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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[ X ] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 002-93477-D
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I-STORM, INC.
(Name of small business issuer in its charter)
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NEVADA 87-0410127
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
2440 West El Camino Real, Suite 520 94040-1400
Mountain View, California (Zip Code)
(Address of principal executive offices)
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(650) 962-5420
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under to Section 12(g) of the Exchange Act: Common Stock,
no par value.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenue for the fiscal year ended December 31, 1998 totaled
$2,856,000.
The aggregate market value of registrant's Common Stock held by non-affiliates
based upon the closing bid price on June 30, 1999, as reported by the OTC
Bulletin Board, was approximately $10,094,700.
As of June 30, 1999, there were 5,457,304 shares of the registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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FORWARD LOOKING INFORMATION
This annual report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company or management as well as assumptions made by and information currently
available to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view
of the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
I-Storm, Inc. ("I-Storm" or "the Company") is a full service online
E-commerce provider specializing in the architecture, management and operation
of outsourced E-commerce and E-business channel solutions for Fortune 500
companies. Headquartered in Silicon Valley, I-Storm launched the I-Storm
CyberStore strategy in May 1998, a joint venture program to finance, design,
develop, and operate electronic commerce storefronts in partnership with
brand-name consumer, financial and technology product companies. In May 1998,
I-Storm also entered into a relationship with Oracle Corporation, a leading
supplier of software for information management to develop and produce
co-branded E-commerce sites for high profile world class branded companies.
Electronic commerce or "E-commerce" is the direct retail sale of goods
and services over the Internet. Over the past five years, I-Storm has developed
electronic and on-line commerce on behalf of major international manufacturing
and technology corporations including: Netscape, E*Trade, Inc., US Robotics,
Inc., Hewlett-Packard Company, Sun Microsystems, Inc., Mitsubishi, Inc., and
others. In particular, the Company designed and developed the Egghead(TM)
Software and the Cisco Systems, Inc. Internet retail transaction sites, two
successful E-commerce sites on the Web today.
I-Storm, Inc. is the parent company of LVL Communications Corporation
("LVL"), a Silicon Valley Internet marketing services and technology company.
In 1996, LVL was inducted into the Inc. Magazine Hall of Fame in recognition of
its being one of the 500 fastest-growing private companies in America for six
consecutive years from 1991 through 1996.
I-Storm, Inc. acquired LVL through a subsidiary merger in July 1998. LVL
had emerged from Chapter 11 Bankruptcy proceedings on April 16, 1998 with full
creditor approval of a Plan of Reorganization filed on March 23, 1998. LVL had
entered bankruptcy proceedings only after the collection default of a major
corporate client. LVL obtained $1,083,000 in 1998 bridge financings
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from private investors to fund its reorganization costs, and successfully
merged with I-Storm, formerly named Digital Power Holding Company ("Digital"),
an inactive public company. In March 1999, I-Storm terminated its advertising
service business to focus on E-commerce and CyberStore development. The Company
presently earns no revenue from its former advertising services business
clients. Collectively, herein, LVL shall be referred to with I-Storm as "the
Company."
The Company is headquartered in Mountain View, California in an 11,500
square foot leased office facility. The Company has 19 full time employees.
INDUSTRY BACKGROUND
The Internet, as a channel of distribution, is dramatically changing the
way products are bought and sold. The advantages to buying online are obvious
to those who use this new electronic commerce ("E-commerce") channel:
convenience, lower cost, greater choice and deeper support. Corporate America
understands the benefits to selling online: broader customer access, deeper
customer relationships and lower costs of distribution. The Internet has
spawned a number of highly successful retail businesses that have grown to
multi-million dollar operations in less than two years. Examples of client and
non-client E-commerce sites are as follows:
Between 1996, 1997 and 1998, Internet book retailer Amazon.com grew
sales from less than $16 million in 1996 to $148 million in 1997 to an
annual run-rate of $460 million in 1998 (I-Storm/LVL non-client).
Cisco Systems, Inc. booked over $100 million in sales on the Internet in
1996. By the end of 1997, its Internet sales were running at a $3.2
billion annual rate. In 1998, Cisco's Internet sales were running at a
$5.8 billion annual rate. LVL built the E-commerce mechanism for Cisco's
credit card authorization, software use and automatic product download
(former I-Storm/LVL client).
