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EMPLOYMENT AGREEMENT, dated November 1, 2012, between NETWORK-1 SECURITY SOLUTIONS, INC., a Delaware corporation with its principal office located at 445 Park Avenue, Suite 1020, New York, New York 10022 (the "Company"), and COREY M. HOROWITZ residing at 6 Brooklawn Drive, Westport, Connecticut 06880 (the “Executive”).

 

The Company desires to enter into this Agreement in order to assure itself of the continued services of Executive, and Executive desires to accept continued employment with the Company, upon the terms and conditions hereinafter set forth.

 

NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties agree as follows:

 

SECTION 1.   Employment.  The Company hereby employs Executive, and Executive hereby accepts employment by the Company, upon the terms and conditions hereinafter set forth.

 

SECTION 2.   Term. The employment of Executive hereunder shall be for a period commencing on November 1, 2012 (the “Commencement Date”) and shall continue until October 31, 2013, or such earlier date upon which the employment of Executive shall terminate in accordance with the terms hereof (the “Initial Term”); provided, however, that the Initial Term shall be automatically extended for two successive additional periods of 12 months each (each such 12 month period, an “Additional Term”), unless the Company shall have given written notice to Executive of non-extension at least sixty (60) days prior to the end of the then applicable Initial Term or Additional Term (the Initial Term and any Additional Term collectively, the “Term of Employment”).  Notice of non-extension by the Company shall be deemed a “Termination Other Than for Cause” (as defined in Section 9(b) hereof) and Executive shall be entitled to the benefits set forth in Section 11(c) hereof.  The date on which Executive’s employment hereunder shall terminate shall be called the “Termination Date”.

 

SECTION 3.   Duties.  During the Term of Employment, Executive shall be employed as Chairman and Chief Executive Officer of the Company and will act in accordance with, and be subject to the policies and procedures as may be duly adopted by the Board of Directors (the “Board”) from time to time.  Executive shall perform such duties as are consistent therewith as the Board shall designate. Executive will be responsible for the management and operations of all aspects of the Company’s business including, but not limited to, licensing, development and enforcement of the Company’s patents, patent acquisitions, strategic relationships with third parties to monetize their patents, patent litigation oversight and finance and administration.  Executive will also have direct responsibility, subject to Board of Directors policies and resolutions as noted above, for all current and future budget and staff, and profit and loss accountability for the Company in its entirety.  Executive shall use his best efforts to perform well and faithfully the foregoing duties and responsibilities.  In addition, Executive shall continue to serve as Chairman of the Board and shall be nominated during the Term of Employment on an annual basis as a director (subject to election by the stockholders of the Company).  On the Termination Date, if Executive is no longer employed by the Company, he shall submit his resignation as Chairman of the Board of Directors (not as a member of the Board) if requested by the Company provided that Executive owns less than 5% of the Company’s outstanding shares of common stock (on a fully diluted basis after assuming the exercise of all outstanding options, warrants and other convertible securities) or he has been

 

Terminated for Cause (as defined in Section 9 hereof) or left the Company without Good Reason (as defined in Section 10 hereof).  For purposes of this Agreement, so long as Executive shall serve as a member of the Board, any references herein to decisions or determinations to be made by the Board with respect to Executive (including, without limitation, matters relating to compensation and termination) shall be made by a majority of the then members of the Board excluding Executive, who shall recuse himself and abstain from voting with respect to any such matters.

 

SECTION 4.   Time to be Devoted to Employment. During the Term of Employment, Executive shall devote his full business time, attention and energies to the business of the Company.

 

SECTION 5.   Compensation.

 

(a) The Company shall pay to Executive an annual base salary of $415,000 (the "Base Salary") for the Term of Employment, payable in such installments (but not less often than monthly) as is generally the policy of the Company with respect to its executive officers.

 

(b) (i) In addition to the Base Salary set forth in paragraph 5(a) above, the Company has established an annual target bonus of $150,000 for Executive for each calendar year during the Term of Employment (beginning with the calendar year 2012) based on its evaluation of his performance (the "Target Bonus").  In determining whether Executive has achieved the Target Bonus the Board may consider, among other things, the following: (i) financial results of the Company including revenue and profitability; (ii) patent acquisition activities (including agreements with third parties with respect to licensing and enforcement of patents); (iii) results of patent infringement litigation; and (iv) additional licensees for the Remote Power Patent.  The Board may also consider additional performance criteria as it deems appropriate in determining whether Executive has achieved the Target Bonus.  Such Target Bonus shall be paid as soon as practicable following January 1 of the calendar year following the calendar year to which the Target Bonus relates, provided that such Target Bonus shall in no event be paid later than March 15 of the calendar year following the calendar year to which such Target Bonus relates.

