Exhibit 10.23
AGREEMENT
AGREEMENT, dated as of October 20, 1998, by and among NETWORK-1 SECURITY
SOLUTIONS, INC. (the "Company"), a Delaware corporation with offices at 70
Walnut Street, Wellesley Hills, Massachusetts 02481 and the noteholders
signatory hereto (collectively, the "Noteholders").
WHEREAS, the Underwriter, Whale Securities Co., L.P., has conditioned
proceeding with the Company's initial public offering ("IPO") on the
Noteholders exchanging outstanding promissory notes in the principal amount
plus accrued interest of $2,954,888 (the "Notes") into Series C Preferred
Stock, par value $.01 per share, of the Company (the "Preferred Stock"), upon
the terms and subject to the conditions set forth herein;
WHEREAS, subject to the Company's consummation of its IPO, the Noteholders
and the Company desire that the Noteholders exchange the Notes into an aggregate
of 562,836 shares of Preferred Stock on the terms and subject to the conditions
set forth herein. The Preferred Stock issuable upon exchange of the Notes is
referred to herein as the "Preferred Shares."
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 Shares for Notes
1.1 Debt Exchange Agreement. Subject to the Company's consummation of
the IPO, at the Closing provided for in Section 1.2 hereof, the Company will
issue to each Noteholder and, subject to the terms and conditions of this
Agreement, each Noteholder will exchange the Notes for the number of
Preferred Shares set forth in Exhibit A hereto based on an exchange price of
$5.25 per share (the "Debt Exchange"). The form of Certificate of
Designation describing the terms of the Preferred Shares is attached as
Exhibit B hereto.
1.2 The Closing. The closing of the Debt Exchange (the "Closing") shall
take place at the offices of Bizar Martin & Taub, LLP, 1350 Avenue of the
Americas, New York, New York, or at such other designated place, simultaneously
with the Company's consummation of its IPO (the time and date of the Closing
being herein referred to as the "Closing Date"). On the Closing Date there will
be issued to the Noteholders the Preferred Shares against delivery and
cancellation of the original Notes. The Preferred Shares shall be held in escrow
in accordance with Section 1.3 hereof. In the event the Company does not
consummate the IPO within ninety (90) days of the date hereof, the terms and
provisions of this Agreement shall be null and void and the parties shall have
no further obligations to each other pursuant to this Agreement.
1.3 Escrow of Preferred Shares; Over-allotment Option Adjustment. The
Preferred Shares to be issued to the Noteholders in accordance with Section
1.1 hereof shall be held in escrow by Bizar Martin & Taub, LLP (the "Escrow
Agent") for up to 50 days from the effective date of the IPO. In the event
that Whale Securities Co., L.P., exercises its over-allotment option, in
whole or in part, to purchase up to an additional 255,000 Preferred Shares of
the Company at $6.00 per share (or an aggregate consideration of $1,530,000)
(the "Over-allotment Option"), 50% of the net proceeds (after deduction of
the Underwriter's commissions and the non-accountable expense allowance)
received by the Company from the exercise of the Over-allotment Option shall
be used to repay the Notes on a pro-rata basis and the Preferred Shares to be
received by the Noteholders in accordance with Section 1.1 hereof shall be
proportionately reduced.
ARTICLE II.
Representations, Warranties, and Agreements of the Company
The Company represents and warrants to, and agrees with, the
Noteholders as follows:
2.1 Corporate Organization and Qualification. The Company (and its wholly
owned subsidiary Network-1 Acquisition Corp.) 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. Except for Network-1 Acquisition Corp., the Company has no subsidiaries
and has no investment, whether by way of ownership of stock or other securities
or by loan, 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.
2.2 Validity of Transaction. The Company has all requisite power and
authority to execute, deliver, and perform this Agreement, and to issue the
Preferred Shares in exchange for the Notes. All necessary corporate proceedings
of the Company have been duly taken to authorize the execution, delivery, and
performance of this Agreement, and to authorize the issuance of the Preferred
Shares for the Notes. This Agreement, has been duly authorized, executed, and
delivered by the Company, and constitutes the legal, valid, and binding
obligation of the Company, and is enforceable as to the Company in accordance
with its 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
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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,
and the execution, delivery, and performance of this Agreement, 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 Preferred Shares issuable upon exchange
of the Notes are duly authorized, 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 Noteholders will have good
title to the Preferred Shares, free and clear of all liens, security interests,
pledges, charges, encumbrances, stockholders agreements and voting trusts.
