SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. )1
NETWORK-1 SECURITY SOLUTIONS, INC.
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(Name of issuer)
COMMON STOCK, $.01 PAR VALUE
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(Title of class of securities)
64121N-10-9
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(CUSIP number)
STEVEN WOLOSKY, ESQ.
OLSHAN GRUNDMAN FROME ROSENZWEIG & WOLOSKY LLP
505 Park Avenue
New York, New York 10022
(212) 753-7200
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(Name, address and telephone number of person
authorized to receive notices and communications)
October 2, 2001
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(Date of event which requires filing of this statement)
If the filing person has previously filed a statement on Schedule
13G to report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box
|_|.
Note. six copies of this statement, including all exhibits, should
be filed with the Commission. See Rule 13d-1(a) for other parties to who copies
are to be sent.
(Continued on following pages)
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1 The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which would
alter disclosures provided in a prior cover page.
The information required on the remainder of this cover
page shall not be deemed to be "filed" for the purpose of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that
section of the Act but shall be subject to all other provisions of the Act
(however, see the Notes).
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CUSIP No. 64121N-10-9 13D Page 2 of 8 Pages
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1 NAME OF REPORTING PERSONS
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS
FALCONSTOR SOFTWARE, INC.
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2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) |_|
(b) |_|
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3 SEC USE ONLY
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4 SOURCE OF FUNDS*
WC
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5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEM 2(d) OR 2(e) |_|
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6 CITIZENSHIP OR PLACE OR ORGANIZATION
UNITED STATES
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NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY 4,339,740*
OWNED BY EACH
REPORTING
PERSON WITH -----------------------------------------------------------------
8 SHARED VOTING POWER
-0-
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9 SOLE DISPOSITIVE POWER
4,339,740*
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10 SHARED DISPOSITIVE POWER
-0-
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11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
4,339,740*
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12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES* |_|
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13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
40.2%
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14 TYPE OF REPORTING PERSON*
CO
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* Assumes the conversion of all Series E Convertible Preferred Stock
held by the Reporting Person only into Common Stock and the exercise
of Warrants to purchase 2,169,870 shares of Common Stock held by the
Reporting Person. Does not include the exercise or conversion of any
other derivative security of the
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CUSIP No. 64121N-10-9 13D Page 3 of 8 Pages
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Issuer. If all derivative securities are included in the numerator
and denominator, the Reporting Person would own 19.3% of the Issuer
on a fully diluted basis.
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CUSIP No. 64121N-10-9 13D Page 4 of 8 Pages
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The following constitutes the initial Schedule 13D filed by FalconStor Software,
Inc. ("FalconStor").
Item 1. Security and Issuer.
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This statement relates to the shares of common stock, $.01 par value
(the "Common Stock ") of Network-1 Security Solutions, Inc. (the "Issuer"). The
Issuer's principal executive offices are located at 1601 Trapelo Road, Reservoir
Place, Waltham, Massachusetts 02451.
Item 2. Identity and Background.
-----------------------
FalconStor is a company incorporated in Delaware with a business
address of 125 Baylis Road, Suite 140, Melville, New York 11747. FalconStor is a
provider of storage networking infrastructure software and is managed by its
Board of Directors.
The directors and executive officers of FalconStor are ReiJane Huai,
Lawrence S. Dolin, Steven H. Owings, Steven R. Fischer, Jacob Ferng and Wayne
Lam. The business address of Messrs. Huai, Dolin, Owings, Fischer, Ferng and Lam
is c/o FalconStor's business address given above.
Messrs. Huai, Dolin, Owings, Fischer, Ferng and Lam are citizens of
the United States of America.
In accordance with the provisions of General Instruction C to
Schedule 13D, information concerning the executive officers and directors of
FalconStor is included in Schedule A hereto and is incorporated by reference
herein.
The Reporting Person and its directors and executive officers have
not been criminally convicted in the past five years. They have not also been a
party to a civil proceeding of a judicial or administrative body of competent
jurisdiction which resulted in a judgement, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to, Federal
or State securities laws or finding any violations with respect to such laws.
Item 3. Source and Amount of Funds or Other Consideration.
-------------------------------------------------
On October 2, 2001, FalconStor acquired 1,084,935 shares of Series E
Convertible Preferred Stock (the "Series E Preferred Stock") of the Issuer which
are initially convertible into 2,169,870 shares of Common Stock of the Issuer.
In connection with such purchase, FalconStor also received warrants (the
"Warrants") to purchase 2,169,870 shares of Common Stock at an exercise price of
$1.27 per share, exercisable commencing October 2, 2001. In addition, the
Reporting Person received additional warrants (the "Additional Warrants") to
purchase 500,000 shares of Common Stock, exercisable commencing October 2, 2002.
The aggregate purchase price of the 1,084,935 shares of Series E Preferred
Stock, acquired by FalconStor is $2,300,062.20. FalconStor paid for such
securities by using its working capital.
