SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant |X|
Filed by a party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary proxy statement |_| Confidential, for Use of the
|X| Definitive proxy statement Commission Only (as permitted
|_| Definitive additional materials by Rule 14a-6(e)(2))
|_| Soliciting material pursuant to
Rule 14a-11(c) or Rule 14a-12
NETWORK-1 SECURITY SOLUTIONS, INC.
----------------------------------
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
1601 TRAPELO ROAD, RESERVOIR PLACE
WALTHAM, MASSACHUSETTS 02451
----------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 9, 2000
----------------------------------------------------
To the Stockholders of Network-1 Security Solutions, Inc.:
Notice is hereby given that a Special Meeting of Stockholders of
Network-1 Security Solutions, Inc., a Delaware corporation (the "Company"), will
be held at its executive offices located at 1601 Trapelo Road, Reservoir Place,
Waltham, Massachusetts, on Thursday, November 9, 2000 at 10:00 A.M., local time,
for the following purposes:
1. To amend the Company's Amended and Restated 1996 Stock Option
Plan to increase the number of shares of the Company's Common
Stock available for issuance thereunder by 735,000 shares to an
aggregate of 2,535,000 shares; and
2. To transact such other business as may properly come before the
meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on October 4,
2000 as the record date for the meeting. Only holders of record of shares of the
Company's Common Stock at that time will be entitled to notice of, and to vote
at, the meeting or any adjournments thereof.
Management requests all stockholders to sign and date the enclosed form
of proxy and return it in the postage paid, self-addressed envelope provided for
your convenience. Please do this whether or not you plan to attend the meeting.
Should you attend, you may, if you wish, withdraw your proxy and vote your
shares in person.
By Order of the Board of Directors,
Murray P. Fish
Secretary
Waltham, Massachusetts
October 6, 2000
<PAGE>
NETWORK-1 SECURITY SOLUTIONS, INC.
---------------------------------------
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON THURSDAY, NOVEMBER 9, 2000
---------------------------------------
This Proxy Statement is furnished by the Board of Directors of
Network-1 Security Solutions, Inc. (the "Company") in connection with the
solicitation of proxies to be voted at the Special Meeting of Stockholders,
which will be held at the Company's offices located at 1601 Trapelo Road,
Reservoir Place, Waltham, Massachusetts, on November 9, 2000, at 10:00 A.M.,
local time, and at all adjournments thereof.
Any stockholder giving a proxy will have the right to revoke it at any
time prior to the time it is voted. A proxy may be revoked by written notice to
the Company, Attention: Secretary, by execution of a subsequent proxy or by
attendance and voting in person at the Special Meeting of Stockholders.
Attendance at the meeting will not automatically revoke the proxy. All shares
represented by effective proxies will be voted at the Special Meeting of
Stockholders, or at any adjournment thereof. Unless otherwise specified in the
proxy, shares represented by proxies will be voted FOR the amendment to the
Company's Amended and Restated 1996 Stock Option Plan (the "Stock Option Plan")
to increase the number of shares of Common Stock available for issuance
thereunder by 735,000 shares to an aggregate of 2,535,000 shares.
The Company's executive offices are located at 1601 Trapelo Road,
Reservoir Place, Waltham, Massachusetts, 02451, and its phone number is (781)
522-3400. On or about October 6, 2000 this Proxy Statement and the accompanying
form of proxy are to be mailed to each stockholder of record at the close of
business on October 4, 2000 (the "Record Date").
VOTING SECURITIES
Only stockholders of record at the close of business on the Record Date
are entitled to vote at the meeting. As of the Record Date, the Company had
issued and outstanding and entitled to vote 6,361,462 shares of common stock,
par value $0.01 per share (the "Common Stock") and 156,204 shares of Series D
Preferred Stock (the "Preferred Stock"). Each share of Common Stock and
Preferred Stock entitles the holder thereof to one vote. The presence at the
meeting in person or by proxy, of a majority of the outstanding shares of stock
entitled to vote is necessary to constitute a quorum for the meeting. For
purposes of the quorum and the vote necessary to take stockholder action,
stockholders of record who are present at the meeting in person or by proxy and
who abstain, including brokers holding customers' shares of record who cause
abstension to be recorded at the meeting, are considered stockholders who are
present and entitled to vote and they count toward the quorum. The approval of
the amendment to the Company's Stock Option Plan, as set forth in the proposal
below, requires the affirmative vote of a majority of the shares entitled to
vote present in person or by proxy.