 

(ii) In addition to the Base Salary set forth in Section 5(a) above and the bonus set forth in Section 5(b)(i) above, during the Term of Employment or during the period in which Executive continues to serve as an executive officer of the Company whether pursuant to this Agreement or otherwise, Executive shall receive incentive compensation ("Incentive Compensation") in an amount equal to 5% of the Company’s royalties or other payments received by the Company from licensing and enforcement activities (exclusive of proceeds from the sale of patents which is covered in Section 5(b)(iii) below) with respect to the Company’s remote power patent (U.S. Patent No. 6,218,930, the “Remote Power Patent”) and 10% of the Company’s royalties and other payments received by the Company from licensing and enforcement activities with respect to the Company’s other patents besides the Remote Power Patent (including patents owned by the Company as of the date hereof other than the Remote Power Patent, patents acquired or licensed by the Company on an exclusive basis and patents owned (or exclusively licensed) by third parties who the Company has an agreement with to license, develop, finance (either debt or equity) and/or enforce such third party patents (the “Additional Patents”).  All such Incentive Compensation payable to Executive pursuant to this Section 5(b)(ii) shall be referred to as "Royalty Incentive Compensation".  All Royalty

 

 

(iii) In addition, during the Term of Employment, Executive shall be entitled to additional Incentive Compensation (the "Additional Incentive Compensation") equal to (a) 5% of the gross proceeds from the sale of the Company’s Remote Power Patent and a 10% Net Interest in the proceeds from the sale of any of the Additional Patents, and (b) 5% of the Acquisition Proceeds derived from a Remote Power Patent Litigation (as defined below) and 10% of the Acquisition Proceeds derived from an Additional Patents Litigation (as defined below).  For purposes hereof, "Acquisition Proceeds" means the gross amount paid to acquire the Company by way of (1) a merger with or into another corporation or entity with the result that the then existing stockholders of the Company immediately prior to such acquisition hold less than 50% of the combined voting power of the then outstanding securities of the surviving entity in such transaction, (2) the sale of substantially all assets of the Company, or (3) the acquisition of an equity interest in the Company; provided, that, such acquisition (under Section 5(b)(iii)(b) (1), (2) or (3) above) (i) involves as the acquiring entity a defendant (or its affiliate) in a patent infringement lawsuit involving the Remote Power Patent (the "Remote Power Patent Litigation") or any Additional Patents (the "Additional Patents Litigation") and (ii) is part of or results directly from a settlement, partial settlement, judgment, or other resolution of such litigation.  For purposes hereof, the amount of any Acquisition Proceeds shall be deemed to be the total amount paid in connection with the acquisition including cash, the fair market value of any non-cash assets (such as securities or other non-cash consideration), plus any liabilities assumed by the acquiring entity as part of the acquisition less (i) the discounted fair market value as determined by a qualified independent third party (chosen by the Company and th cost of which is borne by the Company) of any future royalties or other payments payable to the Company from license agreements in effect at the time of the acquisition, to the extent such future royalties or other payments are transferred to the acquiring entity as part of the acquisition ("License Agreement Assets"), and (ii) the fair market value of any other assets, other than the patent(s) at issue in the Remote Power Patent Litigation or Additional Patents Litigation (as the case may be) and the License Agreement Assets, transferred to, or acquired by, the acquiring entity as part of the acquisition.  Such Additional Incentive Compensation shall be paid within ten (10) days of the closing of any such transaction.

 

(c) Notwithstanding the foregoing provisions of Section 5 hereof, the Royalty Incentive Compensation (payable pursuant to Section 5(b)(ii) hereof) and the Additional Incentive Compensation (payable pursuant to Section 5(b)(iii) hereof) shall continue to be paid to Executive for the life of each of the Remote Power Patent and the Additional Patents during the Term of Employment or at anytime thereafter whether Executive is employed by the Company or not; provided, that, Executive’s employment has not been terminated by the Company for Cause as defined in Section 9(a) hereof or terminated by Executive without Good Reason as defined in Section 10 hereof.  At such time that Executive is no longer employed by the Company, to the extent there is incentive compensation (Royalty Incentive Compensation or Additional Incentive Compensation) payable to Executive in accordance with this Section 5(c), such compensation shall be paid at such time as provided in Section 5(b)(ii) or 5(b)(iii), as the case may be, and Executive shall be provided with a report with each such payment which shall include the basis of the calculation of such incentive compensation in sufficient detail.  In addition, in such circumstance, Executive, including his agents and representatives, shall have the right to review the Company's books and records pertaining to such calculation of incentive compensation on reasonable notice to the Company.

 

(d) In the event the Company enters into a definitive agreement (the “Definitive Agreement”) with respect to an Acquisition Transaction (as defined below), at the option of the Company exercisable at any time prior to five (5) days before the closing of the Acquisition Transaction, upon notice to Executive the Company may elect to extinguish Executive’s  right to receive Royalty Incentive Compensation or Additional Incentive Compensation under Section 5 hereof (effective upon consummation of the Acquisition Transaction) by a lump sum payment to Executive at the closing of the Acquisition Transaction of an amount equal to the fair market value of such compensation to be mutually agreed upon by the Company and Executive or, if no such mutual agreement is reached within 15 days after execution of the Definitive Agreement, an amount equal to the fair market value of such Royalty Compensation and Additional Incentive Compensation as determined by a qualified independent third party expert chosen by the Company which valuation shall be binding upon parties hereto and the cost of which will be paid by the Company.  For purposes hereof an “Acquisition Transaction” shall be defined as (i) a merger of the Company with the result that the then existing stockholders of the Company immediately prior to such merger hold less than 50% of the combined voting power of the then outstanding securities of the surviving entity of the merger or (ii) the sale of substantially all of the assets of the Company.