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CUSIP No. 64121N-10-9 13D Page 5 of 8 Pages
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Item 4. Purpose of Transaction.
----------------------
The Reporting Person acquired the Series E Preferred Stock, the
Warrants and Additional Warrants for investment purposes. It presently has no
plans or proposals which would relate to or result in any of the matters set
forth in subparagraphs (a) - (j) of Item 4 of Schedule 13D.
Item 5. Interest in Securities of the Issuer.
------------------------------------
(a) In calculating the aggregate percentage of shares of Common
Stock reported owned by FalconStor, the denominator is based upon 6,467,547
shares of Common Stock outstanding, which is the total number of shares of
Common Stock outstanding as of August 16, 2001 as reported in the Issuer's
Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2001 and
an additional 4,339,740 shares of Common Stock to reflect the conversion and
exercise of all Series E Preferred Stock and Warrants held by FalconStor into
Common Stock. Except as indicated in the next paragraph, FalconStor has sole
voting power with respect to the shares of Common Stock that it will receive
upon conversion of the Series E Preferred Stock.
For so long as the holders of the outstanding shares of Series E
Preferred Stock own at least 10% of the voting stock of the Issuer, and
FalconStor owns any outstanding shares of Series E Preferred Stock, FalconStor
agrees, for all actions to be voted upon by the holders of the Series E
Preferred Stock, to vote all of its outstanding shares of Series E Preferred
Stock, and all of its outstanding shares, if any, of Common Stock issued upon
the conversion or exercise of its Series E Preferred Stock, Warrants and
Additional Warrants, in the same manner as the holders of the majority of the
Series E Preferred Stock excluding the Series E Preferred Stock owned by
FalconStor.
As of the close of business on October 11, 2001, FalconStor
beneficially owns 4,339,740 shares of Common Stock, constituting approximately
40.2% of the shares of Common Stock outstanding. Such amount does not include
500,000 shares of Common Stock issuable upon the exercise of the Additional
Warrants. In addition, such amount does not include the exercise or conversion
of any derivative securities of the Issuer not held by FalconStor. If all of
such derivative securities were exercised or converted, FalconStor would own
19.3% of the shares of Common Stock outstanding.
The only transaction in the last 60 days by FalconStor was the
purchase of the Series E Preferred Stock, the Warrants and Additional Warrants
on October 2, 2001. Such purchase was made pursuant to a private transaction.
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CUSIP No. 64121N-10-9 13D Page 6 of 8 Pages
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Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to
Securities of the Issuer.
See Item 5 and the Securities Purchase Agreement referred to in Item
7 for a description of the voting agreement between FalconStor, the Issuer and
the other holders of the Series E Preferred Stock of the Issuer.
Item 7. Material to be Filed as Exhibits.
1. Securities Purchase Agreement dated as of October 2, 2001 between
the Issuer and the Investors of the Series E Preferred Stock
including FalconStor. Such Securities Purchase Agreement contains
the voting agreement referred to in Items 5 and 6 hereof.
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CUSIP No. 64121N-10-9 13D Page 7 of 8 Pages
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SIGNATURES
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After reasonable inquiry and to the best of his knowledge and
belief, the undersigned certifies that the information set forth in this
statement is true, complete and correct.
Dated: October 11, 2001 FALCONSTOR SOFTWARE, INC.
By: /s/ Jacob Ferng
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Name: Jacob Ferng
Title: Vice President/Chief
Financial Officer
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CUSIP No. 64121N-10-9 13D Page 8 of 8 Pages
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SCHEDULE A
Information Concerning Directors and Executive Officers of FalconStor
FalconStor is managed by its Board of Directors. Information concerning its
Board of Directors and Executive Officers is given below:
ReiJane Huai is a Director, President and Chief Executive Officer
of FalconStor.
Jacob Ferng is a Vice President and Chief Financial Officer of
FalconStor.
Wayne Lam is Vice President, Marketing of FalconStor.
Steven H. Owings is a Director of FalconStor. Mr. Owings served as
the chief executive officer of ScanSource, Inc., a value-added distributor of
POS and bar code products, from December 1992 to January 2000. Mr. Owings
currently serves as chairman of the board of directors of ScanSource, Inc.
Lawrence S. Dolin is a Director of FalconStor and is currently
chairman, president and chief executive officer of Noteworthy Medical Systems,
Inc., a provider of computerized patient record software. Mr. Dolin is also a
general partner of Mordo Partners, an investment management partnership and a
director of Morgan's Foods, Inc.
Steven R. Fischer is a Director of FalconStor and is currently
president of Transamerica Business Capital Corporation, which specializes in
secured lending for mergers, acquisitions and restructuring. Mr. Fischer is also
a Director of ScanSource, Inc.
SECURITIES PURCHASE AGREEMENT
-----------------------------
AGREEMENT, dated as of October 2, 2001, by and between Network-1
Security Solutions, Inc., a Delaware corporation with principal offices at 1601
Trapelo Road, Waltham, MA 02451 (the "Company"), and the Investors signatory
hereto (collectively, the "Investors").
