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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant |X|
Filed by a party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary proxy statement |_| Confidential, for Use
|_| Definitive proxy statement of the Commission Only
|_| Definitive additional materials (as permitted by Rule
|_| Soliciting material under Rule 14a-12 14a-6(e)(2))
NETWORK-1 SECURITY SOLUTIONS, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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NETWORK-1 SECURITY SOLUTIONS, INC.
1601 TRAPELO ROAD, RESERVOIR PLACE
WALTHAM, MASSACHUSETTS 02451
---------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 27, 2001
----------------------------------------------------
To the Stockholders of Network-1 Security Solutions, Inc.:
Notice is hereby given that the Annual Meeting of Stockholders of
Network-1 Security Solutions, Inc., a Delaware corporation (the "Company"), will
be held at its executive offices located at 1601 Trapelo Road, Reservoir Place,
Waltham, Massachusetts 02451, on Tuesday, November 27, 2001, at 10:00 A.M.,
local time, for the following purposes:
1. To elect directors;
2. To approve an amendment to the Company's Certificate of
Incorporation to increase (i) the number of authorized shares of
common stock, $.01 par value per share (the "Common Stock") from
25,000,000 to 50,000,000 and (ii) the number of authorized shares
of Preferred Stock, $.01 par value per share, from 5,000,000 to
10,000,000;
3. To amend the Company's Amended and Restated 1996 Stock Option Plan
to increase the number of shares of Common Stock available for
issuance thereunder by 1,465,000 shares to an aggregate of
4,000,000 shares;
4. To ratify the selection of Richard A. Eisner & Company, LLP as
independent auditors of the Company for the fiscal year which
commenced on January 1, 2001; and
5. To transact such other business as may properly come before the
meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on October
16, 2001 as the record date for the meeting. Only holders of record of shares at
that time will be entitled to notice of, and to vote at, the meeting or any
adjournments thereof.
MANAGEMENT REQUESTS ALL STOCKHOLDERS TO SIGN AND DATE THE ENCLOSED
FORM OF PROXY AND RETURN IT IN THE POSTAGE PAID, SELF-ADDRESSED ENVELOPE
PROVIDED FOR YOUR CONVENIENCE. PLEASE DO THIS WHETHER OR NOT YOU PLAN TO ATTEND
THE MEETING. SHOULD YOU ATTEND, YOU MAY, IF YOU WISH, WITHDRAW YOUR PROXY AND
VOTE YOUR SHARES IN PERSON.
By Order of the Board of Directors,
Murray P. Fish
President, Chief Financial Officer &
Secretary
Waltham, Massachusetts
October ___, 2001
NETWORK-1 SECURITY SOLUTIONS, INC.
---------------------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD TUESDAY, NOVEMBER 27, 2001
---------------------------------------
This Proxy Statement is furnished by the Board of Directors (the "Board
of Directors") of Network-1 Security Solutions, Inc. (the "Company") in
connection with the solicitation of proxies to be voted at the Annual Meeting of
Stockholders (the "Annual Meeting"), which will be held at the Company's
executive offices located at 1601 Trapelo Road, Reservoir Place, Waltham,
Massachusetts 02451, on Tuesday, November 27, 2001, at 10:00 A.M., local time,
and at all adjournments thereof.
Any stockholder giving a proxy will have the right to revoke it at any
time prior to the time it is voted. A proxy may be revoked by written notice to
the Company, Attention: Secretary, by execution of a subsequent proxy or by
attendance and voting in person at the Annual Meeting. Attendance at the Annual
Meeting will not automatically revoke the proxy. All shares represented by
effective proxies will be voted at the Annual Meeting, or at any adjournment
thereof, according to the instructions set forth in the proxy. If there are no
instructions specified in the proxy, shares represented by proxies will be voted
(i) FOR the election of each of the nominees for director listed below, (ii) FOR
the approval of an amendment to the Certificate of Incorporation to increase the
Company's authorized capital, (iii) FOR the approval to increase the authorized
shares issuable under the 1996 Stock Option Plan of the Company (the "Stock
Option Plan"), and (iv) FOR the ratification of the selection of the independent
auditors.
On or about November 2, 2001 this Proxy Statement and the accompanying
form of proxy, together with a copy of the Annual Report of the Company for the
fiscal year ended December 31, 2000, including financial statements, on Form
10-KSB are to be mailed to each stockholder of record at the close of business
on October 16, 2001 (the "Record Date").
VOTING OF PROXIES
Only stockholders of record at the close of business on the Record Date
are entitled to vote at the Annual Meeting. As of the Record Date, the Company
had issued and outstanding and entitled to vote 6,467,458 shares of common
stock, par value $0.01 per share (the "Common Stock"), 3,191,037 shares of
Series E Preferred Stock, $.01 par value (the "Series E Preferred Stock") and
391,477 shares of Series D Preferred Stock, $.01 par value (the "Series D
Preferred Stock" and together with the Common Stock and Series E Preferred
Stock, collectively the "Voting Stock"). Each share of Common Stock and Series D
Preferred Stock entitles the holder thereof to one vote. Each share of Series E
Preferred Stock entitles the holder thereof to two votes. The presence at the
Annual Meeting, in person or by proxy, of a majority of the outstanding shares
of stock entitled to vote is necessary to constitute a quorum for the Annual
Meeting. For purposes of the quorum and the discussion below regarding the vote
necessary to take stockholder action, stockholders of record who are present at
the Annual Meeting in person or by proxy and who abstain, including brokers
holding customers' shares of record who cause abstentions to be recorded at the
meeting, are considered stockholders who are present and entitled to vote and
are counted towards the quorum.
Brokers holding shares of record for customers generally are not
entitled to vote on certain matters unless they receive voting instructions from
their customers. As used herein, "uninstructed shares" means shares held by a
broker who has not received instructions from its customers on such matters. As
used herein, "broker non-votes" means the votes that could have been cast on the
matter in question by brokers with respect to uninstructed shares if the brokers
had received their customers' instructions. In connection with the treatment of
abstentions and broker non-votes, the Company intends to apply the following
principles:
ELECTION OF DIRECTORS: Directors are elected by the affirmative vote of
a plurality of the shares, present in person or represented by proxy at the
Annual Meeting and entitled to vote. Abstentions and broker non-votes will not
be taken into account in determining the outcome of the election.
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION: To be
approved, this amendment must receive the affirmative vote of the majority of
the outstanding shares of Common Stock, Series D Preferred Stock and Series E
Preferred Stock, voting together, entitled to vote thereon. Uninstructed shares
are not entitled to vote on this matter. Therefore, abstentions and broker-non
votes have the same effect as negative votes.
APPROVAL OF AMENDMENT TO STOCK OPTION PLAN: To be approved, this matter
must receive the affirmative vote of the majority of the shares present in
person or represented by proxy at the Annual Meeting and entitled to vote.
Uninstructed shares are not entitled to vote on this matter. Therefore,
abstentions and broker non-votes will not be included in determining whether
this proposal is approved.
APPROVAL OF AUDITORS: To be approved, this matter must receive the
affirmative vote of the majority of the shares present in person or represented
by proxy at the Annual Meeting and entitled to vote. Uninstructed shares are
entitled to vote on this matter. Therefore, abstentions and broker non-votes
have the effect of negative votes.
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
The Board of Directors consists of five (5) members which are to
elected at the Annual Meeting and hold office until the next Annual Meeting of
Stockholders and until their respective successors have been elected and
qualified. If no other choice is specified in the accompanying proxy, the
persons named therein have advised management that it is their present intention
to vote the proxy for the election of the nominees set forth below. Each of the
nominees is presently a director of the Company. Should any of such nominees
become unable to accept nomination or election, it is intended that the persons
named in the accompanying proxy will vote for the election of such other person
as the Board of Directors may recommend in the place of such nominee.