 

SECTION 6.   Equity.  The Company recognizes that equity participation in the Company through the grant of options is an important part of compensation.  Accordingly, on the Commencement Date, the Company shall grant to Executive a ten (10) year stock option to purchase 500,000 shares of the Company’s common stock which shares shall vest over a three (3) year period in equal quarterly installments of 41,667 shares beginning November 30, 2012 through August 31, 2015, subject to accelerated vesting in the event of a change of control (as defined in the form of Option attached hereto as Exhibit A); provided, that, Executive shall forfeit the balance of unvested shares (subject to the Option) if his employment has been terminated by the Company for Cause as defined in Section 9(a) hereof or terminated by Executive without Good Reason as defined in Section 10 hereof (collectively, the “Options”).  The exercise price per share of the Options shall equal the closing price of the Company’s common stock on the date of grant of the Options (the Commencement Date).  Acknowledging that the Company may adopt a new Stock Incentive Plan (the "Plan") in the future, Executive may elect to exchange the Options for other securities under the Plan on terms subject to the approval of the Board.  The Company agrees to file an amendment to its Registration Statement on Form S-8, within 90 days as so directed by Executive, to register the shares underlying the Options issued on the date hereof pursuant to this Section 6 hereof.

 

SECTION 7.   Business Expenses; Benefits.

 

SECTION 8.   Involuntary Termination.

 

 

SECTION 9.   Termination by the Company.

 

 

SECTION 10.   Termination by Executive.  If at any time during the Term of Employment, Executive elects to terminate Executive’s employment with the Company (other than for "Good Reason", as defined below), then the Company’s obligations to Executive under this Agreement shall be as set forth in Section 11(e) hereof and such termination by Executive shall constitute a breach of this Agreement.  If Executive elects to terminate Executive’s employment with the Company for Good Reason, then the Company shall pay Executive the amounts set forth in Section 11(d) hereof.  For the purpose of this Section, "Good Reason" means (i) any material diminution of duties inconsistent with Executive's title, authority, duties and responsibilities as Chairman and Chief Executive Officer (not continuing to serve as Chairman of the Board of Directors shall not constitute “Good Reason”); (ii) any reduction of or failure to pay Executive compensation provided for herein, which non-payment continues for a period of thirty (30) days following written notice to the Company by Executive of such non-payment, except to the extent Executive consents in writing to any reduction, deferral or waiver of compensation; (iii) any relocation of the principal location of Executive's employment more than 100 miles from the Corporation's current headquarters in New York, New York without Executive's prior written consent; or (iv) any material breach by the Company of its obligations under this Agreement that is not cured (if curable) within thirty (30) days after receipt of notice thereof.

 

SECTION 11.   Effect of Termination.

 

 

SECTION 12.   Code Section 409A.

 

 

SECTION 14.   Disclosure of Information. Executive will not, either during the Term of Employment or at any time thereafter, divulge, publish, communicate, furnish or make accessible to anyone (other than in furtherance of the purposes of the Company) any knowledge or information with respect to the Company’s confidential, secret or proprietary information or assets,  or with respect to any other confidential, secret or proprietary aspects of the business, activities or intellectual property of the Company including, without limitation, (a) patents and related confidential information, terms of patent acquisition contracts or licensing arrangements, or other technical data pertaining to the Company’s patents or other intellectual property (whether or not subject to patent, trademark or copyright protection) or the patents or other intellectual property of third parties who the Company has an agreement with to license, develop, finance (debt or equity) and/or enforce such third party intellectual property or (b) business strategies and plans including, but not limited to, litigation strategies and potential patent acquisitions; except as such items set forth in clauses (a) and (b) above may already be in the public domain through no fault of Executive (all of the foregoing items set forth in clauses (a) and (b) being referred to herein collectively as “Confidential Property”) or except as otherwise required by law.  In the event that Executive becomes legally compelled to disclose any Confidential Property, Executive shall advise the Company as soon as practicable so that the Company may seek a protective order or other appropriate remedy.  In addition, Executive agrees to cooperate in the Company’s effort, at the Company’s expense, to obtain a protective order or other appropriate remedy.  Upon the termination of the Term of Employment, Executive shall return to the Company all property (including Confidential Property) of the Company (or any subsidiary or affiliate thereof) then in the possession of Executive and all books, records, computer tapes or discs and all other material containing non-public information concerning the business or affairs of the Company or any subsidiary or affiliate thereof.

 

SECTION 15.   Right to Inventions.  (a) Executive shall promptly disclose, grant and assign to the Company for its sole use and benefit any and all marks, designs, logos, inventions, improvements, technical information and suggestions relating in any way to the business conducted by the Company, which he may develop or which may be acquired by Executive during the Term of Employment (whether or not during usual working hours), together with all trademarks, patent applications, letters, patent, copyrights and reissues thereof that may at any time be granted for or upon any such mark, design, logo, invention, improvement or technical information (collectively, "Inventions"). In connection therewith, Executive shall (at the Company's sole cost and expense) take all actions reasonably necessary or desirable to assign and/or confirm the assignment of any Invention to the Company.