2.3 Capitalization. The authorized capital stock of the Company consists of
25,000,000 shares of Common Stock and 5,000,000 shares of preferred stock, par
value $.01 per share (the "Preferred Stock"), of which 250,000 Preferred Shares
have been designated Series A Redeemable Preferred Stock, 500,000 Preferred
Shares have been designated Series B Convertible Preferred Stock and 750,000
shares will be designated Series C Convertible Preferred Stock prior to the
Closing Date, having the designations, dividend rights, voting powers,
exchange and redemption rights, rights on liquidation or dissolution, and
other preferences and relative, participating, optional, or other preferences
and relative, participating, optional, or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in their
respective Certificates of Designations. On the date hereof, the Company has
2,598,464 shares of Common Stock and 500,000 shares of Series B Convertible
Preferred Stock outstanding. All issued and outstanding shares of Common Stock
and Preferred Stock have been validly issued and are fully paid and
nonassessable and have not been issued in violation of any Federal or state
securities laws. Except for the obligation of the Company to issue (a)
securities referenced in the Amendment No. 1 to the Company's Registration
Statement on form SB-2, as filed with the Securities and Exchange Commission on
September 16, 1998, relating to the initial public offering of its securities,
(b) upon the exercise of the options and warrants which are currently
outstanding to purchase 630,886 shares of Common Stock, excluding any options
issued or to be 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. 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,
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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.
ARTICLE III.
Representations, Warranties, and Agreements of the Noteholders
Each of the Noteholders, severally and not jointly, represents and warrants
to, and agrees with, the Company as follows:
3.1 Organization. Such Noteholder (if not an individual) is duly organized
under the laws of the state of its jurisdiction of organization and has full
power and authority to enter into this Agreement and to consummate the
transactions set forth herein. All necessary proceedings have been duly taken to
authorize the execution, delivery, and performance of this Agreement by such
Noteholder (if not an individual).
3.2 Accredited Investor; Access to Information. Each Noteholder and, to the
knowledge of such Noteholder, each limited partner or shareholder of such
Noteholder in the case of a Noteholder which is a limited partnership or
corporation, and each partner of such Noteholder in the case of a Noteholder
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. Each
Noteholder, the general partners, limited partners and shareholders of such
Noteholder, as the case may be, has had substantial experience in private
securities transactions like this one, is capable of evaluating the merits and
risks of an investment in the Company, and has had a full opportunity to discuss
the business, management, and financial affairs of the Company with the
Company's management. Each Noteholder has received all requested documents from
the Company and has had a full opportunity to ask questions of, and receive
answers from, the officers of the Company.
3.3 Investment Intent. Each Noteholder is acquiring the Preferred Shares
for its, his or her 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 Securityholder understands that Preferred Shares have not
been registered for sale under the Securities Act or qualified under applicable
state securities laws and that the Preferred Shares are being offered and sold
to such Noteholder pursuant to one or more exemptions. Such Noteholder
understands that it, he or she must bear the economic risk of the investment in
the Company for an indefinite period of time, as the Preferred Shares 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 Noteholder acknowledges that no public market
for the securities of the Company presently exists and none may develop in the
future.
3.4 Transfer of Securities. Such Noteholder will not sell or otherwise
dispose of the Preferred Shares unless (a) a registration statement with respect
thereto has become effective under
4
the Securities Act and such Preferred Shares 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 Noteholder (i) to
any entity controlled by, or under common control with, such Noteholder (ii) to
a partner or officer of such Noteholder, (iii) to a partner or officer of the
general partner of such Noteholder, or (iv) to the spouse, lineal descendants,
estate, or a trust for the benefit of any of the foregoing, provided the
transferee agrees in writing to be subject to the terms hereof to the same
extent as if he were such Noteholder. Such Noteholder consents that any transfer
agent of the Company may be instructed not to transfer any Preferred Shares
unless it receives satisfactory evidence of compliance with the foregoing
provisions, and that there may be endorsed upon any certificate representing
such shares (and any certificates issued in substitution therefor) the following
legend calling attention to the foregoing restrictions on transferability of
such shares, stating in substance:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY STATE SECURITIES LAW."
