<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 2-93477-D
I-STORM, INC.
(FORMERLY DIGITAL POWER HOLDING COMPANY)
(Exact name of small business issuer as specified in its charter)
NEVADA 87-040127
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2440 WEST EL CAMINO REAL, SUITE 520, MOUNTAIN VIEW, CALIFORNIA 94040-1400
(Address of principal executive offices)
(650) 962-5420
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1999
- ----------------------------- ---------------------------------
Common Stock, par value $0.01 5,460,449
Traditional Small Business Disclosure Format (Check One): Yes ___ No _X_
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,163 $ 5
Accounts receivable, net of allowance for doubtful accounts of $31 and $51,
respectively 209 44
Factored accounts receivable, net of allowance for doubtful accounts of $0 and
$349, respectively -- 105
Prepaid expenses and other current assets 81 158
-------------- --------------
Total current assets 1,453 312
Property and equipment, net 142 81
Other assets 811 32
Reorganization asset, net of amortization of $390 and $147, respectively 2,963 3,060
-------------- --------------
Total assets $ 5,369 $ 3,485
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 40 $ --
Factoring liability --- 1,197
Accounts payable 529 1,144
Accrued liabilities 151 912
Deferred revenue -- 504
-------------- --------------
Total current liabilities 720 3,757
-------------- --------------
Long-term notes payable 234 260
-------------- --------------
Redeemable common stock, at $1.00 per share, 0 and 600,000 shares, respectively -- 600
-------------- --------------
Shareholders' equity (deficit):
Preferred stock, $0.01 par value
Series A cumulative convertible preferred stock; liquidation preference of
$4,002:
Designated--600,000 shares; outstanding--0 and 0 shares respectively
Subscribed--600,000 and 600,000 shares 6 6
Series B cumulative convertible preferred stock:
Designated--1,700,000 shares; 407,900 and 0 shares outstanding, respectively 4 --
Series C cumulative convertible preferred stock:
Designated--1,225,000 shares; 371,438 and 0 shares outstanding, respectively 4 --
Common stock, $0.01 par value:
Authorized--25,000,000
Outstanding--5,981,000 and 5,208,000 shares, respectively
Subscribed - 590,000 and 600,000 shares, respectively 60 52
Subscribed warrants to purchase common stock 77 109
Additional paid-in capital 21,623 1,461
Deficit accumulated during the development stage (17,359) (2,760)
-------------- --------------
Total shareholders' equity (deficit) 4,415 (1,132)
-------------- --------------
Total liabilities and shareholders' equity (deficit) $ 5,369 $ 3,485
============== =============
The accompanying notes are an integral part of these consolidated financial statements.
F-1
</TABLE>
<PAGE>
<TABLE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION> POST EMERGENCE PREDECESSOR
------------------------------------------------- -------------
Period from Period from Period from
Three months Inception Inception July 1,
Ended (July 17, 1998) (July 17, 1998) 1998
September 30, to September 30, to September 30, to July 16,
1999 1999 1998 1998
------------- ------------- ------------- -------------
(unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 209 $ 1,383 $ 432 $ 2
------------- ------------- ------------- -------------
Costs and expenses:
Cost of revenues 419 1,877 537 78
Selling, general, and administrative 619 4,900 858 570
Stock compensation expense 674 674 -- --
Amortization of reorganization asset 90 394 65 --
------------- ------------- ------------- -------------
Total operating expenses 1,802 7,845 1,460 648
------------- ------------- ------------- -------------
Loss from operations (1,593) (6,462) (1,028) (646)
Other income (expense), net 20 (283) (75) (19)
------------- ------------- ------------- -------------
Net loss and comprehensive loss $ (1,573) $ (6,745) $ (1,103) $ (665)
Accretion/dividends related to preferred stock (10,502) (10,614) -- --
------------- ------------- ------------- -------------
Net loss attributable to common stock $ (12,075) $ (17,359) $ (1,103) $ (665)
============= ============= ============= =============
Net loss per share:
Basic and diluted $ (2.04) $ (3.11) $ (0.23) $ (0.06)
============= ============= ============= =============
Shares used in computing net loss per share:
Basic and diluted 5,928 5,587 4,713 11,590
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION> POST EMERGENCE PREDECESSOR
------------------------------------------------- -------------
Period from Period from Period from
Nine months Inception Inception January 1,
Ended (July 17, 1998) (July 17, 1998) 1998
September 30, to September 30, to September 30, to July 16,
1999 1999 1998 1998
------------- ------------- ------------- -------------
(unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 546 $ 1,383 $ 432 $ 2,076
------------- ------------- ------------- -------------
Costs and expenses:
Cost of revenues 966 1,877 537 1,563
Selling, general, and administrative 2,580 4,900 858 2,672
Stock compensation expense 674 674 -- ---
Amortization of reorganization asset 247 394 65 --
------------- ------------- ------------- -------------
Total operating expenses 4,467 7,845 1,460 4,235
------------- ------------- ------------- -------------
Loss from operations (3,921) (6,462) (1,028) (2,159)
Other income (expense), net (65) (283) (75) (264)
------------- ------------- ------------- -------------
Net loss and comprehensive loss $ (3,986) $ (6,745) $ (1,103) $ (2,423)
Accretion/dividends related to preferred stock (10,614) (10,614) -- --
------------- ------------- ------------- -------------
Net loss attributable to common stock $ (14,600) $ (17,359) $ (1,103) $ (2,423)
============= ============= ============= ==============
Net loss per share:
Basic and diluted $ (2.46) $ (3.11) $ (0.23) $ (0.21)
============= ============= ============= ==============
Shares used in computing net loss per share:
Basic and diluted 5,934 5,587 4,713 11,590
============= ============= ============= ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<CAPTION>
DEFICIT TOTAL
CONVERTIBLE WARRANTS TO ACCUMULATED SHARE
PREFERRED STOCK COMMON STOCK PURCHASE ADDITIONAL DURING -HOLDERS'
--------------------- --------------------- COMMON PAID-IN DEVELOPMENT EQUITY
POST EMERGENCE SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL STAGE (DEFICIT)
- ------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at inception (July 17, 1998) 600 $ 6 3,040 $ 30 $ 47 $ 1,084 $ -- $ 1,167
Issuance of common stock for services -- -- 2,000 20 -- 336 -- 356
Issuance of common stock related to debt
financing -- -- 170 2 -- 41 -- 43
Issuance of Series B Preferred stock in
January and February 1999, net of
issuance costs of $737 408 4 -- -- -- 4,255 -- 4,259
Issuance of Series C Preferred stock in
March through May 1999, net of
issuance costs of $554 371 4 -- -- -- 3,992 -- 3,996
Conversion of redeemable common stock