DIRECTOR NOMINEES
Set forth below for each nominee is his name, age, the year in which he
became a director of the Company, his principal occupations during the last five
years and any additional directorships in publicly-held companies. The
information is as of November 2, 2001.
2
MURRAY P. FISH, age 50, has been a director of the Company since June
2001 and has served as the Company's President since June 2001, Chief Financial
Officer since May 1998 and as Secretary since February 2000. From August 1997 to
May 1998, Mr. Fish was an independent financial consultant. From April 1991 to
August 1997, Mr. Fish served as President, Chief Executive Officer and a
director of RealWorld Corporation, a manufacturer of accounting software.
COREY M. HOROWITZ, age 46, became Chairman of the Board of Directors of
the Company in January 1996 and has been a director of the Company since April
1994. Mr. Horowitz is a private investor and President and sole stockholder of
CMH Capital Management Corp., a New York investment advisory and merchant
banking firm, which he founded in September 1991. From January 1986 to February
1991, Mr. Horowitz was a general partner in charge of mergers and acquisitions
at Plaza Securities Co., a New York investment partnership.
EMANUEL R. PEARLMAN, age 41, has been a director of the Company since
December 1999. From May, 2000 until June 2001, Mr. Pearlman served as Chief
Operating Officer of Vornado Operating Company. Since June 1998, Mr. Pearlman
served as manager of both Beach Lane Capital LLC, a financial advisory and
consulting firm, and Beach Lane Opportunity LLC, an investment partnership. In
addition, since June 1995, Mr. Pearlman served as President of M.E.P. Capital
Corporation and E.R.P. Capital Corporation, both financial advisory and
consulting firms. From October 1992 until December 1996, Mr. Pearlman was a
consultant to Bally Entertainment Corporation.
JONATHAN MARK, age 47, has been a director of the Company since
November 2000. Since February 2001, Mr. Mark has served as an independent
consultant to technology companies. From September 1999 to January 2001, Mr.
Mark served as Senior Managing Director of Castle Harlan, Inc., a private equity
fund. From September 1981 until August 1999, Mr. Mark served as a director of
Bain & Company, an international strategy consulting firm.
HARRY B. SCHESSEL, age 37, has been a director of the Company since
July 2001. Since July 2001, Mr. Schessel has been employed at Kroll, Inc.
("Kroll") as the Global Practice Leader for the Information Security Group. From
June 2000 to July 2001, Mr. Schessel advised security companies, including
Kroll, in the areas of strategy, operations, marketing and business development
as well as served as a consultant to investment banking firms and venture
capital firms for purposes of evaluating investments in the information security
industry. From March 2000 until June 2000, Mr. Schessel was Vice President of
Cybersafe, Inc., a security software company. In June 1997, Mr. Schessel
co-founded Centrax, Inc., a company engaged in the development and marketing of
intrusion detection software, and was employed from June 1997 until its sale in
March 1999 in various capacities, including Chief Operating Officer and
Executive Vice President.
OTHER EXECUTIVE OFFICERS OF THE COMPANY
JOSEPH A. DONOHUE, age 46, has served as the Company's Vice President
of Engineering since July 1998. From April 1987 to July 1998, Mr. Donohue was
employed by Stratus Computer Inc., having held the positions of Director -
Windows/NT Software Development from November 1997 to July 1998, Director -
Proprietary OS from July 1994 to November 1997 and Manager - Kernel Development
from July 1993 to July 1994. From April 1987 to July 1993, Mr. Donohue was
employed by Stratus Computer, Inc. in various engineering positions.
3
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
In August 1998, the Board of Directors established an "Audit Committee"
and a "Compensation Committee". The Audit Committee currently consists of
Emanuel Pearlman and Harry B. Schessel. The Audit Committee meets with the
Company's independent auditors at least annually to review the scope and results
of the annual audit; recommends to the Board the independent auditors to be
retained; and receives and considers the auditors' comments as to internal
controls, accounting staff and management performance and procedures in
connection with audit and financial controls. All members of the Audit Committee
are independent as independence is defined in Rule 4200(a)(15) of the NASD
listing standards. The Audit Committee has adopted a written Audit Committee
Charter that is attached hereto as Appendix A. The Compensation Committee is
composed of Emanuel Pearlman and Jonathan Mark. The Compensation Committee is
responsible for determining compensation for the executive officers of the
Company, including bonuses and benefits, and administering the Stock Option
Plan.
The Board of Directors does not have a nominating committee. The
selection of nominees for the Board of Directors is made by the entire Board of
Directors. The Board of Directors may from time to time establish other
committees to facilitate the management of the Company.
During the past fiscal year, the Board of Directors held 6 meetings.
The Compensation Committee met 5 times during the past fiscal year. The Audit
Committee met 4 times during the past fiscal year. No incumbent director failed
to participate in at least 75% of all meetings of the Board of Directors and the
committees on which he served during the past fiscal year.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors (the "Audit Committee")
is composed of independent directors and operates under a written charter
adopted by the Board of Directors (Appendix A). The members of the Audit
Committee for January 1, 2000 until December 31, 2000, were Emanuel R. Pearlman
and Corey M. Horowitz. The Audit Committee recommends to the Board of Directors,
subject to stockholder ratification, the selection of the Company's independent
auditors.
The Company's management is responsible for the internal controls and
the financial reporting process. The independent auditors are responsible for
performing an independent audit of the Company's consolidated financial
statements in accordance with generally accepted auditing standards and to issue
a report thereon. The Audit Committee's responsibility is to monitor and oversee
these processes. The activities of the Audit Committee are in no way designed to
supercede or alter the traditional responsibilities of the Company's independent
auditors. The Audit Committee's role does not provide any special assurances
with regard to the Company's financial statements, nor does it involve a
professional evaluation of the quality of the audits performed by the
independent auditors.
In this context, the Audit Committee has met and held discussions with
management and the independent auditors. Management represented to the Audit
Committee that the Company's consolidated financial statements were prepared in
accordance with generally accepted accounting principles and the Audit Committee
has reviewed and discussed the consolidated financial statements with management
and the independent auditors. The Audit Committee discussed with the independent
auditors matters required to be discussed by Statement on Auditing Standards No.
61 (Communication with Audit Committees).
4
The Company's independent auditors also provided to the Audit Committee
the written disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), and the Audit Committee
discussed with the independent auditors that firm's independence.
Based on the Audit Committee's discussion with management and the
independent auditors and the Audit Committee's review of the representation of
management and the report of the independent auditors to the Audit Committee,
the Audit Committee recommended that the Board of Directors include the audited
consolidated financial statements in the Company's Annual Report on the Form
10-KSB for the year ended December 31, 2000 filed with the Securities and
Exchange Commission.
DIRECTOR COMPENSATION
The Company has compensated each director, who is not also an employee
of the Company, by granting to each outside director stock options to purchase
20,000 shares of Common Stock, at an exercise price equal to the closing price
of the Common Stock on the date of grant, with the options vesting over a one
year period in equal quarterly amounts. In addition, each non-employee director
receives an option grant to purchase 5,000 shares of Common Stock for each year
of service (after the first year) as a member of the Board of Directors. Such
options vest over a one year period in equal quarterly amounts. In addition to
the aforementioned option grants, directors may be granted additional options in
the discretion of the Compensation Committee. In October 2001, Emanuel Pearlman,
Jonathan Mark and Mark Tuomenoksa (a former director) each received an option to
purchase 35,000 shares of Common Stock.
VOTES REQUIRED
Directors are elected by a plurality of the votes cast, in person or by
a proxy, at the Annual Meeting.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
THE ELECTION OF EACH OF ITS NOMINEES.
