sec document
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 22, 2001
---------------
FALCONSTOR SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-23970 77-0216135
--------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
125 Baylis Road, Melville, New York 11747
-----------------------------------------
Address of principal executive offices
Registrant's telephone number, including area code: 631-777-5188
------------------------------------------------------
(Former name or former address, if changed since last report.)
Item 2. Acquisition or Disposition of Assets.
------------------------------------
Effective August 22, 2001, pursuant to the Agreement and Plan of
Merger and Reorganization, dated as of May 4, 2001, (the "Merger Agreement"),
among FalconStor, Inc. ("FalconStor"), Network Peripherals Inc. ("NPI") and
Empire Acquisition Corp., a wholly-owned subsidiary of NPI ("MergerSub"),
MergerSub merged with and into FalconStor, with FalconStor as the surviving
corporation. Under the terms of the Merger Agreement, the stockholders of
FalconStor received 0.721858 shares of NPI common stock for each share of
FalconStor common stock that they held. Although NPI acquired FalconStor as a
result of the transaction, FalconStor stockholders hold a majority of the voting
interests in the combined enterprise. Accordingly, for accounting purposes, the
acquisition was a "reverse acquisition" and FalconStor was the "accounting
acquiror." Further, as a result of NPI's decision to discontinue its NuWave and
legacy business, NPI is a non-operating public shell with no continuing
operations, and no intangible assets associated with NPI were purchased by
FalconStor. Accordingly, the transaction will be accounted for as a
recapitalization of FalconStor and recorded based on the fair value of NPI's net
tangible assets acquired by FalconStor, with no goodwill or other intangible
assets being recognized. Costs incurred by FalconStor directly related to the
transaction will be charged to stockholders' equity. In connection with the
merger, the name of NPI was changed to FalconStor Software, Inc. (the
"Registrant").
The common stock issued under the Merger Agreement was registered
under the Securities Act of 1933, as amended, pursuant to NPI's registration
statement on Form S-4 (File No. 333-60780) (the "Registration Statement") filed
with the Securities and Exchange Commission (the "SEC") and declared effective
on July 19, 2001. The joint proxy statement/prospectus filed with the
Registration Statement contains additional information about this transaction.
The Registrant's common stock was approved for listing on the Nasdaq National
Market and is now trading under the ticker symbol "FALC." The Registration
Statement is incorporated by reference herein.
Item 4. Change in Registrant's Certifying Accountant.
--------------------------------------------
On August 30, 2001, the Registrant dismissed PricewaterhouseCoopers
LLP ("PWC") as its independent accountants. The reports of PWC on the
Registrant's balance sheets as of December 31, 2000 and 1999 and related
statements of operations, of stockholders equity and of cash flows for each of
the three years in the period ended December 31, 2000 did not contain an adverse
opinion, disclaimer of opinion or qualification or modification as to
uncertainty, audit scope or accounting principles. The Registrant's Board of
Directors approved the dismissal of PWC on August 30, 2001. During the fiscal
years ended December 31, 2000 and 1999 and during the subsequent interim period
through August 30, 2001, there were no disagreements with PWC on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures which disagreements if not resolved to the satisfaction of
PWC would have caused them to make reference thereto in their report on the
financial statements for such years. During the fiscal years ended December 31,
2000, 1999 and 1998 and during the subsequent interim period through August 30,
2001, there were no reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K).
2
The Registrant provided PWC with a copy of the disclosures it is
making herein prior to the filing of this Current Report on Form 8-K with the
SEC and requested that PWC furnish the Registrant a letter addressed to the SEC
stating whether PWC agrees with the statements made by the Registrant herein
and, if not, stating the respects in which it does not agree. PWC's letter,
dated September 5, 2001 is attached as Exhibit 16.1 hereto.
Simultaneously with the dismissal of its former auditors, the
Registrant engaged KPMG LLP ("KPMG"), the independent auditors of FalconStor, as
the Registrant's independent public auditors, replacing its former auditor, PWC.