 

(b) To the extent any of the rights, title and interest in and to Inventions cannot be assigned by Executive to the Company, Executive hereby grants to the Company an exclusive, royalty-free, transferable, irrevocable, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to practice such non-assignable rights, title and interest.  To the extent any of the rights, title and interest in and to Inventions can be neither assigned nor licensed by Executive to the Company, Executive hereby irrevocably waives and agrees never to assert such non-assignable and non-licensable rights, title and interest against the Company or any of the Company’s successors in interest to such non-assignable and non-licensable rights.  Executive hereby grants to the Company or the Company’s designees a royalty free, irrevocable, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to practice all applicable patent, copyright, moral right, mask work, trade secret and other intellectual property rights relating to any prior inventions which Executive incorporates, or permits to be incorporated, in any Inventions.  Notwithstanding the foregoing, Executive agrees that he will not incorporate, or permit to be incorporated, any prior inventions of Executive in any Inventions without the Company’s prior written consent.

 

SECTION 16.   Future Innovations. Executive recognizes that Inventions or Confidential Property relating to his activities while working for the Company and conceived, reduced to practice, created, derived, developed, or made by Executive, alone or with others, within three (3) months after termination of his employment may have been conceived, reduced to practice, created, derived, developed, or made, as applicable, in significant part while employed by the Company.  Accordingly, Executive agrees that such Inventions or Confidential Property shall be presumed to have been conceived, reduced to practice, created, derived, developed, or made, as applicable, during his employment with the Company and are to be promptly assigned to the Company unless and until Executive has established the contrary by written evidence satisfying the clear and convincing standard of proof.

 

SECTION 17.   Cooperation in Perfecting Rights to Proprietary Information and Innovations.

 

 

SECTION 18.   Restrictive Covenant.

 

 

SECTION 19.   Enforcement; Severability; Etc.  It is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to (a) delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made or (b) otherwise to render it enforceable in such jurisdiction.

 

SECTION 20.   Remedies.  Executive acknowledges and understands that the provisions of this Agreement are of a special and unique nature, the loss of which cannot be adequately compensated for in damages by an action at law, and that the breach or threatened breach of the provisions of this Agreement would cause the Company irreparable harm. In the event of a breach or threatened breach by Executive of the provisions of this Agreement, the Company shall be entitled to an injunction restraining him from such breach. Nothing contained in this Agreement shall be construed as prohibiting the Company from or limiting the Company in pursuing any other remedies available for any breach or threatened breach of this Agreement.

 

SECTION 21.   Notices. All notices, claims, certificates, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given and delivered if personally delivered or if sent by a nationally-recognized overnight courier, by telecopy, or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows:

 

if to the Company, to:

Network-1 Security Solutions, Inc.

445 Park Avenue, Suite 1020

New York, New York 10022

Telecopier: 917 ###-###-####

Telephone:   ###-###-####

with copies to:

Eiseman Levine Lehrhaupt & Kakoyiannis, P.C.

805 Third Avenue

New York, New York 10022

Telecopier: (212) 355-4608

Telephone: (212) 752-1000

Attention:    Sam Schwartz, Esq.

if to Executive, to:

Corey M. Horowitz

6 Brooklawn Drive

Westport, Connecticut 06880

Telephone:    (917) 692-0000

or to such other address as the party to whom notice is to be given may have furnished to the other party or parties in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the next business day after the date when sent, (c) in the case of telecopy transmission, when received, and (d) in the case of mailing, on the third business day following that on which the piece of mail containing such communication is posted.

 

SECTION 22.   Binding Agreement; Benefit.  The provisions of this Agreement will be binding upon, and will inure to the benefit of, the respective heirs, legal representatives, successors and assigns of the parties.

 

SECTION 23.   Governing Law.  This Agreement will be governed by, construed and enforced in accordance with, the laws of the State of New York without giving effect to principles of conflicts of laws.

 

SECTION 24.   Waiver of Breach.  The waiver by either party of a breach of any provision of this Agreement must be in writing and shall not operate or be construed as a waiver of any other breach.

 

SECTION 25.   Entire Agreement; Amendments. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements or understandings, whether written or oral, between the parties with respect thereto.  This Agreement may be amended only by an agreement in writing signed by the parties.

 

SECTION 26.   Survival of Provisions.  Neither the termination of this Agreement, nor of Executive’s employment hereunder, shall terminate or affect in any manner any provisions of this Agreement that is intended by its terms to survive such termination, including, without limitation, the provisions of Sections 5(c), 5(d), 11, 14, 15, 16, 17 and 18.

 

SECTION 27.   Headings. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

 

SECTION 28.   Assignment. This Agreement is personal in its nature and the parties shall not, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder.

 

SECTION 29.   Gender. Any reference to the masculine gender shall be deemed to include the feminine and neuter genders unless the context otherwise requires.

 

SECTION 30.   Counterparts. This Agreement may be executed in counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Employment Agreement as of the date first written above.

 

NETWORK-1 SECURITY SOLUTIONS, INC.

By:        /s/  David C. Kahn                                

David C. Kahn, Chief Financial Officer

EXECUTIVE

  Corey M. Horowitz

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit A

 

STOCK OPTION AGREEMENT

 

STOCK OPTION AGREEMENT, dated as of November __, 2012 (this " Stock Option Agreement") by and between Network-1 Security Solutions, Inc., a Delaware corporation with principal executive offices a 445 Park Avenue, Suite 1020, New York, New York 10022 ("Network-1"), and Corey M. Horowitz, residing at 6 Brooklawn Drive, Westport, Connecticut 06880 (“Horowitz”).