Auto-by-Tel, a web-based automotive marketplace that was formed in 1995,
processed $1.8 billion in auto sales request in 1996. As of the end of
November 1997, the Auto-by-Tel web-site was generating $500 million a
month in auto sales ($6 billion annualized) (I-Storm/LVL non-client).
However, despite these success stories, the challenges that face most
branded product companies--lack of creative expertise, technical and
organizational hurdles, commitment of required resources, and the perceived
long-term return on investment--make it very difficult for them to effectively
develop the technically superior in-house marketing and advertising resources
necessary to generate revenue through the Internet.
I-STORM, INC.
I-Storm, Inc. is the parent company of LVL, a marketing communications
and Internet technology company located in Silicon Valley and founded by
Calbert Lai and Stephen Venuti in 1986, which has launched a strategy to
finance, design, develop, and operate powerful E-commerce
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storefronts in partnership with brand-name consumer technology product
companies ("Product Partners").
Over the past five years the Company has pioneered on-line commerce on
behalf of major international manufacturing and technology corporations
including: Netscape, E*Trade, Inc., US Robotics, Inc., Hewlett-Packard Company,
Sun Microsystems, Inc., Mitsubishi, Inc. and others. In particular, the Company
designed and developed the Egghead(TM) Software and Cisco Systems, Inc. retail
transaction sites, two of the most powerful E-commerce sites on the Web today.
Based upon these highly successful ventures, in May 1998, the Company formally
launched its "I-Storm CyberStore" strategy to create significant long-term
value for its shareholders.
Under the I-Storm CyberStore approach, the Company intends to provide
all necessary financial and professional resources required to build and
operate an electronic commerce storefront capable of selling technology-related
and other products direct to consumers and businesses (an "I-Storm
CyberStore"). Each I-Storm CyberStore is expected to exclusively feature a
Product Partner's brand names exclusively and would be seamlessly tied to the
Product Partner's corporate, product-specific and other web-sites. From a
customer's point-of-view, the I-Storm CyberStore would be a "company store"
dedicated to the Product Partner's entire line of products, including parts,
accessories and related products. The Company is presently negotiating to build
CyberStores and is not currently earning revenue from a CyberStore.
EFFICIENCIES AND LEVERAGE OF AN E-COMMERCE CHANNEL
The potential benefits of online E-commerce selling are clear. The
E-commerce channel offers customer and product-specific data dissemination with
lower distribution costs while increasing efficiencies by leveraging a
business's current infrastructure. Marketing and communications can be targeted
to individual customers, increasing effectiveness and lowering costs by
reducing the need for broad communication vehicles. Sophisticated consumers can
be educated about highly technical and application specific products and
customize their product choices within moments after review of I-Storm
CyberStore product summaries. Moreover, online retail stores are not limited by
expensive shelf space and can offer a full assortment of products, including
hard-to-sell discontinued and out-of-stock merchandise. Inventory is easier to
monitor and control which leverage increased manufacturing productivity and
enable supply chain management.
Businesses that wish to establish a major marketing presence on the
Internet encounter significant challenges. The technical requirements to
building a successful E-commerce business are complex. There are many products
that solve parts of the problem, but few integrative and comprehensive
solutions. Integration with existing legacy systems, including inventory, order
tracking, financial systems, telesales systems and other major elements of
large corporate structures, can be overwhelming.
Organizational hurdles complicate the issues. Manufacturers who have had
no direct exposure to retail customers suddenly find themselves needing
different skill sets and expertise outside of their core competence. In short,
although most recognize the potential reward of E-commerce, corporate America
is moving slowly to take advantage of the channel for three major reasons: the
difficulty in
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building and operating a successful store; the significant capital outlay
required to enter the channel seriously; and the uncertain timeline for
profitability.
I-Storm's solution is to finance, design, develop, and operate powerful
commercial Internet web-sites in partnership with brand-name consumer product
companies on an outsourced basis. The Company intends to leverage its
reputation as a provider of online marketing and E-commerce solutions to build
and co-own nationally and internationally branded selling sites. The key
elements of the Company's strategy to accomplish this goal are to: (i) partner
with major brands, (ii) provide risk capital and expertise in exchange for
ownership, and (iii) build, operate and manage branded I-Storm CyberStores on
an outsourced basis.
