Rubenstein
is the general partner of Woodland Partners and Brookwood Partners, L.P.
Barry Rubenstein is a general partner of Wheatley Partners II, L.P. Does
not include 6,250 shares of common stock subject to stock options held by
Mr. Rubenstein which are not currently exercisable. Mr. Rubenstein
disclaims beneficial ownership of the shares of common stock held by
Wheatley Partners II, L.P., except to the extent of his equity interest
therein. The address of Barry Rubenstein is 68 Wheatley Road, Brookville,
New York 11545. The address for Wheatley Partners II, L.P., Woodland
Venture Fund, Seneca Ventures, Woodland Partners and Brookwood Partners,
L.P. is c/o Barry Rubenstein, 68 Wheatley Road, Brookville, New York 11545.
(4) Includes (i) 31,250 shares of common stock subject to currently exercisable
stock options held by Mr. Lieber, (ii) 66,057 shares of common stock
subject to currently exercisable warrants held by Mr. Lieber (which shares
are being registered hereby), (iii) 16,393 shares of common stock issuable
upon conversion of Series D Preferred Stock held by Mr. Lieber (which
shares are being registered hereby), (iv) 16,393 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes held by Mr. Lieber (which shares are being registered hereby), (v)
16,393 shares of common stock issuable upon conversion of Series D
Preferred Stock underlying certain promissory notes held by Mr. Lieber
(which shares are being registered hereby), and (vi) 1,194,659 shares of
common stock held by Wheatley Partners II, L.P., of which Mr. Lieber is a
general partner. Does not include 6,250 shares of common stock subject to
stock options held by Mr. Lieber which are not currently exercisable. Mr.
Lieber disclaims beneficial ownership of the shares of common stock held by
Wheatley Partners II, L.P., except to the extent of his equity interest
therein.
(5) Includes (i) 16,393 shares of common stock subject to currently exercisable
warrants held by Mr. Fingerhut (which shares are being registered hereby),
(ii) 16,393 shares of common stock issuable upon conversion of Series D
Preferred Stock held by Mr. Fingerhut (which shares are being registered
hereby), (iii) 16,393 shares of common stock subject to currently
exercisable warrants underlying certain promissory notes held by Mr.
Fingerhut (which shares are being registered hereby), (iv) 16,393 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes held by Mr. Fingerhut (which shares are
being registered hereby) and (v) 1,194,659 shares of common stock held by
Wheatley Partners II, L.P., of which Mr. Fingerhut is a general partner.
Mr. Fingerhut disclaims beneficial ownership of the shares of common stock
held by Wheatley Partners II, L.P., except to the extent of his equity
interest therein.
(6) Includes (i) 4,098 shares of common stock subject to currently exercisable
warrants held by
17
<PAGE>
Mr. Lieber (which shares are being registered hereby), (ii) 4,098 shares of
common stock issuable upon conversion of Series D Preferred Stock held by
Mr. Lieber (which shares are being registered hereby), (iii) 4,098 shares
of common stock subject to currently exercisable warrants underlying
certain promissory notes held by Mr. Lieber (which shares are being
registered hereby), (iv) 4,098 shares of common stock issuable upon
conversion of Series D Preferred Stock underlying certain promissory notes
held by Mr. Lieber (which shares are being registered hereby) and (v)
1,194,659 shares of common stock held by Wheatley Partners II, L.P., of
which Mr. Lieber is a general partner. Mr. Lieber disclaims beneficial
ownership of the shares of common stock held by Wheatley Partners II, L.P.,
except to the extent of his equity interest therein.