1
<PAGE>
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's voting stock as of the Record Date by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director, (iii) each of the
executive officers of the Company listed in the Summary Compensation Table
below, and (iv) all executive officers and directors of the Company as a group.
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
---------------- ------------------ ---------------------
Wheatley Partners II, L.P. (2) 1,194,659 18.3%
Corey M. Horowitz(3) 1,149,939 16.9%
CMH Capital Management Corp.
Pisces Investors, L.P.
Security Partners, L.P.
Barry Rubenstein(4) 454,276 6.7%
Woodland Venture Fund
Seneca Ventures
Woodland Partners
Avi A. Fogel(5) 439,487 6.4%
Murray P. Fish(6) 54,700 *
Joseph A. Donohue(7) 50,949 *
Robert Olsen(8) 35,968 *
Emanuel R. Pearlman(9) 31,392 *
Marcus Ranum(10) 1,875 *
Mark Tuomenoksa(11) 5,000 *
Daniel E. Geer(12) 5,000 *
All executive officers and
directors as a group (9 persons) 1,774,310 24.0%
-------------------------------------
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named
in the above table have sole voting and investment power with respect
to all shares of Common Stock beneficially owned by them. A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days from the date hereof upon the exercise of
options, warrants or convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants
and convertible securities held by such person (but not those held by
any other person) and which are exercisable or convertible within 60
days have been exercised or converted. Assumes a base of 6,361,462
shares of Common Stock and 156,204 shares of Preferred Stock
outstanding. Except
2
<PAGE>
as otherwise indicated, the address for each beneficial owner of more
than 5% of the outstanding voting stock of the Company is c/o Network-1
Security Solutions, Inc., 1601 Trapelo Road, Reservoir Place, Waltham,
Massachusetts 02451.
(2) Does not include (i) 31,040, 23,280, 31,040, 4,656 and 3,104 shares of
Common Stock beneficially owned by Barry Rubenstein, Irwin Lieber,
Barry Fingerhut, Seth Lieber and Jonathan Lieber, respectively, each of
whom is a general partner of Wheatley Partners II, L.P. ("Wheatley")
and (ii) an aggregate of 601,028 shares of Common Stock subject to
currently exercisable warrants and options and convertible securities
beneficially owned by Barry Rubenstein (358,828 shares), Irwin Lieber
(160,236 shares), Barry Fingerhut (65,572 shares) and Jonathan Lieber
(16,392 shares). Each of Messrs. Rubenstein, I. Lieber, Fingerhut, S.
Lieber and J. Lieber disclaims beneficial ownership of the shares held
by Wheatley, except to the extent of their equity interest therein.
Wheatley's business address is 80 Cuttermill Road, Great Neck, New York
11021.
(3) Includes (i) 382,752 shares of common stock held by Mr. Horowitz, (ii)
37,500 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, (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, (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, (vii) 40,984
shares of common stock subject to currently exercisable warrants held
by Mr. Horowitz, (viii) 40,984 shares of common stock issuable upon
conversion of Series D Preferred Stock held by Mr. Horowitz, (ix)
40,984 shares of common stock subject to warrants underlying certain
promissory notes held by Mr. Horowitz and (x) 40,984 shares of common
stock issuable upon conversion of Series D Preferred Stock underlying
certain promissory notes held by Mr. Horowitz. Does not include 5,000
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.
(4) Includes (i) 31,040 shares of Common Stock held by Mr. Rubenstein, (ii)
45,000 shares of common stock subject to currently exercisable stock
options held by Mr. Rubenstein, (iii) 49,664 shares of common stock
subject to currently exercisable warrants held by Mr. Rubenstein, (iv)
41,128 and 23,280 shares of common stock held by Woodland Venture Fund
and Seneca Ventures, respectively, (v) 32,787, 16,393, 16,393, 234 and
234 shares of common stock subject to currently exercisable warrants
held by Woodland Venture Fund, Seneca Ventures, Woodland Partners and
Marilyn Rubenstein, respectively, (vi) 32,787, 16,393, 16,393, 234 and
234 shares of common stock issuable upon conversion of Series D
Preferred Stock held by Woodland Venture Fund, Seneca Ventures,
Woodland Partners, Barry Rubenstein and Marilyn Rubenstein,
respectively, (vii) 32,787, 16,393, 16,393, 234 and 234 shares of
common stock subject to warrants underlying certain promissory notes
held by Woodland Venture Fund, Seneca Ventures, Woodland Partners,
Barry Rubenstein and Marilyn Rubenstein, respectively, and (viii)
32,787, 16,393, 16,393, 234 and 234 shares of common stock issuable
upon conversion of Series D Preferred Stock underlying certain
promissory notes held by Woodland Venture Fund, Seneca Ventures,
Woodland Partners, Barry Rubenstein and Marilyn Rubenstein,
respectively. 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.