WHEREAS, each of the Investors and the Company desire that the
Investors purchase (i) up to an aggregate of 3,191,037 shares of Series E
Convertible Preferred Stock (the "Series E Preferred Stock") at a purchase price
of $2.12 per share, equal to two (2) times the average closing price of the
Company's common stock, par value $.01 per share (the "Common Stock"), as
reported on The Nasdaq Small Cap Market for the five (5) trading days prior to
two (2) trading days before the date hereof (the "Purchase Price"), and (ii)
warrants to purchase up to 6,382,074 shares of Common Stock (the "Common Stock
Purchase Warrants"), at an exercise price of $1.27 per share, or 60% of the
Purchase Price, on the terms and subject to the conditions set forth herein. The
shares of Common Stock issuable upon conversion of the Series E Preferred Stock
and exercise of the Common Stock Purchase Warrants and the Additional Warrants
(as defined below) are collectively referred to herein as the "Underlying
Securities."
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I.
Issuance of Series E Preferred Stock and Warrants
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I.1 Agreement to Purchase and Sell. At the initial closing provided
for in Section I.2(a), the Company will issue and sell to each Investor and,
subject to the terms and conditions of this Agreement, each Investor will
purchase from the Company (i) the Series E Preferred Stock which shall have such
rights, powers and preferences as set forth in the Certificate of Designations,
Preferences and Other Rights and Qualifications attached as Exhibit A hereto
(the "Certificate of Designations"), and (ii) the Common Stock Purchase Warrants
in the form of Exhibit B attached hereto, in the amounts opposite such
Investor's name and in consideration for payment by each Investor to the Company
of the Purchase Price as indicated on Schedule 1.1 hereto. The Investors will be
afforded Registration Rights with respect to the Underlying Securities in
accordance with the Registration Rights Agreement attached hereto as Exhibit C
(the "Registration Rights" together with the Common Stock Purchase Warrants and
the Additional Warrants (as defined below), Certificate of Designations and the
License and Distribution Agreement referenced in Section I.3 hereof, the
"Ancillary Documents"). Any Investor who purchases $2.0 million or more of
Series E Preferred Stock shall receive additional five (5) year warrants to
purchase 500,000 shares of Common Stock, at the same exercise price of the
Common Stock Purchase Warrants (the "Additional Warrants").
The Common Stock Purchase Warrants and the Additional Warrants are collectively
referred to as the "Warrants."
I.2 The Closing. (a) The initial closing of the issuance of the
Series E Preferred Stock and Warrants (the "Initial Closing") shall take place
at the offices of Olshan Grundman Frome Rosenzweig & Wolosky LLP, 505
Park Avenue, New York, New York 10022-1170, on the date that this Agreement is
executed by the parties hereto (the time and date of the Closing being hereto
referred to as the "Initial Closing Date"). On the Initial Closing Date there
will be delivered to the Investors the Series E Preferred Stock and Warrants to
be purchased by them in accordance with Schedule 1.1 hereto and the other terms
hereof against delivery by the Investors of checks payable to the order of the
Company (or wire transfers) in the full amount of the Purchase Price. Prior to
the Initial Closing Date, the Certificate of Designations shall be filed with
the Secretary of State, State of Delaware.
(b) Subject to the terms and provisions of this Agreement, if any of
the securities offered hereby are not sold at the Initial Closing, the Company
may at any time within sixty (60) days following the Initial Closing, sell the
remaining securities at the same purchase price as the securities purchased and
sold at the Initial Closing (the "Subsequent Closings"). Any such Subsequent
Closing shall be upon the same terms and conditions as those in the Initial
Closing, and such additional investors shall become parties to this Agreement
and the Registration Rights Agreement. Any such additional investors shall be
deemed to be an "Investor" for all purposes under this Agreement.
I.3 License and Distribution Agreement. Simultaneous with the
execution of this Agreement, the Company and FalconStor Software, Inc.
("FalconStor") shall enter into a License and Distribution Agreement pursuant to
which FalconStor will be granted a non-exclusive ten (10) year license to
market, distribute, resell and sublicense the Company's products. The form of
the License and Distribution Agreement is attached hereto as Exhibit D.
ARTICLE II.
Representations, Warranties, and Agreements of the Company
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The Company represents and warrants to, and agrees with,
the Investors as follows:
II.1 Corporate Organization and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, and is qualified to transact business and
is in good standing as a foreign corporation in every jurisdiction in which its
ownership, leasing, licensing or use of property or assets or the conduct of its
business makes such qualification necessary, except in such jurisdictions where
the failure to be so qualified or in good standing would not have a material
adverse effect on the business, results of operations, financial condition or
prospects of the Company. The Company has no subsidiaries except for Network-1
Acquisition Corp. (which does not conduct any business or own any material
assets) and has no investment, whether by way of ownership of stock or other
securities or by loan,
2
advance or otherwise, in any corporation, partnership, firm, association or
other business entity. The Company has all required power and authority to own
its property and to carry on its business as now conducted and proposed to be
conducted.