into non-redeemable common stock -- -- 600 6 -- 594 -- 600
Repurchase of Series A Preferred stock (17) (1) -- -- -- (7) -- (8)
Issuance of warrants related to debt
financing -- -- -- -- 72 -- -- 72
Fair value of stock options granted to
nonemployees -- -- -- -- -- 424 -- 424
Stock compensation expense -- -- -- -- -- 250 -- 250
Exercise of warrants -- -- 170 1 (42) 41 -- --
Exercise of stock options -- -- 1 1 -- -- -- 1
Accretions/dividends related to
Preferred stock 27 1 -- -- -- 10,613 (10,614) --
Net Loss -- -- -- -- -- -- (6,745) (6,745)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1999 1,389 $ 14 5,981 $ 60 $ 77 $ 21,623 $(17,359) $ 4,415
========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION> POST EMERGENCE PREDECESSOR
------------------------------------------------- -------------
Period from Period from Period from
Nine months Inception Inception January 1,
Ended (July 17, 1998) (July 17, 1998) 1998
September 30, to September 30, to September 30, to July 16,
1999 1999 1998 1998
------------- ------------- ------------- -------------
(unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,313) $ (6,072) $ (1,103) $ (2,423)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of fixed assets 33 33 -- 30
Stock dividends 327 -- -- --
Valuation of common stock issued for services 674 -- -- --
Depreciation and amortization 305 497 86 88
Forgiveness of current obligations in
exchange for fixed assets -- -- -- 738
Valuation of common stock issued for services -- 356 356 --
Provision for bad debts 25 309 -- 85
Changes in assets and liabilities:
Accounts receivable (165) (123) 74 (20)
Factored accounts receivable 105 225 (469) (3)
Prepaid expenses and other assets 77 74 (54) 84
Accounts payable (768) (768) 66 --
Deferred revenue -- 495 356 655
Accrued liabilities (353) (369) 67 149
------------- ------------- ------------- -------------
Net cash used in operating activities (4,053) (5,343) (621) (617)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of fixed assets (514) (522) -- (4)
------------- ------------- ------------- -------------
Net cash used in investing activities (514) (522) -- (4)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from notes payable 105 659 100 528
Repayment of notes payable (1,436) (1,436) -- (57)
Factoring liability, net (1,144) (700) 252 (121)
Payments on capital leases -- -- -- (34)
Proceeds from issuance of redeemable common
stock 8,224 8,224 -- 600
Payment on notes receivable from shareholders (24) (24) -- --
Proceeds from the exercise of warrants -- 10 -- --
------------- ------------- ------------- -------------
Net cash provided by financing activities 5,725 6,733 352 916
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 1,158 868 (269) 295
Cash and cash equivalents at beginning of period 5 295 295 --
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 1,163 $ 1,163 $ 26 $ 295
============= ============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Valuation of common stock related to debt
financing $ 10 $ 41 $ 31 $ --
Valuation of warrants issued in conjunction with
debt financing $ $ 73 $ 73 $ --
Notes payable issued to secured creditors for
pre-petition claims and taxes $ -- $ 275 $ 275 $ --
Valuation of redeemable common stock $ 600 $ 600 $ -- $ --
Accretion/dividends on preferred stock $ 10,614 $ 10,614 $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements.
F-5
</TABLE>
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. GENERAL:
The condensed consolidated financial statements included herein have
been prepared by I-Storm, Inc. ("I-Storm" or the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote 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; however,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The condensed consolidated financial statements
included herein should be read in conjunction with the financial statements and
the notes thereto included in the Company's Report on Form 10-KSB as of December
31, 1998.
In the opinion of management, the accompanying interim financial
statements contain all material adjustments necessary to present fairly the
consolidated financial condition, results of operations, and changes in
financial position and stockholders' equity of the Company for interim periods.
Certain amounts in the prior interim consolidated financial statements have been
reclassified to conform to the current period presentation.
Due to the Restructuring and implementation of Fresh Start Reporting,
Consolidated Financial Statements for the new Reorganized Company (period
starting July 17, 1998) are not comparable to those of the Predecessor Company.
For financial reporting purposes, the effective date of the bankruptcy is
considered to be the close of business on July 16, 1998 (see note 2).
A black line has been drawn on the accompanying Condensed Consolidated
Financial Statements to distinguish between the Reorganized Company and the
Predecessor Company.
2. DESCRIPTION OF THE COMPANY:
COMPANY FORMATION AND FINANCIAL REORGANIZATION
I-Storm was created through the merger of LVL Communications
Corporation ("LVL") and Digital Acquisition Corporation, a wholly owned
subsidiary of Digital Power Holding Company ("Digital"), a Nevada public shell
corporation, on July 17, 1998, resulting in LVL becoming a wholly owned
subsidiary of Digital ("the Merger"). Digital has been renamed "I-Storm, Inc."
The Merger was accounted for as a reverse acquisition under the purchase method
with LVL being the surviving entity.
Since December 1989, Digital had not engaged in any material business
operations. Its only activities since that time, until the Merger, have
consisted of restoring and maintaining its good standing in the State of Nevada.
F-8
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
I-Storm is an Internet advertising, marketing and communications agency,
and the developer of the "I-Storm CyberStore" concept, a joint venture program
to finance, design, develop, and operate electronic commerce storefronts in
partnership with brand-name consumer and technology product companies. LVL has
developed electronic and on-line commerce ("E-commerce") on behalf of
international manufacturing and technology corporations.
On March 23, 1998, LVL and its two wholly owned subsidiaries, LVL
Advertising, Inc. ("LVLA"), and LVL Interactive, Inc. ("LVLI"), filed a
voluntary petition in the United States Bankruptcy Court for the Northern
District of California ("Bankruptcy Court") seeking protection under Chapter 11
of the U.S. Bankruptcy Code. The Chapter 11 proceedings of the Companies were
jointly administered by the Bankruptcy Court. LVL and its subsidiaries operated
their business as debtors-in-possession, subject to Bankruptcy Court approval
for certain transactions, while they developed a reorganization plan to
restructure LVL. On April 16, 1998, the Bankruptcy Court confirmed the First
Amended Plan of Reorganization ("POR") which became effective on July 17, 1998.
