================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
SCHEDULE 13D
(RULE 13D-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULE 13D-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
RULE 13D-2(a)
(Amendment No. 2)1
NETWORK-1 SECURITY SOLUTIONS, INC.
--------------------------------------------------------------------------------
(Name of Issuer)
Common Stock, $.01 Par Value
--------------------------------------------------------------------------------
(Title of Class of Securities)
64121N 10 9
--------------------------------------------------------------------------------
(CUSIP Number)
SAM SCHWARTZ, ESQ.
OLSHAN GRUNDMAN FROME ROSENZWEIG & WOLOSKY LLP
Park Avenue Tower
65 East 55th Street
New York, New York 10022
(212) 451-2306
--------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
April 13, 2004
--------------------------------------------------------------------------------
(Date of Event Which Requires Filing of This Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition that is the subject of this Schedule 13D, and is filing
this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the
following box [_].
NOTE. Schedules filed in paper format shall include a signed original and
five copies of the schedule, including all exhibits. SEE Rule 13d-7 for other
parties to whom copies are to be sent.
(Continued on following pages)
(Page 1 of 23 Pages)
---------------
1 The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which would
alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, SEE THE
NOTES).
===================== ==================
CUSIP No. 64121N 10 9 13D Page 2 of 23 Pages
===================== ==================
========= ====================================================================
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Corey M. Horowitz
--------- --------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_]
(b) [_]
--------- --------------------------------------------------------------------
3 SEC USE ONLY
--------- --------------------------------------------------------------------
4 SOURCE OF FUNDS*
PF, AF, OO
--------- --------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEM 2(d) OR 2(e)
[_]
--------- --------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
USA
--------- --------------------------------------------------------------------
7 SOLE VOTING POWER
5,481,823 (1)
NUMBER OF --------- --------------------------------------------------------
SHARES 8 SHARED VOTING POWER
BENEFICIALLY
OWNED BY 92,261 (2)
EACH --------- --------------------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON
WITH 5,481,823 (1)
--------- --------------------------------------------------------
10 SHARED DISPOSITIVE POWER
92,261 (2)
--------- --------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
5,574,084 (1)(2)
--------- --------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES*
[_]
--------- --------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
32.5%
--------- --------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
================================================================================
*SEE INSTRUCTIONS BEFORE FILLING OUT!
===================== ==================
CUSIP No. 64121N 10 9 13D Page 3 of 23 Pages
===================== ==================
(1) Includes (a)(i) 486,303 shares of Common Stock, (ii) 85,220 shares of
Common Stock issuable upon exercise of warrants and (iii) 992,500
shares of Common Stock issuable upon exercise of options, all of which
are held by Mr. Horowitz and (b)(i) 2,867,800 shares of Common Stock,
(ii) 550,000 shares of Common Stock issuable upon exercise of warrants
and (iii) 500,000 shares of Common Stock issuable upon exercise of
options, all of which are held by CMH Capital Management Corp.
(2) Includes (a) 89,970 shares of Common Stock held by Donna Slavitt, Mr.
Horowitz's spouse and (b) 2,291 shares of Common Stock held by Horowitz
Partners, a general partnership of which Mr. Horowitz is a partner. Mr.
Horowitz disclaims beneficial ownership of the shares held by Horowitz
Partners except to the extent of his pecuniary interest therein.
===================== ==================
CUSIP No. 64121N 10 9 13D Page 4 of 23 Pages
===================== ==================
========= ====================================================================
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
CMH Capital Management Corp.
--------- --------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_]
(b) [_]
--------- --------------------------------------------------------------------
3 SEC USE ONLY
--------- --------------------------------------------------------------------
4 SOURCE OF FUNDS*
WC
--------- --------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEM 2(d) OR 2(e)
[_]
--------- --------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
New York
--------- --------------------------------------------------------------------
7 SOLE VOTING POWER
-0-
NUMBER OF --------- --------------------------------------------------------
SHARES 8 SHARED VOTING POWER
BENEFICIALLY
OWNED BY 3,917,800 (1)
EACH --------- --------------------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON
WITH -0-
--------- --------------------------------------------------------
10 SHARED DISPOSITIVE POWER
3,917,800 (1)
--------- --------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
3,917,800 (1)
--------- --------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES*
[_]
--------- --------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
24.4%
--------- --------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
CO
================================================================================
*SEE INSTRUCTIONS BEFORE FILLING OUT!
(1) Includes (i) 2,867,800 shares of Common Stock, (ii) 550,000 shares of
Common Stock issuable upon exercise of warrants and (iii) 500,000
shares of Common Stock issuable upon exercise of options.
===================== ==================
CUSIP No. 64121N 10 9 13D Page 5 of 23 Pages
===================== ==================
The following constitutes Amendment No. 2 ("Amendment No. 2") to the
Schedule 13D filed by the undersigned. This Amendment No. 2 amends the Schedule
13D as specifically set forth.