II.2 Validity of Transaction. The Company has all requisite power
and authority to execute, deliver and perform this Agreement and the Ancillary
Documents, and to issue the Series E Preferred Stock and Warrants to the
Investors. All necessary corporate proceedings of the Company have been duly
taken to authorize the execution, delivery and performance of this Agreement,
the Ancillary Documents, the Series E Preferred Stock and Warrants and to
authorize the issuance and sale of the Series E Preferred Stock and Warrants,
and upon conversion of the Series E Preferred Stock and exercise of the
Warrants, to authorize the issuance of the Underlying Securities to the
Investors. This Agreement, the Ancillary Documents, the Series E Preferred Stock
and Warrants have been duly authorized, executed and delivered by the Company,
are the legal, valid and binding obligations of the Company, and are enforceable
as to the Company in accordance with their respective terms, except as may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
other similar laws or by legal or equitable principles relating to or limiting
creditors' rights generally or as rights to indemnification may be limited by
applicable securities laws. Except as to filings which may be required under
applicable state securities regulations, no consent, authorization, approval,
order, license, certificate, or permit of or from, or declaration or filing
with, any Federal, state, local or other governmental authority or of any court
or other tribunal is required by the Company in connection with the transactions
contemplated hereby. No consent of any party to any contract, agreement,
instrument, lease, license, arrangement or understanding to which the Company is
a party, or by which any of its properties or assets is bound, is required for
the execution, delivery or performance by the Company of this Agreement, the
Ancillary Documents, the Series E Preferred Stock, Warrants and the issuance of
the Underlying Securities. The execution, delivery, and performance of this
Agreement, the Ancillary Documents, the Series E Preferred Stock and Warrants by
the Company will not violate, result in a breach of, conflict with or (with or
without the giving of notice or the passage of time or both) entitle any party
to terminate or call a default under any such contract, agreement, instrument,
lease, license, arrangement or understanding, or violate or result in a breach
of any term of the Certificate of Incorporation or By-laws of the Company, or
violate, result in a breach of, or conflict with any law, rule, regulation,
order, judgment or decree binding on the Company or to which any of its
operations, business, properties or assets is subject. The registration rights
granted to the Investors, in accordance with the Registration Rights Agreement,
do not violate any of the terms and conditions of the registration rights
previously granted by the Company to other holders of the Company's securities
or any other agreements to which the Company is a party. The shares of Common
Stock issuable upon conversion of the Series E Preferred Stock and exercise of
the Warrants are duly authorized, have been reserved for issuance upon
conversion of the Series E Preferred Stock and upon exercise of the Warrants in
accordance with the terms thereof, will be validly issued, fully paid, and
nonassessable, will not have been issued in violation of any preemptive right of
stockholders or rights of first refusal and the Investors will have good title
to the Underlying Securities, free and clear of all liens, security interests,
pledges, charges, encumbrances, stockholders agreements and voting trusts.
3
II.3 Capitalization. The authorized capital stock of the Company
consists of 25,000,000 shares of Common Stock and 5,000,000 shares of preferred
stock, par value $.01 per share, of which 3,500,000 shares have been designated
Series E Convertible Preferred Stock, having the designations, dividend rights,
voting powers, conversion rights, rights on liquidation or dissolution and other
preferences or other special rights, and the qualifications, limitations or
restrictions thereof, set forth in the Certificate of Designations. Immediately
prior to the Initial Closing, the Company shall have 6,467,458 shares of Common
Stock and 231,054 shares of Series D Preferred Stock outstanding. All issued and
outstanding shares of Common Stock and Series D Preferred Stock have been
validly issued and are fully paid and nonassessable and have not been issued in
violation of any Federal or state securities laws. Except for the obligation of
the Company to issue (a) the Underlying Securities upon conversion of the Series
E Preferred Stock, and upon exercise of the Warrants, (b) the securities
issuable upon conversion of the Series D Preferred Stock outstanding, (c) upon
the exercise of the options, warrants and convertible securities (except for
outstanding Series D Preferred Stock referenced above) that are currently
outstanding to purchase 2,374,398 shares of Common Stock (excluding the options
issued under the Company's Stock Option Plan as set forth in the following
clause (d)), and (d) upon the exercise of options to purchase 1,369,273 shares
of Common Stock issued under the Company's Stock Option Plan, there are not, as
of the date hereof, any outstanding or authorized subscriptions, options,
warrants, calls, rights, commitments or any other agreements obligating the
Company to issue (i) any additional shares of its capital stock or (ii) any
securities convertible into, or exercisable or exchangeable for, or evidencing
the right to subscribe for, any shares of its capital stock except (as set forth
in the Disclosure Schedule) for (i) securities to be issued as a result of
anti-dilution protection relating to the outstanding Series D Preferred Stock
and certain outstanding warrants issued in connection with the Company's
December 1999 private financing and (ii) in accordance with a consulting
arrangement with Sage Alliance. Other than the Company's Stock Option Plan, the
Company has not adopted or authorized any plan for the benefit of its officers,
employees, or directors which require or permit the issuance, sale, purchase, or
grant of any shares of the Company's capital stock, any securities convertible
into, or exercisable or exchangeable for, or evidencing the right to subscribe
for any shares of the Company's capital stock or any phantom shares or any stock
appreciation rights. The Company is under no obligation (contingent or
otherwise) to purchase or otherwise acquire or retire any shares of its capital
stock, except as may be provided with respect to options outstanding under the
Stock Option Plan.