The Audit Committee of the Board of Directors of the Registrant approved the
appointment of KPMG as the Registrant's independent accountants and auditors on
August 30, 2001. During the two most recent fiscal years and subsequent interim
periods, NPI has not consulted with KPMG regarding (i) either the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on its financial statements,
or (ii) any matter that was either the subject of disagreement on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures or a reportable event (as defined in Item 304(a)(1)(v) of
Regulation S-K).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(a) Financial statements of businesses acquired.
*(1) Consolidated Financial Statements of FalconStor, Inc.
(a development stage enterprise) as of December 31,
2000 and for the period from inception (February 10,
2000) through December 31, 2000, included in Network
Peripherals Inc.'s Registration Statement on Form S-4,
as amended (File No. 333-60780).
(2) Unaudited Consolidated Financial Statements of
FalconStor, Inc. (a development stage enterprise) as of
and for the six months ended June 30, 2001 and for the
period from inception (February 10, 2000) through June
30, 2000.
(b) Pro forma financial information.
Exhibit Number Description
-------------- -----------
*2.1 Agreement and Plan of Merger and Reorganization,
dated as of May 4, 2001, incorporated by
reference as Annex A to Network Peripherals
Inc.'s Registration Statement on Form S-4, as
amended (File No. 333-60780).
16.1 Letter of PricewaterhouseCoopers LLP regarding
termination as certifying accountant.
23.1 Consent of expert/counsel
* as previously filed
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FALCONSTOR SOFTWARE, INC.
Dated: September 5, 2001 By: /s/ ReiJane Huai
---------------------------
Name: ReiJane Huai
Title: Chief Executive Officer and
President
4
FALCONSTOR, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED BALANCE SHEETS
June 30, 2001 December 31, 2000
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 32,302,546 $ 7,727,182
Accounts receivable, net ................................................... 475,628 15,814
Prepaid expenses and other current assets .................................. 166,935 47,995
------------ ------------
Total current assets .............................................. 32,945,109 7,790,991
Property and equipment, net ................................................... 1,245,992 583,201
Security deposits ............................................................. 468,296 220,099
------------ ------------
Total assets ...................................................... $ 34,659,397 $ 8,594,291
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 647,644 $ 137,365
Accrued expenses............................................................ 1,283,899 266,949
Deferred revenue ........................................................... 823,400 133,000
------------ ------------
Total current liabilities ......................................... 2,754,943 537,314
------------ ------------
Commitments
Stockholders' equity:
Convertible preferred stock - $.001 par value, 27,626,322 shares authorized,
Series A - 3,000,000 shares issued and outstanding .............. 3,000 3,000
Series B - 4,900,000 shares issued and outstanding .............. 4,900 4,900
Series C - 12,986,079 shares issued and outstanding
at June 30, 2001............................................... 12,986 --
Common stock - $.001 par value, 100,000,000 shares authorized, 15,336,000
and 15,100,000 shares issued and outstanding, respectively............... -- 15,100
15,336
Additional paid-in capital ................................................. 46,543,279 10,621,052
Deferred compensation ...................................................... (1,280,936) (469,351)
Deficit accumulated during the development stage ........................... (13,352,598) (2,095,719)
Accumulated other comprehensive loss ....................................... (41,513) (22,005)
------------ ------------
Total stockholders' equity ........................................ 31,904,454 8,056,977
------------ ------------
Total liabilities and stockholders' equity ........................ $ 34,659,397 $ 8,594,291
============ ============
See accompanying notes to the Consolidated Financial Statements
5
FALCONSTOR, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Period from
Inception
Six Months (February 10,
Ended 2000) Through
June 30, 2001 June 30, 2000
------------- -------------
Revenues ................................................ $ 43,400 $ --
Cost of revenues ........................................ 555,174 --