The Company shall, upon the request of any holder of a stock certificate bearing
the foregoing legend and the surrender of such certificate, issue a new stock
certificate without such legend if (A) the 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.
3.5 Authorization. All actions on the part of such Noteholder necessary for
the authorization, execution, delivery, and performance by such Noteholder of
this Agreement have been taken. This Agreement has been duly authorized,
executed, and delivered by such Noteholder, is the legal, valid, and binding
obligation of such Noteholder, and are enforceable as to such Noteholder 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.
3.6 Finder or Broker. Neither such Noteholder nor any person acting on
behalf of such Noteholder has negotiated with any finder, broker, intermediary,
or similar person in connection with the transactions contemplated herein.
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ARTICLE IV.
Additional Provisions.
4.1 Indemnification. From and after the Closing, the Company, on the one
hand, and the Noteholders (severally and not jointly), on the other hand, shall
indemnify and save harmless the other (including officer, directors, employees,
agents and representatives) against any loss, claim, liability, expense
(including reasonable attorney's fees) or other damage caused by or arising out
of (i) the breach of any representation or warranty made by any such party or
(ii) the failure by the party against whom indemnification is sought to perform
any of its covenants or agreements in this Agreement.
4.2 Escrow Agent - Indemnification. The parties acknowledge that: (i) the
Escrow Agent is acting solely as a stakeholder at their request and for their
convenience and without compensation; (ii) the Escrow Agent shall not be deemed
to be the agent of any of the parties; and (iii) the Escrow Agent shall not be
liable to any party herein in connection with its role as Escrow Agent, or the
performance of its duties as Escrow Agent hereunder, or any act or omission in
connection therewith, except for acts of gross negligence or willful misconduct.
The parties hereby jointly and severally indemnify and agree to defend and hold
the Escrow Agent harmless from and against all costs, claims and expenses,
including, but not limited to, reasonable attorneys' fees suffered or incurred
by the Escrow Agent and arising out of or related to its role as escrow agent or
the performance of its duties hereunder, including the costs and expenses of
defending itself (whether by retained attorneys or by itself) against any claim
or liability arising out of or related to such role or such performance, except
to the extent the same were suffered or incurred as a result of the Escrow
Agent's gross negligence or willful misconduct.
4.3 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.
70 Walnut Street
Wellesley, MA 02481
Attention: Avi A. Fogel, President and Chief Executive Officer
With a copy to:
Bizar Martin & Taub, LLP
1350 Avenue of the Americas
29th Floor
New York, New York 10019
Attention: Sam Schwartz, Esq.
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If to the Noteholders, at their respective addresses as set forth on
Exhibit A hereto, or such other address as any party may designate to the other
in accordance with the aforesaid procedure. All notices and other communications
sent by overnight courier service shall be deemed to have been given as of the
next business day after delivery thereof to such courier service, those given by
telex or facsimile transmission shall be deemed given when sent, and all notices
and other communications sent by mail shall be deemed given as of the third
business day after the date of deposit in the United States mail.
4.4 Successors and Assigns. The Company may not sell, assign, transfer, or
otherwise convey any of its rights or delegate any of its duties under this
Agreement, except to a corporation which has succeeded to substantially all of
the business and assets of the Company and has assumed in writing its
obligations under this Agreement, and this Agreement shall be binding on the
Company and such successor. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the Noteholders and their successors and
assigns.
4.5 Amendments and Waivers. Neither this Agreement nor any term hereof may
be changed or waived (either generally or in a particular instance and either
retroactively or prospectively) absent the written consent each party hereto.
4.6 Survival of Representations. The representations, warranties,
covenants, and agreements made herein or in any certificate or document executed
in connection herewith shall survive the execution and delivery of this
Agreement and the issuance and delivery of the Preferred Shares to the
Noteholders.