5
EXECUTIVE COMPENSATION
The following table summarizes compensation paid to the Company's Chief
Executive Officer and to each of its executive officers and one employee
(collectively, the "Named Executive Officers") who received compensation in
excess of $100,000 for services rendered in all capacities to the Company during
each of the years ended December 31, 2000, 1999, and 1998.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------
------------------- SHARES
YEAR ENDED OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION DECEMBER 31 SALARY ($) BONUS ($) COMPENSATION(1) OPTIONS(#)
--------------------------- ----------- ---------- --------- ------------ ----------
Avi A. Fogel 2000 $171,963 $29,500 -- 50,000
President & Chief Executive 1999 $150,000 $28,375 -- 122,116
Officer 1998 $128,192(2) $24,986 383,343
Robert P. Olsen
Vice President of Marketing 2000 $138,462 $16,481 -- 30,000
Vice President of Product 1999 $120,000 $24,975 -- 52,758
Management 1998 $ 94,154(3) $14,992 94,362
Murray P. Fish 2000 $138,461 $17,713 -- 30,000
Chief Financial Officer 1999 $120,000 $25,500 -- 52,714
Secretary 1998 $ 75,692(4) $14,926 94,185
Joseph A. Donohue 2000 $138,462 $16,588 -- 30,000
Vice President of 1999 $120,000 $22,125 -- 52,605
Engineering 1998 $ 53,077(5) $10,060 93,750
Brian Gildea 2000 $117,013 -- -- 15,000
Senior Accounts Manager
-------------------
(1) The Company has concluded that the aggregate amount of perquisites and
other personal benefits paid to each of the Named Executive Officers did
not exceed the lesser of ten percent (10%) of such individual's annual
salary and bonus for each fiscal year indicated or $50,000.
(2) Mr. Fogel was employed as President and Chief Executive Officer in May 1998
and served as a consultant to the Company from March 1998 to May 1998. Mr.
Fogel received $33,000 as a consultant. Mr. Fogel's annual base salary
during 1998 was $150,000. Mr. Fogel resigned as Chief Executive Officer and
President in June 2001.
(3) Mr. Olsen served as the Company's Vice President of Product Management
since May 1998 until March 1999, at which time he became Vice President of
Marketing. Mr. Olsen served as a consultant to the Company from March 1998
to May 1998. Mr. Olsen received $18,000 as a consultant. Mr. Olsen's annual
base salary during 1998 was $120,000. Effective December 29, 2000, Mr.
Olsen was no longer employed by the Company.
(4) Mr. Fish joined the Company in May 1998. Mr. Fish's annual base salary
during 1998 was $120,000. In June 2001, Mr. Fish assumed the additional
office of President.
6
(5) Mr. Donohue joined the Company in July 1998. Mr. Donohue's annual base
salary during 1998 was $120,000.
OPTION GRANTS IN 2000
The following stock options were granted to each of the Named Executive
Officers during the year ended December 31, 2000:
NUMBER OF % OF TOTAL
SHARES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES PRICE PER EXPIRATION
OPTIONS GRANTED IN 2000(1) SHARE (2) DATE
--------------- ---------- --------- ----
Avi A. Fogel 50,000 9.3% $ 7.875 5/15/2010
Robert P. Olsen 30,000 5.6% $ 7.875 5/15/2010
Murray P. Fish 30,000 5.6% $ 7.875 5/15/2010
Joseph Donohue 30,000 5.6% $ 7.875 5/15/2010
Brian Gildea 15,000 2.8% $10.125 4/5/2010
---------------------------
(1) The number of options granted to employees during the year ended December
31, 2000 used to compute this percentage is based on 530,600 incentive
stock options and 10,000 non-qualified stock options (which do not include
the non-qualified options issued to the PSG Employees referred to below).
(2) All options were granted at an exercise price equal to the fair market
value of the Company's Common Stock at the date of grant, as determined by
the Board of Directors, except for the options granted to employees of the
Company's professional services group (the "PSG Employees"). Such options
to purchase up to an aggregate of 104,063 shares were committed to the PSG
Employees on November 8, 1999 at an exercise price equal to the fair market
value of the Company's Common Stock on that date; however, the options were
deemed to have been granted on February 9, 2000, the date of the Company's
sale of its professional services division because the options were
contingent upon the closing.
7
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2000 AND 2000 FISCAL YEAR-END
OPTION VALUES
Options were exercised by each of the Named Executive Officers during
the year ended December 31, 2000. The following table sets forth information
relating to the fiscal year-end value of unexercised options held by executive
officers on an aggregated basis:
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired Value at 12/31/2000 (#) at Fiscal Year-End ($) (1)
on Exercise Realized ------------------------------ ------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------------ ----------- -------- ----------- ------------- ----------- -------------
Avi A. Fogel -- -- 376,393 179,067 $ 249,148 $ 92,367
Robert P. Olsen 70,779 $640,886 37,768 139,352 $ 11,770 $ 41,729
Murray P. Fish 51,884 $455,474 56,500 120,399 $ 29,914 $ 23,504
Joseph Donohue 55,236 $531,625 52,748 123,607 $ 11,979 $ 41,242
Brian Gildea -- -- -- -- -- --
------------------------
(1) Options are "in-the-money" if the market price of the Common Stock on
December 31, 2000 ($3.3125) exceeds the exercise price of such options. The
value of such options is calculated by determining the difference between
the aggregate market price of the Common Stock underlying the options on
December 31, 2000 and the aggregate exercise price of such options.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS
On June 12, 2001, Avi A. Fogel resigned as President and Chief
Executive Officer of the Company. Mr. Fogel had been employed by the Company
pursuant to a four (4) year employment agreement which was to expire on May 18,
2002. On October 3, 2001, the Company and Mr. Fogel entered into an agreement
(the "Termination Agreement") which resolved certain disputes regarding Mr.
Fogel's departure from the Company. In accordance with the Termination
Agreement, the Company paid Mr. Fogel $60,000 in full satisfaction of the
Company's obligations to Mr. Fogel under his employment agreement or otherwise.
On June 29, 2001, the Company entered into an employment agreement with
Murray P. Fish pursuant to which Mr. Fish agreed to serve as the Company's
President and Chief Financial Officer for a two year term at an annual salary of
$185,000 per annum, subject to an additional cash bonus of up to $50,000 as
determined by the Compensation Committee. In the event Mr. Fish's employment
agreement is terminated "other than for cause" (as defined in the employment
agreement), he shall be entitled to (i) the vesting of all options in the year
of termination and 50% of the options that would have vested in the year
following termination and (ii) the lesser of twelve (12) months base salary or
the base salary for the balance of the term of the employment agreement. Mr.
Fish has agreed not to disclose any confidential information of the Company
during the term of his employment or at any time thereafter and not to compete
with the Company during the term of his agreement and for a period of two years
thereafter, in the event of termination for cause.
8
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's shares of Common Stock and Preferred Stock (the
"Voting Stock") as of the Record Date by (i) each person known by the Company to
be the beneficial owner of more than 5% of the outstanding shares of Voting
Stock, (ii) each director and nominee, (iii) each of the executive officers of
the Company, and (iv) all executive officers and directors of the Company as a
group.
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
------------------- ------------------ ---------------------
Barry Rubenstein(2) 5,051,561 33.4%
FalconStor Software, Inc.(3) 4,339,740 28.2%
Irwin Lieber (4) 2,882,382 20.4%
Barry Fingerhut (5) 2,792,978 19.9%
Wheatley Partners II, L.P. (6) 1,572,015 11.7%
Corey M. Horowitz(7) 1,339,749 9.7%
CMH Capital Management Corp.