------------ ------------
Gross loss ..................................... (511,774) --
------------ ------------
Operating expenses:
Software development costs ........................... 2,285,421 139,610
Selling and marketing ................................ 3,450,703 3,417
General and administrative ........................... 1,495,489 39,203
------------ ------------
7,231,613 182,230
Operating loss ............................... (7,743,387) (182,230)
------------ ------------
Interest income ......................................... 384,107 26,486
------------ ------------
Loss before income taxes ....................... (7,359,280) (155,744)
Provision for income taxes .............................. 1,312 --
------------ ------------
Net loss ....................................... $ (7,360,592) $ (155,744)
------------ ------------
Beneficial conversion feature attributable to convertible
preferred stock ...................................... 3,896,287 --
------------ ------------
Net loss attributable to common shareholders ............ $(11,256,879) $ --
============ ============
Basic and diluted net loss per share .................... $ (0.74) $ (0.01)
============ ============
Weighted average basic and diluted shares
outstanding .......................................... 15,159,710 15,000,000
============ ============
See accompanying notes to the Consolidated Financial Statements
6
FALCONSTOR, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Period from
Inception (February
Six Months Ended 10, 2000) through
June 30, 2001 June 30, 2000
------------- -------------------
Cash flows from operating activities:
Net loss ........................................ $ (7,360,592) $ (155,744)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............. 133,476 --
Non-cash professional services expenses ... 429,671 --
Equity-based compensation earned .......... 217,055 --
Changes in operating assets and liabilities:
Accounts receivable, net .................. (459,814) --
Prepaid expenses and other current assets . (118,940) --
Accounts payable .......................... 510,279 --
Accrued expenses .......................... 1,016,950 --
Deferred revenue .......................... 690,400 --
------------ ------------
Net cash used in operating activities .. (4,941,515) (155,744)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment .............. (796,267)
Security deposits ............................... (248,197) --
------------ ------------
Net cash used in investing activities ........ (1,044,464) --
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock ... 30,521,849 2,976,329
Proceeds from issuance of common stock .......... -- 30,000
Proceeds from exercise of stock options ......... 59,002 --
------------ ------------
Net cash provided by financing activities .... 30,580,851 3,006,329
------------ ------------
Effect of exchange rate changes on cash ............ (19,508) --
------------ ------------
Net increase in cash and cash equivalents 24,575,364 2,850,585
Cash and cash equivalents, beginning of period ..... 7,727,182 --
------------ ------------
Cash and cash equivalents, end of period ........... $ 32,302,546 $ 2,850,585
============ ============
See accompanying notes to the Consolidated Financial Statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) THE COMPANY AND NATURE OF OPERATIONS
FalconStor, Inc. ("FalconStor") was incorporated in Delaware on February 10,
2000 for the purpose of developing, manufacturing and selling storage networking
infrastructure software. FalconStor also provides network consulting services in
the metropolitan New York area.
As of June 30, 2001, FalconStor was in the development stage, as operations from
inception through June 30, 2001 consisted primarily of the development of
FalconStor's core data storage network software product, and no significant
revenues were generated from FalconStor's planned principal operations. In the
second quarter of 2001, FalconStor completed the development of its principal
product.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim financial statements of FalconStor as of and for the six
months ended June 30, 2001, and the period from inception (February 10, 2000)
through June 30, 2000, included herein have been prepared, without audit,
pursuant to the rules and regulations of the SEC. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations relating to interim financial statements.
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of FalconStor at
June 30, 2001, and the results of its operations and its cash flows for the six
months ended June 30, 2001 and the period from inception (February 10, 2000)
through June 30, 2000.