(7) Includes (i) 382,752 shares of common stock held by Mr. Horowitz, (ii)
31,250 shares of common stock subject to currently exercisable stock
options held by Mr. Horowitz, (iii) 206,933 shares of common stock held by
Pisces Investors, L.P., a limited partnership whose general partner is CMH
Capital Management Corp., a corporation whose sole stockholder and officer
is Mr. Horowitz (which shares are being registered hereby), (iv) 145,887
shares of common stock owned by Security Partners, L.P., a limited
partnership whose general partner is CMH and one of whose limited partners
is Mr. Horowitz (which shares are being registered hereby), (v) 87,995
shares of common stock held by CMH, (vi) 124,936 shares of common stock
subject to currently exercisable warrants held by CMH (which shares are
being registered hereby), (vii) 40,984 shares of common stock subject to
currently exercisable warrants held by Mr. Horowitz (which shares are being
registered hereby), (viii) 40,984 shares of common stock issuable upon
conversion of Series D Preferred Stock held by Mr. Horowitz (which shares
are being registered hereby), (ix) 40,984 shares of common stock subject to
currently exercisable warrants underlying certain promissory notes held by
Mr. Horowitz (which shares are being registered hereby) and (x) 40,984
shares of common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes held by Mr. Horowitz (which shares are
being registered hereby). Does not include 6,250 shares of common stock
subject to stock options which are not currently exercisable. Mr. Horowitz
disclaims beneficial ownership of the shares held by Pisces Investors, L.P.
and Security Partners, L.P., except to the extent of his equity interest
therein. The address of CMH Capital Management Corp. is 885 Third Avenue,
New York, New York 10022 and the address of Pisces Investors, L.P. and
Security Partners, L.P. is c/o CMH Capital Management Corp., 885 Third
Avenue, New York, New York 10022.
(8) Includes (i) 165,132 shares of common stock subject to currently
exercisable stock options (which shares are being registered hereby), (ii)
129,747 shares of common stock subject to stock options which are not
currently exercisable (which shares are being registered hereby), (iii)
8,197 shares of common stock subject to currently exercisable warrants
(which shares are being registered hereby), (iv) 8,197 shares of common
stock issuable upon conversion of Series D Preferred Stock (which shares
are being registered hereby), (v) 8,197 shares of common stock subject to
currently exercisable warrants underlying certain promissory notes (which
shares are being registered hereby) and (vi) 8,197 shares of common stock
issuable
18
<PAGE>
upon conversion of Series D Preferred Stock underlying certain promissory
notes (which shares are being registered hereby). The address of Mr. Fogel
is c/o Network-1 Security Solutions, Inc., 1601 Trapelo Road, Reservoir
Place, Waltham, Massachusetts 02451.
(9) Includes 170,000 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby).
(10) Includes (i) 32,787 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 32,787 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 32,787 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes (which shares are being registered hereby) and (iv) 32,787 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(11) Includes (i) 66,057 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 16,393 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 16,393 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes (which shares are being registered hereby) and (iv) 16,393 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(12) Includes (i) 24,590 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 24,590 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 24,590 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes (which shares are being registered hereby) and (iv) 24,590 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(13) Includes (i) 16,393 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 16,393 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 16,393 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes (which shares are being registered hereby) and (iv) 16,393 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(14) Includes (i) 12,295 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 12,295 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 12,295 shares of common stock
subject to currently exercisable warrants underlying certain
19
<PAGE>
promissory notes (which shares are being registered hereby) and (iv) 12,295
shares of common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(15) Includes (i) 10,656 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 10,656 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 10,656 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes (which shares are being registered hereby) and (iv) 10,656 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(16) Includes 37,248 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby).
(17) Includes (i) 8,197 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 8,197 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 8,197 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes (which shares are being registered hereby) and (iv) 8,197 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(18) Includes (i) 6,559 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 6,559 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 6,559 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes (which shares are being registered hereby) and (iv) 6,559 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(19) Includes (i) 5,740 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 5,740 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 5,740 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes (which shares are being registered hereby) and (iv) 5,740 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(20) Includes (i) 5,000 shares of common stock subject to currently exercisable
options, (ii) 4,098 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (iii) 4,098 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iv) 4,098 shares of
20
<PAGE>
common stock subject to currently exercisable warrants underlying certain
promissory notes (which shares are being registered hereby) and (v) 4,098
shares of common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby). Does not include 15,000 shares of common stock subject to options
not currently exercisable.
(21) Includes (i) 4,098 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 4,098 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 4,098 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes (which shares are being registered hereby) and (iv) 4,098 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(22) Includes 9,312 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby).