Barry Rubenstein is a general partner of Wheatley Partners II, L.P.
Marilyn Rubenstein is the wife of Barry Rubenstein. Does not include
2,500 shares of common stock subject to stock options held by Mr.
Rubenstein which are not currently exercisable. Mr. Rubenstein
disclaims beneficial ownership of the shares of common stock held by
Wheatley Partners II, L.P., except to the extent of his equity interest
therein. The address of Barry Rubenstein is 68 Wheatley Road,
Brookville, New York 11545. The address for Wheatley Partners II, L.P.,
Woodland Venture Fund, Seneca Ventures and Woodland Partners is c/o
Barry Rubenstein, 68 Wheatley Road, Brookville, New York 11545.
3
<PAGE>
(5) Includes (i) 373,393 shares of common stock subject to currently
exercisable stock options and (ii) 16,394 shares of common stock
subject to currently exercisable warrants. Does not include 182,066
shares subject to stock options which are not currently exercisable.
(6) Includes 54,700 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Fish pursuant to the Stock Option Plan.
Does not include 70,315 shares of Common Stock subject to stock options
which are not currently exercisable.
(7) Includes 50,949 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Donohue pursuant to the Stock Option Plan.
Does not include 70,170 shares of Common Stock subject to stock options
which are not currently exercisable.
(8) Includes 35,968 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Olsen pursuant to the Stock Option Plan.
Does not include 70,373 shares of Common Stock subject to options not
currently exercisable.
(9) Includes (i) 15,000 shares of common stock subject to currently
exercisable options issued to Mr. Pearlman pursuant to the Stock Option
Plan, (ii) 4,098 shares of common stock subject to currently
exercisable warrants, (iii) 4,098 shares of common stock issuable upon
conversion of Series D Preferred, (iv) 4,098 shares of common stock
subject to currently exercisable warrants underlying certain promissory
notes and (v) 4,098 shares of common stock issuable upon conversion of
Series D Preferred Stock underlying certain promissory notes. Does not
include 5,000 shares of common stock subject to options not currently
exercisable.
(10) Includes 1,875 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Ranum pursuant to the Stock Option Plan.
Does not include 5,000 shares of Common Stock subject to stock options
which are not currently exercisable.
(11) Includes 5,000 shares of Common Stock subject to currently exercisable
options issued to Mr. Tuomenoksa. Does not include 15,000 shares of
Common Stock subject to options not currently exercisable.
(12) Includes 5,000 shares of Common Stock subject to currently exercisable
options issued to Mr. Geer. Does not include 15,000 shares of Common
Stock subject to options not currently exercisable.
4
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and to each of its executive
officers who received salary and bonus in excess of $100,000 for services
rendered in all capacities to the Company during each of the years ended
December 31, 1999, 1998 and 1997 (the "Named Executive Officers"). None of the
Company's other employees received in excess of $100,000 in compensation during
the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE><CAPTION>
ANNUAL COMPENSATION
-------------------
LONG TERM
COMPENSATION
AWARDS
-----------------
YEAR ENDED SHARES UNDERLYING
NAME AND PRINCIPAL POSITION DECEMBER 31 SALARY ($) BONUS ($) OPTIONS(#)
--------------------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Avi A. Fogel 1999 $150,000 $28,375 122,116
President & Chief Executive 1998 $128,192(1) $24,986 383,343
Officer
Robert Russo 1999 $120,000(2) $16,000 56,250
President and Chief Operating 1998 $153,746(3) $ 5,000 -
Officer, Vice President of 1997 $145,000(4) - -
Professional Services
William Hancock 1999 $160,000(5) - 56,250
Chief Technology Officer, 1998 $160,000 - -
Executive Vice President 1997 $160,000(6) - -
Robert P. Olsen 1999 $120,000 $24,975 52,758
Vice President of Marketing 1998 $ 94,154(7) $14,992 94,362
Vice President of Product
Management
Murray P. Fish 1999 $120,000 $25,500 52,714
Chief Financial Officer, 1998 $ 75,692(8) $14,926 94,185
Secretary
Joseph A. Donohue 1999 $120,000 $22,125 52,605
Vice President of Engineering 1998 $ 53,077(9) $10,060 93,750
</TABLE>
-----------------
(1) Mr. Fogel was first employed as President and Chief Executive Officer
in May 1998 and served as a consultant to the Company from March 1998
to May 1998. Mr. Fogel received $33,000 as a consultant. Mr. Fogel's
annual base salary during 1998 was $150,000.