(c) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 "BUSINESS COMBINATIONS" ("SFAS No. 141"),
which is effective for business combinations initiated after June 30, 2001. SFAS
No. 141 requires that all business combinations initiated after June 30, 2001 to
be accounted for using the purchase method. FalconStor expects the adoption of
SFAS No. 141 to have no material impact on the consolidated results of
operations or financial position.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 "GOODWILL AND OTHER INTANGIBLE ASSETS"
("SFAS No. 142"), which is effective for fiscal years beginning after June 15,
2001. SFAS No. 142 establishes accounting and reporting standards for goodwill
and other intangible assets. In accordance with SFAS No. 142, an entity can no
longer amortize goodwill over its estimated useful life. Rather goodwill will be
subject to assessments for impairment by applying a fair-value-based test.
Intangible assets must be separately recognized and amortized over the useful
life. FalconStor expects the adoption of SFAS No. 142 to have no material impact
on the consolidated results of operations or financial position.
(2) Stockholders' Equity
On March 30, 2001, FalconStor entered into an agreement with Network Peripherals
Inc. ("NPI"), a public company that designs and manufactures Ethernet switching
hardware, whereby on April 2, 2001 FalconStor issued 9,792,401 shares of its
$0.001 par value Series C convertible preferred stock ("Series C") at $2.55 per
share to NPI for gross proceeds of $25,000,000. Each share of Series C is
convertible, at the option of the holder, into one share of common stock. The
Series C will automatically convert into common stock upon the affirmative vote
of the holders of a majority of the outstanding shares of Series C and upon
either (i) the closing of a public offering FalconStor's common stock under
certain circumstances, or (ii) the consummation of a merger or consolidation of
FalconStor with or into another company. The holders of Series C are entitled to
receive cumulative cash dividends at the same rate as dividends are paid with
respect to the common stock. The Series C is not redeemable at the option of the
8
holder and has a liquidation preference equal to the greater of $2.55 per share
plus all accumulated unpaid dividends, or the amount that the Series C holders
would have received had they converted all Series C into shares of common stock.
The holders of the Series C are entitled to elect one director of FalconStor.
In connection with the sale of the Series C, on March 30, 2001 FalconStor and
NPI entered into an irrevocable option agreement whereby NPI received an
exclusive option to merge with FalconStor. The option was exercised on May 4,
2001. The merger agreement provides that, as consideration for all outstanding
shares of FalconStor's common stock, NPI would issue a number of newly issued
shares of NPI common stock as determined in accordance with the merger
agreement. Based on the agreement, the number of NPI common shares to be issued
would result in FalconStor's stockholders having at least a two-thirds ownership
in the combined entity. The merger would be structured as a tax free
reorganization, and would be accounted for as a purchase transaction. Completion
of the merger would be subject to the expiration of the applicable
Hart-Scott-Rodino waiting period, stockholder approval and other customary
closing conditions. There can be no assurance that the merger will be
consummated in a timely manner, if at all.
(3) Beneficial Conversion Feature
On May 4, 2001, FalconStor issued 3,193,678 shares of its Series C at $2.55 per
share for gross proceeds of $8,153,460. Each share of Series C preferred stock
was convertible into one share of common stock, was not redeemable at the option
of the holder and has other terms similar to the previous issuance of Series C
shares. Based upon the $3.77 fair value of FalconStor's common stock on May 4,
2001, the Series C preferred stock had a non-cash beneficial conversion feature,
of $3,896,287. Since the Series C preferred stock was immediately convertible by
issuance, the entire beneficial conversion feature is recognized in the
calculation of net loss attributable to common stockholders in the six months
ended June 30, 2001.