The principal terms of the POR are as follows:
1. LVLA and LVLI merged into LVL.
2. LVL became a wholly owned subsidiary of Digital.
3. The outstanding shares of common stock of LVL ("Old Common Stock") and
options to purchase Old Common Stock were canceled effective July 17,
1998.
4. Certain founders and shareholders of LVL received 600,000 shares of
common stock of the Company, subject to certain restrictions on the
sale and disposition of these shares.
5. Certain secured claims are to be repaid by the Company pursuant to the
original terms of the agreements or will be repaid over five years in
equal quarterly installments at an annual interest rate of 10%.
6. An investor in LVL, Trident III, LLC ("Trident") that provided $600,000
in pre-confirmation bridge financing was issued 600,000 shares of
redeemable non-voting common stock and 440,000 shares of non-redeemable
common stock.
7. All unsecured claims will receive a pro rata portion of 600,000 shares
of Series A Cumulative Convertible Preferred Stock ("Series A"). Claims
of less than $5,000 may elect to receive 10% of their claim in cash in
lieu of receiving shares of Series A ("Cash Option"). Claims exceeding
$5,000 may elect to reduce their claim to $5,000 and receive $500 in
lieu of receiving shares of Series A. The pool of 600,000 shares of
Series A was reduced by the percentage dollar amount of claims electing
the Cash Option.
F-9
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
8. The Company issued warrants to purchase common stock to certain
investors and service providers during the reorganization.
The Company also concluded the following additional transactions relating to the
restructuring of the Company:
1. Trident provided $228,000 in post-confirmation bridge financing and
received 91,200 shares of non-voting common stock.
2. The Company has also received $100,000 in pre-confirmation bridge
financing and $300,000 in post-confirmation bridge financing from other
investors. The Company issued warrants to purchase 80,000 shares of
common stock at $0.50 per share and 120,000 shares of common stock at
$0.001 per share, respectively, in conjunction with these financings.
3. I-Storm issued warrants to purchase 290,000 shares of common stock at
$0.25 per share in conjunction with post-confirmation bridge financing
of $725,0000.
SIGNIFICANT RISKS AND UNCERTAINTIES
The Chapter 11 proceedings significantly affected I-Storm's capital
structure, liquidity and capital resources. During 1997 and 1998, the Company's
operations generated substantial losses. I-Storm expects that in the near term,
it will continue to sustain losses from operations (before giving effect to the
non-cash charges that it will incur with respect to the amortization of a $3.1
million bankruptcy Reorganization Asset over the next ten years).
The Company is in the development stage, has yet to generate any
significant revenues and has no assurance of future revenues. The Company is
subject to the risks and challenges associated with other companies at a similar
stage of development, including: dependence on key individuals, successful
development, marketing and sales of products and services, and competition from
larger companies with greater financial, technical, management, marketing, and
sales resources.
In order to continue operations, the Company will require additional
capital to sustain and expand its business. I-Storm is currently seeking
additional equity financing and is seeking to list its stock on a
nationally-recognized exchange. There can be no assurance that I-Storm will be
able to obtain financing or that the terms of the financing will be favorable to
I-Storm. These factors raise substantial doubt about the ability of I-Storm to
continue as a going concern and about the ability of I-Storm to realize its
Reorganization Asset. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
In addition to the need for additional financing, I-Storm is subject to
a number of other risk factors including, but not limited to, a limited
operating history as a reorganized entity; highly competitive markets with
limited barriers to entry; and successful implementation of its new E-Commence
CyberStore concept.
F-10
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
FRESH START ACCOUNTING
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," prescribes the use of "fresh start
accounting" when the sum of the allowed claims plus post-petition liabilities
exceeds the value of pre-confirmation assets and the entity experiences a change
in control as pre-reorganization equity holders effectively receive less than
50% of new common stock issued pursuant to the POR. Under these circumstances, a
new reporting entity is created and assets and liabilities should be recorded at
their fair values. This accounting treatment is referred to as "fresh start
reporting."
Distributions in settlement of allowed claims, other transactions
pursuant to the POR and fresh start reporting adjustments have been applied to
I-Storm's pre-confirmation balance sheet resulting in the accompanying July 17,
1998 consolidated balance sheet of I-Storm. Since fresh start accounting results
in a new reporting entity, amounts included in the accompanying consolidated
financial statements as of or subsequent to July 17, 1998 are not intended to be
comparable to financial statements as of or for any previous period.
Fresh start reporting equity value was determined in good faith by the
Board of Directors of I-Storm. I-Storm has valued the Series A Cumulative
Convertible Preferred Stock at $1.00 per share, representing proceeds to the
unsecured creditors of approximately $0.10 per $1.00 of liabilities. Redeemable
common stock has also been valued at $1.00 based on the redemption features of
the common stock. Common stock has been valued at $0.25 per share based on the
value of the last transaction involving Digital's common stock. Warrants to
purchase common stock to be issued pursuant to the POR have been valued at
approximately $0.13 based on an option-pricing model.
F-11
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
The reorganization and the adoption of fresh start reporting resulted in the
following adjustments to the Company's Consolidated Balance Sheet as of July 17,
1998 (in thousands):
<TABLE>
(UNAUDITED INFORMATION)
<CAPTION>
REORGANIZATION AND
PREDECESSOR FRESH START ADJUSTMENTS REORGANIZED
COMPANY --------------------------- COMPANY
JULY 17, 1998 DEBIT CREDIT JULY 17, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Current assets $ 1,360 $ -- $ 379 (a)$ 981
Property and equipment, net 307 -- 185 (b) 122
Reorganization asset -- 3,131 (c) -- 3,131
------------ ------------ ------------ ------------
Total assets $ 1,667 $ 3,131 $ 564 $ 4,234
============ ============ ============ ============
Accounts payable $ 9,574 $ 7,635 (d)$ -- $ 1,939
Long-term notes payable 403 -- 125 (e) 528
Redeemable common stock -- -- 600 (f) 600
Preferred A -- -- 600 (g) 600
Common 11 -- 19 (h) 30
Warrants -- -- 47 (i) 47
Paid in capital 724 234 (j) -- 490
Accumulated deficit (9,045) -- 9,045 (k) --
------------ ------------ ------------ ------------
Total liabilities and equity $ 1,667 $ 7,869 $ 10,436 $ 4,234
============ ============ ============ ============
</TABLE>
Explanation of the above adjustment columns are as follows:
(a) To adjust current assets to fair market value.
(b) To adjust property and equipment to fair market value.