4.7 Delays or Omissions; Waiver. No delay or omission to exercise any
right, power, or remedy accruing to either the Company or the Noteholders upon
any breach or default by the other under this Agreement shall impair any such
right, power, or remedy no 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.
4.8 Entire Agreement; Binding Effect. This Agreement (together with the
exhibit 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. This Agreement and the Debt
Exchange shall be binding on each Noteholder who executes this Agreement. The
failure of any Noteholder named in Exhibit A to execute this Agreement shall not
effect the Closing of the Debt Exchange with respect to those Noteholders who
have executed this Agreement.
4.9 Headings. All article and section headings herein are inserted for
convenience only and shall not modify or affect the construction or
interpretation of any provision of this Agreement.
4.10 Counterparts; Governing Law. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
Massachusetts, without giving effect to conflict of laws.
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4.11 Further Actions. At any time and from time to time, each party agrees,
without further consideration, to take such actions and to execute and deliver
such documents as may be reasonably necessary to effectuate the purposes of this
Agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed on the date
hereinabove set forth.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Avi A. Fogel
---------------------------------------
Name: Avi A. Fogel
Title: President and Chief Executive Officer
Noteholders:
APPLEWOOD ASSOCIATES, L.P.
By: /s/ Barry Rubenstein
---------------------------------------
Name: Barry Rubenstein
Title: General Partner
CMH CAPITAL MANAGEMENT CORP.
By: /s/ Corey M. Horowitz
---------------------------------------
Name: Corey M. Horowitz
Title: President
/s/ Corey M. Horowitz
---------------------------------------
COREY M. HOROWITZ
RAPTUR MANAGEMENT CO.
By: /s/ Steve Ackerman
---------------------------------------
Name:
Title:
/s/ Douglas Lipton
---------------------------------------
DOUGLAS LIPTON
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/s/ Lawrence A. Wein
---------------------------------------
LAWRENCE WEIN
/s/ Steven Heineman
---------------------------------------
STEVEN HEINEMAN
/s/ Herb Karlitz
---------------------------------------
HERB KARLITZ
/s/ Charles Stevenson
---------------------------------------
CHARLES P. STEVENSON, JR.
/s/ Albert Kalimian
---------------------------------------
ALBERT KALIMIAN
NAVIGATOR FUND, L.P
By: /s/ Corey Horowitz
---------------------------------------
Name: Corey M. Horowitz
Title: Authorized Signatory
NAVIGATOR GLOBAL FUND
By: /s/ Corey Horowitz
---------------------------------------
Name: Corey M. Horowitz
Title: Authorized Signatory
/s/ Robert Graifman
---------------------------------------
ROBERT GRAIFMAN
MBF CAPITAL CORP.
By: /s/ Mark Fisher
---------------------------------------
Name:
Title:
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EXHIBIT A
PRINCIPAL AMOUNT OF
PROMISSORY NOTES AND
ACCRUED INTEREST (AS OF NUMBER OF SHARES
OCTOBER 30, 1998) TO BE OF SERIES C
NAME AND ADDRESS CONVERTED INTO SERIES C PREFERRED STOCK
OF SECURITYHOLDER PREFERRED STOCK TO BE RECEIVED
- --------------------------------------------- ----------------------------------------------- ---------------------------------
Applewood Associates, L.P. $2,009,156 382,696
68 Wheatley Road
Brookville, New York 11545
CMH Capital Management Corp. $171,541 32,675
875 Third Avenue, Suite 2900
New York, New York 10022
Corey M. Horowitz $41,193 7,846
220 East 63rd Street, PH-D
New York, New York 10021
Raptur Management Co. $87,075 16,586
c/o Corey Horowitz
CMH Capital Management Corp.