(4) Subsequent Event (Unaudited)
Effective August 22, 2001, pursuant to the Agreement and Plan of Merger and
Reorganization, dated as of May 4, 2001, (the "Merger Agreement"), among
FalconStor, NPI and Empire Acquisition Corp., a wholly-owned subsidiary of NPI
("MergerSub"), MergerSub merged with and into FalconStor, with FalconStor as the
surviving corporation. Under the terms of the Merger Agreement, all of
FalconStor's preferred shares were converted into common shares and the
stockholders of FalconStor received 0.721858 shares of NPI common stock for each
share of FalconStor common stock that they held. Although NPI acquired
FalconStor as a result of the transaction, FalconStor stockholders hold a
majority of the voting interests in the combined enterprise. Accordingly, for
accounting purposes, the acquisition was a "reverse acquisition" and FalconStor
was the "accounting acquiror." Further, as a result of NPI's decision to
discontinue its NuWave and legacy business, NPI is a non-operating public shell
with no continuing operations, and no intangible assets associated with NPI were
purchased by FalconStor. Accordingly, the transaction will be accounted for as a
recapitalization of FalconStor and recorded based on the fair value of NPI's net
tangible assets acquired by FalconStor, with no goodwill or other intangible
assets being recognized. Costs incurred by FalconStor directly related to the
transaction will be charged to stockholders' equity. In connection with the
merger, the name of NPI was changed to FalconStor Software, Inc.
9
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial
statements are presented to illustrate the effects of the merger on the
historical financial position and operating results of FalconStor and NPI. The
pro forma statements were prepared as if the merger had been completed as of
January 1, 2000 for statement of operations purposes and as of June 30, 2001 for
balance sheet purposes. The pro forma statements have been derived from, and
should be read in conjunction with, the historical financial statements,
including the notes thereto, of each of FalconStor and NPI.
Since FalconStor shareholders own a majority of the voting interest
in the combined enterprise, for accounting purposes the acquisition was a
"reverse merger" and FalconStor was the accounting acquiror. In connection with
the merger, NPI has implemented a plan to wind-down or otherwise dispose of its
NuWave and legacy businesses. After efforts to find a buyer for these
businesses, on June 1, 2001, the last party that had expressed interest in
buying NPI's NuWave and legacy business assets informed NPI management that it
was no longer interested in doing so. As a result, NPI determined that the only
method of disposal of these assets available to them would be to wind-down the
businesses. The wind-down will primarily include finding potential buyers or
liquidators of any remaining inventories and property and equipment used in the
manufacture and research and development of these products. It is expected that
this wind-down will be substantially concluded by the end of August 2001.
NPI incurred a net loss from discontinued operations for the period
from April 1, 2001 to June 1, 2001 (measurement date) of approximately $4.9
million. Further, NPI recorded a loss on the disposal of discontinued operations
of approximately $19.6 million in the quarter ended June 30, 2001, which
includes a provision of $4.0 million for operating losses during the wind-down
period.
As a result of the decision to discontinue NPI's NuWave and legacy
businesses, NPI became a non-operating public shell with no continuing
operations. The following unaudited pro forma condensed combined statement of
operations for the year ended December 31, 2000 include adjustments to present
NPI as a discontinued operation. Further, because FalconStor did not purchase
any assets of NPI other than cash, cash equivalents and short-term investments,
the merger will be accounted for as a recapitalization of FalconStor, and the
transaction will be recorded based on the fair value of NPI's net tangible
assets acquired by FalconStor, with no goodwill or other intangible assets being
recognized. Costs incurred by FalconStor directly related to the transaction
will be charged to stockholders' equity.
The pro forma statements are provided for illustrative purposes only
and do not purport to represent what the actual consolidated results of
operations or the consolidated financial position of FalconStor would have been
had the merger occurred on the date assumed, nor are they necessarily indicative
of future consolidated results of operations or financial position.
