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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________.
Commission File Number: 1-14896
NETWORK-1 SECURITY SOLUTIONS, INC.
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(Name of small business issuer in its Charter)
DELAWARE 11-3027591
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(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
1601 TRAPELO ROAD, RESERVOIR PLACE
WALTHAM, MASSACHUSETTS 02451
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(Address of Principal Executive Offices)
Issuer's telephone number : (781) 522-3400
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value Boston Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $1,046,000.
The aggregate market value of the voting stock of the registrant held by
non-affiliates computed by reference to the price at which the stock was sold on
March 25, 2002 was approximately $8,404,050.
The number of shares of Common Stock outstanding as of March 25, 2002 was
7,677,680.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (Check One): Yes [_] No [X]
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Part III of this Annual Report is hereby amended in its entirety to add the
following information:
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
NAME AGE POSITION
- ---- --- --------
Richard J. Kosinski 47 President, Chief Executive Officer and Director
Murray P. Fish 50 Chief Financial Officer and Secretary
Jonathan Greene 40 Senior Vice President of Marketing and Business
Development
Jonna Stopnik 40 Vice President of Channel Development
Alex Chen 40 Vice President and General Manager - Asia
Pacific
Joseph A. Donohue 47 Vice President of Engineering
Corey M. Horowitz 47 Chairman of the Board of Directors
Emanuel R. Pearlman 42 Director
Jonathan Mark 47 Director
Harry B. Schessel 37 Director
RICHARD J. KOSINSKI, age 47, has served as President, Chief Executive
Officer and a director of the Company since March 2002. From May 2001 until
February 2002, Mr. Kosinski provided management services on a consulting basis
to various private companies. From February 1999 until April 2001, Mr. Kosinski
was President of nCipher, Inc., a developer of Internet security products. From
December 1997 until January 1999, he was Vice President and General Manager of
Security 7 Software, Inc., a network security software company. During the
period June 1994 until November 1997, Mr. Kosinski was Executive Vice President
of Netegrity, Inc., a network security software company.
MURRAY P. FISH, age 50, has served as Chief Financial Officer since May
1998 and as Secretary since February 2000. Mr. Fish served as President of the
Company from
June 2001 until March 2002. 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.
JONATHAN GREENE, age 40, has served as Senior Vice President of Marketing
and Business Development since March 2002. From December 2001 until March 2002,
Mr. Greene served the Company as Vice President of Strategic Planning/Business
Development. From January 2000 until September 2001, Mr. Greene served as Senior
Vice President-Marketing of PANACYA, Inc., an eService management software
company. During the period January 1999 until January 2000, he served as Vice
President-Product Marketing for System Management ARTS, a network management
software company. From December 1996 until January 1999, Mr. Greene was employed
by Computer Associates, Inc. as Product Manager and Assistant Vice President.
From June 1993 until November 1996, Mr. Greene held several positions at
Cheyenne Software, Inc. including Product Line Manager and Product Manager.
JONNA STOPNIK, age 40, has served as Vice President of Channel Development
since January 2002. During the period March 2001 until December 2001, Ms.
Stopnik was employed as Director of Alliances of Art Technology Group, a CRM
software company. From May 2000 until March 2001, she was Senior Director,
Global Alliances of Broadvision Inc., also a CRM software company. From August
1999 until May 2000, Ms. Stopnik was Vice President of Sales of Solution Soft
Systems, Inc., an e-commerce application software and services company. During
the period February 1998 until September 1999, Ms. Stopnik was Director of
Channels for Xircom, a division of Intel Corporation. From December 1996 until
February 1998, she was Vice President, Distribution Channels for Computer
Associates, Inc. From October 1993 until November 1996, Ms. Stopnik was Vice
President, Distribution Channels for Cheyenne Software, Inc.
ALEX CHEN, age 40, has served as Vice President and General Manager - Asia
Pacific since January 2002. From March 2000 until December 2001 Mr. Chen served
as Vice-President of Computer Associates, Inc. in China. During the period
February 1999 until March 2000, Mr. Chen served as General Manager of
EastCom-CA, Software, Inc., a joint venture company of Computer Associates, Inc.
in China. From December 1996 until February 1999, he served as a Vice President
of Computer Associates International, Inc. From May 1990 until November 1996,
Mr. Chen was director of Cheyenne Software, Inc.