Murray P. Fish(8) 146,018 1.1%
Joseph A. Donohue(9) 92,146 *
Emanuel R. Pearlman(10) 60,652 *
Jonathan Mark(11) 20,000 *
Harry B. Schessel(12) 5,000 *
All officers and directors as
a group (6 Persons) 1,663,565 11.7%
-----------------------
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named in
the above table have sole voting and investment power with respect to all
shares of Voting Stock beneficially owned by them. A person is deemed to be
the beneficial owner of securities that can be acquired by such person
within 60 days from the date hereof upon the exercise of options, warrants
or convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants and convertible securities
held by such person (but not those held by any other person except for
outstanding shares of Preferred Stock) and which are exercisable or
convertible within 60 days have been exercised and converted. Assumes a
base of 13,241,009 shares of Voting Stock including (i) 6,467,458 shares of
outstanding Common Stock (ii) 6,382,074 shares of Common Stock issuable
upon conversion of 3,191,037 outstanding shares of Series E Preferred Stock
and (iii) 391,477 shares of Common Stock issuable upon conversion of
391,477 shares of outstanding Series D Preferred Stock. Except as otherwise
indicated, the address for each beneficial owner is c/o Network-1 Security
Solutions, Inc., 1601 Trapelo Road, Reservoir Place, Waltham, Massachusetts
02451.
9
(2) Includes (i) 1,194,659 shares of Common Stock, 188,678 shares of Common
Stock issuable upon conversion of Series E Preferred Stock and 188,678
shares of Common Stock subject to currently exercisable warrants held by
Wheatley Partners II,L.P., (ii) 173,584 shares of Common Stock issuable
upon conversion of Series E Preferred Stock and 173,584 shares of Common
Stock subject to currently exercisable warrants held by Wheatley Partners,
L.P., (iii) 15,094 shares of Common Stock issuable upon conversion of
Series E Preferred Stock and 15,094 shares of Common Stock subject to
currently exercisable warrants held by Wheatley Foreign Partners, L.P. (iv)
31,040 shares of Common Stock held by Mr. Rubenstein, (v) 47,500 shares of
common stock subject to currently exercisable stock options held by Mr.
Rubenstein, (vi) 151,628 and 133,780 shares of Common Stock held by
Woodland Venture Fund and Seneca Ventures, respectively, (vii) 424,528,
330,188, 188,678 and 94,338 shares of Common Stock issuable upon conversion
of Series E Preferred Stock held by Woodland Venture Fund, Seneca Ventures,
Woodland Partners and Barry Rubinstein, respectively, (viii) 611,366,
423,605, 282,095, 145,335 and 1,333 shares of common stock subject to
currently exercisable warrants held by Woodland Venture Fund, Seneca
Ventures, Woodland Partners, Barry Rubenstein and Marilyn Rubenstein,
respectively and (ix) 117,550, 58,774, 58,774, 839 and 839 shares of Common
Stock issuable upon conversion of Series D Preferred Stock held by Woodland
Venture Fund, Seneca Ventures, Woodland Partners, Barry Rubenstein and
Marilyn Rubenstein, respectively. Does not include options to purchase
11,875 shares of Common Stock which are not currently exercisable. Barry
Rubenstein is a general partner of Wheatley Partners II, L.P. and a member
of the general partner of each of Wheatley Partners, L.P. and Wheatley
Foreign Partners, L.P. Barry Rubenstein and Woodland Services Corp. are the
general partners of Woodland Venture Fund and Seneca Ventures. Barry
Rubenstein is the President and sole director of Woodland Services Corp.
Marilyn Rubenstein is the wife of Barry Rubenstein. Mr. Rubenstein
disclaims beneficial ownership of the shares of Common Stock held by
Wheatley Partners II, L.P., Wheatley Partners, L.P. and Wheatley Foreign
Partners, L.P., except to the extent of his equity interest therein. The
address of Barry Rubenstein is 68 Wheatley Road, Brookville, New York
11545. The address of Wheatley Partners, L.P. is 60 Cuttermill Road, Great
Neck, New York 11021. The address of Wheatley Foreign Partners, L.P. is c/o
Fiduciary Trust, One Capital Place, Snedden Road, P.O. Box 162, Grand
Cayman, British West Indies. The address for Woodland Venture Fund, Seneca
Ventures and Woodland Partners is c/o Barry Rubenstein, 68 Wheatley Road,
Brookville, New York 11545.
(3) Includes (i) 2,169,870 shares of Common Stock issuable upon conversion of
Series E Preferred Stock and (ii) 2,169,870 shares of Common Stock subject
to currently exercisable warrants. Does not include 500,000 shares of
Common Stock subject to warrants which are not currently exercisable. The
address of FalconStor Software, Inc. is 125 Baylis Road, Melville, New York
11747.
(4) Includes (i) 1,194,659 shares of Common Stock, 188,678 shares of Common
Stock issuable upon conversion of Series E Preferred Stock and 188,678
shares of Common Stock subject to currently exercisable warrants held by
Wheatley Partners II,L.P., (ii) 173,584 shares of Common Stock issuable
upon conversion of Series E Preferred Stock and 173,584 shares of Common
Stock subject to currently exercisable warrants held by Wheatley Partners,
L.P., (iii) 15,094 shares of Common Stock issuable upon conversion of
Series E Preferred Stock and 15,094 shares of Common Stock subject to
currently exercisable warrants held by Wheatley Foreign Partners, L.P.,
(iv) 23,280 shares of Common Stock owned by Mr. Lieber, (v) 47,500 shares
of Common Stock subject to currently exercisable stock options owned by
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Mr. Lieber, (vi) 330,188 shares of Common Stock issuable upon conversion of
Series E Preferred Stock owned by Mr. Lieber, (vii) 58,774 shares of Common
Stock issuable upon conversion of Series D Preferred Stock owned by Mr.
Lieber, and (viii) 473,269 shares of Common Stock subject to currently
exercisable warrants owned by Mr. Lieber. Does not include options to
purchase 11,875 shares of Common Stock owned by Mr. Lieber which are not
currently exercisable. Mr. Lieber disclaims beneficial ownership of the
shares of Common Stock held by Wheatley Partners II, L.P., Wheatley
Partners, L.P. and Wheatley Foreign Partners, L.P.
(5) Includes (i) 1,194,659 shares of Common Stock, 188,678 shares of Common
Stock issuable upon conversion of Series E Preferred Stock and 188,678
shares of Common Stock subject to currently exercisable warrants held by
Wheatley Partners II, L.P., (ii) 173,584 shares of Common Stock issuable
upon conversion of Series E Preferred Stock and 173,584 shares of Common
Stock subject to currently exercisable warrants held by Wheatley Partners,
L.P., (iii) 15,094 shares of Common Stock issuable upon conversion of
Series E Preferred Stock and 15,094 shares of Common Stock subject to
currently exercisable warrants held by Wheatley Foreign Partners, L.P.,
(iv) 31,040 shares of Common Stock owner by Mr. Fingerhut, (v) 330,188
shares of Common Stock issuable upon conversion of Series E Preferred Stock
owned by Mr. Fingerhut, (vi) 58,774 shares of Common Stock issuable upon
conversion of Series D Preferred Stock owned by Mr. Fingerhut, and (vii)
423,605 shares of Common Stock subject to currently exercisable warrants
owned by Mr. Fingerhut. Mr. Fingerhut disclaims beneficial ownership of the
shares of Common Stock held by Wheatley Partners II, L.P., Wheatley
Partners, L.P. and Wheatley Foreign Partners, L.P.
(6) Includes (i) 1,194,659 shares of Common Stock, (ii) 188,678 shares of
Common Stock issuable upon conversion of Series E Preferred Stock and (iii)
188,678 shares of Common Stock subject to currently exercisable warrants.
Does not include (i) 316,448, 23,280, 31,040, 4,656 and 3,104 shares of
Common Stock beneficially owned by Barry Rubenstein, Irwin Lieber, Barry
Fingerhut, Seth Lieber and Jonathan Lieber, respectively, each of whom is a
general partner of Wheatley Partners II, L.P. and (ii) an aggregate of
6,527,203 shares of Common Stock subject to currently exercisable warrants,
options, Series D Preferred Stock and Series E Preferred Stock beneficially
owned by Barry Rubenstein (3,163,098 shares), Irwin Lieber (1,287,087
shares), Barry Fingerhut (1,189,923 shares), Jonathan Lieber (462,571
shares) and Seth Lieber (424,524 shares). Each of Messrs. Rubenstein, I.