The benefits to potential Product Partners are many. First and foremost,
these companies can rapidly enter this new channel at little or no capital
investment. Second, these companies can have a site, well integrated with their
core business, which has its own dedicated store management team with the
skills and motivation to succeed. I-Storm intends to help large companies
realize the benefits of E-commerce while minimizing the risks of entering the
channel.
I-STORM CYBERSTORE STRATEGY
Utilizing the advertising, marketing and Internet expertise of its
wholly-owned subsidiary, LVL, I-Storm is negotiating to build and manage
premier E-commerce web sites that are capable of generating sales of $10
million to $100 million within one or two years from their introduction in
partnership with world class branded product companies.
I-Storm's strategy is to finance, design, develop and operate electronic
commerce storefronts in partnership with top-tier brand-name consumer and
technology product companies on an partnership basis. The Company is leveraging
its reputation as a provider of online marketing and E-commerce solutions to
build and co-own the most powerful branded selling sites. The key elements of
the Company's strategy to accomplish this goal are: (i) negotiate exclusive
partnerships with leading consumer brand companies; (ii) provide capital and
E-commerce expertise in return for ownership; and (iii) establish long-term
control of branded retail web sites.
When reviewing a company as a potential Product Partner, I-Storm looks
for evidence of a large web-enabled and educated customer base and for products
that can be effectively and specifically described and purchased over the
Internet. The Company's strategy, based upon its experience in developing
commercial web sites for Egghead(TM) Software and Cisco Systems, Inc., is to
pursue Product Partner candidates where at least 10% of the Product Partner's
revenue can be sold over the Internet to web-enabled customers. This includes
both consumers and businesses, particularly small office/home office ("SOHO")
businesses. For example, in the fourth quarter of 1997, the Egghead(TM)
Software web site sold over $11 million of product and accounted for
approximately 15% of Egghead's revenue. Today, Egghead(TM) Software Internet
sales are running at a $140 million annual rate. Currently, the Cisco Systems,
Inc. ("Cisco") web site sells over $3 billion annually and accounts for over
25% of Cisco's overall revenue.
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Ownership of the I-Storm CyberStore is proposed to be structured as a
joint venture or royalty partnership that splits returns between the Company
and the Product Partner in a manner permitting the Company to consolidate sales
and pre-tax profits while sharing a portion of those profits with the Product
Partner.
Under such a joint venture or royalty partnership structure, I-Storm
will propose to design, build and operate the I-Storm CyberStore, including
Internet-based advertising and promotion, and customer development. The Product
Partner would provide its brand name, product line, and would be responsible
for inventory and order fulfillment. Product shipments would be made from the
Product Partner's inventory directly to the customer with I-Storm handling
billing, collections, and sales order processing. After an initial period of
four or five years, it is expected that the Product Partner would have the
option to purchase the Company's ownership of the I-Storm CyberStore at fair
market value and assume complete control of the business.
The development of I-Storm CyberStores through an I-Storm Product
Partnership is intended to provide manufacturers with a quick, low risk path to
a profitable, customer-direct channel within the constraints of their existing
corporate strategy and infrastructure. The Company expects to benefit by being
able to access the massive product, manufacturing, and brand-name investment
resident in Product Partners' businesses.
EXTENDING I-STORM'S CORE BUSINESS INTO E-COMMERCE
Much of the Company's capabilities have been developed over the past
twelve years through LVL's history of selling and marketing technology products
to commercial and consumer customers on a consultant basis on behalf of
fee-based clients. LVL's interactive group has designed, developed, or
consulted with respect to approximately 35 client E-commerce and/or information
web-sites over the past three and one-half years. Exemplative of LVL's creation
of successful retail I-Storm CyberStore-type sites are Egghead(TM) Software
("Egghead") and Cisco System's Internet Junction:
Egghead, Inc.: In early 1995, LVL created one of the web's first
online E-commerce sites for Egghead(TM) Software. The site features
full online shopping and purchasing capabilities with an inventory of
over 3,000 products. In 1997 the online store sold more than $40
million of product, outselling any of Egghead's 200 traditional
storefronts and accounting for over 10% of Egghead's total retail
sales. The average sale through the site was more than twice that of
Egghead's retail outlets and it generated higher gross margins. The
site has been credited with adding over 400,000 new customer names to
Egghead's customer database. In March 1998, Egghead announced that it
was closing all of its traditional locations to sell strictly through
its web-site. In 1998, Egghead's Internet sales are running at a $140
million annual rate.