 

WHEREAS, in accordance with Section 6(a) of the Employment Agreement, dated November 1, 2012 between the Company and Horowitz (the “Employment Agreement”), the Company agreed, to issue to Horowitz an option to purchase 500,000 shares of the Company’s common stock, upon the terms and conditions set forth herein; and

 

NOW THEREFORE, in consideration of the premises and of the mutual covenants, representations, warranties and agreements contained herein and in the Employment Agreement, and intending to be legally bound hereby, the parties hereto agree as follows:

 

SECTION 1.   Grant of Option.

 

Network-1 hereby grants to Horowitz an option (the "Option") to purchase, out of its authorized but unissued shares of common stock (the "Common Stock"), 500,000 shares of Common Stock (the shares of Common Stock purchased or purchasable pursuant to the Option, subject to adjustment as set forth herein, being referred to as the "Option Shares"), at an exercise price per share equal to $_____ (such exercise price, subject to adjustment as set forth herein, being referred to as the "Exercise Price", or in the aggregate, the “Aggregate Exercise Price”).  Horowitz and/or his transferees or assigns are hereinafter referred to as “Holder”.

 

SECTION 2.   Term and Exercise of Option.

 

(a) The Option granted hereby shall vest on a calendar quarterly basis in equal shares of 41,667 beginning November 1, 2012 through August 31, 2015.  This Option may be exercised in whole or in part as to vested Option Shares at any time through November 1, 2022 (the “Expiration Date”) by Holder’s presentation of this Option, with the Exercise Form attached hereto duly executed, at Network-1’s office (or such office or agent of Network-1 as it may designate in writing to the Holder hereof by notice pursuant to Section 13 hereof), specifying the number of Option Shares as to which the Option is being exercised.

 

(b) In the event of (i) a “change of control” (as hereinafter defined) of Network-1 at any time prior to the Expiration Date, this Option may, from and after such date, and notwithstanding Section 2(a) hereof, be exercised for up to 100% of the total number of shares then subject to the Option minus the number of shares previously purchased upon exercise of the Option (as adjusted for any changes in the outstanding Common Stock by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the Board of Directors deems in its sole discretion to be similar circumstances).

 

(c) A “Change of Control” shall be deemed to have occurred upon the happening of any of the following events: (i) the shareholders of Network-1 approve a merger of consolidation of Network-1 with any other entity, other than a merger or consolidation which would result in the voting securities of Network-1 outstanding immediately prior thereto continuing to represent more than fifty percent (50%) of the total voting power represented by the voting securities of Network-1 or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of Network-1 approve a plan of complete liquidation of Network-1 or consummate the sale or disposition by Network-1 of all or substantially all of Network-1’s assets (other than to a subsidiary or subsidiaries) or (ii) any other event deemed to constitute a “Change of Control” by the Compensation Committee or the Board of Directors of Network-1.

 

SECTION 3.   Issuance of Option Shares; Cashless Exercise

 

(a) Upon surrender of the Option and payment of the Exercise Price as provided herein, Network-1 shall issue and deliver with all reasonable dispatch the certificate(s) for the Option Shares to or upon the written order of the Holder and in such name or names as the Holder may designate.  Such certificate(s) shall represent the number of Option Shares issuable upon the exercise of the Option, together with a cash amount in respect of any fraction of a share otherwise issuable upon such exercise.

 

(b) In lieu of paying the Aggregate Exercise Price in cash and/or upon exercise of the Option, the Holder may elect a “cashless exercise” in which event the Holder will receive upon exercise a reduced number of Option Shares equal to (i) the number of Option Shares that would be issuable pursuant to the Option upon payment of the Aggregate Exercise Price minus (ii) the number of Option Shares that have an aggregate Market Price (as defined below) equal to the Aggregate Exercise Price.

 

(c) Unless otherwise provided herein, for purposes of any computations made in this Stock Option Agreement, "Market Price" per share of shares of Common Stock on any date shall be: (i) if the shares of Common Stock are listed or admitted for trading on any national securities exchange, the last reported sales price as reported on such national securities exchange; (ii) if the shares of Common Stock are not listed or admitted for trading on any national securities exchange, the average of the last reported closing bid and asked quotation for the shares of Common Stock as reported on the Nasdaq Stock Market’s National Market (“NNM”) or Nasdaq Stock Market’s Small Cap Market (“NSM”) or a comparable service if NNM or NSM are not reporting such information; (iii) if the shares of Common Stock are not listed or admitted for trading on any national securities exchange, NNM or NSM or a comparable system, the last reported daily closing price for the shares of Common Stock as reported on the Over-The Counter Bulletin Board ("OTCBB"), or a comparable service if the OTCBB is not reporting such information, or (iv) if the shares of Common Stock are not listed or admitted for trading on any national securities exchange or NNM, quoted by NSM or quoted and reported on the OTCBB or a comparable system, the fair market value of such shares as determined in good faith by the Board of Directors of Network-1.