II.4 Financial Statements. The financial statements of the Company,
including the notes thereto, as they appear in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2000 (the "10-KSB") and the
Company's Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 2001 (the "10-QSB"), respectively (the "Financials"), fairly present, in all
material respects, the financial position and results of operations of the
Company at the dates thereof and for the periods covered thereby, subject, in
the case of interim periods, to year-end adjustments and normal recurring
accruals and to the extent that such Financials may not include footnotes. Such
Financials have been prepared in conformity with generally accepted accounting
principles ("GAAP"), consistently applied throughout the periods involved except
as may otherwise
4
be stated therein and except that the notes in the interim financial statements
may be abbreviated and do not contain all of the information that is contained
in the notes to the audited financial statements. The Company has no material
liabilities or obligations, contingent, direct, indirect or otherwise except (i)
as set forth in the latest balance sheet included in the Financials or the
footnotes thereto (the date of such balance sheet being referred to as the
"Balance Sheet Date"), and (ii) those incurred in the ordinary course of
business since the Balance Sheet Date.
II.5 No Undisclosed Liabilities. The Company does not have any
liabilities or obligations of any nature required to be set forth in the
Financials under GAAP, whether or not accrued, contingent or otherwise, and
there is no existing condition, situation or set of circumstances which may
result in such a liability or obligation, except (a) liabilities or obligations
of the Company reflected in its Securities and Exchange Commission (the "SEC")
filings and in the Financial Statements or (b) liabilities and obligations which
are not, individually or in the aggregate, reasonably expected to have a
material adverse effect on the Company.
II.6 Legal Proceedings. Except as set forth in the Disclosure
Schedule annexed hereto as Schedule 1.2, there are no actions, suits,
proceedings, claims or hearings of any kind or nature existing or pending or, to
the best knowledge of the Company, threatened and, to the best knowledge of the
Company, no investigations or inquiries, before or by any court, or other
governmental authority, tribunal or instrumentality (or, to the Company's best
knowledge, any state of facts that would give rise thereto), pending or
threatened against the Company, or involving the properties of the Company,
that, individually or in the aggregate as to any matter covered by this Section
II.6, are reasonably likely to result in any material adverse effect on the
Company or that might adversely affect the transactions or other acts
contemplated by this Agreement or the Ancillary Documents or the validity or
enforceability of this Agreement or the Ancillary Documents.
II.7 SEC Filings. The Company has filed all forms, reports,
statements and other documents required to be filed with (i) the SEC including,
without limitation, (A) all Annual Reports on Form 10-KSB, (B) all Quarterly
Reports on Form 10-QSB, (C) all Reports on Form 8-K, (D) all other reports or
registration statements and (E) all amendments and supplements to all such
reports and registration statements (collectively referred to as the "SEC
Reports") and (ii) any other applicable state securities authorities (all such
forms, reports, statements and other documents in (i) and (ii) of this Section
II.7 being referred to herein, collectively, as the "Reports"). The Reports (i)
were prepared in all material respects in accordance with the requirements of
applicable law (including, with respect to the SEC Reports, the Securities Act
of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as the case may be, and the rules and
regulations of the SEC thereunder applicable to such SEC Reports) and (ii) did
not at the time they were filed contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. In addition, since the last quarterly
report of the Company on Form 10-QSB filed with the SEC, there have been no
material events that require disclosure under the Exchange Act.
5
II. 8 Finder or Broker. Neither the Company nor anyone acting on
behalf of the Company has negotiated with any finder, broker or intermediary or
similar person in connection with the transactions contemplated herein.
II. 9 Taxes. The Company has filed all federal tax returns and all
state and municipal and local tax returns (whether relating to income, sales,
franchise, withholding, real or personal property or other types of taxes)
required to be filed under the laws of the United States and applicable states,
and has paid in full all taxes which have become due pursuant to such returns or
claimed to be due by any taxing authority or otherwise due and owing; provided,
however, that the Company has not paid any tax, assessment, charge, levy or
license fee that it is contesting in good faith and by proper proceedings and
adequate reserves for the accrual of same are maintained if required by GAAP.
The Company believes that each of the tax returns heretofore filed by the
Company correctly and accurately reflects the amount of its tax liability
thereunder. The Company has withheld, collected and paid all levies,
assessments, license fees and taxes to the extent required.
ARTICLE III.