Lieber, Fingerhut, J. Lieber and S. Lieber disclaims beneficial ownership
of the shares held by Wheatley Partners II, L.P., except to the extent of
their equity interest therein. Jonathan Lieber and Seth Lieber each
beneficially owns less than 1% of the outstanding Voting Stock exclusive of
shares beneficially owned by Wheatley Partners II, L.P., Wheatley Partners,
L.P. and Wheatley Foreign Partners, L.P. and as such have not been included
in the beneficial ownership table. Wheatley Partners II, L.P.'s business
address is 80 Cuttermill Road, Great Neck, New York 11021.
(7) Includes (i) 486,303 shares of Common Stock held by Mr. Horowitz, (ii)
42,500 shares of Common Stock subject to currently exercisable stock
options held by Mr. Horowitz, (iii) 155,463 shares of Common Stock held by
CMH Capital Management Corp. ("CMH"), (iv) 424,936 shares of Common Stock
subject to currently exercisable warrants held by CMH, (v) 85,220 shares of
Common Stock subject to currently exercisable warrants held by Mr.
Horowitz, (vi) 70,754 shares of Common Stock issuable upon conversion of
Series E Preferred Stock, 70,754 shares of Common Stock subject to
currently exercisable warrants and 1,528 shares of Common Stock, all owned
by Donna Slavitt, the wife of Mr. Horowitz and (vii) 2,291 shares of Common
Stock held by Horowitz Partners, a general partnership of which Mr.
11
Horowitz is a partner. Does not include warrants and options to purchase
260,625 shares of Common Stock which are not currently exercisable. The
address of CMH Capital Management Corp. is 885 Third Avenue, New York, New
York 10022.
(8) Includes 146,018 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Fish pursuant to the Stock Option Plan. Does
not include 135,251 shares of Common Stock subject to stock options which
are not currently exercisable.
(9) Includes 92,146 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Donohue pursuant to the Stock Option Plan. Does
not include 74,253 shares of Common Stock subject to stock options which
are not currently exercisable.
(10) Includes (i) 4,430 shares of Common Stock owned by an entity controlled by
Mr. Pearlman. (ii) 23,750 shares of common stock subject to currently
exercisable options issued to Mr. Pearlman pursuant to the Stock Option
Plan, (iii) 4,098 shares of common stock subject to currently exercisable
warrants, (iv) 6,943 shares of common stock issuable upon conversion of
Series D Preferred, (v) 7,954 shares of common stock subject to currently
exercisable warrants underlying certain promissory notes and (vi) 13,477
shares of common stock issuable upon conversion of Series D Preferred Stock
underlying certain promissory notes. Does not include 42,500 shares of
common stock subject to options not currently exercisable.
(11) Includes 20,000 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Mark pursuant to the Stock Option Plan. Does
not include 40,000 shares of Common Stock subject to stock options which
are not currently exercisable.
(12) Includes 5,000 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Schessel pursuant to the Stock Option Plan.
Does not include 15,000 shares of Common Stock subject to stock options
which are not currently exercised.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 13, 1999, the Company entered into an agreement with Robert
Russo, then Vice President of Professional Services of the Company, pursuant to
which $71,615 of deferred salary owed to Mr. Russo was satisfied in full by the
payment of $40,000 in cash and the issuance of 5,855 shares of the Common Stock
at a price per share of $5.40.
On March 10, 1999, the Company entered into an agreement with William
Hancock, then Chief Technology Officer of the Company, pursuant to which the
Company agreed to loan to Mr. Hancock up to $100,000, at an interest rate of
6.5% per annum, to be used by Mr. Hancock to satisfy certain outstanding
personal tax obligations. In consideration for such loan, Mr. Hancock pledged
50,000 shares of Common Stock of the Company as security for the repayment of
the loan. As of March 10, 2000, the loan was repaid in full.
On December 22, 1999, the Company entered into a Securities Purchase
Agreement for the private sale of $3,000,000 of preferred stock, warrants and
notes to a group of 39 investors, including entities affiliated with Barry
Rubenstein and Corey M. Horowitz, both principal stockholders of the Company,
Avi Fogel, then President, Chief Executive Officer and a director of the Company
and Emanuel R. Pearlman, a director of the Company. In the offering, the Company
issued 491,803 shares of Series D Preferred Stock at $3.05 per share and
12
warrants to purchase an aggregate of 491,803 shares of Common Stock at an
exercise price of $3.00 per share, subject to certain adjustments (which
resulted in a reduction of the exercise price to $1.00 per share). The Company
also issued convertible promissory notes (the "Notes") in the principal amount
of $1.5 million at an interest rate of 8% per year. Subject to stockholder
approval, the Notes were convertible into an additional 491,803 shares of Series
D Preferred Stock (up to 570,492 shares if potential interest through maturity
of such Notes is included) and warrants to purchase an additional 491,803 shares
of Common Stock (up to 570,492 shares if potential interest through maturity of
such Notes is included) at an exercise price of $1.00 per share reduced from
$3.00 per share as referenced above). On April 28, 2000, at a special meeting of
the stockholders of the Company, the conversion feature of the Notes was
approved by the stockholders of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors, and persons who own more than 10% of the Company's
outstanding Common Stock to file initial reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% stockholders are required by Commission regulations to furnish
the Company with copies of all Section 16(a) forms they file. The Company
believes that its executive officers, directors, and greater than 10%
stockholders complied during the year ended December 31, 2000 with the reporting
requirements of Section 16(a).
INCREASING THE AUTHORIZED COMMON AND PREFERRED STOCK
(PROPOSAL NO. 2)
On October 19, 2001, subject to stockholder approval, the Board of
Directors authorized an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock from twenty-five
million (25,000,000) shares to fifty million (50,000,000) shares and the number
of authorized shares of Preferred Stock, $0.01 par value per share ("Preferred
Stock"), from five million (5,000,000) to ten million (10,000,000) shares. If
approved by the stockholders, Article IV Section A of the Company's Certificate
of Incorporation would be amended to provide as follows:
"IV:
A. Classes of Stock.
----------------
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock". The
total number of shares which the Corporation is authorized to issue
is sixty million (60,000,000) shares. Fifty million (50,000,000)
shares shall be Common Stock, $.01 par value per share (the "Common
Stock"), and ten million (10,000,000) shares shall be Preferred
Stock, $.01 par value per share (the "Preferred Stock")."
The Company is currently authorized to issue 25,000,000 shares of
Common Stock. As of the Record Date, 6,467,458 shares of Common Stock were
issued and outstanding, 6,773,551 shares were reserved for issuance upon
conversion of outstanding shares of Preferred Stock and an additional 11,542,855
13
shares of Common Stock were reserved for issuance upon exercise of outstanding
stock options, warrants, convertible notes and for options that may be granted
in future under the Stock Option Plan. The Company is currently authorized to
issue 5,000,000 shares of Preferred Stock, of which 3,500,000 have been
designated as the Series E Preferred Stock and 1,250,000 have been designated as
Series D Preferred Stock. As of the Record Date, 3,191,037 shares of Series E
Preferred Stock and 391,477 shares of Series D Preferred Stock were issued and
outstanding. Accordingly, there are only 216,134 shares of Common Stock and
1,417,486 shares of Preferred Stock available for future issuances.
The Board of Directors believes that it is advisable and in the best
interest of the Company and its stockholders to have available authorized but
unissued shares of Common Stock and Preferred Stock in an amount adequate to
provide for the future financing needs of the Company. The additional shares
will be available for issuance from time to time by the Company in the
discretion of the Board of Directors, normally without further stockholder
action (except as may be required for a particular transaction by applicable
law, requirements of regulatory agencies or by Nasdaq rules), for any proper
corporate purpose including, among other things, future acquisitions of property
or securities of other corporations, stock dividends, stock splits, convertible
debt financing and equity financings. As there are no offerings of the Preferred
Stock contemplated by the Company in the proximate future, the terms of such
securities have not been determined. The rights and preferences of Preferred
Stock, such as dividends or interest rates, conversion prices, voting rights,
liquidation preferences, redemption prices, maturity dates and similar matters,
will be determined by the Board of Directors, without further authorization of
the stockholders. No stockholder of the Company has any preemptive rights
regarding future issuance of any shares of Common Stock and Preferred Stock.