Item 5(a) is hereby amended and restated to read as follows:
(a) The following list sets forth the aggregate number and percentage
(based on 15,012,576 Shares outstanding as reported in the Issuer's Form 10-KSB
for the year ended December 31, 2003) of Shares beneficially owned by each
Reporting Person, as of April 13, 2004:
Shares of Common Percentage of Shares
Stock of Common Stock
Name Beneficially Owned Beneficially Owned
---- ------------------ ------------------
Corey M. Horowitz 5,574,084 (1) 32.5%
CMH Capital Management Corp. 3,917,800 (2) 24.4%
(1) Includes (a)(i) 486,303 Shares, (ii) 85,220 Shares issuable upon
exercise of Warrants and (iii) 992,500 Shares issuable upon exercise of
options, all of which are held by Mr. Horowitz, (b)(i) 2,867,800
Shares, (ii) 550,000 Shares issuable upon exercise of warrants and
(iii) 500,000 Shares issuable upon exercise of options, all of which
are held by CMH Capital Management Corp., (c) 89,970 Shares held by
Donna Slavitt and (d) 2,291 Shares held by Horowitz Partners. Mr.
Horowitz disclaims beneficial ownership of the Shares held by Horowitz
Partners, except to the extent of his pecuniary interest therein.
(2) Includes (i) 2,867,800 Shares, (ii) 550,000 Shares issuable upon
exercise of warrants and (iii) 500,000 Shares issuable upon exercise of
options.
Item 5(b) is hereby amended and restated to read as follows:
(b) Mr. Horowitz has sole power to vote and dispose of 5,481,823 Shares
(consisting of the 1,564,023 Shares beneficially owned by him, constituting
approximately 9.7% of the Shares outstanding and, by virtue of his position as
sole stockholder, officer and director of CMH, of the 3,917,800 Shares
beneficially owned by CMH, constituting approximately 24.4% of the Shares
outstanding), constituting approximately 32.5% of the Shares outstanding.
By virtue of being her spouse, Mr. Horowitz may be deemed to have
shared power to vote and dispose of the 89,970 Shares beneficially owned by
Donna Slavitt, constituting less than 1% of the Shares outstanding. Ms. Slavitt
resides at 1085 Park Avenue, New York, New York 10128. She is the president of
World Packaging Corp., a manufacturer and distributor of promotional and
licensed products. Ms. Slavitt has not, in the last five years, been convicted
in a criminal proceeding or a party to a civil proceeding as described in Items
2(d) and (e). Ms. Slavitt is a citizen of the United States of America.
===================== ==================
CUSIP No. 64121N 10 9 13D Page 6 of 23 Pages
===================== ==================
By virtue of his position as a partner of Horowitz Partners ("HP"), Mr.
Horowitz may be deemed to have shared power to vote and dispose of the 2,291
Shares beneficially owned by HP, constituting less than 1% of the Shares
outstanding. HP is a general partnership with an address at 445 Park Avenue,
Suite 1028, New York, New York 10022. HP's principal business is investments and
it has not, in the last five years, been convicted in a criminal proceeding or a
party to a civil proceeding as described in Items 2(d) and (e). The other
partners of HP are Mr. Horowitz's mother, Syd Horowitz, his brother, Gary
Horowitz and his sister, Cindy Horowitz (the "Partners"). Syd Horowitz resides
at 56 Field Lane, Roslyn Heights, New York 11577 and is retired. Gary Horowitz
resides at 41 Lowell Drive, Stow, Massachusetts 01775 and his principal
occupation is a clinical pathologist. Cindy Horowitz resides at 173 West 78th
Street, New York, New York 10024 and her principal occupation is an elementary
school teacher. None of the Partners have, in the last five years, been
convicted in a criminal proceeding or a party to a civil proceeding as described
in Items 2(d) and (e). The Partners are all citizens of the United States of
America.
CMH has shared power to vote and dispose of 3,917,800 Shares,
constituting approximately 24.4% of the Shares outstanding.
Item 5(c) is hereby amended to add the following:
(c) On April 13, 2004, the Issuer as part of a recapitalization entered
into an exchange agreement with each of the holders of its outstanding preferred
stock pursuant to which such holders exchanged an aggregate of 2,714,562 shares
of Preferred Stock (231,054 shares of Series D Preferred Stock and 2,483,508
shares of Series E Preferred Stock) for an aggregate of 6,698,118 shares of
Common Stock. Holders of preferred stock received 1.25 shares of Common Stock
for each share of Common Stock such holders would have received based upon the
conversion rate of their preferred stock. CMH and Ms. Slavitt were included
among the 27 holders participating in the exchange and received the following
amounts of Shares in exchange for their holdings of Series E Preferred Stock of
the Issuer:
Number of Number of Shares
Name of Series E Preferred Received
Preferred Stockholder Stock Held Upon Exchange
--------------------- ---------- -------------
CMH Capital Management Corp. 1,084,935 2,712,337
Donna Slavitt 35,377 88,442
A copy of the Exchange Agreement is attached as an exhibit hereto and
incorporated herein by reference. There were no additional transactions by the
Reporting Persons in the Shares of the Issuer during the past sixty days.