875 Third Avenue, Suite 2900
New York, New York 10022
Douglas Lipton $43,538 8,293
1235 Park Avenue, Apt 2B
New York, New York 10128
Lawrence Wein $21,769 4,146
247 West 12th Street
New York, New York 10014
Steven Heineman $21,769 4,146
69 LaRue Drive
Huntington, New York 11743
Herb Karlitz $64,364 12,260
55 Old Quarry Road
Englewood Drive, NJ 07631
Charles P. Stevenson, Jr. $87,075 16,586
45 Rockefeller Plaza
Suite 1776
New York, New York 10022
10
PRINCIPAL AMOUNT OF
PROMISSORY NOTES AND
ACCRUED INTEREST (AS OF NUMBER OF SHARES
OCTOBER 30, 1998) TO BE OF SERIES C
NAME AND ADDRESS CONVERTED INTO SERIES C PREFERRED STOCK
OF SECURITYHOLDER PREFERRED STOCK TO BE RECEIVED
- -----------------------------------------------------------------------------------------------------------------------------
Albert Kalimian $43,538 8,293
P.O. Box 645
Locust Valley, NY 11560
Navigator Fund, L.P. $264,766 50,432
45 Rockefeller Plaza
Suite 1776
New York, New York 10022
Navigator Global Fund $37,085 7,064
45 Rockefeller Plaza
Suite 1776
New York, New York 10022
Robert Graifman $20,826 3,967
100 Tennyson
Short Hills, NJ
MBF Capital Corp. $41,193 7,846
12 East 49th Street
New York, New York 10017
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL: $2,954,888 562,836
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CERTIFICATE OF DESIGNATION
OF SERIES C PREFERRED STOCK
NETWORK-1 SECURITY SOLUTIONS, INC.
-----------------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
-----------------------------------------------
We, the undersigned, Avi A. Fogel, being the President and Chief Executive
Officer of Network-1 Security Solutions, Inc. ("Corporation") and Robert Russo,
Secretary of the Corporation, hereby certify pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware that:
1. The name of the Corporation is Network-1 Security Solutions, Inc.
2. The Certificate of Incorporation of the Corporation was filed with the
Department of State on July 13, 1990, an Amended and Restated Certificate of
Incorporation was filed with the Department of State on February 28, 1994, and
Certificates of Amendment to the Certificate of Incorporation were filed with
the Department of State on March 16, 1994, May 18, 1998, and July 20, 1998,
respectively.
3. Pursuant to authority thereby vested in the Board of Directors by
Article IV of the Corporation's Amended and Restated Certificate of
Incorporation, the Board of Directors adopted the following resolutions on
October ___, 1998 establishing a series of 750,000 shares of Preferred Stock of
the Corporation:
RESOLVED, that pursuant to Section 151(g) of the General Corporation Law of
the State of Delaware and Article IV of the Corporation's Amended and Restated
Certificate of Incorporation, there is hereby established a series of the
Corporation's Preferred Stock having the following terms and designations:
Section 1. Designation and Amount. The shares of such series having a par
value of $0.01 per share shall be designated as "Series C Convertible Preferred
Stock" (the "Series C Preferred Stock") and the number of shares constituting
such series shall be 750,000. The relative rights, preferences and limitations
of the Series C Preferred Stock shall be in all respects identical, share for
share, to the Common Stock of the Corporation, except as otherwise provided
herein.
Section 2. Dividends. The holders of Series C Preferred Stock shall be
entitled to receive dividends and other distributions when, as and if declared
by the Board of Directors out
of funds legally available for such purposes. If at any time the Corporation
declares any dividend or other distribution on its Common Stock and there are
shares of its Series C Preferred Stock issued and outstanding, then a dividend
or other distribution shall also be declared on the Series C Preferred Stock
payable at the same time and on the same terms and conditions, entitling each
holder of Series C Preferred Stock to receive the dividend or distribution such
holder would have received had such holder converted the Series C Preferred
Stock as of the record date for determining stockholders entitled to receive
such dividend or distribution.
Section 3. Voting Rights. Except as otherwise provided by the General
Corporation Law of the State of Delaware, the Series C Preferred Stock and the
Common Stock of the Corporation shall vote as one class, with the holder of each
share of Series C Preferred Stock entitled to the number of votes equal to the
number of shares of Common Stock into which such share of Series C Preferred
Stock could have been converted as of the record date for determining the
stockholders having notice of and to vote at such meeting.