The Company has no present plans, understandings or agreements for the
issuance or use of the proposed additional shares of Common Stock and Preferred
Stock. However, the Board of Directors believes that if an increase in the
authorized number of shares of Common Stock and Preferred Stock were to be
postponed until a specific need arose, the delay and expense incident to
obtaining the approval of the Company's stockholders at that time could
significantly impair the Company's ability to meet financing requirements or
other objectives.
The issuance of additional shares of Common Stock and Preferred Stock
may have the effect of diluting the stock ownership of persons seeking to obtain
control of the Company. Although the Board of Directors has no present intention
of doing so, the Company's authorized but unissued Common Stock and Preferred
Stock could be issued in one or more transactions that would make a takeover of
the Company more difficult or costly, and less likely. The proposed amendment to
the Company's Certificate of Incorporation is not being recommended in response
to any specific effort of which the Company is aware to obtain control of the
Company, nor is the Board of Directors currently proposing to stockholders any
anti-takeover measures.
VOTES REQUIRED
A majority of the outstanding Voting Stock is required to amend the
Certificate of Incorporation of the Company.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE PROPOSAL
TO AMEND THE CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED
CAPITAL STOCK OF THE COMPANY.
14
AMENDMENT OF THE COMPANY'S AMENDED AND RESTATED STOCK
OPTION PLAN TO INCREASE THE NUMBER OF SHARES RESERVED FOR
ISSUANCE THEREUNDER FROM 2,535,000 TO 4,000,000
(PROPOSAL NO. 3)
At the Annual Meeting, the Company's stockholders will be asked to
approve an amendment to the Stock Option Plan to increase the number of shares
of Common Stock reserved for issuance under the Stock Option Plan from 2,535,000
to 4,000,000.
The Board of Directors believes that in order to enable the Company to
continue to attract and retain personnel of the highest caliber, provide
incentive for officers, directors, key employees and other key persons and
continue to promote the well-being of the Company, it is in the best interest of
the Company and its stockholders to provide to officers, directors, key
employees, consultants and the other independent contractors who perform
services for the Company, through the granting of stock options, the opportunity
to participate in the value and/or appreciation in value of the shares of Common
Stock. The Board of Directors has found that the grant of options under the
Stock Option Plan has proven to be a valuable tool in attracting and retaining
key employees. By Unanimous Written Consent on October 19, 2001, the Board of
Directors voted to increase the authorized number of shares of Common Stock
available for issuance under the Stock Option Plan from 2,535,000 shares to
4,000,000.
SUMMARY OF THE STOCK OPTION PLAN
On March 7, 1996, the Board of Directors and stockholders of the
Company approved the adoption of the Stock Option Plan. The Stock Option Plan is
intended to assist the Company in securing and retaining key employees,
directors and consultants by allowing them to participate in the ownership and
growth of the Company through the grant of incentive and non-qualified options
(collectively, the "Options"). Under the Stock Option Plan, key employees
(including officers and employee directors) are eligible to receive grants of
incentive stock options. Employees (including officers), directors of the
Company or any affiliates and consultants are eligible to receive grants of
non-qualified options. Incentive stock options granted under the Stock Option
Plan are intended to be "Incentive Stock Options" as defined by Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
The Stock Option Plan is administered by the Compensation Committee of
the Board of Directors of the Company which currently consists of Emanuel
Pearlman and Jonathan Mark. The Compensation Committee of the Board of Directors
will consist of members who have been determined by the Board of Directors to be
"disinterested persons" within the meaning of Rule 16b-3(c)(2)(i) promulgated
under the Exchange Act or any future corresponding rule.
The Compensation Committee will determine who shall receive Options,
the number of shares of Common Stock that may be purchased under the Options,
the time and manner of exercise of Options and exercise prices. The term of
Options granted under the Stock Option Plan may not exceed 10 years (five years
in the case of an incentive stock option granted to an optionee owning more than
10% of the voting stock of the Company) (a "10% Holder"). The exercise price for
incentive stock options shall not be less than 100% of the "fair market value"
of the shares of Common Stock at the time the Option is granted; provided,
however, that with respect to an incentive stock option, in the case of a 10%
Holder, the purchase price per share shall be at least 110% of such fair market
value. The exercise price for non-qualified options is set by the Compensation
Committee in its discretion. The aggregate fair market value of the shares of
15
Common Stock as to which an optionee may exercise incentive stock options may
not exceed $100,000 in any calendar year. Payment for shares purchased upon
exercise of Options is to be made in cash, check or other instrument, and at the
discretion of the Committee, may be made by delivery of other shares of Common
Stock of the Company. If any Option granted under the Plan expires or terminates
for any reason without having been exercised in full, then the unpurchased
shares subject to the Option will once again be available for additional Option
grants.
Under certain circumstances involving a change in the number of
outstanding shares of Common Stock including a stock split, consolidation,
merger or payment of stock dividend, the class and aggregate number of shares of
Common Stock in respect of which Options may be granted under the Stock Option
Plan, the class and number of shares subject to each outstanding Option and the
exercise price per share will be proportionately adjusted.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE STOCK OPTION PLAN
The following is a brief summary of the Federal income tax aspects of
grants made under the Stock Option Plan based upon statutes, regulations and
interpretations in effect on the date hereof. This summary is not intended to be
exhaustive, and does not describe state or local tax consequences.
1. Incentive Stock Options. An option holder will recognize no taxable
income upon the grant or exercise of an Incentive Stock Option. Upon a
disposition of the shares after the later of two years from the date of grant
and one year from the date of exercise, (i) the option holder will recognize the
difference, if any, between the amount realized and the exercise price as
long-term capital gain or long-term capital loss (as the case may be) if the
shares are capital assets in his or her hands; and (ii) the Company will not
qualify for any deduction in connection with the grant or exercise of the
options. The excess, if any, of the fair market value of the shares on the date
of exercise of an Incentive Stock Option over the exercise price will be treated
as an item of adjustment for his or her taxable year in which the exercise
occurs and may result in an alternative minimum tax liability for the
participant. In the case of a disposition of shares in the same taxable year as
the exercise where the amount realized on the disposition is less than the fair
market value of the shares on the date of exercise, there will be no adjustment
since the amount treated as an item of adjustment, for alternative minimum tax
purposes, is limited to the excess of the amount realized on such disposition
over the exercise price which is the same amount included in regular taxable
income.
If the Common Stock acquired upon the exercise of an Incentive Stock
Option is disposed of prior to the expiration of the holding periods described
above, (i) the option holder will recognize ordinary compensation income in the
taxable year of disposition in an amount equal to the excess, if any, of the
lesser of the fair market value of the shares on the date of exercise or the
amount realized on the disposition of the shares, over the exercise price paid
for such shares; and (ii) the Company will qualify for a deduction equal to any
such amount recognized, subject to the requirements of Section 162(m) of the
Code and that the compensation be reasonable. The option holder will recognize
the excess, if any, of the amount realized over the fair market value of the
shares on the date of exercise, if the shares are capital assets in his or her
hands, as short-term or long-term capital gain, depending on the length of time
that the option holder held the shares, and the Company will not qualify for a
deduction with respect to such excess.