Item 7 is hereby amended to add the following:
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
4. Exchange Agreement between the Issuer and its Preferred Stockholders,
dated April 13, 2004.
===================== ==================
CUSIP No. 64121N 10 9 13D Page 7 of 23 Pages
===================== ==================
SIGNATURES
After reasonable inquiry and to the best of his knowledge and belief, each
of the undersigned certifies that the information set forth in this statement is
true, complete and correct.
Dated: April 26, 2004
/s/ Corey M. Horowitz
-----------------------------
Corey M. Horowitz
CMH CAPITAL MANAGEMENT CORP.
By: /s/ Corey M. Horowitz
-----------------------------
Name: Corey M. Horowitz
Title: President
===================== ==================
CUSIP No. 64121N 10 9 13D Page 8 of 23 Pages
===================== ==================
EXHIBIT INDEX
Document Page
-------- ----
1. Securities Purchase Agreement by and between CMH Capital
Management Corp. and FalconStor Software, Inc., dated
November 18, 2003 (previously filed). --
2. Joint Filing Agreement by and between Corey M. Horowitz and
CMH Capital Management Corp., dated November 26, 2003
(previously filed). --
3. Offer Letter, dated December 22, 2003, by and between the
Issuer and Corey M. Horowitz, including Incentive Stock
Option, dated December 22, 2003, by and between the Issuer
and Corey M. Horowitz, Non-Qualified Stock Option, dated
December 22, 2003, by and between the Issuer and Corey M.
Horowitz and Issuer Capitalization (previously filed). --
4. Exchange Agreement between the Issuer and its Preferred
Stockholders, dated April 13, 2004. 9 - 23
===================== ==================
CUSIP No. 64121N 10 9 13D Page 9 of 23 Pages
===================== ==================
EXCHANGE AGREEMENT
------------------
AGREEMENT, dated as of April 13, 2004, by and among NETWORK-1 SECURITY
SOLUTIONS, INC. (the "Company"), a Delaware corporation with offices at 445 Park
Avenue, Suite 1028, New York, New York 10022, and the holders of the Company's
Series E Convertible Stock (the "Series E Preferred Stock") and the Series D
Convertible Preferred Stock (the "Series D Preferred Stock") signatory hereto
(collectively, the "Preferred Stockholders").
WHEREAS, as part of a recapitalization of the Company, the Board of
Directors of the Company has determined that it is in the best interest of the
Company to eliminate its outstanding shares of Preferred Stock (the "Preferred
Stock") by exchanging such securities for shares of Common Stock, par value $.01
per share, of the Company (the "Common Stock"), upon the terms and subject to
the conditions set forth herein;
WHEREAS, each of the Preferred Stockholders and the Company desire that the
Preferred Stockholders exchange (i) 2,483,508 shares of Series E Preferred Stock
which is convertible into 4,967,016 shares of Common Stock and (ii) 231,054
shares of Series D Preferred Stock which is convertible into 391,478 shares of
Common Stock, for an aggregate of 6,698,118 shares of Common Stock, or 1.25
times the number of shares of Common Stock for each share of Common Stock that
each Preferred Stockholder would have received upon conversion of their
Preferred Stock, all upon the terms and subject to the conditions set forth
therein. The Common Stock issuable in exchange for the shares of Preferred Stock
are referred to herein as the "Shares."
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
Issuance of Shares for Preferred Stock
--------------------------------------
1.1 Exchange Agreement. At the Closing provided for in Section 1.2, the
Company will issue to each Preferred Stockholder and, subject to the terms and
conditions of this Agreement, each Preferred Stockholder will exchange the
Preferred Stock for the number of Shares set forth in Exhibit A hereto (the
"Exchange") in accordance with Schedule A hereto.
1.2 The Closing. The closing of the Exchange (the "Closing") shall take
place at the offices of Olshan Grundman Frome Rosenzweig & Wolosky, LLP, Park
Avenue Tower, 65 East 55th Street, New York, New York on the date that this
Agreement is executed by the parties hereto (the time and date of the Closing
being herein referred to as the "Closing Date"). On the Closing Date there will
be delivered to the Preferred Stockholders the Shares on the Closing Date
against delivery and cancellation of the original Preferred Stock in accordance
with Schedule A hereto.
===================== ===================
CUSIP No. 64121N 10 9 13D Page 10 of 23 Pages
===================== ===================
ARTICLE II
Representations. Warranties. and Agreements of the Company
----------------------------------------------------------
The Company represents and warrants to the Preferred Stockholders as
follows:
2.1 Corporate Organization and Qualification. The Company is a corporation
duly organized and validly existing under the laws of the State of Delaware and
is qualified to transact business as a foreign corporation in every jurisdiction
in which its ownership, leasing, licensing, or use of property or assets or the
conduct of its business makes such qualification necessary, except in such
jurisdictions where the failure to be so qualified would not have a material
adverse effect on the business, results of operations, financial condition, or
prospects of the Company. The Company has all required power and authority to
own its property and to carry on its business as now conducted and proposed to
be conducted.