 

(d) Certificates representing the Option Shares shall be deemed to have been issued and the person so designated to be named therein shall be deemed to have become a holder of record of such Option Shares as of the date of the surrender of the Option and payment of the Aggregate Exercise Price as provided herein; notwithstanding that the transfer books for the Option Shares or other classes of stock purchasable upon the exercise of the

 

 

(e) Prior to due presentment for registration of transfer of the Option, Network-1 shall deem and treat the Holder as the absolute owner of the Option (notwithstanding any notation of ownership or other writing on this Option Agreement made by anyone other than Network-1) for the purpose of any exercise hereof or any distribution to the Holder and for all other purposes, and Network-1 shall not be affected by any notice to the contrary.

 

SECTION 4.   Lost, Stolen, or Mutilated Option

 

In case this Option shall be mutilated, lost, stolen or destroyed, Network-1 shall issue and deliver, in exchange and substitution for and upon cancellation of the mutilated Option, or in lieu of and substitution for the Option lost, stolen or destroyed, a new Option of like tenor and representing an equivalent number of Option Shares purchasable upon exercise, but only upon receipt of evidence reasonably satisfactory to Network-1 of such mutilation, loss, theft or destruction of such Option and reasonable indemnity, if requested, also reasonably satisfactory to Network-1.  No bond or other security shall be required from Holder in connection with the replacement by Network-1 of a lost, stolen or mutilated warrant certificate.

 

SECTION 5.   Rights Upon Expiration

 

Unless the Option is surrendered and payment made for the Option Shares as herein provided before the close of business on the Expiration Date, this Option will become wholly void and all rights evidenced hereby will terminate after such time.

 

SECTION 6.   Exchange of Option

 

This Option may be exchanged for a number of Options of the same tenor as this Option for the purchase in the aggregate of the same number of Option Shares of Network-1 as are purchasable upon the exercise of this Option, upon surrender hereof at the office of Network-1 with written instructions as to the denominations of the Options to be issued in exchange.

 

SECTION 7.   Adjustment for Certain Events

 

(a) In case Network-1 shall at any time after the date hereof (i) declare a dividend on its shares of Common Stock payable in shares of Network-1's capital stock (whether in shares of Common Stock or of capital stock of any other class), (ii) subdivide its outstanding shares of Common Stock, (iii) reverse split its outstanding shares of Common Stock into a smaller number of shares, or (iv) issue any shares of Network-1's capital stock in a reclassification of shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which Network-1 is the continuing corporation), then, in each case, the Exercise Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, reverse split or reclassification, and/or the number and kind of shares of capital stock issuable upon exercise of the Option on such date, shall be proportionately adjusted so that the holder of the Option exercised after such time shall be entitled to receive the aggregate number and kind of securities which, if such Option had been exercised immediately prior to such date, such Holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, reverse split or reclassification.  Such adjustment shall be made successively whenever any event listed above shall occur.

 

(b) In case Network-1 shall fix a record date for the making of a distribution to all holders Common Stock (including any such distribution made in connection with a consolidation or merger in which Network-1 is the continuing corporation) of evidences of indebtedness or assets (other than cash dividends or cash distributions payable out of earnings, consolidated earnings, if Network-1 shall have one or more subsidiaries, or earned surplus, or dividends payable in Common Stock) or rights, options or warrants to subscribe for or purchase Common Stock, then, in each case, the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, of which the numerator shall be the current Market Price for one share of Common Stock on such record date less the fair market value of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights, options or warrants applicable to one share of Common Stock, and of which the denominator shall be the current Market Price for one share of Common Stock.  In the event that Network-1 and the Holder cannot agree as to such fair market value, such determination of fair market value shall be made by an appraiser who shall be mutually selected by Network-1 and the Holder, and the reasonable costs of such appraiser shall be borne by Network-1.  Such adjustment shall be made successively whenever such a record date is fixed, and in the event that such distribution is not so made, the Exercise Price shall again be adjusted to be the Exercise Price which would then be in effect if such record date had not been fixed.

 

(c) No adjustment in the Exercise Price shall be required unless such adjustment would require a decrease of at least one cent ($0.01) in such price; provided, however, that any adjustment which by reason of this Section 7(c) is not required to be made shall be carried forward and taken into account in any subsequent adjustment.  All calculations under this Section 7 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be, but in no event shall Network-1 be obligated to issue fractional shares of Common Stock or fractional portions of any securities issuable upon the exercise of the Option.

 

(d) In the event that at any time, as a result of an adjustment made pursuant to Section 7 hereof, the Holder of the Option thereafter exercised shall become entitled to receive any shares of capital stock, options, warrants or other securities of Network-1 other than the shares of Common Stock, thereafter the number of such other shares of capital stock, options, warrants or other securities so receivable upon exercise of this Option shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in this Section 7, and the provisions of this Option Agreement with respect to the shares of Common Stock shall apply, to the extent applicable, on like terms to any such other shares of capital stock, options or warrants or other securities.

 

(e) Upon each adjustment of the Exercise Price as a result of calculations made in this Section 7, the Option outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of Option Shares (calculated to the nearest hundredth), obtained by (i) multiplying the number of Option Shares purchasable upon exercise of the Option immediately prior to such adjustment of the Exercise Price by the Exercise Price in effect immediately prior to such adjustment and (ii) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price.