2. Non-Qualified and Non-Plan Stock Options. With respect to
Non-Qualified and Non-Plan Stock Options (i) upon grant of the option, the
16
participant will recognize no income; (ii) upon exercise of the option (if the
shares are not subject to a substantial risk of forfeiture), the option holder
will recognize ordinary compensation income in an amount equal to the excess, if
any, of the fair market value of the shares on the date of exercise over the
exercise price, and the Company will qualify for a deduction in the same amount,
subject to the requirements of Section 162(m) of the Code and that the
compensation be reasonable; (iii) the Company will be required to comply with
applicable Federal income tax withholding requirements with respect to the
amount of ordinary compensation income recognized by the option holder; and (iv)
on a sale of the shares, the option holder will recognize gain or loss equal to
the difference, if any, between the amount realized and the sum of the exercise
price and the ordinary compensation income recognized. Such gain or loss will be
treated as short-term or long-term capital gain or loss if the shares are
capital assets in the participant's hands depending upon the length of time that
the participant held the shares.
OUTSTANDING OPTIONS
The Stock Option Plan currently only authorizes the issuance of a
maximum of 2,535,000 shares of Common Stock pursuant to the exercise of options
granted thereunder. As of the Record Date, stock options to purchase 1,839,324
shares of Common Stock have been granted (including 470,051 options which have
been exercised) under the plan, or 72.5% of the number of shares authorized to
be issued under the Stock Option Plan. If the amendment is approved, the Stock
Option Plan will be authorized to issue options for a maximum of 4,000,000
shares of Common Stock, approximately 16.5% of the current outstanding shares of
Common Stock on a fully diluted basis (assuming the exercise or conversion of
all outstanding options, warrants and convertible securities).
As of the Record Date, options to purchase shares of Common Stock have
been granted pursuant to the Stock Option Plan to (i) its current President,
(ii) members of the Compensation Committee (iii) all current executive officers
as a group (iv) all employees, including all current officers who are not
executive officers, as a group, and (v) non-employee directors during the fiscal
year ended December 31, 2000 and through the record date as follows:
Number of Options Granted
-------------------------
Murray P. Fish
President and Chief Financial Officer 333,153
Executive Group 554,788
Non-Executive Officer Employee Group 642,578
Non-Executive Director Group 199,375
VOTES REQUIRED
The affirmative vote of a majority of the votes cast by stockholders
entitled to vote is required to approve the increase.
REGISTRATION OF SHARES
The Company filed two registration statements on Form S-8 under the
Securities Act of 1933, as amended, with respect to the 1,800,000 and 735,000
shares of Common Stock issuable pursuant to the Stock Option Plan on December
17
30, 1999 and June 28, 2001, respectively. The Company plans to file a new
registration statement under the Securities Act of 1933, as amended, with
respect to the additional 1,465,000 shares of Common Stock issuable pursuant to
the Stock Option Plan, if the proposed amendment to the option plan is approved.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
INCREASE OF SHARES RESERVED FOR ISSUANCE UNDER THE STOCK OPTION PLAN.
INDEPENDENT PUBLIC ACCOUNTANTS
(PROPOSAL NO. 4)
The Board of Directors recommends ratification of the selection of the
independent accounting firm of Richard A. Eisner & Company, LLP ("Eisner &
Company") as auditors of the Company for the fiscal year which commenced on
January 1, 2001. A representative of Richard A. Eisner & Company, LLP is
expected to attend (or be available by telephone) the Annual Meeting, will have
the opportunity to make a statement should he or she desire to do so, and is
expected to be available to respond to appropriate questions.
AUDIT FEES
Eisner & Company billed the Company an aggregate of $99,994 for the
following professional services: audit of the Company's annual consolidated
financial statements for the fiscal year ended December 31, 2000 included in the
Company's annual report on Form 10-KSB and review of the Company's interim
financial statements included in the Company's quarterly reports on Form 10-QSB
for the periods ended March 31, 2000, June 30, 2000 and September 30, 2000.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
Eisner & Company did not render any professional service related to
financial information, systems design and implementation services for the fiscal
year ended December 31, 2000.
ALL OTHER FEES
Eisner & Company did not render any other professional service other
the those discussed above for the fiscal year ended December 31, 2000.
Since Eisner & Company did not receive fees from the Company other than
audit fees, the Audit Committee has considered and believes that Eisner &
Company has maintained its independence from the Company.
VOTES REQUIRED
The affirmative vote of a majority of the votes cast by stockholders
entitled to vote is required to ratify the appointment of Eisner & Company as
the Company's independent auditors for fiscal year which commenced on January 1,
2001.
18
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPOINTMENT OF
RICHARD A. EISNER & COMPANY, LLP AS THE COMPANY'S INDEPENDENT AUDITORS
FOR FISCAL YEAR WHICH COMMENCED ON JANUARY 1, 2001
GENERAL AND OTHER MATTERS
Management knows of no matter other than the matters described above
that will be presented to the Annual Meeting. However, if any other matters
properly come before the Annual Meeting, or any of its adjournments, the person
or persons voting the proxies will vote them in accordance with his or their
best judgment on such matters.
SOLICITATION OF PROXIES
The cost of proxy solicitations will be borne by the Company. In
addition to solicitations of proxies by use of the mails, some officers or
employees of the Company, without additional remuneration, may solicit proxies
personally or by telephone. The Company will also request brokers, dealers,
banks and their nominees to solicit proxies from their clients, where
appropriate, and will reimburse them for reasonable expenses related thereto.
STOCKHOLDER PROPOSALS
Any stockholder who intends to present a proposal for action at the
Company's 2002 Annual Meeting of Stockholders, and to be included in the
Company's Proxy Statement and form of proxy relating to the 2002 Annual Meeting
of Stockholders, must deliver such proposal to the Company at its principal
executive office, 1601 Trapelo Road, Reservoir Place, Waltham, Massachusetts by
February 1, 2002.
19
NETWORK-1 SECURITY SOLUTIONS, INC.
ANNUAL MEETING OF STOCKHOLDERS
-----------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Murray P. Fish and Corey M. Horowitz, and
each of them, with full power of substitution and resubstitution, to vote all
shares of common stock and preferred stock of Network-1 Security Solutions, Inc.
(the "Company") that the undersigned is entitled to vote at the Company's Annual
Meeting of Stockholders to be held at 1601 Trapelo Road, Reservoir Place
Waltham, Massachusetts 02451, on Tuesday, November 27, 2001, at 10:00 a.m.,
local time, and at any adjournment or postponement thereof, hereby ratifying all
that said proxies or their substitutes or resubstitutes may do by virtue hereof,
and the undersigned authorizes and instructs said proxies to vote as follows:
1. ELECTION OF DIRECTORS: To elect Murray P. Fish, Corey M. Horowitz, Emanuel
R. Pearlman, Jonathan Mark and Harry B. Schessel to the Board of Directors
of the Company.
FOR all nominees listed (except as marked to the contrary above) |_|
WITHHOLD AUTHORITY to vote for all nominees |_|
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME ABOVE)
2. APPROVAL OF AMENDMENT TO CERTIFCATE OF INCORPORATION: To approve an
amendment to the Company's Certificate of Incorporation to increase (i)
the number of authorized shares of the shares of common stock, $.01 par
value per share, from 25,000,000 to 50,000,000 and (ii) the number of
authorized shares of Preferred Stock, $.01 par value per share, from
5,000,000 to 10,000,000.
FOR |_| AGAINST |_| ABSTAIN |_|
3. APPROVAL OF AMENDMENT TO STOCK OPTION PLAN: To approve an amendment to the
Company's Amended and Restated 1996 Stock Option Plan to increase the
number of shares available for issuance thereunder by 1,465,000 shares to
an aggregate of 4,000,000 shares.
FOR |_| AGAINST |_| ABSTAIN |_|
4. RATIFICATION OF INDEPENDENT AUDITORS: To ratify the selection of Richard
A. Eisner & Company, LLP as independent auditors of the Company for the
fiscal year which commenced on January 1, 2001.
and in his discretion, upon any other matters that may properly come before the
meeting or any adjournment or postponement thereof.
(Continued and to be dated and signed on the other side.)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.
PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
Receipt of the Notice of Annual Meeting and of the Proxy
Statement and Annual Report on Form 10-KSB of the Company annexed to the same is
hereby acknowledged.