(2) In January 1999, Mr. Russo became Vice President of Professional
Services. Effective February 2000, Mr. Russo was no longer employed by
the Company.
(3) Mr. Russo served as President and Chief Operating Officer until May
1998 at which time he became Vice President of Business Development.
Includes $19,925 of deferred salary.
(4) Includes $51,692 of deferred salary.
(5) Effective February 2000, Mr. Hancock was no longer employed by the
Company.
5
<PAGE>
(6) Includes $6,154 of deferred salary.
(7) Mr. Olsen served as Vice President of Product Management from May 1998
until March 1999 at which time he became Vice President of Marketing.
Mr. Olsen served as a consultant to the Company from March 1998 to May
1998. Mr. Olsen received $18,000 as a consultant. Mr. Olsen's annual
base salary during 1998 was $120,000.
(8) Mr. Fish joined the Company in May 1998.
(9) Mr. Donohue joined the Company in July 1998.
OPTION GRANTS IN 1999
The following stock options were granted to the Company's Named Executive
Officers during the year ended December 31, 1999:
<TABLE><CAPTION>
NUMBER OF % OF TOTAL
SHARES OPTIONS GRANTED TO EXERCISE
UNDERLYING EMPLOYEES PRICE PER EXPIRATION
OPTIONS GRANTED IN 1999(1) SHARE(2) DATE
--------------- ---------- -------- ----
<S> <C> <C> <C> <C>
Avi A. Fogel 40,000 5.4% $3.75 6/22/09
32,116 4.3% $1.50 10/25/09
50,000 6.7% $2.91 11/08/09
Robert Russo 20,000 2.7% $3.75 6/22/09
11,250 1.5% $1.50 10/25/09
William Hancock 20,000 2.7% $3.75 6/22/09
11,250 1.5% $1.50 10/25/09
Robert P. Olsen 20,000 2.7% $3.75 6/22/09
28,591 3.8% $1.50 10/25/09
4,167 0.6% $2.91 11/08/09
Murray P. Fish 20,000 2.7% $3.75 6/22/09
28,546 3.8% $1.50 10/25/09
4,168 0.6% $2.91 11/08/09
Joseph Donohue 20,000 2.7% $3.75 6/22/09
28,438 3.8% $1.50 10/25/09
4,167 0.6% $2.91 11/08/09
</TABLE>
---------------
(1) The number of options granted to employees during the year ended December
31, 1999 used to compute this percentage is based on 604,152 incentive
stock options and 143,478 non-qualified stock options.
(2) All options were granted at an exercise price equal to the fair market
value of the Company's Common Stock at the date of grant, as determined by
the Board of Directors.
6
<PAGE>
1999 FISCAL YEAR-END OPTION VALUES
No options were exercised by an executive officer of the Company during
the year ended December 31, 1999. The following table sets forth information
relating to the fiscal year-end value of unexercised options held by Named
Executive Officers on an aggregated basis:
<TABLE><CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($) (1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Avi A. Fogel 256,191 249,268 $1,956,356 $1,920,854
Robert Russo(2) 24,625 31,625 $151,020 $215,308
William Hancock(2) 24,625 31,625 $151,020 $215,308
Robert P. Olsen 70,780 76,340 $417,268 $500,874
Murray P. Fish 70,666 76,233 $416,544 $500,147
Joseph Donohue 70,386 75,969 $401,919 $488,261
</TABLE>
------------------------
(1) Options are "in-the-money" if the market price of the Common Stock on
December 31, 1999 ($10.8125) exceeds the exercise price of such
options. The value of such options is calculated by determining the
difference between the aggregate market price of the Common Stock
underlying the options on December 31, 1999 and the aggregate exercise
price of such options.