 

(f) In case of any capital reorganization of Network-1 or of any reclassification of shares of Common Stock (other than as a result of subdivision or combination) or in case of the consolidation of Network-1 with, or the merger of Network-1 into, any other corporation (other than a consolidation or merger in which Network-1 is the continuing corporation) or of the sale of the properties and assets of Network-1 as, or substantially as, an entirety, the Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable, upon the terms and conditions specified herein, for the number of shares of Common Stock or other capital stock, options or warrants or other securities or property to which a Holder (at the time of such reorganization, reclassification, consolidation, merger or sale) upon exercise of such Option would have been entitled upon such reorganization, reclassification, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this Section 7(f) with respect to the rights and interests thereafter of the Holder shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of Common Stock or other capital stock or options, warrants or other securities or property thereafter deliverable upon the exercise of the Option.  The subdivision, reverse split or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares shall not be deemed to be a reclassification of the Common Stock for the purposes of this Section 7(f).

 

(g) In any case in which this Section 7 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, Network-1 may elect to defer until the occurrence of such event issuing to the Holder, if such Holder exercised any portion of this Option after such record date, shares of capital stock or other securities of Network-1, if any, issuable upon such exercise over and above the shares of Common Stock or other securities issuable, on the basis of the Exercise Price in effect prior to such adjustment; provided, however, that Network-1 shall deliver to the holder a due bill or other appropriate instrument evidencing such Holder's right to receive such shares of Common Stock or other securities upon the occurrence of the event requiring such adjustment.

 

(h) The Company may, at any time during the term of the Option, reduce the Exercise Price to the then fair market value of the Common Stock.

 

SECTION 8.   Fractional Shares

 

Upon exercise of the Option, Network-1 shall not be required to issue fractional shares of Common Stock or other capital stock.  In lieu of such fractional shares, the Holder shall receive an amount in cash equal to the same fraction of the (i) current Market Price of one whole share of Common Stock if clause (i), (ii) or (iii) in the definition of Market Price in Section 3(c) hereof is applicable or (ii) book value of one whole shares of Common Stock as reported in Network-1's most recent audited financial statements if clause (iv) in the definition of Market Price in Section 3 above is applicable.  All calculations under Section 7 shall be made to the nearest cent.

 

SECTION 9.   Securities Act Legend

 

The Holder shall not be entitled to any rights of a stockholder of Network-1 with respect to any Option Shares purchasable upon the exercise of this Option, including voting, dividend or dissolution rights, until such Option Shares have been paid for in full.  As soon as practicable after such exercise, Network-1 shall deliver a certificate or certificates for the securities issuable upon such exercise, all of which shall be fully paid and nonassessable, to the person or persons entitled to receive the same; provided, however, that, if the Option Shares are not registered under the Securities Act, such certificate or certificates delivered to the Holder of the surrendered Option shall bear a legend reading substantially as follows:

 

"These securities have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state and may not be sold or transferred in the absence of such registration or any exemption therefrom under such Act and laws, if applicable.  Network-1, prior to permitting a transfer of these securities, may require an opinion of counsel or other assurances satisfactory to it as to compliance with or exemption from such Act and laws."

 

SECTION 10.   Transfer

 

All or a portion of this Option may be transferred, sold or assigned by Holder without the consent of Network-1 provided, that, Holder provides Network-1 with evidence reasonably satisfactory to it that such transfer is not in violation of the Securities Act of 1933, as amended (the “Act”).  With respect to any such transfer, sale or assignment, Holder shall execute and deliver to Network-1 the Form of Assignment attached hereto.

 

SECTION 11.   Taxes; Expenses

 

Network-1 shall pay all taxes and expenses that may be payable in connection with the preparation, issuance and delivery of Options Shares under this Stock Option Agreement.

 

SECTION 12.   Notice of Adjustment

 

(a) Upon any adjustment of the Exercise Price pursuant to Section 7 hereof, Network-1, within 30 calendar days thereafter, shall have on file for inspection by the Holder a certificate of the Board of Directors of Network-1 setting forth the Exercise Price after such adjustment, the method of calculation thereof in reasonable detail, the facts upon which such calculations were based and the number of Option Shares issuable upon exercise of the Option after such adjustment in the Exercise Price, which certificate shall be conclusive evidence of the correctness of the matters set forth therein.

 

(b) In case:

 

(i) Network-1 shall authorize the issuance to all holders of shares of Common Stock of rights, options, warrants or other securities to subscribe for or purchase capital stock of Network-1 or of any other subscription rights, options, warrants or other securities; or

 

(ii) Network-1 shall authorize the distribution to all holders of shares of Common Stock of evidences of its indebtedness or assets; or

 

 

(iv) of the voluntary or involuntary dissolution, liquidation or winding up of Network-1; or

 

(v) Network-1 proposes to take any other action which would require an adjustment of the Exercise Price pursuant to Section 7 above;

 

then, in each such case, Network-1 shall give to the Holder at its address appearing below at least 20 calendar days prior to the applicable record date hereinafter specified in (A), (B), or (C) below, by first class mail, postage prepaid, a written notice stating (A) the date as of which the holders of record of shares of Common Stock entitled to receive any such rights, options, warrants or distribution are to be determined or (B) the date on which any such consolidation, merger, conveyance, transfer, reorganization, reclassification, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such consolidation, merger, conveyance, transfer, reorganization, reclassification, dissolution, liquidation or winding up or (C) the date of such action which would require an adjustment of the Exercise Price.  The failure to give the notice required by this Section 12 or any defect therein shall not affect the legality or validity of any such issuance, distribution, consolidation, merger, conveyance, transfer, reorganization, reclassification, dissolution, liquidation, winding up or other action or the vote upon any such action.