Dated: _____________________________, 2001
------------------------------------------
(Signature of Stockholder)
-------------------------------------------
(Signature of Stockholder)
Your signature should appear the same as
your name appears herein. If signing as
attorney, executor, administrator, trustee
or guardian, please indicate the capacity in
which signing. When signing as joint
tenants, all parties to the joint tenancy
must sign. When the proxy is given by a
corporation, it should be signed by an
authorized officer.
APPENDIX A
NETWORK-1 SECURITY SOLUTIONS, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
I. PURPOSE
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing: the
financial reports and other financial information provided by the Corporation to
any governmental body or the public; the Corporation's systems of internal
controls regarding finance, accounting, legal compliance and ethics that
management and the Board have established; and the Corporation's auditing,
accounting and financial reporting processes generally. Consistent with this
function, the Audit Committee should encourage continuous improvement of, and
should foster adherence to, the Corporation's policies, procedures and practices
at all levels. The Audit Committee's primary duties and responsibilities are to:
o Serve as an independent and objective party to monitor the
Corporation's financial reporting process and internal control
system;
o Review and appraise the audit efforts of the Corporation's
independent accountants and internal financial personnel; and
o Provide an open avenue of communication among the financial and
senior management, internal financial personnel, independent
accountants and the Board of Directors.
The Audit Committee will primarily fulfill these responsibilities by carrying
out the activities enumerated in Section IV of this Charter.
II. COMPOSITION
The Audit Committee shall be comprised of two or more directors(1) as
determined by the Board, a majority of whom shall be "independent" as defined.
All members of the Committee shall have a working familiarity with basic finance
and accounting practices, and at least one member of the Committee shall have
accounting or related financial expertise.
--------
(1) So long as the Corporation qualifies as a small business filer under SEC
rules, it is exempt from the Nasdaq Audit Committee - Structure and Membership
requirements which, among other things, include a requirement of three committee
members, all of whom shall be "independent".
The members of the Committee shall be elected by the Board at the annual
organizational meeting of the Board or until their successors shall be duly
elected and qualified. Unless a Chair is elected by the full Board, the members
of the Committee may designate a Chair by majority vote of the full Committee
membership.
III. MEETINGS
The Committee shall meet at least four times annually, or more
frequently as circumstances dictate. As part of its job to foster open
communication, the Committee should meet at least annually with management, the
Chief Financial Officer and the independent accountants in separate sessions to
discuss any matters that the Committee or each of these groups believe should be
discussed privately. In addition, the Committee or at least its Chair should
meet with management and the independent accountants quarterly to review the
Corporations financials consistent with IV.4. below).
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
Documents/Reports Review
------------------------
1. Review and update this Charter periodically, at least annually,
as conditions dictate.
2. Review the Corporation's annual financial statements and any
reports or other financial information submitted to any
governmental body, or the public, including any certification,
report, opinion, or review rendered by the independent
accountants.
3. Review with financial management and the independent accountants
the Corporation's 10-QSB prior to its filing or prior to the
release of earnings. The Chair of the Committee may represent the
entire Committee for purposes of this review.
4. Provide in the Corporation's Proxy Statement (filed after
December 15, 2000) a report from the Committee that discloses
whether the Committee has reviewed and discussed certain matters
with management and the auditors, and whether it recommends to
the Board that the audited Financial Statements be included in
the Corporation's Annual Report on 10-KSB.
2
Independent Accountants
-----------------------
5. Recommend to the Board of Directors the selection of the
independent accountants, considering independence and
effectiveness and approve the fees and other compensation to be
paid to the independent accountants. The Audit Committee is
responsible for receiving from the independent accountants a
written statement deliniating all relationships between the
independent accountants and the Corporation, consistent with
Independence Standards Board Standard 1. The Audit Committee
shall actively engage in a dialogue with the auditor with respect
to any disclosed relationships or services that may impact the
objectivity and the independence of the auditor and for taking,
or recommending that the full Board take, appropriate action to
ensure the independence of the auditor.
6. Review the performance of the independent accountants and approve
any proposed discharge of the independent accountants when
circumstances warrant.
7. Periodically consult with the independent accountants out of the
presence of management about internal controls and the fullness
and accuracy of the organization's financial statements.
Financial Reporting Processes
-----------------------------
8. In consultation with the independent accountants and the Chief
Financial Officer, review the integrity of the Corporation's
financial reporting processes both internal and external.
9. Consider the independent accountants' judgments about the quality
and appropriateness of the Corporation's accounting principles as
applied in its financial reporting.
10. Consider and approve, if appropriate, major changes to the
Corporation's auditing and accounting principles and practices as
suggested by the independent accountants or management.
3
Process Improvement
-------------------
11. Establish regular and separate systems of reporting to the Audit
Committee by each of management, the independent accountants and
the Chief Financial Officer regarding any significant judgments
made in management's preparation of the financial statements and
the view of each as to appropriateness of such judgments.
12. Following completion of the annual audit, review separately with
each of management, the independent accountants and the Chief
Financial Officer any significant difficulties encountered during
the course of the audit, including any restrictions on the scope
of work or access to required information.
13. Review any significant disagreement among management and the
independent accountants or the Chief Financial Officer in
connection with the preparation of the financial statements.
14. Review with management, the Chief Financial Officer and the
independent accountants the extent to which changes or
improvements in financial or accounting practices, as approved by
the Audit Committee, have been implemented. (This review should
be conducted at an appropriate of time subsequent to
implementation of changes or improvements, as decided by the
Committee.)
Legal Compliance
----------------
15. Review activities, organizational structure, and qualifications
of the Corporation's financial staff.
16. Review and concur in the appointment, replacement, reassignment
or dismissal of the Corporation's Chief Financial Officer.
17. Review, with the Corporation's counsel, legal compliance matters
including corporate securities trading policies.
18. Review, with the Corporation's counsel, any legal matter that
could have a significant impact on the Corporation's financial
statements.
19. The Committee shall have the power to conduct or authorize
investigations into any matters within the Committee's scope of
responsibilities. The Committee shall be empowered to retain
independent counsel, accountants, or others to assist it in the
conduct of any investigation.
4
20. Perform any other activities consistent with the Charter, the
Corporation's By-laws and governing law, as the Committee or the
Board deems necessary or appropriate.
5
APPENDIX B
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
NETWORK-1 SECURITY SOLUTIONS, INC.
------------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
------------------------------------------
Network-1 Security Solutions, Inc., (the "Corporation"), a Delaware
corporation, hereby certifies as follows:
FIRST: The Board of Directors of the Corporation duly adopted a
resolution setting forth and declaring advisable the amendment of Article IV
Section A of the Amended and Restated Certification of Incorporation of the
Corporation so that, as amended, said Section shall read as follows:
ARTICLE IV
A. Classes of Stock
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock". The total
number of shares which the Corporation is authorized to issue is sixty
million (60,000,000) shares. Fifty million (50,000,000) shares shall be
Common Stock, $.01 par value per share (the "Common Stock"), and ten
million (10,000,000) shares shall be Preferred Stock, $.01 par value per
share (the "Preferred Stock").
SECOND: That a resolution was duly adopted by unanimous written consent
of the directors of the Corporation, pursuant to Section 242 of the General
Corporation Law of the State of Delaware, setting forth the above-mentioned
amendment to the Certificate of Incorporation and declaring said amendment to be
advisable. A majority of the stockholders of the Corporation entitled to vote on
the proposed amendment approved the matter during its annual meeting on November
21, 2001 in accordance with Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF AND UNDER PENALTIES OF PERJURY. Network-1 Security
Solutions, Inc. has caused this Certificate of Amendment to the Certificate of
Incorporation to be signed by its President this ___ day of November, 2001.
NETWORK-1 SECURITY SOLUTIONS, INC.
----------------------------------
Murray P. Fish
President and Chief Financial Officer
2