JOSEPH A. DONOHUE, age 47, has served as 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.
2
COREY M. HOROWITZ, age 47, became Chairman of the Board of Directors of the
Company in January 1996 and has been a member of the Board of Directors since
April 1994. Mr. Horowitz is a private investor and President and sole
shareholder 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 42, 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 E.R.P. Capital
Corporation, a financial advisory and consulting firm. E.R.P. Capital
Corporation is the general partner of Gemini Partners, L.P., also a financial
advisory and consulting firm. From October 1992 until December 1996, Mr.
Pearlman was a consultant to Bally Entertainment Corporation.
JONATHAN MARK, age 48, 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 in various positions with Bain
& Company, an international strategy consulting firm, including Director
(1992-1999), Vice President (1986-1991), Manager (1984-1986) and Consultant
(1981-1984).
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 and also 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.
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 is composed of Emanuel Pearlman
and Harry 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 Company's 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. 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 will administer the
Company's compensation programs, including the Company's 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 Company's Board of Directors held ten (10)
meetings. The Board of Directors' Compensation Committee met six (6) times
during the past fiscal year. The Audit Committee met six (6) 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.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except for liability
(i) for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. The
Company's Bylaws provide that the Company shall indemnify its directors,
officers, employees and agents to the fullest extent permitted by law. The
Company's Bylaws also permit the Company to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in such capacity. The Company currently maintains liability
insurance for its officers and directors. At present, there is no pending
material litigation or proceeding involving any director, officer, employee or
agent of the Company where indemnification will be required or permitted. The
Company is not aware of any threatened litigation or proceeding that might
result in a material claim for such indemnification.
4
DIRECTOR COMPENSATION
The Company has compensated each director, who is not also an employee of
the Company, by granting to each outside director (upon joining the Board) 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 Board of Directors and 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.
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, 2001 with the reporting
requirements of Section 16(a) except that Barry Rubenstein and Irwin Lieber each
filed a Form 5 on February 14, 2002 with the SEC relating to options to purchase
11,875 shares of Common Stock granted on January 19, 2001 which were required to
be reported on Form 4 by February 10, 2001. Based on their Form 5 filings, Mr.
Rubenstein and Mr. Lieber were not aware of the option grants until December
2001.
5
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes compensation, for the fiscal years
indicated, awarded to, earned by or paid to the Company's Chief Executive
Officer ("CEO") and to each of its executive officers, and two other employees
(collectively, the "Named Executive Officers") who were the four highest
compensated individuals other than the CEO for the year ended December 31, 2001
for services rendered in all capacities to the Company.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------- -----------------------------
SHARES
YEAR ENDED OTHER ANNUAL UNDERLYING ALL OTHER ANNUAL
NAME AND PRINCIPAL POSITION DECEMBER 31 SALARY ($) BONUS ($) COMPENSATION(1) OPTIONS(#) COMPENSATION(1)
- --------------------------- ----------- ---------- --------- ------------ ---------- ------------
Avi A. Fogel 2001 $ 82,689(2) $ -- $60,000(2) 65,145 --
President & Chief Executive 2000 $171,963 $29,500 -- 50,000 --
Officer 1999 $150,000 $28,375 -- 122,116 --
Murray P. Fish 2001 $169,356(3) $62,613 -- 156,254 --
President 2000 $138,461 $17,713 -- 30,000 --
Chief Financial Officer 1999 $120,000 $25,500 -- 52,714 --
Secretary
Joseph A. Donohue 2001 $150,000 $21,488 -- 45,280 --
Vice President of 2000 $138,462 $16,588 -- 30,000 --
Engineering 1999 $120,000 $22,125 -- 52,605 --
Cynthia Mills 2001 $125,000 $ 9,473 -- 20,000 --
Director Product Technology 2000 $ 17,045(4) -- 20,000 --
Product Manager 1999 $ -- -- -- --
Michael Clarkin 2001 $128,492 $ 2,596 -- 35,000 --
Director of Sales 2000 $ 43,823(5) -- -- 20,000 --
1999 $ -- -- -- -- --
(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 resigned as Chief Executive Officer and President in June
2001. The Company paid Mr. Fogel $60,000 to resolve a dispute under his
employment agreement.