2.2 Validity of Transaction. The Company has all requisite power and
authority to execute, deliver, and perform this Agreement, and to issue the
Shares in exchange for the Preferred Stock as part of the Exchange. All
necessary corporate proceedings of the Company have been duly taken to authorize
the execution, delivery, and performance of this Agreement, and to authorize the
issuance of the Shares for the Preferred Stock as part of the Exchange. This
Agreement, has been duly authorized, executed, and delivered by the Company, and
constitutes the legal, valid, and binding obligation of the Company, and is
enforceable as to the Company in accordance with its respective terms, except as
may be limited by applicable bankruptcy, reorganization, insolvency, moratorium,
or other similar laws or by legal or equitable principles relating to or
limiting creditors' rights generally or as rights to indemnification may be
limited by applicable securities laws. Except as to filings which may be
required under applicable state securities regulations, no consent,
authorization, approval, order, license, certificate, or permit of or from, or
declaration or filing with, any Federal, state, local, or other governmental
authority or of any court or other tribunal is required by the Company in
connection with the transactions contemplated hereby. No consent of any party to
any contract, agreement, instrument, lease, license, arrangement, or
understanding to which the Company is a party, or by which any of its properties
or assets is bound, is required for the execution, delivery, or performance by
the Company of this Agreement, and the execution, delivery, and performance of
this Agreement, will not violate, result in a breach of, conflict with, or (with
or without the giving of notice or the passage of time or both) entitle any
party to terminate or call a default under any such contract, agreement,
instrument, lease, license, arrangement, or understanding, or violate or result
in a breach of any term of the Certificate of Incorporation or By-laws of the
Company, or violate, result in a breach of, or conflict with any law, rule,
regulation, order, judgment, or decree binding on the Company or to which any of
its operations, business, properties, or assets is subject. The Shares issuable
in exchange for the Shares are duly authorized, will be validly issued, fully
paid, and nonassessable, will not have been issued in violation of any
preemptive right of stockholders or rights of first refusal, and the Preferred
Stockholders will have good title to the Shares, free and clear of all liens,
security interests, pledges, charges, encumbrances, stockholders agreements and
voting trusts (other than any created by the Preferred Stockholders).
===================== ===================
CUSIP No. 64121N 10 9 13D Page 11 of 23 Pages
===================== ===================
2.3 Capitalization. The authorized capital stock of the Company consists of
40,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, par
value $.01 per share (the "Preferred Stock"), of which 1,250,000 shares have
been designated Series D Convertible Preferred Stock and 3,500,000 shares have
been designated Series E Convertible Preferred Stock, having the designations,
dividend rights, voting powers, conversion and redemption rights, rights on
liquidation or dissolution, and other preferences and relative, participating,
optional, or other preferences and relative, participating, optional, or other
special rights, and the qualifications, limitations or restrictions thereof, set
forth in their respective Certificates of Designations. Immediately prior to the
Closing, the Company shall have 8,314,458 shares of Common Stock, 2,483,508
shares of Series E Convertible Preferred Stock, and 231,054 shares of Series D
Convertible Preferred Stock outstanding. All issued and outstanding shares of
Common Stock and Preferred Stock have been validly issued and are fully paid and
nonassessable and have not been issued in violation of any Federal or state
securities laws. Except for (a) upon the exercise of the options and warrants
which are currently outstanding to purchase 5,481,860 shares of Common Stock
(including options to purchase 3,297,370 under the Company's Stock Option Plan),
there are not, as of the date hereof, any outstanding or authorized
subscriptions, options, warrants, calls, rights, commitments, or any other
agreements obligating the Company to issue (i) any additional shares of its
capital stock or (ii) any securities convertible into, or exercisable or
exchangeable for, or evidencing the right to subscribe for, any shares of its
capital stock. Other than the Company's Stock Option Plan, the Company has not
adopted or authorized any plan for the benefit of its officers, employees, or
directors which require or permit the issuance, sale, purchase, or grant of any
shares of the Company's capital stock, any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to subscribe for any
shares of the Company's capital stock, or any phantom shares or any stock
appreciation rights.
2.4 SEC Filings. The Company has filed all forms, reports, statements and
other documents required to be filed with (i) the SEC including, without
limitation, (A) all Annual Reports on Form 10-KSB, (B) all Quarterly Reports on
Form 10-QSB, (C) all Reports on Form 8-K, (D) all other reports or registration
statements and (E) all amendments and supplements to all such reports and
registration statements (collectively referred to as the "SEC Reports") and (ii)
any other applicable state securities authorities (all such forms, reports,
statements and other documents in (i) and (ii) of this Section 2.4 being
referred to herein, collectively, as the "Reports"). The Reports (i) were
prepared in all material respects in accordance with the requirements of
applicable law (including, with respect to the SEC Reports, the Securities Act
of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as the case may be, and the rules and
regulations of the SEC thereunder applicable to such SEC Reports) and (ii) did
not at the time they were filed contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. In addition, since the last quarterly
report of the Company on Form 10-QSB filed with the SEC, there have been no
material events that require disclosure under the Exchange Act.