(2) In February 2000, Messrs. Russo and Hancock entered into termination
agreements with the Company pursuant to which (i) each of them received
options to purchase 25,000 shares and (ii) the vesting of certain of
their options was accelerated so that each of them had 41,250
exercisable options and 15,000 unexercisable options, with values at
fiscal year-end of $264,459 and $118,538, respectively.
EMPLOYMENT AGREEMENTS
On May 18, 1998, the Company entered into an employment agreement with
Avi A. Fogel, pursuant to which Mr. Fogel serves as the Company's Chief
Executive Officer and President for a four year term at an annual base salary of
$150,000 per year subject to annual increases in base salary of up to 20% at the
discretion of the Compensation Committee of the Board of Directors. In May 2000,
Mr. Fogel's annual base salary was increased to $185,000 per year. Mr. Fogel is
eligible to receive an additional annual cash bonus of up to $50,000 as
determined by the Compensation Committee of the Board of Directors in its
discretion. In addition, upon execution of his employment agreement, Mr. Fogel
received five year options to purchase 294,879 shares of the Company's Common
Stock at an exercise price of $2.42 per share. The options granted to Mr. Fogel
vested as to 34% of the shares covered thereby at the time of execution of his
employment agreement and vest as to 22% of the shares covered thereby on each of
the first three anniversaries thereafter, subject to acceleration upon a change
of control of the Company. In the event Mr. Fogel's employment agreement is
terminated "other than for cause" (as defined in the agreement), he shall be
entitled to (i) the vesting of all options in the year of termination and 50% of
the options that would have vested in the year following termination and (ii)
the lesser of one year's base salary or the base salary for the balance of the
term of the agreement. Mr. Fogel has agreed not to disclose any confidential
information of the Company during the term of his employment or at any time
thereafter or to compete with the Company during the term of his agreement and
for a period of two years thereafter in the event of termination for cause.
7
<PAGE>
On June 30, 1998, the Company entered into an employment agreement with
William Hancock pursuant to which Mr. Hancock agreed to continue to serve as the
Company's Chief Technology Officer for a three year term at an annual salary of
$160,000 per annum, subject to additional bonus compensation as determined by
the Compensation Committee of the Board of Directors in its discretion. Mr.
Hancock has agreed not to disclose any confidential information of the Company
during the term of his employment or at any time thereafter. On February 7,
2000, the Company entered into a termination agreement with Mr. Hancock pursuant
to which he received an additional option to purchase 25,000 shares of Common
Stock and options to purchase 6,625 shares of Common Stock held by Mr. Hancock
were accelerated to vest upon the closing of the sale by the Company of its
Professional Services business which was consummated on February 9, 2000 (the
"Closing Date"). The Company also agreed to extend the time period to exercise
the vested incentive stock options from 30 days to 90 days. In addition, the
Company agreed to pay Mr. Hancock a special bonus within 10 days of the one-year
anniversary of the Closing Date, conditioned upon his still being employed by
the acquiror at such time, in an amount equal to 3% of the net funds ($1,000,000
held in escrow) received by the Company from the acquiror following the first
anniversary of the Closing Date, subject to certain adjustments. Furthermore,
the Company secured an agreement with Wheatley to release Mr. Hancock's founder
shares from a lockup over a period of time. Effective on the Closing Date, Mr.
Hancock was no longer employed by the Company.
On May 18, 1998, the Company entered into an employment agreement with
Robert P. Olsen pursuant to which Mr. Olsen serves as the Company's Vice
President of Marketing for a three year term at an annual salary of $120,000 per
annum, subject to an additional cash bonus of up to $30,000 as determined by the
Compensation Committee of the Board of Directors in its discretion. In May 2000,
Mr. Olsen's annual base salary was increased to $150,000 per year. Upon
execution of his employment agreement, Mr. Olsen received an incentive stock
option to purchase 58,976 shares of the Company's Common Stock at an exercise
price of $5.60 per share. The options granted to Mr. Olsen vested as to 34% of
the shares covered thereby upon execution of the agreement and 22% of the shares
covered thereby on each of the first three anniversaries thereafter, subject to
acceleration upon a change of control of the Company. In the event Mr. Olsen's
employment agreement is terminated "other than for cause" (as defined in the
agreement), he shall be entitled to (i) the vesting of all options in the year
of termination and 50% of the options that would have vested in the year
following termination and (ii) the lesser of one year base salary or the base
salary for the balance of the term of the agreement. Mr. Olsen has agreed not to
disclose any confidential information of the Company during the term of his
employment or at any time thereafter or to compete with the Company during the
term of his agreement and for a period of two years thereafter in the event of
termination for cause.