Representations, Warranties, and Agreements of the Investors
------------------------------------------------------------
Each of the Investors, severally and not jointly, represents and
warrants to, and agrees with, the Company as follows:
III.1 Organization. Such Investor (if not an individual) is duly
organized under the laws of the state of its jurisdiction of organization and
has full power and authority to enter into this Agreement and to consummate the
transactions set forth herein. The address set forth on Schedule 1.1 hereof is
such Investor's true and correct business, residence or domicile address.
III.2 Accredited Investor, Experience, Access to Information, etc.
-----------------------------------------------------------
(a) Such Investor and, to the knowledge of such Investor, each
limited partner of such Investor in the case of an Investor which is a limited
partnership, and each partner of such Investor in the case of an Investor which
is a general partnership, is an "accredited investor," as that term is defined
in Rule 501 of Regulation D promulgated under the Securities Act;
(b) Such Investor and, to the knowledge of such Investor, the
shareholders of the general partner of such Investor, if any, and each of the
limited partners of such Investor, if any, have had substantial experience in
investing in private transactions like this one, are capable of evaluating the
merits and risks of an investment in the Company and understands that an
investment in the Series E Preferred Stock and Warrants is speculative and
involves a high degree of risk and should not be purchased by any one who cannot
afford the loss of their entire investment. Such Investor has carefully
considered the Risk Factors set forth in Exhibit E hereof; and
6
(c) Such Investor acknowledges that it has had a full opportunity to
discuss the business, management and financial affairs of the Company with the
Company's management. Such Investor has reviewed the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2000 and the Company's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 2001 and all
additional requested documents from the Company and has had a full opportunity
to ask questions of, and receive answers from, the officers of the Company
concerning the terms and conditions of this Agreement, the purchase of the
Series E Preferred Stock and Warrants, the business, operations, market
potential, capitalization, financial condition and prospects of the Company, and
all other matters deemed relevant by the Investor. Such Investor acknowledges
that it has had an opportunity to evaluate all information regarding the Company
as it has deemed necessary or desirable in connection with the transactions
contemplated by this Agreement, has independently evaluated the transactions
contemplated by this Agreement and has reached its own decision to enter into
this Agreement.
III.3 Investment Intent. Such Investor is acquiring the Series E
Preferred Stock and Warrants and the Underlying Securities for its or his own
account for investment and not with a view to, or for sale in connection with,
any public distribution thereof in violation of the Securities Act. Such
Investor understands that none of the shares of Series E Preferred Stock and
Warrants or the Underlying Securities have been registered for sale under the
Securities Act or qualified under applicable state securities laws and that the
shares of Series E Preferred Stock and Warrants and the Underlying Securities
are being offered and sold to such Investor pursuant to one or more exemptions.
Such Investor understands that it must bear the economic risk of its investment
in the Company for an indefinite period of time, as the Series E Preferred Stock
and Warrants and the Underlying Securities cannot be sold unless subsequently
registered under the Securities Act and qualified under state securities laws,
unless an exemption from such registration and qualification is available. Such
Investor acknowledges that no public market for the Series E Preferred Stock or
Warrants of the Company presently exists and none may develop in the future.
III.4 Transfer of Securities. Such Investor will not sell or
otherwise dispose of any Series E Preferred Stock and Warrants or Underlying
Securities unless (a) a registration statement with respect thereto has become
effective under the Securities Act and such Series E Preferred Stock and
Warrants and Underlying Securities have been qualified under applicable state
securities laws or (b) there is presented to the Company notice of the proposed
transfer and, if it so requests, a legal opinion reasonably satisfactory to the
Company that such registration and qualification is not required; provided,
however, that no such registration or qualification or opinion of counsel shall
be necessary for a transfer by such Investor (i) to any entity controlled by, or
under common control with, such Investor, (ii) to a shareholder, partner or
officer of such Investor, (iii) to a shareholder, partner or officer of the
general partner of such Investor, (iv) to the spouse, lineal descendants, estate
or a trust or for the benefit of any of the foregoing or (v) by operation of
law, provided the transferee agrees in writing to be subject to the terms hereof
to the same extent as if he were such Investor. Such Investor consents that any
transfer agent of the Company may be instructed not to transfer any Series E
Preferred Stock and Warrants or Underlying Securities unless it receives
satisfactory
7
evidence of compliance with the foregoing provisions, and that there may be
endorsed upon any certificate (or other instrument) representing such securities
(and any certificates issued in substitution therefor) the following legend
calling attention to the foregoing restrictions on transferability of such
shares, stating in substance:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS
OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM
UNDER SUCH ACT AND LAWS, IF APPLICABLE. THE COMPANY, PRIOR
TO PERMITTING A TRANSFER OF THESE SECURITIES, MAY REQUIRE
AN OPINION OF COUNSEL OR OTHER ASSURANCES SATISFACTORY TO
IT AS TO COMPLIANCE WITH OR EXEMPTION FROM SUCH ACT AND
LAWS"
The Company shall, upon the request of any holder of Series E Preferred Stock,
Warrants or Underlying Securities and the surrender of such securities, issue a
new stock certificate and Warrants without such legend if (A) the Warrants or
stock evidenced by such certificate has been effectively registered under the
Securities Act and qualified under any applicable state securities law and sold
by the holder thereof in accordance with such registration and qualification, or
(B) such holder shall have delivered to the Company a legal opinion reasonably
satisfactory to the Company to the effect that the restrictions set forth herein
are no longer required or necessary under the Securities Act or any applicable
state law.