===================== ===================
CUSIP No. 64121N 10 9 13D Page 12 of 23 Pages
===================== ===================
ARTICLE III
Representations and Warranties of the Preferred Stockholders
------------------------------------------------------------
Each of the Preferred Stockholders, severally and not jointly, represents
and warrants to the Company as follows:
3.1 Organization. Such Preferred Stockholder (if not an individual) is duly
organized under the laws of the state of its jurisdiction of organization and
has full power and authority to enter into this Agreement and to consummate the
transactions set forth herein. All necessary proceedings have been duly taken to
authorize the execution, delivery, and performance of this Agreement by such
Preferred Stockholder (if not an individual).
3.2 Accredited Investor; Access to Information. Such Preferred Stockholder
and, to the knowledge of such Preferred Stockholder, each limited partner of
such Preferred Stockholder in the case of a Preferred Stockholder which is a
limited partnership, and each partner of such Preferred Stockholder in the case
of a Preferred Stockholder which is a general partnership, is an "accredited
investor," as that term is defined in Rule 501 of Regulation D promulgated under
the Securities Act. Such Preferred Stockholder, shareholders of the general
partner of such Preferred Stockholder, if any, and each of the limited partners
of such Preferred Stockholder, if any, has had substantial experience in private
securities transactions like this one and has had a full opportunity to discuss
the business, management, and financial affairs of the Company with the
Company's management. Such Preferred Stockholder has received all requested
documents from the Company and has had a full opportunity to ask questions of,
and receive answers from, the officers of the Company.
3.3 Authorization. All actions on the part of such Preferred Stockholder
necessary for the authorization, execution, delivery, and performance by such
Preferred Stockholder of this Agreement have been taken. This Agreement has been
duly authorized, executed, and delivered by such Preferred Stockholder, is the
legal, valid, and binding obligation of such Preferred Stockholder, and are
enforceable as to such Preferred Stockholder in accordance with their respective
terms, except as may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium, or other similar laws or by legal or equitable
principles relating to or limiting creditors' rights generally or as rights to
indemnification may be limited by applicable securities laws.
3.4 Investment Intent. Such Preferred Stockholder is acquiring the Shares
for its, his or her own account for investment and not with a view to, or for
sale in connection with, any public distribution thereof in violation of the
Securities Act. Such Preferred Stockholder understands that Shares have not been
registered for sale under the Securities Act or qualified under applicable state
securities laws and that the Shares are being offered and sold to such Preferred
Stockholder pursuant to one or more exemptions. Such Preferred Stockholder
understands that it, he or she must bear the economic risk of the investment in
the Company for an indefinite period of time, as the Shares cannot be sold
unless subsequently registered under the Securities Act and qualified under
state securities laws, unless an exemption from such registration and
qualification is available.
===================== ===================
CUSIP No. 64121N 10 9 13D Page 13 of 23 Pages
===================== ===================
3.5 Transfer of Securities. Such Preferred Stockholder will not sell or
otherwise dispose of the Shares unless (a) a registration statement with respect
thereto has become effective under the Securities Act and such Shares have been
qualified under applicable state securities laws or (b) there is presented to
the Company notice of the proposed transfer and, if it so requests, a legal
opinion reasonably satisfactory to the Company that such registration and
qualification is not required; provided, however, that no such registration or
qualification or opinion of counsel shall be necessary for a transfer by such
Preferred Stockholder (i) to any entity controlled by, or under common control
with, such Preferred Stockholder (ii) to a partner or officer of such Preferred
Stockholder, (iii) to a partner or officer of the general partner of such
Preferred Stockholder, or (iv) to the spouse, lineal descendants, estate, or a
trust for the benefit of any of the foregoing, provided the transferee agrees in
writing to be subject to the terms hereof to the same extent as if he were such
Preferred Stockholder. Such Preferred Stockholder consents that any transfer
agent of the Company may be instructed not to transfer any Shares unless it
receives satisfactory evidence of compliance with the foregoing provisions, and
that there may be endorsed upon any certificate representing such shares (and
any certificates issued in substitution therefor) the following legend calling
attention to the foregoing restrictions on transferability of such shares,
stating in substance:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT WITH RESPECT TO THE SECURITIES EVIDENCED BY THIS
CERTIFICATE, OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT
REGISTRATION UNDER SUCH ACT AND APPLICABLE SECURITIES LAWS IS NOT
REQUIRED."