(c) To establish the reorganization value in excess of identifiable assets
as follows (in thousands):
New debt $ 125
New equity 1,266
------------
Reorganization value 1,391
Plus: Fair value of liabilities 2,843
Less: Fair value of assets (1,103)
------------
$ 3,131
============
F-12
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(d) To reflect the cancellation of old accounts payable and notes payable.
(e) To reflect the addition of bridge debt pursuant to the Reorganization
Plan.
(f) To reflect the issuance of 600,000 shares of Redeemable Common pursuant
to the Reorganization Plan.
(g) To reflect the issuance of 600,000 shares of Convertible Preferred A
pursuant to the Reorganization Plan.
(h) To reflect the net issuance of Common shares pursuant to the
Reorganization Plan.
(i) To reflect the issuance of 350,000 shares of Common Warrants pursuant
to the Reorganization Plan.
(j) To reflect net adjustments to Capital pursuant to the Reorganization
Plan.
(k) To reflect the elimination of stockholders' deficit of the Predecessor
Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the
activities of I-Storm and its wholly-owned subsidiary after elimination of all
intercompany accounts and transactions.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, I-Storm considers all
highly liquid investments purchased with original maturities of three months or
less to be cash and cash equivalents. Cash and cash equivalents consist of
amounts on deposit at a commercial bank.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject I-Storm to
concentrations of credit risk consist principally of accounts receivable.
I-Storm performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral.
F-13
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to seven years) of
the assets.
AMORTIZATION OF REORGANIZATION ASSET
At July 17, 1998, the reorganization value of I-Storm in excess of its
net assets was determined to be $3,131,000. This intangible asset was classified
as a reorganization asset ("Reorganization Asset") in the accompanying
consolidated balance sheet of I-Storm and will be amortized on a straight-line
basis over ten years. Pursuant to Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code," the
Reorganization Asset was determined by discounting future cash flows for I-Storm
at rates reflecting the business and financial risks involved and it
approximates the amount a willing buyer would pay for the assets of the Company
immediately after the restructuring. The carrying value of the Reorganization
Asset will be reviewed periodically for impairment, and if the facts and
circumstances suggest that it may not be recoverable, as determined based on the
undiscounted cash flows of I-Storm over the remaining amortization period, the
carrying value of the Reorganization Asset will be adjusted in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of."
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation," in October 1995. This accounting
standard permits the use of either a fair value based method of accounting or
the method defined in Accounting Principles Board Opinion 25 ("APB 25"),
"Accounting for Stock Issued to Employees" to account for stock-based
compensation arrangements. Companies that elect to employ the method prescribed
by APB 25 are required to disclose the pro forma net income (loss) that would
have resulted from the use of the fair value based method. I-Storm has elected
to account for its stock-based compensation arrangements under the provisions of
APB 25. As of September 30, 1999, the compensation cost, determined as the fair
value of the options at grant date, under the provision of SFAS No. 123, was
immaterial.
REVENUE RECOGNITION
I-Storm's revenues consist principally of services related to
development and maintenance of web sites. I-Storm recognizes revenue as the
services are provided. To the extent costs incurred and anticipated costs to
complete projects in progress exceed anticipated billings, a loss is accrued for
the excess.
F-14
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which I-Storm adopted beginning on January 1, 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income (loss)
and its components in a full set of general purpose financial statements. The
objective of SFAS No. 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the period
other than transactions with shareholders ("comprehensive income ").
Comprehensive income (loss) is the total of net income (loss) and all other
non-owner changes in equity. For the nine months ended September 30, 1999 and
1998, I-Storm's comprehensive loss was equal to net loss.
COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," basic net loss
per common share has been computed by dividing net loss after deduction of
preferred stock dividends by the weighted average number of shares of common
stock outstanding during the period.
Accretion related to the beneficial conversion features of the Series B
Preferred and the Series C Preferred Stock and the dividend/accretion rate of 9%
on the Series B and C of Preferred Stock totaled $10,614,000 during the nine
months ended September 30, 1999. These charges were recorded directly to
accumulated deficit and are included as a component of net loss per share
attributable to common stockholders.
SEGMENT REPORTING
During 1998, I-Storm adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 requires a new basis of
determining reportable business segments (i.e., the management approach). This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for information
disclosure. On this basis, I-Storm has only one business segment, the
development and implementation of the eStore concept.
During the nine months ended September 30, 1999 and 1998, I-Storm's
revenue was generated in the United States.
4. FACTORED ACCOUNTS RECEIVABLE:
I-Storm has entered into a factoring agreement with a financial
institution. Under this arrangement, I-Storm sells to the financial institution
all third-party receivables that meet certain criteria outlined in the
agreement. The financial institution has the right to charge back any
receivables that are not paid within 90 days of the invoice date to I-Storm. As
I-Storm does not surrender control over the factored receivables, the amounts
received from the transfer are treated as secured borrowings until either
payment is received by the financial institution or the receivable is put back
to I-Storm. The factoring agreement expired on March 25, 1999. As of September
30, 1999, I-Storm has completely paid off the factoring liability.
F-15
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
5. INCOME TAXES:
We were not required to provide for income taxes in the first three
quarters of 1999 due to our net operating losses. No tax benefit has been
recorded for the losses due to the uncertainty as to the realizability. At
January 1, 1999, we had available net operating loss carryforwards to reduce
future taxable income.
6. RELATED PARTIES:
The Company entered into a twelve-month consulting agreement with
Benchmark Equity Group Inc. ("Benchmark") , dated August 31, 1998, pursuant to
which the Company is obligated to pay a total of $175,000 in twelve monthly
installments to Benchmark for merger and acquisitions consulting services
rendered to either LVL or the Company, commencing as of March 1, 1998. Benchmark
also entered into an agreement in April 1998, to provide consulting services to
LVL and its successor entity in consideration of 600,000 shares of unregistered
Common Stock, and the Board of Directors approved the issuance of this Common
Stock to Benchmark or its designees on August 1, 1998, subject to an eighteen
month lock-up agreement.
In September 1997, the Company engaged Mackenzie Shea, Inc. ("MSI") as
a consultant to assist the Company in structuring a reorganization and
post-organization operating entity. MSI or its designees were issued 500,000
shares of the Company's Common Stock in August 1998, and MSI was paid a $20,000
cash fee in 1998 in full compensation for such services. The shares are exempt
from registration under the federal securities laws, in accordance with Section
1145 of the Bankruptcy Code. The shares are subject to an eighteen month lock-up
agreement, commencing August 1, 1998. Ten percent of such shares to date have
been released from the lock-up agreement.