III.5 Authorization. All actions on the part of such Investor
necessary for the authorization, execution, delivery and performance by such
Investor of this Agreement have been taken. This Agreement has been duly
authorized, executed and delivered by such Investor, is the legal, valid and
binding obligations of such Investor, and are enforceable as to such Investor in
accordance with their respective terms, except as may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other similar laws or by
legal or equitable principles relating to or limiting creditors' rights
generally or as rights to indemnification may be limited by applicable
securities laws.
III.6 Finder or Broker. Neither such Investor nor any person acting
on behalf of such Investor has negotiated with any finder, broker, intermediary
or similar person in connection with the transactions contemplated herein.
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ARTICLE IV
Indemnification
---------------
IV.1 Indemnification by Investors. (a) Each Investor, severally and
not jointly, agrees to indemnify and hold harmless the Company, its officers and
directors, employees, agents and representatives and affiliates and each other
person, if any, who controls any thereof, against any loss, liability, claim,
damage and expense whatsoever (including, but not limited to, any and all
expenses whatsoever reasonably incurred in investigating, preparing or defending
against any litigation commenced or threatened or any claim whatsoever) arising
out of or based upon any untruth, inaccuracy, or breach of any of the
representations, warranties, covenants or agreements of such Investor contained
in this Agreement or in any other document furnished by such Investor to any of
the foregoing in connection with this transaction.
IV.2 Indemnification by the Company. The Company agrees to indemnify
and hold harmless the Investors, its officers and directors, employees, agents,
representatives and affiliates and each other person, if any, who controls any
thereof, against any loss, liability, claim, damage and expense whatsoever
(including, but not limited to, any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any litigation
commenced or threatened or any claim whatsoever) arising out of or based upon
any untruth, inaccuracy, or breach of any of the representations, warranties,
covenants or agreements of the Company contained in this Agreement or in any
other document furnished by the Company to any of the foregoing in connection
with this transaction.
IV.3 Notices of Claims. Promptly after receipt by an indemnified
party of notice of the commencement of any action or proceeding involving a
claim referred to in Section IV.1 and IV.2, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party, give
written notice to the latter of the commencement of such action; provided,
however, that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under Section
IV hereof, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. In case any such action is brought
against an indemnified party, the indemnifying party shall be entitled to
participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if the indemnified party reasonably
believes it is advisable for it to be represented by separate counsel because
there exists a conflict of interest between its interests and those of the
indemnifying party with respect to such claim, or there exist defenses available
to such indemnified party which may not be available to the indemnifying party,
or if the indemnifying party shall fail to assume responsibility for such
defense, the indemnified party may retain counsel satisfactory to it and the
indemnifying party shall pay all fees and expenses of such counsel. No
indemnifying party shall be liable for any settlement of any action or
proceeding effected without its written consent, which consent shall not be
unreasonably withheld or delayed. No indemnifying party shall, without the
consent of the indemnified party, consent to entry of any judgment or enter into
any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release from
9
all liability in respect to such claim or litigation or which requires action
other than the payment of money by the indemnifying party. Each indemnified
party shall furnish such information regarding itself or the claim in question
as an indemnifying party may reasonably request in writing and as shall be
reasonably requested in connection with the defense of such claim and litigation
resulting therefrom.
IV. 4 Contribution. If the indemnification provided for in Section
IV.1 and IV.2 shall for any reason be held by a court of competent jurisdiction
to be unavailable to an indemnified party in respect of any loss, claim, damage
or liability, or any action in respect thereof, then, in lieu of the amount paid
or payable under Section IV.1 or IV.2 hereof, the indemnified party and the
indemnifying party shall contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigating the same), (a) in such proportion as is appropriate to
reflect the relative fault of the Company and the Investors in connection with
the statement or omissions which resulted in such loss, claim, damage or
liability, or action in respect thereof, as well as any other relevant equitable
consideration (the relative fault of the Company and such Investors to be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Investors
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission) or (b) if the
allocation provided by clause (a) above is not permitted by applicable law, in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Investors from the offering of the securities.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. In addition, no person
shall be obligated to contribute hereunder any amounts in payment of any
settlement of any action or claim effected without such person's consent, which
consent shall not be unreasonably withheld or delayed.
ARTICLE V
Additional Provisions
---------------------
V.1 CEO Hiring. Immediately following the Initial Closing, the
Company agrees to use its best efforts to hire a new Chief Executive Officer.