(3) In June 2001, Mr. Fish assumed the office of President and also
continued to serve as Chief Financial Officer and Secretary. In March
2002, the Company hired Richard J. Kosinski as President and Chief
Executive Officer and Mr. Fish continued to serve as Chief Financial
Officer and Secretary.
(4) Ms. Mills commenced employment with the Company in November 2000.
(5) Mr. Clarkin commenced employment with the Company in August 2000.
6
OPTION GRANTS IN 2001
The following stock options were granted to each of the Named Executive
Officers during the year ended December 31, 2001:
NUMBER OF % OF TOTAL
SHARES OPTIONS GRANTED TO EXERCISE
UNDERLYING EMPLOYEES PRICE PER EXPIRATION
OPTIONS GRANTED IN 2001(1) SHARE (2) DATE
--------------- ---------- --------- ----
Avi A. Fogel 65,145 9.3% $3.06 1/19/11
Murray P. Fish 31,254 22.2% $3.06 1/19/11
100,000 $ .70 7/12/11
25,000 $1.10 10/2/11
Joseph Donohue 30,280 6.4% $3.06 1/19/11
15,000 $1.10 10/2/11
Cynthia Mills 5,000 2.8% $3.06 1/19/11
15,000 $1.10 10/2/11
Michael Clarkin 5,000 5.0% $3.06 1/19/11
30,000 $1.10 10/2/11
- ---------------------------
(1) The number of options granted to employees during the year ended
December 31, 2001 used to compute this percentage is based on 603,770
incentive stock options and 100,000 non-qualified stock options.
(2) All options were granted at an exercise price equal to the fair market
value of the Company's Common Stock at the date of grant, as determined
by the Board of Directors.
FISCAL YEAR-END OPTION VALUES
No options were exercised by any of the Named Executive Officers
during the year ended December 31, 2001. The following table sets forth
information relating to the fiscal year-end value of unexercised options held by
executive officers on an aggregated basis:
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at 12/31/2001 (#) at Fiscal Year-End ($) (1)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Avi A. Fogel 294,879 -0- $-0- $-0-
Murray P. Fish 146,018 135,251 $39,000 $48,500
Joseph Donohue 92,146 74,253 $-0- $5,700
Cynthia Mills 4,800 35,200 $-0- $5,700
Michael Clarkin 6,000 49,000 $-0- $11,400
- ------------------------
(1) Options are "in-the-money" if the market price of the Common Stock on
December 31, 2001 ($1.48) 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, 2001 and the aggregate exercise price of such
options.
7
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 2, 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 (on an interim basis) 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. In addition, Mr. Fish will continue to receive benefits (health,
etc.) during the severance period. 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.
On March 4, 2002, the Company entered into an employment agreement with
Richard J. Kosinski pursuant to which Mr. Kosinski agreed to serve as the
Company's President and Chief Executive Officer for a two (2) year term at an
annual base salary of $200,000 per annum. Mr. Kosinski is also eligible to
receive bonus compensation of up to $150,000 per year upon the Company achieving
certain objectives. In addition, Mr. Kosinski was issued options to purchase
1,200,000 shares of the Company's Common Stock, at an exercise price of $1.65
per share, which vest as follows: 25% of the shares (300,000 shares) on March
11, 2003, and 6.25% (75,000 shares) at the end of each three month period for
the subsequent three years. In the event Mr. Kosinski's employment is terminated
by the Company "other than for cause" (as such term is defined in the Employment
Agreement) or by Mr. Kosinski for "Good Reason" (as such term is defined in the
Employment Agreement), Mr. Kosinski shall be entitled to (i) a severance of nine
(9) months base salary and (ii) the vesting all options that would have vested
within twelve (12) months of termination. Mr. Kosinski has agreed not to
disclose any confidential information of the Company during the term of his
employment or at any time thereafter or to compete with the Company during the
term of his agreement and for a period of two years thereafter in the event of
"Termination for Cause" or without "Good Reason."
8
ITEM 11. SECURITY OWNERSHIP OF CERTAIN 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 April 15, 2002 (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 OF NUMBER OF SHARES PERCENTAGE OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
---------------- ------------------ ---------------------
Barry Rubenstein(2) 5,523,257 35.0%
FalconStor Software, Inc.(3) 4,339,740 27.4%
Irwin Lieber (4) 2,882,382 19.8%
Barry Fingerhut (5) 2,792,978 19.3%
Wheatley Partners II, L.P. (6) 1,572,015 11.3%
Corey M. Horowitz(7) 1,339,749 9.4%
CMH Capital Management Corp.