In September 1997, the Company engaged Thomas Schulz as a consultant to
assist the Company in structuring a reorganization and post-organization
operating entity. Mr. Schulz or its designees were issued 500,000 shares of the
Company's Common Stock in August 1998, and Mr. Schulz also was paid a fee for
such services. Mr. Schulz is a director of the Company. The shares are exempt
from registration under the federal securities laws, in accordance with Section
1145 of the Bankruptcy Code. The shares are subject to an eighteen month lock-up
agreement, commencing August 1, 1998. Ten percent of such shares to date have
been released from the lock-up agreement.
In August 1998, the Company engaged Weatherly Securities Corp.
("Weatherly") to provide investment banking services and strategic planning for
the management, capitalization and business development of the Company for a
flat fee of 1,000,000 shares of Common Stock of the Company, valued at $0.25 per
share. The shares of Common Stock issued to Weatherly were fully vested as of
August 1, 1998, are unregistered shares and are subject to an eighteen month
lock-up agreement.
F-16
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
In August 1998, the Company engaged Pound Capital Corp. ("Pound") to
provide investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of 225,000
shares of Common Stock of the Company, valued at $0.25 per share. The shares of
Common Stock issued to Pound were fully vested as of August 1, 1998, are
unregistered shares and are subject to an eighteen month lock-up agreement.
Robert Tomz entered into a consulting arrangement with the Company on
December 8, 1998 whereby he was entitled to receive monthly compensation of
$8,000 a month and warrants to purchase 14,000 shares of Common Stock,
exercisable at $2.00 per share each month for a period of twelve months
commencing January 11, 1999. Mr. Tomz also served briefly as Acting Chief
Financial Officer of the Company from January 1 to March 15, 1999. Mr. Tomz and
the Company terminated this consulting arrangement on June 15, 1999, and
renegotiated the consulting fee so that Mr. Tomz received in total $90,000 and
84,000 warrants to purchase Common Stock of the Company exercisable at $2.00 per
share.
Pursuant to the Plan of Reorganization, the Company has issued 297,642
shares of Common Stock to each of Calbert Lai and Stephen Venuti, and 500,000
shares of Common Stock to Thomas A. Schulz, or his designees, as set forth
below. Further, Benchmark Equity Group, Inc., an affiliate of Frank DeLape, a
director, has been issued 557,800 shares of Common Stock. Additionally, Mr.
DeLape, has received options to purchase 50,000 shares of Common Stock at $3.50
per share for one year's service as the Chairman of the Board of Directors of
the Company on July 23, 1999, and all other non-employee directors have received
options to purchase 25,000 shares at $3.50 per share for one year's service on
the Board of Directors of the Company, to be issued on July 23, 1999.
The Company is a party to a twelve month consulting agreement with
Benchmark, dated August 31, 1998, pursuant to which the Company is obligated to
pay $175,000 in twelve monthly installments to Benchmark for consulting services
rendered to either LVL or the company, commencing as of March 1, 1998. As of
March 1999, the Consulting Agreement has been paid in full. Benchmark also
entered into an earlier agreement, in April 1998, to provide consulting services
to LVL and its successor entity in consideration of 600,000 shares of Common
Stock, and the Board of Directors approved the issuance of this Common Stock to
Benchmark or its designees on July 23, 1998. Frank DeLape, Chairman of the
Board, is the President of Benchmark Equity Group, Inc. The Company has a
management consulting agreement with Matthew Howard, a director, for a fee of
$5,000 per month. Mr. Howard's consulting arrangement commenced August 1998.
F-17
<PAGE>
7. STOCKHOLDERS'S EQUITY
Employee Stock Option Plan Under the Plan of Reorganization ("1998 A Stock
Option Plan")
In August 1998, the Board approved the establishment of an employee
stock option plan ("the 1998 A Stock Option Plan") consisting of options to
purchase 1.4 million shares of Common Stock, pursuant to the Plan of
Reorganization. The options and underlying stock set aside for issuance upon
exercise of such warrants are exempt from registration under Section 1145 of the
Bankruptcy Code.
All of the 1998 A Stock Option Plan options are exercisable at $0.50
per share. Except for options granted to Calbert Lai and Stephen Venuti, all
such options will vest ratably over a period of three years on an annual basis.
With respect to Messrs. Venuti and Lai, one-half of these options will vest
ratably over a period of not less than three years from the date of grant, and
the remaining one half shall not vest until the Company has had sales of at
least $12 million for any 12 consecutive month period and the Company is
profitable on a quarterly basis through the same 12 month period.
Additional Employee Stock Option Plan
In June 1999, the Board approved the establishment of the 1998 B Stock
Option Plan, proposed in 1998, consisting of 1.5 million shares of Common Stock.
Such options and the Common Stock underlying such options shall not be exempt
from registration under the federal securities laws. As of September 30, 1999,
this stock option plan has not yet been approved by the Company's shareholders.
Issuance of Stock Options to Advisors and Consultants
During 1999 the Company has assigned 311,000 options for common stock
exercisable from $2.00 per share to $8.50 per share to various advisors and
consultants to the Company. These options will be granted from the 1998 B Stock
Option Plan pool. As discussed above, this plan has not yet been approved by the
Company's shareholders as of September 30, 1999. Approximately $424,000 of
compensation expense has been recorded for these options to the consultants
based on the fair market value of the Company's common stock as of September 30,
1999.
Equity Funding
In February 1999, I-Storm raised net proceeds of $4,259,456 in
connection with the issuance of 407,900 shares of Series B Cumulative
Convertible Preferred Stock ("Series B") offered in a Regulation D private
placement at par value of $0.01 per share for an offering price of $12.25 per
share. The Series B shares shall pay a quarterly cumulative dividend at 9% per
annum, payable in cash or Series B Preferred Stock at the option of the Board of
Directors, and shall be convertible into common stock at a conversion price of
not greater than $3.50 per share and not less than $2.80 per share.
In May 1999, I-Storm raised net proceeds of $3,995,594 in connection
with the issuance of 371,438 shares of Series C Cumulative Convertible Preferred
Stock ("Series C") offered in a Regulation D private placement at par value of
$0.01 per share for an offering price of $12.25 per share. The Series C shares
shall pay a quarterly cumulative dividend at 9% per annum, payable in cash or
Series C Preferred Stock at the option of the Board of Directors, and shall be
convertible into stock at a conversion price of not greater than $3.50 per share
and not less than $2.80 per share.