 

Except as provided herein, nothing contained herein shall be construed as conferring upon Holder the right to vote on any matter submitted to the stockholders of Network-1 for their vote or to receive notice of meetings of stockholders or the election of directors of Network-1 or any other proceedings of Network-1, or any rights whatsoever as a stockholder of Network-1.

 

SECTION 13.   Notices

 

Any notice, request, demand or other communication pursuant to the terms of this Stock Option Agreement shall be in writing and shall be sufficiently given or made when delivered or mailed by first class or registered mail, postage-prepaid, to the following addresses:

 

If to Network-1:

 

Network-1 Security Solutions, Inc. 445 Park Avenue, Suite 1020 New York, New York 10022

 

with a copy to:

 

Eiseman Levine Lehrhaupt & Kakoyiannis, P.C.

805 Third Avenue, 10th Floor

New York, NY  10022

Attn:  Sam Schwartz, Esq.

 

If to Holder:

 

 

SECTION 14.   Miscellaneous

 

(a) Waiver.  At any time the parties hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein by the other party or (c) waive compliance with any of the agreements or conditions contained herein.  No failure on the part of any party to exercise any power, right, privilege or remedy under this Stock Option Agreement, and no delay on the part of any party in exercising any power, right, privilege or remedy under this Stock Option Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No party shall be deemed to have waived any claim arising out of this Stock Option Agreement, or any power, right, privilege or remedy under this Stock Option Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such party; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.

 

(b) Entire Agreement.  Except as otherwise set forth in this Stock Option Agreement and the other documents referred to herein, collectively contain the entire understanding of the parties hereto with respect to the subject matter contained herein and supersede all prior agreements and understandings, oral and written, with respect thereto.

 

(c) Binding Effect; Benefit.  This Stock Option Agreement shall inure to the benefit of and be binding upon the parties hereto and nothing in this Stock Option Agreement, expressed or implied, is intended to confer on any person or entity other than the parties hereto or their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Stock Option Agreement.

 

(d) Amendment and Modification.  Subject to applicable law, this Stock Option Agreement may only be amended, modified and supplemented by a written agreement duly executed the parties hereto.

 

(e) Further Actions.  Network-1 shall use its best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereunder and to carry out the interest and purposes of this Stock Option Agreement, including, without limitation, using its reasonable best efforts to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental entities.

 

(f) Applicable Law.  This Stock Option Agreement and the legal relations between the parties hereto shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to the conflicts of laws rules thereof.

 

 

(g) Severability.  Any term or provision of this Stock Option Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.  If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties hereto agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Stock Option Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed.

 

(h) Non-exclusivity.  The rights and remedies of Network-1 and Holder under this Stock Option Agreement are not exclusive of or limited by any other rights or remedies which either of them may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative and not alternative.

 

IN WITNESS WHEREOF, an authorized officer of Network-1 has signed and delivered this Option as of the date first written above.

 

NETWORK-1 SECURITY SOLUTIONS, INC.

By:                                                                              

David C. Kahn, Chief Financial Officer

 

(To be executed by the registered holder if such holder desires to exercise the within Option)

 

To:           NETWORK-1 SECURITY SOLUTIONS, INC.

445 Park Avenue, Suite 1020

New York, New York  10022

 

 

The undersigned hereby (1) irrevocably elects to exercise its right to exercise _____ shares of Common Stock covered by the within Option, (2) makes payment in full of the Exercise Price by wire transfer or enclosure of a certified check or (3) elects a cashless exercise, (4) requests that certificates for such shares be issued in the name of:

 

Please print name, address and Social Security or Tax Identification Number:

 

________________________________________________

 

________________________________________________

 

________________________________________________

 

and (5) if said number of shares shall not be all the shares evidenced by the within Option, requests that a new Option Agreement for the balance of the shares covered by the within Option be registered in the name of, and delivered to:

 

Please print name and address:

 

________________________________________________

 

________________________________________________

 

________________________________________________

 

In lieu of receipt of a fractional share of Common Stock, the undersigned will receive a check representing payment therefor.

 

Dated:  _____________________

 

By:      _________________________________   

 

 

 
 

FORM OF ASSIGNMENT

 

 

 

 

FOR VALUE RECEIVED                              , hereby sells, assigns and transfers to                          (Social Security or I.D. No.                         ) the within Option, or that portion of this Option purchasable for ________ shares of Common Stock together with all rights, title and interest therein, and does hereby irrevocably constitute and appoint ______________ attorney to transfer such Option on the register of Network-1 Security Solutions, Inc., with full power and substitution.

 

_________________________________

(Signature)

 

Dated: ___________, 20__

 

Signature Guaranteed:

 

 

____________________