Woodland Venture Fund(8) 1,305,072 9.1%
Seneca Ventures (9) 946,347 6.7%
Murray P. Fish(10) 154,018 1.1%
Joseph A. Donohue(11) 100,146 *
Emanuel R. Pearlman(12) 53,541 *
Jonathan Mark(13) 37,500 *
Harry B. Schessel(14) 15,000 *
Richard J. Kosinski(15) -0- -0-
Jonathan M. Greene(16) -0- -0-
Jonna Stopnik(17) -0- -0-
Alex Chen(18) -0- -0-
All officers and directors as
a group (10 Persons) 1,699,954 11.6%
------------------------
* 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
9
exercised and converted. Assumes a base of 13,672,952 shares of Voting
Stock including (i) 7,677,680 shares of outstanding Common Stock (ii)
5,603,794 shares of Common Stock issuable upon conversion of 2,801,897
outstanding shares of Series E Preferred Stock and (iii) 391,478 shares
of Common Stock issuable upon conversion of 231,054 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.
(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, 235,848, 188,678 and
94,338 shares of Common Stock issuable upon conversion of Series E
Preferred Stock held by Woodland Venture Fund, Seneca Ventures,
Brookwood Partners, L.P., Woodland Partners and Barry Rubenstein,
respectively, (viii) 611,366, 423,605, 282,095, 235,848, 145,335 and
1,333 shares of common stock subject to currently exercisable warrants
held by Woodland Venture Fund, Seneca Ventures, Woodland Partners,
Brookwood Partners, L.P., 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 II, L.P. and 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,
Brookwood Partners, L.P. 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.
10
(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 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., except to the
extent of his equity interest therein.
(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., except to the extent of his equity
interest therein.
(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 7,140,407 shares of Common Stock subject to
currently exercisable warrants, options, Series D Preferred Stock and
Series E Preferred Stock beneficially owned by Barry Rubenstein
(3,634,794 shares), Irwin Lieber (1,287,087 shares), Barry Fingerhut
(1,189,923 shares), Jonathan Lieber (604,079 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.
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(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. 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 (i) 151,628 shares of Common Stock, (ii) 424,528 shares of
Common Stock issuable upon conversion of Series E Preferred Stock,
(iii) 611,366 shares of Common Stock subject to currently exercisable
warrants and (iv) 117,550 shares of Common Stock issuable upon
conversion of Series D Preferred Stock. Woodland Venture Fund's
business address is 68 Wheatley Road, Brookville, New York 11546.
(9) Includes (i) 133,780 shares of Common Stock, (ii) 330,188 shares of
Common Stock issuable upon conversion of Series E Preferred Stock,
(iii) 423,605 shares of Common Stock subject to currently exercisable
warrants, and (iv) 58,774 shares of Common Stock issuable upon
conversion of Series D Preferred Stock. Seneca Venture's business
address is 68 Wheatley Road, Brookville, NY 11546.
(10) Includes 154,018 shares of Common Stock subject to currently
exercisable stock options issued to Mr. Fish pursuant to the Stock
Option Plan. Does not include 127,251 shares of Common Stock subject to
stock options which are not currently exercisable.
(11) Includes 100,146 shares of Common Stock subject to currently
exercisable stock options issued to Mr. Donohue pursuant to the Stock
Option Plan. Does not include 66,253 shares of Common Stock subject to
stock options which are not currently exercisable.
(12) Includes (i) 42,500 shares of common stock subject to currently
exercisable options issued to Mr. Pearlman pursuant to the Stock Option
Plan, (ii) 4,098 shares of common stock subject to currently
exercisable warrants, and (iii) 6,943 shares of common stock issuable
upon conversion of Series D Preferred. Does not include 23,750 shares
of common stock subject to options not currently exercisable.
(13) Includes 37,500 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Mark pursuant to the Stock Option Plan.
Does not include 22,500 shares of Common Stock subject to stock options
which are not currently exercisable.
(14) Includes 15,000 shares of Common Stock subject to currently exercisable
stock options issued to Mr. Schessel pursuant to the Stock Option Plan.