On May 19, 1998, the Company entered into an employment agreement with
Murray P. Fish pursuant to which Mr. Fish agreed to serve as the Company's Chief
Financial Officer for a three year term at an annual salary of $120,000 per
annum, subject to an additional cash bonus of $30,000 as determined by the
Compensation Committee of the Board of Directors in its discretion. In May 2000,
Mr. Fish's annual base salary was increased to $150,000 per year. Upon
execution of his employment agreement, Mr. Fish received an incentive stock
option to purchase 58,500 shares of the Company's Common Stock at an exercise
price of $5.60 per share. The options granted to Mr. Fish vested as to 34% of
the shares covered thereby upon execution of the agreement and vest as to 22% on
each of the first three anniversaries thereafter, subject to acceleration upon a
change of control of the Company. In the event Mr. Fish's employment agreement
is terminated "other than for cause" (as defined in the agreement), he shall be
entitled to (i) the vesting of all options in the year of termination and 50% of
the options that would have vested in the year following termination and (ii)
the lesser of six months base salary or the base salary for the balance of the
term of the agreement. Mr. Fish has agreed not to disclose any confidential
information of the Company during the term of his employment or at any time
thereafter or to compete with the Company during the term of his agreement and
for a period of two years thereafter in the event of termination for cause.
On July 31, 1998, the Company entered into an employment agreement with
Joseph A. Donohue pursuant to which Mr. Donohue agreed to serve as the Company's
Vice President of Engineering for a three year term at an annual salary of
$120,000 per annum, subject to an additional cash bonus of $30,000 as determined
by the Compensation Committee of the Board of Directors in its discretion. In
May 2000, Mr. Donohue's annual base salary was increased to $150,000 per year.
In connection with his employment, Mr. Donohue received an incentive stock
option to purchase 62,500 shares of the Company's Common Stock at an exercise
price of $6.00 per share. The options granted to Mr. Donohue vested as to 34% of
the shares covered thereby upon execution of the agreement and 22% of the shares
covered thereby on each of the first three anniversaries thereafter, subject to
acceleration upon a change of control of the Company. In the event Mr. Donohue's
employment agreement is terminated "other than for cause" (as defined in the
agreement), he shall be entitled to (i) the vesting of all options in the year
of termination and 50% of the options that would have vested in the year
following termination and (ii) the lesser of six months base salary or the base
salary for the balance
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of the term of the agreement. Mr. Donohue has agreed not to disclose any
confidential information of the Company during the term of his employment or at
any time thereafter or to compete with the Company during the term of his
agreement and for a period of two years thereafter in the event of termination
for cause.
On May 15, 1999, the Company entered into an employment agreement with
Robert Russo pursuant to which Mr. Russo agreed to continue to serve as the
Company's Vice President of Professional Services for a two year term at an
annual salary of $120,000, subject to additional bonus compensation as
determined by the Compensation Committee of the Board of Directors in its
discretion. Mr. Russo agreed not to disclose any confidential information of the
Company during the term of his employment or at any time thereafter. On February
7, 2000, the Company entered into a termination agreement with Mr. Russo
pursuant to which he received an additional option to purchase 25,000 shares of
Common Stock and options to purchase 6,625 shares of Common Stock held by Mr.
Russo were accelerated to vest upon the closing of the sale by the Company of
its Professional Services business which was consummated on February 9, 2000
(the "Closing Date"). The Company also agreed to extend the time period to
exercise the vested incentive stock options from 30 days to 90 days. In
addition, the Company agreed to pay Mr. Russo a special bonus within 10 days of
the one-year anniversary of the Closing Date, conditioned upon his still being
employed by the acquiror at such time, in an amount equal to 3% of the net funds
($1,000,000 held in escrow) received by the Company from the acquiror following
the first anniversary of the Closing Date, subject to certain adjustments.