Section 4. Reacquired Shares. Any shares of the Series C Preferred Stock
redeemed or purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock, unless otherwise provided for in the
Certificate of Incorporation of the Corporation, and may be reissued as part of
a new series of Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions or restrictions on issuance
set forth herein.
Section 5. Liquidation, Dissolution or Winding Up.
(A) Upon the liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (i) to the holders of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Series C
Preferred Stock unless, prior thereto, the holders of Series C Preferred Stock
shall have received a liquidation preference of $5.25 per share, plus an amount
equal to unpaid dividends thereon, if any, including accrued dividends, whether
or not declared, to the date of such payment or (ii) to the holders of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series C Preferred Stock, except distributions made ratably
on the Series C Preferred Stock and all other such parity stock in proportion to
the total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. For purposes of this Certificate, (1)
the sale, conveyance, exchange or transfer of all or substantially all of the
property and assets of the Corporation, or (2) the consolidation or merger of
the Corporation with or into any other corporation (in which the Corporation
is not the surviving entity) shall be deemed to be a liquidation, dissolution
or winding up of the Corporation within the meaning of this Section 5(A) if so
elected by a majority of the outstanding shares of Series C Preferred Stock,
in their sole discretion.
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For purposes of this Certificate the term "junior stock" shall mean the
Common Stock and any other class or series of shares of the Corporation
hereafter authorized over which Series C Preferred Stock has preference or
priority in the payment of dividends or in the distribution of assets on any
liquidation, dissolution or winding up of the Corporation.
(B) Upon liquidation, dissolution or winding up of the Corporation, and
after full payment as provided in Section 5(A) above, the holders of Series C
Preferred Stock shall not be entitled to any further participation in any
distribution of assets by the Corporation.
Section 6. Conversion.
(A) Subject to the provisions for adjustments hereinafter set forth, each
share of the Series C Preferred Stock shall be convertible, at any time
hereafter, at the option of the holder thereof, in the manner hereinafter set
forth, into one fully paid and non-assessable share of Common Stock of the
Corporation.
(B) The number of shares of Common Stock into which each share of Series C
Preferred Stock is convertible shall be adjusted from time to time as follows:
(i) In case the Company shall (a) subdivide the outstanding shares of
its Common Stock into a larger number of shares, (b) combine the
outstanding shares of its Common Stock into a smaller number of
shares or (c) issue by reclassification of its Common Stock any
shares of the Company, each holder of Series C Preferred Stock
shall thereafter be entitled upon conversion to receive for each
share of Series C Preferred Stock held by him the number of
shares of the Company which he would have owned or have been
entitled to receive after the happening of one of the events
described above in this clause (i) had such share of Series C
Preferred Stock been converted immediately prior to the happening
of such event. Such adjustment shall become effective on the day
next following the day upon which such subdivision, combination
or reclassi-fication shall become effective.
(ii) In case the Company shall consolidate or merge into or with
another corporation, or in case the Company shall sell or convey
to any other person or persons all or substantially all the
property of the Company, or in case the Company shall effect a
capital reorganization or reclassification of its Common Stock,
each holder of Series C Preferred Stock then outstanding shall
have the right thereafter to convert each share of Series C
Preferred Stock held by him into the kind and amount of shares
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of stock, other securities, cash, and property receivable upon
such consolidation, merger, sale, conveyance, reorganization or
reclassification by a holder of the number of shares of Common
Stock into which such share might have been converted immediately
prior to such consolidation, merger, sale, conveyance,
reorganization or reclassification and shall no other conversion
rights. In any such event, effective provision shall be made, in
the certificate or articles or incorporation of the resulting or
surviving corporation or otherwise or in any contracts of sale
and conveyance so that, so far as appropriate and as nearly as
reasonably may be, the provisions set forth herein for the
protection of the conversion rights of the shares of Series C
Preferred Stock shall thereafter be made applicable.
Such adjustments shall be made successively whenever any event
listed above shall occur.