(23) Includes (i) 1,639 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), (ii) 1,639 shares of
common stock issuable upon conversion of Series D Preferred Stock (which
shares are being registered hereby), (iii) 1,639 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes (which shares are being registered hereby) and (iv) 1,639 shares of
common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes (which shares are being registered
hereby).
(24) Includes 6,207 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby).
(25) Includes (i) 2,328 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby), and (ii) 3,400 shares
of common stock subject to currently exercisable stock options. Does not
include 6,600 shares of common stock subject to stock options which are not
currently exercisable. This selling stockholder is a member of the law firm
of Solovay Edlin & Eiseman, P.C., our outside legal counsel.
(26) Includes 2,328 shares of common stock subject to currently exercisable
warrants (which shares are being registered hereby).
PLAN OF DISTRIBUTION
This prospectus relates to the offer and sale by the selling
stockholders of:
o an aggregate of 506,007 shares of our common stock that we may issue
upon the exercise
21
<PAGE>
of outstanding warrants issued for certain services;
o 294,879 shares of our common stock that we may issue upon the
conversion of outstanding options;
o an aggregate of 352,820 shares of our common stock that we issued to
Pisces Investors, L.P. and Security Partners, L.P.;
o an aggregate of 983,606 shares of our common stock that we may issue
upon the exercise of outstanding warrants and conversion of
outstanding shares of Series D Preferred Stock issued by us in a
private placement;
o an aggregate of 983,606 shares of our common stock that we may issue
upon the exercise of warrants and the conversion of shares of Series
D Preferred Stock underlying outstanding promissory notes; and
o up to an aggregate of 157,378 additional shares of our common stock
that we may issue upon the exercise of warrants and the conversion
of shares of Series D Preferred Stock underlying the potential
interest under such promissory notes.
The selling stockholders may sell the shares in transactions in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale. The selling stockholders may sell the shares through public or
private transactions at prevailing market prices, at prices related to such
prevailing market prices or at privately negotiated prices. The selling
stockholders may also sell shares pursuant to Rule 144 of the Securities Act, if
applicable.
The selling stockholders may use underwriters or broker-dealers to sell
the shares. Such underwriters and broker-dealers may receive compensation in the
form of discounts or commissions from the selling stockholders, or they may
receive commissions from the purchasers of shares for whom they acted as agents,
or both (which compensation as to a particular broker-dealer might be in excess
of customary commissions). The selling stockholders and any underwriter or
broker-dealer who participates in the distribution of the shares may be deemed
to be "underwriters" within the meaning of the Securities Act, and any
commissions received by them and any profit on the resale of the shares
purchased by them may be deemed to be underwriting discounts or commissions
under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the shares may not simultaneously engage in
market-making activities with respect to our common stock for a certain period
of time, except under certain limited circumstances. Also, without limiting the
foregoing, each selling stockholder and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
rules and regulations thereunder (including Regulation M), which provisions may
limit the timing of purchases and sales of shares of our common stock by such
selling stockholder.
At the time a selling stockholder makes an offer to sell shares, to the
extent required by the Securities Act, a prospectus will be delivered. If a
supplemental prospectus is required, one will be delivered setting forth the
number of shares being offered and the terms of the offering, including the
names of any underwriters, dealers or agents, the purchase price paid by any
underwriter for the
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<PAGE>
shares, and any discounts or commissions.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and complied with.
We have agreed to pay substantially all of the expenses incident to the
registration, offering and sale of the shares to the public, excluding the
commissions or discounts of underwriters, broker-dealers or agents.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
us by Solovay Edlin & Eiseman, P.C., New York, New York. Sam Schwartz, a member
of that firm, owns warrants and options to purchase 12,328 shares of our common
stock as of the date of this prospectus.
EXPERTS
The financial statements on Form 10-KSB for the year ended December 31,
1998 incorporated by reference in this registration statement have been audited
by Richard A. Eisner & Company, LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or persons controlling us, we
have been advised that it is the SEC's opinion that such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
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<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
3,278,296 SHARES
OF
COMMON STOCK
------------------
PROSPECTUS
------------------
________, 2000
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the
offering described in the Registration Statement, all of which will be borne by
the Company.