In accordance with the Emerging Issues Task Force Topic No. D-60,
"Accounting for the Issuance of Convertible Preferred Stock and Debt Securities
with a Nondetachable Conversion Feature," the Company has recorded a preferred
stock dividend in the amount of approximately $10.6 million relating to the
beneficial conversion rights of the Series B and C Preferred Stock as the
conversion rate was discounted below the fair value of the common stock on the
issuance date which was the date of earliest conversion.
8. BOARD OF DIRECTORS SHARES:
On June 11, 1999, the Board of Directors authorized, subject to
shareholder approval, the issuance of options to purchase 50,000 shares of
common stock to the Chairman of the Board of Directors. Each director other than
the Chairman shall be granted options to purchase 25,000 shares of common stock.
These options will be granted annually for each full year of service and vest
one year from the date of grant. The exercise price of options granted for the
current year of service is $3.50 per share. The Board of Directors also
authorized the issuance of options to purchase 50,000 and 25,000 shares of
common stock to the Chairman and members of the Advisory Board of I-Storm,
respectively, under the same terms as the options granted to the Chairman and
members of the Board of Directors. Individuals may only receive options as a
member of either the Board of Directors or the Advisory Board, but not as a
member of both boards.
F-18
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Over the past two years, the Company has been shifting from its
traditional business of providing advertising services to developing and
operating retail web-sites in partnership with brand-name companies. The Company
developed and negotiated a Plan of Reorganization which was approved by the
United States Bankruptcy Court for the Northern District of California without
creditor objection on April 16, 1998. On July 17, 1998, the Company merged into
a wholly-owned subsidiary of Digital Power Holding Company, an inactive public
Nevada corporation ("the Merger"). On July 20, 1998, the combined entity was
renamed "I-Storm, Inc."
The Company is in the development stages, has yet to generate any
significant revenues, and has no assurance of future revenues. The Company
believes that it must raise additional equity capital within the next three to
six months in order to continue operating. There can be no assurance that the
Company will be able to raise the necessary capital under acceptable terms, if
any, within the time available. These factors raise substantial doubt about the
ability of I-Storm to continue as a going concern.
In addition to the need for additional financing, I-Storm is subject to
a number of other risk factors, including but not limited to, a limited
operating history as a reorganized entity, dependence on key individuals,
successful implementation of its new E-Commerce Cyberstore concept, successful
marketing and sales of products and services and competition from larger
companies with greater financial, technical, management and marketing resources.
RESULTS OF OPERATIONS
On April 16, 1998, the Company's Plan of Reorganization was confirmed
by the United States Bankruptcy Court. The Plan of Reorganization resulted in
the conversion of approximately $7,151,000 in accounts payable into preferred
equity. As a result of the Reorganization, the recording of the restructuring
transaction and implementation of Fresh Start Reporting, the Company's results
of operation after April 16, 1998 (the cutoff date used for financial reporting
purposes) are not comparable to results reported in subsequent periods
The Company's net loss for the quarter ended September 30, 1999 was
approximately $1,573,000 primarily due to a result of operating losses and
expenses associated with the Company's reorganization, and its shift away from
advertising service revenue toward E-commerce development activities. The
Company's net loss for the nine months ended September 30, 1999 was
approximately $3,986,000 primarily due to operating losses compared to a net
loss of approximately $3,526,000 for the nine months ended September 30, 1998.
The Company's operating loss for the quarter ended September 30, 1999 was
approximately $1,593,000 as compared to an operating loss of approximately
$1,028,000 for the quarter ended September 30, 1998. The increase in operating
loss of approximately $565,000 was caused primarily by a valuation adjustment
resulting from issuance of common stock for compensation to consultants in lieu
of cash. The Company's operating loss for the nine months ended September
30,1999 was approximately $3,921,000 as compared to an operating loss of
approximately $3,187,000 for the nine months ended September 30, 1998. The
increase in operating loss is due to a decline in revenue because of the
Company's continued and strategic focus on E-commerce development activities and
sales efforts and the effects of the phase-out of the advertising services
business.
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1999
Revenue for the quarters ended September 30, 1999 & 98 were
approximately $209,000 and $432,000, respectively, a decrease of approximately
$223,000 due to the change in focus of the Company from generating advertising
service revenue to seeking financing for the newly-merged corporation and
developing E-commerce partnerships. Gross profit for the quarters ended
September 30, 1999 and September 30, 1998 were approximately $(210,000) and
$(105,000) or (202)% and (124)% of sales respectively. The decrease in gross
profit was primarily a result of the Company's shift away from advertising
service revenue toward E-commerce development activities. Revenue for the nine
months ended September 30, 1999 and 98 were approximately $546,000 and
$2,508,000, respectively, a decrease of approximately $1,962,000. Gross profit
for the nine months ended September 30, 1999 and 98 were approximately
$(420,000) and $408,000 or (177)% and 16% of sales, respectively.
Operating expenses for the quarters ended September 30, 1999 and 98
were approximately $1,802,000 and $1,460,000 respectively. The increase in
operating expenses of approximately $342,000 from the period one year earlier
was due primarily to a valuation adjustment resulting from the issuance of
common stock to consultants in lieu of payment. Operating expenses for the nine
months ended September 30, 1999 and 1998 were $4,467,000 and $5,695,000
respectively. The decrease in operating expenses for the nine month period ended
September 30, 1999 was due primarily to a reduction in staff relating to a shift
away from advertising services business to E-Commerce site development and a
reduction in facilities expenses due to the relocation of the Company's
corporate headquarters.
Interest expense for the quarters ended September 30, 1999 & 98 were
approximately $2,000 and $75,000, respectively. For the nine month ended
September 30, 1999 and 1998 interest expense was approximately $118,000 and
$202,000 respectively. As of September 30, 1999, liabilities of the Company
consisted of $234,000 of long term debt and current liabilities of $720,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999 and 1998, the Company had current assets of
approximately $1,453,000 and $1,234,000 respectively, while cash and cash
equivalents were approximately $1,163,000 and $26,000 September 30,1999 and 1998
respectively. The increase in cash and cash equivalents during the last nine
months was primarily due to approximately $9,546,000 provided by equity
financing and partially offset by approximately $6,900,000 in ongoing operating
expenses and approximately $1,510,000 was used to repay bridge financing debt.