Cisco Systems, Inc.: In 1996, when Cisco Systems, Inc. purchased
Internet Junction, a manufacturer of Internet software, Cisco decided
that "online" would be the only retail distribution channel through
which customers could purchase the software. Cisco asked LVL to build
the commerce mechanism that could perform credit card authorization
and verification, creation of a software key, and automatic download
of the product. By the end of
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1997, Cisco's Internet sales were running at a $3.2 billion annual
rate. In 1998, Cisco's Internet sales were running at a $5.8 billion
annual rate.
RELATIONSHIP WITH ORACLE CORPORATION
In May 1998, Oracle Corporation ("Oracle"), a global supplier of
software for enterprise information management, entered into a Memorandum of
Understanding with I-Storm to potentially produce and manage world-class
electronic marketing sites for high profile consumer brand companies. Under the
proposed arrangement, it is anticipated that I-Storm would have the right to
own and develop each E-commerce site for the target account, and Oracle would
subcontract its software and technical consulting services on an "as-needed
project basis." Both Oracle and I-Storm propose to jointly invest the pre-sales
and up-front marketing resources needed to win the target account. The
E-commerce sites would be co-branded with both the "On Oracle" and the
"I-Storm" commerce marks. On July 6, 1999, Oracle and I-Storm reaffirmed their
commitment to work together to provide services to Fortune 500 companies
pursuing aggressive and focused channel-building programs. To date the Company
has not earned revenue as a result of its relationship with Oracle.
I-STORM CYBERSTORE ECONOMICS
The economic model for individual I-Storm CyberStores takes advantage of
two key factors: (i) the ability to leverage the Product Partner's existing
inventory and fulfillment systems, and (ii) the existing brand names and large
marketing/advertising budgets. This combination will allow the I-Storm
CyberStore to manage operating expenses effectively and efficiently while
benefiting greatly from existing communications programs that drive web traffic
and product demand. The following percentages have been developed by I-Storm's
management based upon its experience working with traditional retail selling
distribution, and from its knowledge of the retail products sales industry.
Typical retailers of computer products (CompUSA, Computer City, etc.)
are burdened with high overhead costs associated with storefronts and sales
personnel. I-Storm's management estimates that in such traditional retail
situation gross profit is typically calculated as 14% of sales, and operating
expenses in this category range between 9-10% of sales. Retailers also need to
spend substantial amounts of advertising and promotional dollars in order to
drive traffic to their particular chain.
Typical "Internet-only" retailers (Amazon.com, CDNow, Software.net, N2K)
work with margins in the range of 15-20%. They have similar operating expenses
(in the range of 9-10% of sales). However, most of these "Internet-only" stores
are required to spend a substantial percentage of sales on advertising and
marketing (in the range of 15-20%) in order to create a brand and drive
customer traffic.
The I-Storm CyberStore model proposes to take advantage of its Product
Partner's existing infrastructure to substantially decrease operating expenses
as well as to leverage its Product Partner's large advertising and marketing
expenses. Because I-Storm CyberStores will be designed to utilize their Product
Partner's inventory, warehousing, and fulfillment systems, overall operating
expenses
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should be significantly reduced. Unlike "Internet-only" companies and
traditional retailers, I-Storm CyberStores will not need to spend large amounts
of independent advertising dollars since they will directly benefit from the
millions of dollars their Product Partners already spend to generate awareness
and sales. Based on its work with Egghead, Cisco, and other technology
manufacturers, the Company expects between 10-15% of total sales to come
through the Internet within two years of opening and operating an I-Storm
CyberStore.