(C) In the event that at any time, as a result of an adjustment made
pursuant to this Section 6, the holder of any share of Series C Preferred Stock
thereafter converted shall become entitled to receive any shares of capital
stock or other securities of the Company other than shares of its Common Stock,
thereafter the number of such other shares of capital stock or other securities
so receivable upon conversion of Series C Preferred Stock shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to shares of the Company's Common
Stock contained in this Section 6, and the provisions of this certificate with
respect to shares of the Company's Common Stock shall apply, to the extent
applicable, on like terms to any such other shares of capital stock or warrants
or other securities.
(D) If any adjustment in the number of shares of Common Stock into which
each share of the Series C Preferred Stock may be converted as required pursuant
to this Section 6 would result in an increase or decrease of less than 1% in the
number of shares of Common Stock into which each share of the Series C Preferred
Stock is then convertible, the amount of any such adjustment shall be carried
forward, and adjustment with respect thereto shall be made at the time of and
together with any subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate at least 1% of the
number of shares of Common Stock into which each share of the Series C Preferred
Stock is then convertible. All calculations under this Section 6(D) shall be
made to the nearest one-hundredth of a share.
(E) The Board of Directors may, but shall not be required to, increase the
number of shares of Common Stock into which each share of the Series C Preferred
Stock may be converted, in addition to the adjustment required by this Section
6, as shall be determined by it (as evidenced by a resolution of the Board of
Directors) to be advisable in order to avoid or diminish any income deemed to be
received by any holder of the Common Stock or Series C Preferred Stock
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resulting from any dividend or distribution of stock or issuance of rights or
warrants to purchase or subscribe for stock or from any event treated as such
for federal income tax purposes.
(F) The holder of any shares of the Series C Preferred Stock may exercise
his or its option to convert such shares into shares of Common Stock by
surrendering for such purpose to the Corporation, at its principal office or at
such other office or agency maintained by the Corporation for that purpose, a
certificate or certificates representing the shares of Series C Preferred Stock
to be converted accompanied by a written notice stating that such holder elects
to convert all or a specified whole number of such shares in accordance with the
provisions of this Section 6 and specifying the name or names in which such
holder wishes the certificate or certificates for shares of Common Stock to be
issued. In case such notice shall specify a name or names other than that of
such holder, such notice shall be accompanied by payment of all transfer taxes
payable upon the issuance of shares of Common Stock in such name or names. As
promptly as practicable, and in any event within five business days after the
surrender of such certificates and the receipt of such notice relating thereto
and, if applicable, payment of all transfer taxes, the Corporation shall deliver
or cause to be delivered (a) certificates representing the number of validly
issued, fully paid and non-assessable shares of Common Stock of the Corporation
to which the holder of the Series C Preferred Stock so converted shall be
entitled and (b) if less than the full number of shares of the Series C
Preferred Stock evidenced by the surrendered certificate or certificates, of
like tenor, for the number of shares evidenced by such surrendered certificate
or certificates less the number of shares converted. Such conversions shall be
deemed to have been made at the close of business on the date of giving of such
notice and of such surrender of the certificate or certificates representing the
shares of the Series C Preferred Stock to be converted so that the rights of the
holder thereof shall cease except for the right to receive Common Stock of the
Corporation in accordance herewith, and the converting holder shall be treated
for all purposes as having become the record holder of such Common Stock of the
Corporation at such time.
(G) Upon conversion of any shares of the Series C Preferred Stock, the
holder thereof shall not be entitled to receive any accumulated, accrued or
unpaid dividends in respect of the shares so converted, provided that such
holder shall be entitled to receive any dividends on such shares of the Series C
Convertible Preferred Stock declared prior to such conversion if such holder
held such shares on the record date fixed for the determination of holders of
the Series C Preferred Stock entitled to receive payment of such dividend.
(H) The transfer of shares of Series C Preferred Stock by any holder shall
constitute an automatic conversion of such shares into Common Stock in
accordance with 6(A) hereof; provided, that, the holder of Series C Preferred
Stock may transfer such shares without triggering such automatic conversion if a
transfer is made to (i) the holder's spouse, children or issue, trustee of
trusts or custodians for his benefit or for the benefit of his spouse, children
or issue, or (ii) any entity controlled by or under common control with such
holder or his spouse, children or issue or (iii) by operation of law pursuant to
rights of testacy and intestacy.