The company believes that additional cash resources will be required in the next
three to six months to fund operations and is in the process of obtaining
additional funds through equity financing. There can be no assurance that any
such equity financing will be obtained.
As of September 30, 1999 the Company owed approximately $234,000 in
long term debt and current notes payable totaling approximately $40,000. The
Company is in compliance with all covenants of the shareholder notes payable as
of September 30, 1999.
COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," basic net loss
per common share has been computed by dividing net loss after deduction of
preferred stock dividends by the weighted average number of shares of common
stock outstanding during the period.
Accretion related to the beneficial conversion features of the series B
preferred and the Series C preferred and the dividend/accretion rate of 9% on
the Series B and C Preferred Stock totaled $10,614,000 during the nine month
period ended September 30, 1999. These charges were recorded directly to
accumulated deficit and are included as a component of net loss per share
attributable to common stockholders.
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1999
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information and events reported in the Company's 1998 Form 10-KSBA,
filed September 8, 1999, are hereby incorporated by reference and should be read
in conjunction with this Form 10-QSB.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The information and events reported in the Company's 1998 Form 10-KSB,
filed on September 8, 1999, are hereby incorporated by reference and should be
read in conjunction with this Form 10-QSB.
SALES OF UNREGISTERED STOCK
PRIVATE PLACEMENT OFFERING OF THE SERIES C PREFERRED STOCK
The Company has recently raised a total of $4,550,000 in gross proceeds
from a private placement offering of Series C Cumulative Convertible Preferred
Stock ("Series C Preferred Stock"), made pursuant to Section 506 of Regulation
D, at a price per share of $12.25. The offering of such Series C Preferred Stock
("the Offering") commenced on February 22, 1999 and concluded on May 31, 1999. A
total of 371,429 shares of Series C Preferred Stock were offered and sold by the
Company with the assistance of financial consultants who received a consulting
fee equal to 12% of gross proceeds or $546,000. Additionally, certain
consultants received warrants to purchase 2,040 shares of Series C Preferred
Stock at an exercise price of $12.25. After deducting the consulting fees and
various expenses related to the offering, a total of approximately $3,996,000 in
proceeds was received by the Company from the Offering. The net proceeds are
being used for the development of I-Storm E-commerce stores, for normal
operating expenses during the Company's development stage, and for general
working capital purposes.
The Series C Preferred Stock has a par value of $0.01 per share. Each
share is entitled to cumulative annual dividends, when and as declared by the
Board of Directors, at an annual rate of nine percent (9%) each year, in
quarterly installments of $0.28 on February 15, May 15, August 15, and November
15, of each year, payable at the option of the Company either in shares of
Series C Preferred Stock or in cash. The right of the Series C Preferred Stock
to payment of either cash or Series C Preferred stock dividends is subordinate
to the right to cash or stock dividend payments of Series A Preferred Stock or
Series B Preferred Stock. The shares of Series C Preferred Stock are convertible
into Common Stock at any time following the closing of the Offering, at the
option of the holder, into such number of shares of the Company's Common Stock
as shall equal $12.25 divided by the lower of $3.50 (the "Conversion Price"), or
should the closing bid price for any five consecutive trading days during the
period commencing 11 months after the Final Closing of the Offering and ending
one month thereafter be less than $3.50, the Conversion Price shall be
readjusted to that price, provided, however, that in no event shall the
Conversion Price be reduced below $2.80. The number of shares of Common Stock to
be issued upon conversion shall also be subject to certain antidilution
provisions. Each share may be converted into Common Stock at the Conversion
Price at the option of the Company, at any time after one year from the Final
Closing of the Offering, upon the payment to the holder of any unpaid
accumulated dividends, in cash or Common Stock, at the option of the Company.
The Common Stock exercisable upon conversion of the Shares shall have piggy-back
registration rights effective from the Final Closing of this Offering and shall
have demand registration rights effective from the Final Closing until 12 months
thereafter.
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1999
ISSUANCE OF COMMON STOCK AND OPTIONS TO CONSULTANTS
In August 1999, the Company entered into an agreement, subject to Board
Approval, to grant options to purchase 150,000 shares of Common Stock of the
Company to Richard Lin, the Company's new Vice President of Business
Development, exercisable at $2.00 per share. The options shall vest ratably over
three years on a monthly basis, and are also accelerable, based upon certain
performance conditions.
In July 1999, the Board approved the grant of performance based options
to purchase 10,000 shares of Common Stock of the Company to each of Marvin Su
and Jerry Klemushin, providers of business consulting services to the Company,
exercisable at $2.25 per share. The options will cliff-vest in five years,
subject to performance conditions and are also accelerable, based upon certain
performance conditions.
In July 1999, the Board of Directors gave approval to a grant of
options to purchase Series C Preferred Stock, exercisable at $12.25 per share
until March 22, 2009, issued on March 22, 1999 to Calbert Lai, in the amount of
255,000 options, and to Stephen Venuti, 126,000 options. Such options shall
cliff-vest five years from the date of grant. The vesting of the options can
also be accelerated at a rate of 105,000 options with respect to Mr. Lai and
51,000 options, with respect to Mr. Venuti, at the time that the first
E-commerce CyberStore of the Company becomes operational; and an additional
75,000 options with respect to Mr. Lai and an additional 37,500 options with
respect to Mr. Venuti, may vest at the time that the second E-commerce
CyberStore shall becomes operational. Finally, an additional 75,000 options with
respect to Mr. Lai, and an additional 37,500 options with respect to Mr. Venuti,
may vest at the time that the third E-commerce CyberStore shall becomes
operational.
In July, 1999, the Board of Directors granted approval to the issuance
of 100,000 options to purchase Series C Preferred Stock, exercisiable at $12.25
per share for a period of ten years from the date of grant, subject to vesting
conditions, to Irfan Salim. The options shall cliff-vest three years from the
date of grant. The vesting of the options may also be accelerated at a rate of
40,000 options at the time that the first E-Commerce Cyberstore of the Company
becomes operational; and an additional 30,000 options may vest at the time of
the Company's second E-Commerce Cyberstore becomes operational; and finally,
30,000 options may vest at the time the Company's third E-Commerce Cyberstore
becomes operational.
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1999
In May 1999, Mackenzie Shea, Inc. or its designees became entitled,
subject to Board approval, to a warrant to purchase 2,040 shares of Series C
Preferred Stock, exercisable for five years for a price of $12.25 per share for
services rendered to the Company.
In April 1999, consultant Michael Kanas became entitled, subject to
Board approval, to 10,000 options exercisable at $6.37 per share for services
rendered to the Company.