I-STORM CORPORATE PARTNERS AND ADVISORS
The Company is teaming with companies and individuals who can strengthen
I-Storm's ability to develop and operate I-Storm CyberStores effectively. These
companies and individuals include:
ORACLE CORPORATION: Oracle Corporation is a leading supplier of
corporate database software in more than 140 countries, with
approximately 12,000 employees worldwide, dedicated to designing,
integrating, and programming database solutions. With annual revenues
exceeding $6 billion, Oracle is the global supplier of enterprise
information management software to many of the Internet's leading
commercial web-sites. Under the May 5, 1998 Memorandum of Understanding
with I-Storm, both I-Storm and Oracle proposed to develop a mutual
scaleable model for the ongoing development of profitable world-class
electronic marketing sites, as well as to establish three to ten high
profile consumer branded product sites, and as of July 6, 1999, Oracle
and I-Storm reaffirmed this commitment.
I-STORM ADVISORY BOARD: In May of 1998, I-Storm held its first meeting
of the I-Storm Advisory Board. This organization was created to provide
the new business with experience and contacts in key areas of
merchandising and marketing. The Company intends to continually add
members to the Advisory Board. Certain members of the I-Storm Advisory
Board are as follows:
Matthew Howard is a thirty-year veteran in executive management
for major U.S. retailers. Mr. Howard has served as Senior
Executive Vice President of both Marketing and Merchandising
for Sears, as President of Computer City, a subsidiary of Tandy
Corporation, and as an Executive Vice President of Montgomery
Ward.
Peter Janssen was a member of the start up team that developed
the Sears Business Systems Center. After 18 years at Sears, Mr.
Janssen left to head sales and marketing for several technology
start-up companies, including Mindset, the Amdek Division of
Wyse, Nexgen Microsystems, and Acer Computers, where he was
responsible for Acer's entry into the consumer channels of
distribution and growing that division to $500 million in four
years.
Mr. Janssen was brought into Egghead(TM) Software, as head of
Merchandising and Marketing and was instrumental in increasing
sales by 20% and reducing inventory by 40%. Together with LVL,
Mr. Janssen implemented one of the first E-commerce Internet
sites, Egghead.com.
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For the past two and one-half years, Mr. Janssen has headed his
own firm, Peter Janssen & Associates ("PJA"), a technology
consulting firm specializing in helping technology companies
develop and implement their sales marketing and channel
marketing strategies and tactics. Since its founding, PJA has
worked with Texas Instruments, Motorola, Acer, Toshiba, Thomson
Consumer Electronics, Philips, Symantec, CalComp and 20 smaller
start-up companies.
I-STORM CYBERSTORE PARTNERSHIPS
The Company has approached a targeted number of brand-name consumer
product companies regarding the I-Storm CyberStore program. As a result, on
December 7, 1998, the Company signed a letter of understanding with Sun
Microsystems, Inc. ("Sun"), a leading manufacturer and global provider of
network computing systems, including UNIX based workstations, microprocessors,
Internet/intranet services, and Java(TM) software. Sun's products command a
significant share of a rapidly growing segment of the computer industry and are
used for many demanding commercial and technical applications in various
industries. The Sun Letter of Intent authorizes the Company to do a feasibility
study on establishing an I-Storm CyberStore dedicated to exclusively selling
Sun and compatible products to retail customers for profit.
Further, on June 16, 1999, the Company entered into a three-year
E-commerce Sales and Marketing Agreement with AIG Warranty Services and
Insurance Agency ("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 contract agreements.
In 1998, the Company also signed letters of understanding and pursued
feasibility studies for the construction of CyberStores, as follows:
Garden Botanika: Garden Botanika ("GBOT") is a marketer of all-natural
personal care products through direct mail and 267 company-owned retail
locations. Total GBOT revenue is $114 million per year, of which
approximately 5% of revenue is generated through catalog sales. Its
catalog business, at 5% of total revenues, is secondary to its retail
stores.
The High-Tech Group: The High-Tech Group ("HTG") is a premier provider
of merchandise and membership fee services in the credit card
syndication industry, and holds the rights to market products and
merchandise to over 75 million existing credit card holders of major oil
companies, banks and departments stores such as AMOCO, BP, Bank One,
Chase Manhattan, Montgomery Ward and Sears.
Abercrombie and Kent: Abercrombie and Kent is a specialty provider of
luxury vacations and adventure travel to seven continents and over 100
countries.
Philips Electronics, Inc. Philips Electronics, Inc. is a $39 billion
manufacturer of consumer electronics and other products. The Philips
Mobile Computing Group ("PMCG") is a product division based in San Jose,
California, which is rolling out a line of handheld, sub-notebook, and
notebook computers intended for mobile professional users.