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(I) The Corporation shall at all times reserve and keep available out of
its authorized Common Stock the full number of shares of Common Stock of the
Corporation or other securities issuable upon the conversion of all outstanding
shares of the Series C Preferred Stock.
Section 7. Adjustments for Consolidation, Merger, etc. Prior to the
consummation of a consolidation or merger or a sale of substantially all of the
property of the Company as described in Section 6 (B)(ii) hereof, each
corporation, including this Corporation, which may be required to deliver any
stock, securities cash or other property to the holders of shares of the Series
C Preferred Stock shall assume, by written instrument delivered to each transfer
agent of the Series C Preferred Stock, the obligation to deliver to such holder
such shares of stock, securities, cash or other property to which, in accordance
with the provisions of Section 6, such holder may be entitled and each such
corporation shall have furnished to each such transfer agent or person acting in
a similar capacity, including the Corporation, an opinion of counsel for such
corporation, stating that such assumption agreement is legal, valid and binding
upon such corporation.
Section 8. Reports as to Adjustments. Whenever the number of shares of
Common stock into which the shares of the Series C Preferred Stock are
convertible is adjusted as provided in Section 6, the Corporation shall (A)
promptly compute such adjustment and furnish to each transfer agent or person
acting in a similar capacity, including the Corporation, for the Series C
Preferred Stock, a certificate, signed by a principal financial officer of the
Corporation, setting forth the number of shares of Common Stock into which each
share of Series C Preferred Stock is convertible as a result of such adjustment
and the computation thereof and when such adjustment will become effective and
(B) promptly mail to the holders of record of the outstanding shares of the
Series C Preferred Stock a notice stating that the number of shares into which
the shares of Series C Preferred Stock are convertible has been adjusted and
setting forth the new number of shares into which each share of the Series C
Preferred Stock is convertible as a result of such adjustment and when such
adjustment will become effective.
Section 9. Notices of Corporate Action. In the event of:
(A) any taking by the Corporation of a record of the holders of its Common
Stock for the purpose of determining the holders thereof who are entitled to
receive any dividend (other than a dividend payable solely in cash or shares of
common stock) or other distribution, or any right or warrant to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right;
(B) any capital reorganization, reclassification or recapitalization of the
Corporation (other than a subdivision or combination of the outstanding shares
of its common stock), any consolidation or merger involving the Corporation and
any other person (other than a consolidation or merger with a wholly-owned
subsidiary of the Corporation, provided that the Corporation is the surviving or
the continuing corporation and no change occurs in the common
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stock), or any transfer of all or substantially all the assets of the
Corporation to any other person; or
(C) any voluntary or involuntary dissolution, liquidation or winding up of
the Corporation;
then, and in each such case, the Corporation shall cause to be mailed to
each transfer agent for the shares of the Series C Preferred stock and to the
holders of record of the outstanding shares of the Series C Preferred Stock, at
least 20 days (or 10 days in case of any event specified in clause (A) above)
prior to the applicable record or effective date thereinafter specified, a
notice stating (i) the date or expected date on which any such record is to be
taken for the purpose of such dividend, distribution or right or (ii) the date
or expected date to which any such reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding up is to take place and the time, if any such time is to be fixed, as of
which the holders of record of Common Stock shall be entitled to exchange their
shares of Common Stock for the securities or other property deliverable upon
such reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding up. Such notice shall also state
whether such transaction will result in any adjustment in the number of shares
of Common Stock into which each share of the Series C Preferred Stock shall be
convertible upon such adjustment and when such adjustment will become effective.
The failure to give any notice required by this Section 9, or any defect
therein, shall not affect the legality or validity of any such action requiring
such notice.
IN WITNESS WHEREOF, the undersigned, being the President and Secretary of
the Corporation, do hereby execute this Certificate of Designation, here
declaring that this is their free act and deed and that the facts stated herein
are true and accordingly have hereunto set their hands as of this ____ day of
October, 1998.
NETWORK-1 SECURITY SOLUTIONS, INC.
By:
------------------------------------
Avi A. Fogel, President
and Chief Executive Officer
ATTEST:
- ---------------------------------
Robert Russo, Secretary
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