The Company believes that the transactions set forth above were exempt
from registration with the Commission pursuant to Section 4(2) of the Securities
Act as transactions by an issuer not involving any public offering. No
broker-dealer or underwriter was involved in the foregoing transactions. All
certificates representing such securities were appropriately legended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of securities holders during this
period.
ITEM 5. OTHER INFORMATION
The information and events reported in the Company's 1998 Form 10-KSBA,
filed September 8, 1999, are hereby incorporated by reference and should be read
in conjunction with this Form 10-QSB.
E-COMMERCE MARKETING AND SALES AGREEMENT WITH AIG WARRANTY SERVICES AND
INSURANCE
On June 16, 1999, the Company entered into a three-year E-commerce
Sales and Marketing Agreement with AIG Warranty Services and Insurance Company
("AIG"). During the three-year term of the Sales and Marketing Agreement,
I-Storm will be the exclusive on-line marketer of AIG's on-line warranties and
service contracts.
ADDITIONAL EMPLOYEE STOCK OPTION PLAN
In June 1999, the Board approved the establishment of an employee stock
option plan proposed in 1998 consisting of 1.5 million shares of common stock.
The anticipated provisions of the this plan are as follows: options granted
under the 1998 Option Plan may be either incentive stock options or nonstatutory
stock options, as designated by the Board of Directors; options granted under
the 1998 Option Plan will expire on the tenth anniversary of the date of grant;
the exercise price of each incentive stock option will be no less than 100% of
the fair market value of the common stock at the date of the grant; the exercise
price of each nonstatutory stock option will be no less than 85% of the fair
market value of the common stock at the date of the grant; the exercise price to
an optionee who possesses more than 10% of the total combined voting power of
all classes of stock will be no less than 110% of the fair market value of the
common stock at the date of the grant and is not exercisable after the
expiration of five years from the date of grant; vesting provisions of
individual options under the 1998 Option Plan may vary as the Board of Directors
will have the authority to set exercise dates, payment terms and other
provisions for each grant. Such options and the stock underlying such options
shall not be exempt from registration under the federal securities laws.
EMPLOYMENT OF RICHARD LIN AS VICE PRESIDENT OF BUSINESS DEVELOPMENT
The Company has entered into an employment agreement with Richard Lin
at a rate of $150,000 per annum to serve as Vice President of Business
Development for the Company. Subject to Board and Shareholder approval, Mr. Lin
will also receive options to purchase 150,000 shares of Common Stock of the
Company, exercisable at $2.00 per share. The options shall vest ratably over
three years on a monthly basis, and are also accelerable, based upon certain
performance conditions. Further terms of Mr. Lin's employment agreement are
currently being negotiated.
EMPLOYMENT OF IRFAN SALIM AS CHIEF OPERATING OFFICER OF THE COMPANY
The Company has entered into an employment agreement with Irfan Salim
at a rate of $200,000 per annum to serve as Chief Operating Officer of the
Company. Subject to Shareholder approval, Mr. Salim will also receive options to
purchase 100,000 shares of series C Preperred Stock, exercisable at $12.25 per
share for a period of ten years from the date of grant, subject to certain
vesting conditions.
The options shall cliff-vest three years from the date of grant. The
vesting of the options may also be accelerated at a rate of 40,000 options at
the time that the first E-Commerce Cyberstore of the Company becomes
operational; and an additional 30,000 options may vest at the time of the
Company's second E-Commerce Cyberstore becomes operational; and finally, 30,000
options may vest at the time the Company's third E-Commerce Cyberstore becomes
operational.
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1999
APPOINTMENT OF JOHN MATTHEWS TO THE BOARD OF DIRECTORS
In June 1999, the Board appointed John Matthews to the Board of
Directors to fill a vacancy left by Richard Snyder in April 1999. Mr. Matthews
has been the Chairman of the Board and Chief Executive Officer of Weatherly
Securities Corp. since June 1996. Mr. Matthews previously served as the Chief
Operating Officer of Americorp Securities, Inc., a New York based
investment-banking firm, from June 1992 to May 1996. From 1990 to 1992, Mr.
Matthews was a Vice President of Vantage Securities, Inc., an investment-banking
firm located in Melville, New York. In 1990, prior to entering the securities
industry, Mr. Matthews served as a Director of the New York Office of Senator
Daniel Patrick Moynhihan (D-NY). His responsibilities included managing the
Senator's staff, coordinating all intergovernmental relations in New York,
serving as the Senator's senior ombudsman, as well as directing legislative
initiatives and constituent services for the State of New York.
RETIREMENT OF CONTINGENT LIABILITY UNDER THE PLAN OF REORGANIZATION
As of September 1, 1999, the Company had entered into agreements with
certain creditors of LVL Communications Corporation to retire in their entirety
certain alleged secured claims which they had made in connection with the LVL
Plan of Reorganization, in the aggregate amount of $588,775. Such creditors
agreed that they would retire their claims in their entirety for an aggregate
sum of $149,694. As of September 10, 1999, the Company has paid this aggregate
sum of $149,694 in its entirety.
CLOSING OF BANKRUPTCY ESTATE
On September 15, 1999, the United States Bankruptcy Court for the
Northern District of California issued an order closing the Chapter Eleven
bankruptcy proceedings for LVL Communications Corporation, the wholly owned
subsidiary of I-Storm, based upon the satisfaction of substantial payments
required under the April 16, 1998 Plan of Reorganization.
DECLARATION OF DIVIDENDS ON SERIES B AND C PREFERRED STOCK
In October 1999, the Board of Directors declared quarterly dividends in
shares of Series B Preferred Stock upon each share of Series B Preferred Stock
for the quarters ending May 15, 1999 and August 15, 1999. The Board of Directors
also declared quarterly dividends in shares of Series C Preferred Stock for the
quarter ending August 15, 1999 upon each share of Series C Preferred Stock. Each
of the shares of Series B Preferred Stock and the Series C Preferred Stock is
entitled to a 9% cumulative annual dividend which shall cumulate, if not
declared. The Board also determined that such stock dividends would be
distributed on an annual basis for cost and administrative reasons.
<PAGE>
I-STORM, INC.
FORMERLY DIGITAL POWER HOLDING COMPANY
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 1999
SIGNATURES
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 thereunder duly authorized.
Date: December 1, 1999 I-STORM, INC.
By: /s/ Calbert Lai
---------------------------
Calbert Lai, President
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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