The holders of a majority of the Series E Preferred Stock shall have the right
to approve the hiring of a new Chief Executive Officer.
V.2 Board Observer Rights. Following the Initial Closing, Wheatley
Partners II, L.P., ("Wheatley") shall have the right to send two (2)
representatives (who need not be the same individuals from meeting to meeting)
to observe each meeting of the Board of Directors. The Company agrees to give
Wheatley written notice of each such meeting and to provide Wheatley with an
agenda no later than it gives such notice and provides such items to the
directors.
V.3 FalconStor Voting Agreement. For so long as the holders of the
outstanding shares of Series E Preferred Stock own at least 10% of the voting
stock of the Company, and FalconStor owns any outstanding shares of Series E
10
Preferred Stock, FalconStor agrees, for all actions to be voted upon by the
holders of the Series E Preferred Stock, to vote all of its outstanding shares
of Series E Preferred Stock, and all of its outstanding shares, if any, of
Common Stock issued upon the conversion or exercise of its Series E Preferred
Stock, Common Stock Purchase Warrants and Additional Warrants, in the same
manner as the holders of the majority of the Series E Preferred Stock excluding
the Series E Preferred Stock owned by FalconStor.
V.4 Investment Banking Firms and Public Relations Firms. Following
the Initial Closing the Company shall hire investment banking firms and public
relations firms satisfactory to Wheatley.
V.5 Communications. All notices or other communications hereunder
shall be in writing and shall be given by registered or certified mail (postage
prepaid and return receipt requested), by an overnight courier service which
obtains a receipt to evidence delivery or by telex or facsimile transmission
(provided that written confirmation of receipt is provided), addressed as set
forth below:
If to the Company:
Network-1 Security Solutions, Inc.
1601 Trapelo Road
Waltham, MA 02451
Attention: Murray P. Fish, President and Chief Financial Officer
With a copy to:
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, New York 10022-1170
Attention: Sam Schwartz, Esq.
If to the Investors, at their respective addresses as set forth on
Schedule 1.1 hereto, or such other address as any party may designate to the
other in accordance with the aforesaid procedure and with a copy to: Morrison
Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New York, New York
10022, Attn: Michael Reiner, Esq., counsel to the Investors. All notices and
other communications sent by overnight courier service shall be deemed to have
been given as of the next business day after delivery thereof to such courier
service, those given by telex or facsimile transmission shall be deemed given
when sent, and all notices and other communications sent by mail shall be deemed
given as of the third business day after the date of deposit in the United
States mail.
V.6 Successors and Assigns. The Company may not sell, assign,
transfer or otherwise convey any of its rights or delegate any of its duties
under this Agreement, except to a corporation which has succeeded to
substantially all of the business and assets of the Company and has assumed in
writing its obligations under this Agreement, and this Agreement shall be
11
binding on the Company and such successor. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by, the Investors and their
successors and assigns.
V.7 Amendments and Waivers. Neither this Agreement nor any term
hereof may be changed or waived (either generally or in a particular instance
and either retroactively or prospectively) absent the written consent of the
holders of a majority of the Series E Preferred Stock then outstanding.
V.8 Survival of Representations, Etc. The representations,
warranties, covenants and agreements made herein or in any certificate or
document executed in connection herewith shall survive the execution and
delivery of this Agreement and the issuance and delivery of the Series E
Preferred Stock, Warrants and Underlying Securities to the Investors and shall
in no way be affected by any investigation of the subject matter thereof made by
or on behalf of the Investor or the Company.
V.9 Delays or Omissions; Waiver. No delay or omission to exercise
any right, power or remedy accruing to either the Company or the Investors upon
any breach or default by the other under this Agreement shall impair any such
right, power or remedy nor shall it be construed to be a waiver of any such
breach or default, or any acquiescence therein or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring.
V.10 Entire Agreement. This Agreement (together with the exhibits
attached hereto) contains the entire understanding of the parties with respect
to their respective subject matter and all prior negotiations, discussions,
commitments and understandings heretofore had between them with respect thereto
are merged herein and therein.
V.11 Expenses. The Company shall, at the Closing and upon receipt of
an invoice, reimburse reasonable fees and expenses of Morrison Cohen Singer
& Weinstein LLP, counsel to the Investors.
V.12 Headings. All article and section headings herein are inserted
for convenience only and shall not modify or affect the construction or
interpretation of any provision of this Agreement.
V.13 Counterparts; Governing Law. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, without giving effect to conflict of laws.
V.14 Further Actions. At any time and from time to time, each party
agrees, without further consideration, to take such actions and to execute and
deliver such documents as may be reasonably necessary to effectuate the purposes
of this Agreement.
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V.15 Gender. As the context so requires, terms herein in the
masculine form shall be construed to include the feminine form as well as
neuter.
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IN WITNESS WHEREOF, this Agreement has been duly executed on the
date herein above set forth.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Murray P. Fish
-------------------------------------
Murray P. Fish
President and Chief Financial Officer
INVESTORS