The Company shall, upon the request of any holder of a stock certificate bearing
the foregoing legend and the surrender of such certificate, issue a new stock
certificate without such legend if (A) the stock evidenced by such certificate
has been effectively registered under the Securities Act and qualified under any
applicable state securities law and sold by the holder thereof in accordance
with such registration and qualification, or (B) such holder shall have
delivered to the Company a legal opinion reasonably satisfactory to the Company
to the effect that the restrictions set forth herein are no longer required or
necessary under the Securities Act or any applicable state law.
===================== ===================
CUSIP No. 64121N 10 9 13D Page 14 of 23 Pages
===================== ===================
ARTICLE IV
Additional Provisions.
----------------------
4.1 Indemnification. From and after the Closing, the Company, on the one
hand, and the Preferred Stockholders (severally and not jointly), on the other
hand, shall indemnify and save harmless the other (including officer, directors,
employees, agents and representatives) against any loss, claim, liability,
expense (including reasonable attorney's fees) or other damage caused by or
arising out of (i) the breach of any representation or warranty made by any such
party or (ii) the failure by the party against whom indemnification is sought to
perform any of its covenants or agreements in this Agreement.
4.2 Communications. All notices or other communications hereunder shall be
in writing and shall be given by registered or certified mail (postage prepaid
and return receipt requested), by an overnight courier service which obtains a
receipt to evidence delivery, or by telex or facsimile transmission (provided
that written confirmation of receipt is provided), addressed as set forth below:
If to the Company:
Network- 1 Security Solutions, Inc.
445 Park Avenue, Suite 1028
New York, New York 10022
Attention: Corey M. Horowitz, Chairman and Chief Executive Officer
With a copy to:
Olshan Grundman Frome Rosenzweig & Wolosky, LLP
Park Avenue Tower
65 East 55th Street
New York, New York 10022
Attention: Sam Schwartz, Esq.
If to the Preferred Stockholders, at their respective addresses as set
forth on Exhibit A hereto, or such other address as any party may designate to
the other in accordance with the aforesaid procedure. All notices and other
communications sent by overnight courier service shall be deemed to have been
given as of the next business day after delivery thereof to such courier
service, those given by telex or facsimile transmission shall be deemed given
when sent, and all notices and other communications sent by mail shall be deemed
given as of the third business day after the date of deposit in the United
States mail.
4.3 Successors and Assigns. The Company may not sell, assign, transfer, or
otherwise convey any of its rights or delegate any of its duties under this
Agreement, except to a corporation which has succeeded to substantially all of
the business and assets of the Company
===================== ===================
CUSIP No. 64121N 10 9 13D Page 15 of 23 Pages
===================== ===================
and has assumed in writing its obligations under this Agreement, and this
Agreement shall be binding on the Company and such successor. This Agreement
shall be binding upon, inure to the benefit of, and be enforceable by, the
Preferred Stockholders and their successors and assigns.
4.4 Amendments and Waivers. Neither this Agreement nor any term hereof may
be changed or waived (either generally or in a particular instance and either
retroactively or prospectively) absent the written consent each party hereto.
4.5 Survival of Representations. The representations, warranties,
covenants, and agreements made herein or in any certificate or document executed
in connection herewith shall survive the execution and delivery of this
Agreement and the issuance and delivery of the Shares to the Preferred
Stockholders.
4.6 Delays or Omissions; Waiver. No delay or omission to exercise any
right, power, or remedy accruing to either the Company or the Preferred
Stockholders upon any breach or default by the other under this Agreement shall
impair any such right, power, or remedy no shall it be construed to be a waiver
of any such breach or default, or any acquiescence therein or in any similar
breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring.
4.7 Entire Agreement; Binding Effect. This Agreement (together with
Schedule A attached hereto) contains the entire understanding of the parties
with respect to their respective subject matter and all prior negotiations,
discussions, commitments, and understandings heretofore had between them with
respect thereto are merged herein and therein. This Agreement and the Exchange
shall be binding on each Preferred Stockholder who executes this Agreement,
provided, that, Preferred Stockholders holding at least 75% of the outstanding
shares of Preferred Stock have executed this Agreement (the "Required
Percentage"). The failure of any Preferred Stockholder named in Exhibit A to
execute this Agreement shall not effect the Closing of the Exchange with respect
to those Preferred Stockholders who have executed this Agreement so long as the
Agreement has been signed by the Required Percentage.
4.8 Headings. All article and section headings herein are inserted for
convenience only and shall not modify or affect the construction or
interpretation of any provision of this Agreement.
4.9 Counterparts; Governing Law. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, without giving effect to conflict of laws.
4.10 Further Actions. At any time and from time to time, each party agrees,
without further consideration, to take such actions and to execute and deliver
such documents as may be reasonably necessary to effectuate the purposes of this
Agreement.
===================== ===================
CUSIP No. 64121N 10 9 13D Page 16 of 23 Pages
===================== ===================
IN WITNESS WHEREOF, this Agreement has been duly executed on the date
hereinabove set forth.