Furthermore, the Company secured an agreement with Wheatley to release Mr.
Russo's founder shares from a lockup over a period of time. Effective on the
Closing Date, Mr. Russo was no longer employed by the Company.
AMENDMENT OF THE COMPANY'S AMENDED AND RESTATED STOCK
OPTION PLAN TO INCREASE THE NUMBER OF SHARES RESERVED FOR
ISSUANCE THEREUNDER FROM 1,800,000 TO 2,535,000
(PROPOSAL NO. 1)
At the Special Meeting, the Company's stockholders will be asked to
approve an amendment to the Company's Amended and Restated 1996 Stock Option
Plan (the "Stock Option Plan") to increase the number of shares of Common Stock
reserved for issuance under the Stock Option Plan from 1,800,000 to 2,535,000.
The Board believes that in order to enable the Company to continue to
attract and retain personnel of the highest caliber, provide incentive for
officers, directors, key employees and other key persons and continue to promote
the well-being of the Company, it is in the best interest of the Company and its
stockholders to provide to officers, directors, key employees, consultants and
the other independent contractors who perform services for the Company, through
the granting of stock options, the opportunity to participate in the value
and/or appreciation in value of the Company's Common Stock. The Board has found
that the grant of options under the Stock Option Plan has proven to be a
valuable tool in attracting and retaining key employees. It believes that such
authority, in view of the substantial growth of the Company and need to continue
to grow, should be exercised to increase the number of options which may be
granted under the Stock Option Plan. The Board believes that such authority will
provide the Company with significant means to attract and retain personnel and
maintain current key employees.
SUMMARY OF THE STOCK OPTION PLAN
On March 7, 1996, the Board of Directors and stockholders of the
Company approved the adoption of the Stock Option Plan. The Stock Option Plan is
intended to assist the Company in securing and retaining key employees,
directors and consultants by allowing them to participate in the ownership and
growth of the Company through the grant of incentive and non-qualified options
(collectively, the "Options"). Under the Stock Option Plan, key employees
(including officers and employee directors) are eligible to receive grants of
incentive stock options. Employees (including officers), directors of the
Company or any affiliates and consultants are eligible to receive grants of
non-qualified options. Incentive stock options granted under the Stock Option
Plan are intended to be "Incentive Stock Options" as defined by Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
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The Stock Option Plan is administered by the Compensation Committee of
the Board of Directors of the Company which currently consists of Corey M.
Horowitz and Emanuel Pearlman. The Compensation Committee of the Board of
Directors will consist of members who have been determined by the Board of
Directors to be "disinterested persons" within the meaning of Rule
16b-3(c)(2)(i) promulgated under the Exchange Act or any future corresponding
rule.
The Compensation Committee will determine who shall receive Options,
the number of shares of Common Stock that may be purchased under the Options,
the time and manner of exercise of Options and exercise prices. The term of
Options granted under the Stock Option Plan may not exceed 10 years (five years
in the case of an incentive stock option granted to an optionee owning more than
10% of the voting stock of the Company) (a "10% Holder"). The exercise price for
incentive stock options shall not be less than 100% of the "fair market value"
of the shares of Common Stock at the time the Option is granted; provided,
however, that with respect to an incentive stock option, in the case of a 10%
Holder, the purchase price per share shall be at least 110% of such fair market
value. The exercise price for non-qualified options is set by the Compensation
Committee in its discretion. The aggregate fair market value of the shares of
Common Stock as to which an optionee may exercise incentive stock options may
not exceed $100,000 in any calendar year. Payment for shares purchased upon
exercise of Options is to be made in cash, check or other instrument, and at the
discretion of the Committee, may be made by delivery of other shares of Common
Stock of the Company. If any Option granted under the Plan expires or terminates
for any reason without having been exercised in full, then the unpurchased
shares subject to the Option will once again be available for additional Option
grants.