SEC registration fee................................ $ 11,224.07
Legal fees and expenses*............................ _______
Accounting fees and expenses*....................... _______
Miscellaneous expenses*............................. _______
TOTAL............................. $ _______
==============
* Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporations Law (the "DGCL")
contains provisions entitling the Company's directors and officers to
indemnification from judgments, fines, amounts paid in settlement, and
reasonable expenses (including attorneys' fees) as the result of an action or
proceeding in which they may be involved by reason of having been a director or
officer of the Company. In its Certificate of Incorporation, the Company has
included a provision that limits, to the fullest extent now or hereafter
permitted by the DGCL, the personal liability of its directors to the Company or
its stockholders for monetary damages arising from a breach of their fiduciary
duties as directors. Under the DGCL as currently in effect, this provision
limits a director's liability except where such director (i) breaches his duty
of loyalty to the Company or its stockholders, (ii) fails to act in good faith
or engages in intentional misconduct or a knowing violation of law, (iii)
authorizes payment of an unlawful dividend or stock purchase or redemption as
provided in Section 174 of the DGCL, or (iv) obtains an improper personal
benefit. This provision does not prevent the Company or its stockholders from
seeking equitable remedies, such as injunctive relief or rescission. If
equitable remedies are found not to be available to stockholders in any
particular case, stockholders may not have any effective remedy against actions
taken by directors that constitute negligence or gross negligence.
The Certificate of Incorporation also includes provisions to the effect
that (subject to certain exceptions) the Company shall, to the maximum extent
permitted from time to time under the law of the State of Delaware, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent that such indemnification and advancement of expenses is permitted under
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<PAGE>
such law, as it may from time to time be in effect. In addition, the Bylaws
require the Company to indemnify, to the full extent permitted by law, any
director, office, employee or agent of the Company for acts which such person
reasonably believes are not in violation of the Company's corporate purposes as
set forth in the Certificate of Incorporation. At present, the DGCL provides
that, in order to be entitled to indemnification, an individual must have acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the Company's best interests.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to any charter, provision, by-law, contract, arrangement,
statute or otherwise, the Company has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
ITEM 16. EXHIBITS
NO. DESCRIPTION
- --- -----------
3.1 Certificate of Incorporation, as amended (includes Form of Certificate
of Designations of Series C Preferred Stock). Previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-59617), declared effective by the SEC in November
1998 (the "1998 Registration Statement"), and incorporated herein by
reference.
3.2 Certificate of Designations of Series D Preferred Stock.. Previously
filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed
January 4, 2000 (the "Form 8-K"), and incorporated herein by reference.
3.3 By-laws, as amended. Previously filed as Exhibit 3.2 to the 1998
Registration Statement and incorporated herein by reference.
4.1 Form of Common Stock certificate. Previously filed as Exhibit 4.1 to
the 1998 Registration Statement and incorporated herein by reference.
4.2 Warrant issued as of November 17, 1998 to Whale Securities Co., L.P.
Previously filed as Exhibit 1.2 to the 1998 Registration Statement and
incorporated herein by reference.
4.3* Form of Warrant previously issued for services rendered.
5.1* Opinion of Solovay Edlin & Eiseman, P.C. regarding legality of
securities being registered.
10.1 Securities Purchase Agreement, dated as of December 22, 1999, between
the Company and the investors listed therein. Previously filed as
Exhibit 10.28 to the Form 8-K and incorporated herein by reference.
10.2 Form of Convertible Promissory Note, dated December 22, 1999, made by
the Company in
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<PAGE>
favor of the holder listed thereon. Previously filed as Exhibit C to
Exhibit 10.28 to the Form 8-K and incorporated herein by reference.
10.3 Form of Warrant, dated December 22, 1999, issued by the Company to the
holder listed thereon. Previously filed as Exhibit B to Exhibit 10.28
to the Form 8-K and incorporated herein by reference.
21.1 List of the Company's subsidiaries. Previously filed as Exhibit 21.1 to
the 1998 Registration Statement and incorporated herein by reference.