NETWORK-1 SECURITY SOLUTIONS, INC.
By: /s/ Corey M. Horowitz
------------------------------------
Name: Corey M. Horowitz
Title: Chairman and Chief
Executive Officer
APPLEGREEN PARTNERS
By: /s/ Seth Lieber
------------------------------------
Name: Seth Lieber
Title: Partner
BROOKWOOD PARTNERS, L.P.
By: /s/ Barry Rubenstein
------------------------------------
Name: Barry Rubenstein
Title: General Partner
CASILLI REVOCABLE TRUST
By: /s/ Gerald S. Casilli
------------------------------------
Name: Gerald S. Casilli
Title: Trustee
CMH CAPITAL MANAGEMENT CORP.
By: /s/ Corey M. Horowitz
------------------------------------
Name: Corey M. Horowitz
Title: President
/s/ Andrew Fingerhut
------------------------------------
Andrew Fingerhut
===================== ===================
CUSIP No. 64121N 10 9 13D Page 17 of 23 Pages
===================== ===================
/s/ Barry Fingerhut
------------------------------------
Barry Fingerhut
/s/ Robert Gladstone
------------------------------------
Robert Gladstone
/s/ Amy Katz
------------------------------------
Amy Katz
/s/ Irwin Lieber
------------------------------------
Irwin Lieber
/s/ Jonathan Lieber
------------------------------------
Jonathan Lieber
/s/ Seth Lieber
------------------------------------
Seth Lieber
/s/ David Nussbaum
------------------------------------
David Nussbaum
/s/ Jennifer Olsen
------------------------------------
Jennifer Olsen
/s/ Harvey Pollak
------------------------------------
Harvey Pollak
/s/ Barry Rubenstein
------------------------------------
Barry Rubenstein
/s/ Marilyn Rubenstein
------------------------------------
Marilyn Rubenstein
/s/ James Scibelli
------------------------------------
James Scibelli
===================== ===================
CUSIP No. 64121N 10 9 13D Page 18 of 23 Pages
===================== ===================
SENECA VENTURES
By: /s/ Barry Rubenstein
------------------------------------
Name: Barry Rubenstein
Title: General Partner
/s/ Donna Slavitt
------------------------------------
Donna Slavitt
/s/ John Slavitt
------------------------------------
John Slavitt
WHEATLEY PARTNERS, L.P.
By: /s/ Barry Rubenstein
------------------------------------
Name: Barry Rubenstein
Title: CEO, WHEATLEY PARTNERS LLC
General Partner
WHEATLEY PARTNERS II, L.P.
By: /s/ Barry Rubenstein
------------------------------------
Name: Barry Rubenstein
Title: General Partner
WHEATLEY FOREIGN PARTNERS, L.P.
By: /s/ Barry Rubenstein
------------------------------------
Name: Barry Rubenstein
Title: CEO, WHEATLEY PARTNERS LLC
General Partner
WOODLAND PARTNERS
By: /s/ Barry Rubenstein
------------------------------------
Name: Barry Rubenstein
Title: General Partner
===================== ===================
CUSIP No. 64121N 10 9 13D Page 19 of 23 Pages
===================== ===================
WOODLAND VENTURE FUND
By: /s/ Barry Rubenstein
------------------------------------
Name: Barry Rubenstein
Title: General Partner
/s/ Emanuel Pearlman
------------------------------------
Emanuel Pearlman
SANDLER COMPANY INVESTMENT PARTNERS
By: Sandler Capital Management, General
Partner
By: MJDM Corp., a General Partner
By: /s/ Moira Mitchell
------------------------------------
Name: Moira Mitchell
Title: President
===================== ===================
CUSIP No. 64121N 10 9 13D Page 20 of 23 Pages
===================== ===================
SCHEDULE A
PREFERRED STOCKHOLDERS
Series E Convertible Preferred Stock
------------------------------------
Number
of Shares
of Common Number of
Number of Stock Upon Shares
Shares of Conversion of of Common
Name and Address Preferred Preferred Stock Upon
of Preferred Stockholder Stock Stock Exchange
------------------------ ----- ----- --------
Applegreen Partners 35,377 70,754 88,442
c/o Jonathan Lieber
271 Hamilton Road
Chappaqua, NY 10514
Brookwood Partners, L.P. 117,924 235,848 294,810
68 Wheatley Road
Brookville, NY 11545
Casilli Revocable Trust 47,169 94,338 117,922
2905 Woodside Road
Woodside, CA 94062
Andrew Fingerhut 11,792 23,584 29,480
70 East 10th St. Apt. 11L
New York, NY 10003
Barry Fingerhut 165,094 330,188 412,735
Wheatley Partners, L.P.