10
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2001
(IN THOUSANDS)
HISTORICAL PRO FORMA ADJUSTMENTS
---------------------- --------------------- PRO FORMA
FALCONSTOR NPI DEBIT CREDIT COMBINED
---------- --- ----- ------ --------
ASSETS
Current assets:
Cash, cash equivalents and short-term
investments .......................... $ 32,303 $ 56,779 $ -- $ -- $ 89,082
Accounts receivable, net ................ 476 -- -- -- 476
Prepaid expenses and other current assets 167 -- -- -- 167
Assets of discontinued operations ....... -- 1,962 -- -- 1,962
--------- --------- --------- --------- ---------
Total current assets .................. 32,946 58,741 -- -- 91,687
Property and equipment, net ............. 1,246 -- -- -- 1,246
Security deposits ....................... 467 -- -- -- 467
Investment in FalconStor ................ -- 25,000 -- 25,000 C --
--------- --------- --------- --------- ---------
$ 34,659 $ 83,741 $ -- $ 25,000 $ 93,400
========= ========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................ $ 648 $ -- -- $ 12,000 B $ 12,648
Accrued liabilities ..................... 1,284 -- -- -- 1,284
Deferred revenue ........................ 823 -- -- -- 823
Liabilities of discontinued operations .. -- 7,728 -- -- 7,728
--------- --------- --------- --------- ---------
Total current liabilities ............. 2,755 7,728 -- 12,000 22,483
--------- --------- --------- --------- ---------
Stockholders' equity:
Preferred stock ......................... 21 -- 21 -- C --
Common stock ............................ 15 17 17 30 C 45
Additional paid-in capital .............. 46,543 237,310 237,310 51,004 C 85,547
12,000 -- B
Accumulated deficit ..................... (13,352) (107,060) -- 107,060 C (13,352)
Deferred compensation ................... (1,281) -- -- -- (1,281)
Accumulated other comprehensive income .. (42) 205 205 -- C (42)
Treasury stock .......................... -- (54,459) -- 54,459 C --
--------- --------- --------- --------- ---------
Total stockholders' equity ............ 31,904 76,013 249,553 212,553 70,917
--------- --------- --------- --------- ---------
$ 34,659 $ 83,741 $ 249,553 $ 224,553 $ 93,400
========= ========= ========= ========= =========
11
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
------------------ PRO FORMA
FALCONSTOR NPI COMBINED
---------- ------ -----------
Revenues .................................... $ 43 $ -- $ 43
Cost of revenues ............................ 555 -- 555
-------- -------- --------
Gross loss ............................... (512) -- (512)
-------- -------- --------
Operating expenses:
Research and development ................. 2,285 -- 2,285
-------- -------- --------
Sales and marketing ...................... 3,451 -- 3,451
-------- -------- --------
General and administrative ............... 1,495 -- 1,495
-------- -------- --------
Total operating expenses ............... 7,231 -- 7,231
-------- -------- --------
Loss from operations ........................ (7,743) -- (7,743)
-------- -------- --------
Interest income ............................. 384 -- 384
-------- -------- --------
Loss before income taxes .................... (7,359) -- $ (7,359)
-------- -------- --------
Income taxes ................................ -- -- --
-------- -------- --------
Loss from continuing operations ............. $ (7,359) $ $ (7,359)
======== ======== --------
Net loss from continuing operations per share
- basic and diluted ......................... $ -- $ (0.17)
======== --------
Shares used in per share calculations ....... 12,958 44,274 D
======== ========
12
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECMEBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical
-------------------------
FalconStor
Period from
Inception NPI
February 10, For the year
2000) to Ended Pro Forma Pro
December 31, December 31, Adjustments Forma
2000 2000 Debit Credit Combined
------------ ----------- ----------------- --------
Revenues .................................... $ 143 $ 7,514 $ 7,514 $ -- A $ 143
Cost of revenues ............................ 223 9,144 -- 9,144 A 223
-------- -------- -------- -------- --------
Gross loss ............................... (80) (1,630) 7,514 9,144 (80)
-------- -------- -------- -------- --------
Operating expenses:
Research and development ................. 1,379 11,233 -- 11,233 A 1,379
Sales and marketing ..................... 327 10,672 -- 10,672 A 327