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Although PMCG, Garden Botanika, HTG Group and Abercrombie and Kent
signed letters of intent with the Company in 1998, there can be no assurance
that the Company will enter into final CyberStore Agreements with any of these
potential Product Partners, and the Company has not entered into any such
agreements as of June 30, 1999. The Company, to date has not constructed
CyberStores for these entities, nor has the Company received any revenue from
these entities.
LVL COMMUNICATIONS CORPORATION
LVL, a marketing and internet technology company headquartered in
Mountain View, California, has a twelve-year track record of creative and
technical success in serving marketers of consumer-oriented technology
products. Founded in 1986 by Calbert Lai and Stephen Venuti, and also known as
"Lai, Venuti and Lai," LVL specialized in offering a wide range of strategic
communication services that help its clients market their products, services
and messages to targeted segments of the consumer population. These services
included market research, corporate and product market strategy development,
identity definition, product branding, consumer and technical media services,
advertising and promotion and interactive advertising development. In
particular, LVL is a provider of integrated communications to consumers that
take advantage of emerging technologies and new media, including electronic
communications such as the Internet, the World Wide Web, on-line services,
PC-related media (CD-ROMs, multi-media, etc.) was inducted into Inc. Magazine's
Hall of Fame as one of the 500 fastest-growing companies in America for six
consecutive years from 1991 through 1996.
LVL's business has been built upon its ability to provide its corporate
clients with the intellectual structure and creative resources necessary to
design and deliver market communications to appropriate consumer audiences
using traditional and new media. In 1997, the Company was named "Agency of the
Year" by Marketing Computers magazine for its integration of traditional and
new media disciplines to increase a company's marketing efficiencies and
effectiveness.
Although LVL achieved the foregoing recognition for twelve
year-operation of its advertising and marketing services business in Silicon
Valley, LVL suffered substantial losses in 1997 as a result of the payment
default of a major corporate client. Although in 1998 LVL was able to
reorganize under Chapter Eleven bankruptcy proceedings with creditor approval,
and although the Company has changed its focus from traditional advertising
services to providing joint venture-based E-commerce channels and CyberStore
development, there can be no assurance that the Company as a newly-reorganized
corporation will achieve profitability or remain as a going concern. The
Company presently has no revenue from any former LVL advertising services
business client.
PRE-MERGER LVL SERVICES AND CLIENTS
The following is a list of customers that represented $50,000 or more in
annual billings for LVL in various twelve-month periods from December 1996
through December 1998:
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Netscape US Robotics, Inc. Bay Networks, Inc. Hewlett-Packard Company
Disney Cisco Systems, Inc. Mitsubishi, Inc. Bank of America
Group, Inc. DirectTV, Inc. Philips Electronics, Inc. 3COM
E*Trade Sun Microsystems, Inc. Acer, Inc.
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Because of the project-oriented nature of its services, LVL's traditional
services revenues tended to be concentrated in a handful of clients at any one
time. The Company's largest client accounted for approximately 50% of the
Company's revenues for the period commencing January 1, 1998 and ending
December 31, 1998. For the period commencing from July 17, 1998 and ending
December 31, 1998, five clients accounted for 79% of the Company's revenue with
no client accounting for more than 26.3% of the Company's revenue for that
period.
In March 1999, the Company reorganized its internal corporate
structure and terminated the advertising services business formerly handled in
LVL Advertising, Inc. The Company phased out this traditional advertising
business to focus its managerial, technical and capital resources on its
strategy of financing, developing and operating E-commerce storefronts with
Product Partners. As a result, the Company presently has no revenue from any
former advertising services business client.
I-STORM COMPETITION
Use of the Internet is growing at very high rates and many well
financed companies are operating or developing web-based businesses currently.
At the same time, barriers to entry into web-based commerce are low and an
extremely large number of individuals and small companies are offering goods of
all types for sale over the Internet on web-sites of varying levels of
sophistication.