825 Third Avenue, 32th Floor
New York, New York 10028-1170
Robert Gladstone 11,792 23,584 29,480
25 Evans Drive
Brookville, NY 11545
CMH Capital Management Corp. 1,084,935 2,169,870 2,712,337
445 Park Avenue, Suite 1028
New York, NY 10022
Attn: Corey M. Horowitz, President
Amy Katz 9,433 18,866 23,583
26 North Moore Street, Apt. 8W
New York, NY 10013
Irwin Lieber 165,094 330,188 412,735
8 Applegreen Drive
Old Westbury, NY 11568
Jonathan Lieber 11,792 23,584 29,480
271 Hamilton Road
Chappaqua, NY 10514
===================== ===================
CUSIP No. 64121N 10 9 13D Page 21 of 23 Pages
===================== ===================
Number
of Shares
of Common Number of
Number of Stock Upon Shares
Shares of Conversion of of Common
Name and Address Preferred Preferred Stock Upon
of Preferred Stockholder Stock Stock Exchange
------------------------ ----- ----- --------
Seth Lieber 11,792 23,584 29,480
103 Greene Street
New York, NY 10012-3859
David Nussbaum 11,792 23,584 29,480
83 Village Road
Roslyn Heights, NY 11577
Jennifer Olsen 11,792 23,584 29,480
c/o Lawrence S. Dolin
16111 Parkland Drive
Shaker Heights, OH 44120
Harvey Pollak 11,792 23,584 29,480
14 Pine Drive North
Roslyn, NY 11576
Barry Rubenstein 47,169 94,338 117,922
68 Wheatley Road
Brookville, NY 11545
James Scibelli 23,584 47,168 58,960
Roberts & Greene, Inc.
One Hollow Lane, Suite 208
Lake Success, NY 11040
Seneca Ventures 165,094 330,188 412,735
68 Wheatley Road
Brookville, NY 11545
Donna Slavitt 35,377 70,754 88,442
1085 Park Avenue, Apt. 3B
New York, NY 10028
John Slavitt 9,433 18,866 23,582
250 Baldwin Avenue, Apt. 801
San Mateo, CA 94401
Wheatley Partners, L.P. 86,792 173,584 216,980
80 Cuttermill Road, Suite 311
Great Neck, NY 11021
Wheatley Partners II, L.P. 94,339 188,678 235,848
80 Cuttermill Road, Suite 311
Great Neck, NY 11021
Wheatley Foreign Partners, L.P. 7,547 15,094 18,868
80 Cuttermill Road, Suite 311
Great Neck, NY 11021
===================== ===================
CUSIP No. 64121N 10 9 13D Page 22 of 23 Pages
===================== ===================
Number
of Shares
of Common Number of
Number of Stock Upon Shares
Shares of Conversion of of Common
Name and Address Preferred Preferred Stock Upon
of Preferred Stockholder Stock Stock Exchange
------------------------ ----- ----- --------
Woodland Partners 94,339 188,678 235,848
68 Wheatley Road
Brookville, NY 11545
Woodland Venture Fund 212,264 424,528 530,660
68 Wheatley road
Brookville, NY 11545
--------- --------- ---------
Total Series E Preferred Stock 2,483,508 4,967,016 6,208,770
========= ========= =========
===================== ===================
CUSIP No. 64121N 10 9 13D Page 23 of 23 Pages
===================== ===================
Series D Convertible Preferred Stock
------------------------------------
Number
of Shares
of Common Number of
Number of Stock Upon Shares
Shares of Conversion of of Common
Name and Address Preferred Preferred Stock Upon
of Preferred Stockholder Stock Stock Exchange
------------------------ ----- ----- --------
Woodland Venture Fund 69,379 117,550 146,936
68 Wheatley Road
Brookville, NY 11545
Seneca Ventures 34,689 58,774 73,468
68 Wheatley Road
Brookville, NY 11545
Woodland Partners 34,689 58,774 73,468
68 Wheatley Road
Brookville, NY 11545
Irwin Lieber 34,689 58,774 73,468
Wheatley Partners, L.P.
825 Third Avenue
New York, NY 10028-1170
Barry Fingerhut 34,689 58,774 73,468
Wheatley Partners, L.P.
825 Third Avenue
New York, NY 10028-1170
Applegreen Partners 8,672 14,693 18,364
c/o Jonathan Lieber
271 Hamilton Road
Chappaqua, NY 10514
Emanuel Pearlman 4,098 6,943 8,677
Liberation Investment Group
11766 Wilshire Blvd., Suite 870
Los Angeles, CA 90025
Barry Rubenstein 495 839 1,049
68 Wheatley Road
Brookville, NY 11545
Marilyn Rubenstein 495 839 1,049
68 Wheatley Road
Brookville, NY 11545
Sandler Company Investment Partners 9,159 15,518 19,398
--------- --------- ---------
767 Fifth Avenue - 45th Floor
New York, NY 10153
Total Series D Preferred Stock 231,054 391,478 489,348
--------- --------- ---------
TOTAL PREFERRED STOCK (SERIES
E AND SERIES D) 2,714,562 5,358,494 6,698,118
========= ========= =========