Does not include 5,000 shares of Common Stock subject to stock options
which are not currently exercised.
(15) Does not include options owned by Mr. Kosinski to purchase 1,200,000
shares of Common Stock which are not currently exercisable.
(16) Does not include options owned by Mr. Greene to purchase 75,000 shares
of Common Stock which are not currently exercisable.
(17) Does not include options owned by Ms. Stopnik to purchase 100,000
shares of Common Stock which are not currently exercisable.
(18) Does not include options owned by Mr. Chen to purchase 150,000 shares
of Common Stock which are not currently exercisable.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 29, 2001, upon the resignation of the Company's Chief Executive
Officer and President, the Company entered into a financial advisory agreement
with CMH Capital Management Corp. ("CMH") for term of six (6) month (the "CMH
Consulting Agreement"), pursuant to which CMH was paid consulting fees of
$17,500 per month and received a ten (10) year warrant to purchase 300,000
shares of the Company's Common Stock at an exercise price of $.70 per share. In
addition, CMH was reimbursed $44,000 for expenses during the year ended December
31, 2001 including the allocable portion of rent for office space in New York
City. On October 8, 2001, the Company issued to CMH in consideration for
additional consulting services rendered a five (5) year warrant to purchase
250,000 shares of the Company's Common Stock at an exercise price of $1.48 per
share. On January 29, 2002, the Company extended the CMH Consulting Agreement
for a period equal to the earlier of (i) June 29, 2002 or (ii) three months from
the commencement of employment of a new Chief Executive Officer of the Company.
On April 18, 2002, in consideration for consulting services rendered to the
Company, the Company issued to CMH options to purchase 750,000 shares of the
Company's Common Stock at an exercise price of $1.20 per share. Corey M.
Horowitz, the Chairman of the Board of Directors of the Company and a principal
stockholder of the Company, is the sole officer, director and stockholder of
CMH.
On October 2, 2001, the Company completed a private offering of $6,765,000
of preferred stock and warrants to a group of investors (the "October 2001
Offering"). The October 2001 Offering included the issuance of 3,191,037 shares
of our Series E Preferred Stock at $2.12 per share and warrants to purchase
6,882,074 shares of the Company's common stock at an exercise price of $1.27 per
share, subject to certain adjustments. Each share of Series E Preferred Stock is
convertible into two shares of common stock, subject to certain adjustments.
Investors in the October 2001 Offering included FalconStor Software Inc.
($2,300,000), Barry Rubenstein and affiliated entities, ($1,400,000), Wheatley
Partners II, L.P. and related entities ($400,000), Irwin Lieber ($350,000) and
Barry Fingerhut ($350,000), all principal stockholders of the Company, and Donna
Slavitt ($75,000), the wife of Corey M. Horowitz, Chairman of the Board of
Directors of the Company and a principal stockholder of the Company.
On October 2, 2001, simultaneously with the closing of the October 2001
Offering, the Company entered into a ten (10) year Distribution and License
Agreement with FalconStor Software, Inc. ("FalconStor"), pursuant to which
FalconStor has the right to distribute the Company's product offerings in its
indirect and OEM channels. As part of the Distribution and License Agreement,
FalconStor paid the Company a non-refundable advance of $500,000 against future
royalty payments. (See "Management's Discussion and Analysis or Plan of
Operation").
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Waltham, Commonwealth of Massachusetts, on the 29th day of April 2002.
NETWORK-1 SECURITY SOLUTIONS, INC.
By /s/ Richard Kosinski
------------------------------------------
Richard Kosinski
President and Chief Executive Officer
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the following persons in the capacities and on the dates
indicated:
NAME TITLE DATE
- ---- ----- ----
/s/ Richard Kosinski President, Chief Executive Officer and April 29, 2002
- ----------------------- Director (principal executive officer)
Richard Kosinski
/s/ Murray P. Fish Chief Financial Officer, Secretary and April 29, 2002
- ----------------------- Director (principal financial officer
Murray P. Fish and principal accounting officer)
/s/ Corey M. Horowitz Chairman of the Board of Directors April 29, 2002
- -----------------------
Corey M. Horowitz
/s/ Jonathan Mark Director April 29, 2002
- -----------------------
Jonathan Mark
15