23.1* Consent of Richard A. Eisner & Company, LLP, independent certified
public accountants.
24.1 No person has signed this Registration Statement under a power of
attorney. A power of attorney relating to the signing of amendments
hereto is incorporated in the signature pages hereof.
- --------------
* To be filed by amendment
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes that it will:
(a) File, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to include any
additional or changed material information on the plan of distribution.
(b) For determining liability under the Act, treat each
post-effective amendment as a new Registration Statement of the securities
offered, and the offering of securities at that time to be the initial BONA FIDE
offering.
(c) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of this
offering.
(2) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
(3) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1)
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<PAGE>
or (4), or 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declared it effective.
(b) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and the offering of such securities at that time as the initial BONA FIDE
offering of those securities.
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<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Waltham, State of Massachusetts.
Dated: February 4, 2000
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
------------------------------
Avi A. Fogel, President and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below constitutes and appoints Avi A. Fogel and Murray P.
Fish, or any of them, his true and lawful attorney-in-fact and agent, with full
power and substitution and re-substitution, to sign in any and all capacities
any and all amendments or post-effective amendments to this Registration
Statement on Form S-3 and to file the same with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do all such other acts and execute all such other documents as
they, or any of them, may deem necessary or desirable in connection with the
foregoing, as fully as the undersigned might or could do in person, hereby
ratifying and confirming all that such attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE><CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Avi A. Fogel President, Chief Executive Officer February 4, 2000
- ------------------------------------ and Director (principal executive
Avi A. Fogel officer)
/s/ Murray P. Fish Chief Financial Officer (principal February 4, 2000
- ------------------------------------ financial officer and principal
Murray P. Fish accounting officer)
/s/ William H. Hancock Chief Technology Officer and Director February 4, 2000
- ------------------------------------
William H. Hancock
/s/ Corey M. Horowitz Chairman of the Board of Directors February 4, 2000
- ------------------------------------
Corey M. Horowitz
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
NO. DESCRIPTION
- --- -----------
3.1 Certificate of Incorporation, as amended (includes Form of Certificate
of Designations of Series C Preferred Stock). Previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-59617), declared effective by the SEC in November
1998 (the "1998 Registration Statement"), and incorporated herein by
reference.
3.2 Certificate of Designations of Series D Preferred Stock.. Previously
filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed
January 4, 2000 (the "Form 8-K"), and incorporated herein by reference.
3.3 By-laws, as amended. Previously filed as Exhibit 3.2 to the 1998
Registration Statement and incorporated herein by reference.
4.1 Form of Common Stock certificate. Previously filed as Exhibit 4.1 to
the 1998 Registration Statement and incorporated herein by reference.
4.2 Warrant issued as of November 17, 1998 to Whale Securities Co., L.P.
Previously filed as Exhibit 1.2 to the 1998 Registration Statement and
incorporated herein by reference.
4.3* Form of Warrants previously issued for services rendered.
5.1* Opinion of Solovay Edlin & Eiseman, P.C. regarding legality of
securities being registered.
10.1 Securities Purchase Agreement, dated as of December 22, 1999, between
the Company and the investors listed therein. Previously filed as
Exhibit 10.28 to the Form 8-K and incorporated herein by reference.
10.3 Form of Convertible Promissory Note, dated December 22, 1999, made by
the Company in favor of the holder listed thereon. Previously filed as
Exhibit C to Exhibit 10.28 to the Form 8-K and incorporated herein by
reference.
10.3 Form of Warrant, dated December 22, 1999, issued by the Company to the
holder listed thereon. Previously filed as Exhibit B to Exhibit 10.28
to the Form 8-K and incorporated herein by reference.
21.1 List of the Company's subsidiaries. Previously filed as Exhibit 21.1 to
the 1998 Registration Statement and incorporated herein by reference.
23.1* Consent of Richard A. Eisner & Company, LLP, independent certified
public accountants.
24.1 No person has signed this Registration Statement under a power of
attorney. A power of
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<PAGE>
attorney relating to the signing of amendments hereto is incorporated
in the signature pages hereof.
- --------------
* To be filed by amendment
II-7