General and administrative .............. 535 4,749 -- 4,749 A 535
Restructuring expenses .................. -- 600 -- 600 A --
Loss on sale of assets, net ............. -- 620 -- 620 A --
-------- -------- --------- --------- ---------
Total operating expenses ............. 2,241 27,874 -- 27,874 2,241
-------- -------- --------- --------- ---------
Loss from operations ........................ (2,321) (29,504) 7,514 37,018 (2,321)
Interest income ............................. 225 7,262 7,262 -- A 225
-------- -------- --------- --------- ---------
Loss before income taxes .................... (2,096) (22,242) 14,776 37,018 (2,096)
Income taxes ................................ -- -- -- -- --
-------- -------- --------- --------- ---------
Loss from continuing operations ............. $ (2,096) $(22,242) $ 14,776 $ 37,018 $ (2,096)
======== ======== ========= ========= =========
Net loss from continuing operations per share
- basic and diluted ....................... $ (1.73) $ (0.05)
======== =========
Shares used in per share calculations ....... 14,224 45,540 D
======== =========
13
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRO FORMA PRESENTATION
On August 22, 2001, FalconStor, Inc. consummated its merger with
Network Peripherals, Inc. ("NPI"). Under the terms of the merger, all of
FalconStor, Inc.'s preferred shares were converted into common stock and then
each share of FalconStor, Inc. common stock was exchanged into .721858 shares of
NPI common stock. In addition, NPI assumed all outstanding FalconStor, Inc.
options based on the .721858 conversion ratio. Although NPI acquired FalconStor,
Inc., after the transaction, FalconStor, Inc. stockholders hold a majority of
the voting interest in the combined company. Accordingly, for accounting
purposes, the acquisition will be a "reverse acquisition" and FalconStor, Inc.
will be the accounting acquiror. Further, as a result of NPI's decision to
discontinue its NuWave and legacy businesses, NPI became a non-operating public
shell with no continuing operations. The combined company's name was changed to
FalconStor Software, Inc., and no intangible assets associated with NPI were
purchased by FalconStor. Accordingly, the transaction will be accounted for as a
recaptalization of FalconStor, and recorded based on the fair value of NPI's net
tangible assets acquired by FalconStor, with no goodwill or other intangible
assets being recognized. FalconStor's costs directly related to the transaction
will be charged to stockholders' equity.
2. PRO FORMA ADJUSTMENTS
The pro forma financial information includes adjustments to reflect
NPI as a discontinued operation, for the year ended December 31, 2000, and the
merger as a recapitalization of FalconStor. Accordingly, the net tangible assets
acquired by FalconStor will be recorded at their fair value, with no goodwill or
other intangible assets being recognized. Costs directly related to the
transaction will be charged to stockholders' equity. The following pro forma
adjustments are reflected in the unaudited pro forma condensed consolidated
financial statements:
(A) To eliminate the results of operations of NPI as a
discontinued operation for the year ended December 31, 2000,
as required by Article 11 of Regulation S-X.
(B) To record merger related liabilities of $12,000,000 as a
charge to stockholders' equity. Merger related liabilities
include the following charges (IN THOUSANDS):
Severance and retention bonus for NPI's executive officers....$ 3,700
Financial advisor fees ....................................... 5,500
Legal and accounting fees .................................... 1,200
Printing costs, filing fees and other ........................ 1,600
-------
$12,000
=======
(C) To eliminate NPI's historical stockholders' equity accounts,
and record in stockholders' equity the fair value of the
tangible net assets of NPI acquired by FalconStor.
(D) The pro forma number of weighted average shares of common
stock outstanding is computed as follows (IN THOUSANDS):
14
Six Months Year Ended
Ended June 30, December 31,
2001 2000
---- ----
NPI weighted average shares of common stock outstanding for
the six months ended June 30, 2001 and for the year
ended
December 31, 2000 ..................................... 12,958 14,224
NPI shares of common stock issued to FalconStor
stockholders in the merger ............................ 31,316 31,316
------ ------
44,274 45,540
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15