Under certain circumstances involving a change in the number of
outstanding shares of Common Stock including a stock split, consolidation,
merger or payment of stock dividend, the class and aggregate number of shares of
Common Stock in respect of which Options may be granted under the Stock Option
Plan, the class and number of shares subject to each outstanding Option and the
exercise price per share will be proportionately adjusted.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE STOCK OPTION PLAN
The following is a brief summary of the Federal income tax aspects of
grants made under the Stock Option Plan based upon statutes, regulations and
interpretations in effect on the date hereof. This summary is not intended to be
exhaustive, and does not describe state or local tax consequences.
1. Incentive Stock Options. An option holder will recognize no taxable
income upon the grant or exercise of an Incentive Stock Option. Upon a
disposition of the shares after the later of two years from the date of grant
and one year from the date of exercise, (i) the option holder will recognize the
difference, if any, between the amount realized and the exercise price as
long-term capital gain or long-term capital loss (as the case may be) if the
shares are capital assets in his or her hands; and (ii) the Company will not
qualify for any deduction in connection with the grant or exercise of the
options. The excess, if any, of the fair market value of the shares on the date
of exercise of an Incentive Stock Option over the exercise price will be treated
as an item of adjustment for his or her taxable year in which the exercise
occurs and may result in an alternative minimum tax liability for the
participant. In the case of a disposition of shares in the same taxable year as
the exercise where the amount realized on the disposition is less than the fair
market value of the shares on the date of exercise, there will be no adjustment
since the amount treated as an item of adjustment, for alternative minimum tax
purposes, is limited to the excess of the amount realized on such disposition
over the exercise price which is the same amount included in regular taxable
income.
If the Common Stock acquired upon the exercise of an Incentive Stock
Option is disposed of prior to the expiration of the holding periods described
above, (i) the option holder will recognize ordinary compensation income in the
taxable year of disposition in an amount equal to the excess, if any, of the
lesser of the fair market value of the shares on the date of exercise or the
amount realized on the disposition of the shares, over the exercise price paid
for such shares; and (ii) the Company will qualify for a deduction equal to any
such amount recognized, subject to the requirements of Section 162(m) of the
Code and that the compensation be reasonable. The option holder will recognize
the excess, if any, of the amount realized over the fair market value of the
shares on the date of exercise, if the shares are capital assets in his or her
hands, as short-term or long-term capital gain, depending on the length of time
that the option holder held the shares, and the Company will not qualify for a
deduction with respect to such excess.
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2. Non-Qualified and Non-Plan Stock Options. With respect to
Non-Qualified and Non-Plan Stock Options (i) upon grant of the option, the
participant will recognize no income; (ii) upon exercise of the option (if the
shares are not subject to a substantial risk of forfeiture), the option holder
will recognize ordinary compensation income in an amount equal to the excess, if
any, of the fair market value of the shares on the date of exercise over the
exercise price, and the Company will qualify for a deduction in the same amount,
subject to the requirements of Section 162(m) of the Code and that the
compensation be reasonable; (iii) the Company will be required to comply with
applicable Federal income tax withholding requirements with respect to the
amount of ordinary compensation income recognized by the option holder; and (iv)
on a sale of the shares, the option holder will recognize gain or loss equal to
the difference, if any, between the amount realized and the sum of the exercise
price and the ordinary compensation income recognized. Such gain or loss will be
treated as short-term or long-term capital gain or loss if the shares are
capital assets in the participant's hands depending upon the length of time that
the participant held the shares.
The approval of the proposed amendment to the Company's Stock Option
Plan requires the affirmative vote of a majority of the voting stock present in
person or represented by proxy at the Special Meeting, provided a quorum exists.
The Board believes that the Proposed Amendment to the Stock Option Plan
will help the Company attract and retain qualified officers, directors and key
employees. Accordingly, the Board believes that the Amendment to the 1996 Stock
Option Plan is in the best interest of the Company and unanimously recommends a
vote FOR its approval.
GENERAL AND OTHER MATTERS
Management knows of no matter other than the matters described above
that will be presented to the meeting. However, if any other matters properly
come before the meeting, or any of its adjournments, the person or persons
voting the proxies will vote them in accordance with his or their best judgment
on such matters.
SOLICITATION OF PROXIES
The cost of proxy solicitations will be borne by the Company. In
addition to solicitations of proxies by use of the mails, some officers or
employees of the Company, without additional remuneration, may solicit proxies
personally or by telephone. The Company will also request brokers, dealers,
banks and their nominees to solicit proxies from their clients, where
appropriate, and will reimburse them for reasonable expenses related thereto.
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