The markets for the Company's services are highly competitive and are
driven by client demands for better service (more effective programs, quicker
response times, and implementation of new electronic tools or media) and
perceived price and performance of its services. Although the Company has built
a market position for itself in its traditional services area, there are few
barriers to entry in the advertising business and interactive marketing
business. The Company has no significant proprietary technology that would
preclude or inhibit competitors from entering the marketing communications
market and it expects to face additional competition from new entrants in the
market in the future. In particular, the niche that the Company traditionally
serves is considered to be an attractive, high-growth segment of the
advertising industry. Current and prospective competitors include
international, national, and regional advertising agencies, specialized
communications firms currently operating in a single medium (such as the
Internet), and firms such as CKS Group, Inc. and Think New Ideas, Inc., Organic
On-Line, Studio Archetype, and Agency.com which all share the Company's market
focus. Although the Company is actively implementing its CyberStore concept in
conjunction with Oracle Corporation, a leading global enterprise software
supplier, the Company also faces a highly competitive market in this segment of
its services. E-commerce competitors include: Claremont, Andersen Consulting,
Cambridge Technologies, IBM and EDS.
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EMPLOYEES OF THE COMPANY
As of December 31, 1998, the Company and its subsidiaries employed 26
full-time and one part-time employees. The Company employs highly skilled
computer and creative-oriented personnel from the Silicon Valley area. Seven
employees had annual salaries of $100,000 or more.
As of June 30, 1999, the Company and its subsidiaries employed 19
full-time and one part-time employees. The number of employees decreased as a
result of the Company's cessation in March 1999 of the advertising line of
business, formerly managed by LVL Advertising, Inc. As of June, 1999, six
employees have annual salaries of $100,000.
Neither the Company's nor the subsidiaries' employees are unionized.
Management believes that it has good working relations with its employees.
ADDITIONAL RISK FACTORS RELATED TO BUSINESS OPERATIONS
OPERATING LOSSES
The Company realized significant operating losses in 1997 and 1998.
There can be no assurance that the Company will generate profit or positive
cash flows from operating activities in the future. The Company terminated its
traditional advertising services business in March 1999 and presently receives
no revenue from those former clients. If the Company is unable to achieve
profitability or positive cash flows from operating activities, it will not be
able to meet its working capital or future debt service requirements, which
would have a material adverse effect on the Company's ability to continue to
operate. See "Financial Statements."
MANAGEMENT OF GROWTH; ONGOING CAPITAL REQUIREMENTS
The conduct of the Company's business and the continued implementation
of its business plans and operations will require the availability of
additional funds in the future. While the Company currently has no material
commitments for capital or other expenditures, other than as set forth herein,
it is the Company's intention to continue to implement the growth of its
business and expand its operations, which may require additional financing. If
needed, there can be no assurance that the Company will be able to successfully
negotiate or obtain additional financing.
NEW E-COMMERCE BUSINESS STRATEGY
The Company is engaging a new E-commerce business strategy with respect
to the partnership of I-Storm CyberStores with brand-name consumer product
companies ("Product Partners") to finance, design, develop and operate Internet
commercial web-sites. The Company terminated its traditional advertising
services business in March 1999. Although the Company believes it has the
critical blend of skills necessary to develop and successfully operate such
Product Partner ventures, there can be no assurance that the Company will be
able to establish or maintain strategic alliances with any Product Partner, or
that any associated I-Storm CyberStore will generate sufficient revenue to
produce a profit. In addition, I-Storm's ability to maintain its partnerships
with Product Partners
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<PAGE> 13
and develop new Product Partners depends to a significant degree on the quality
of its services and its ability to generate revenue and profit from its initial
I-Storm CyberStores. Further, the success of I-Storm's CyberStore business will
be driven in large part by the strength of the brand-names and product lines of
its Product Partners. The Company expects to have little influence on the
products and non-Internet-related advertising strategies of its Product
Partners.
INDUSTRY CONSOLIDATION, CLIENT RELATIONSHIPS
The Company's ability to continue to generate new business is dependent
upon the Company's continued relationship with key executives of its clients.
In addition, consolidation in clients' industries can result in the immediate
loss of substantial clients and revenue streams without any advanced notice.
Such occurrences can cause the Company to incur substantial and unchanged
overhead, while experiencing a rapid loss of revenue. There can be no
assurances that such consolidation or loss of clients will not occur in the
future.
MARKET ACCEPTANCE OF THE COMPANY'S APPROACH; SERVICE DEVELOPMENT; RAPID
TECHNOLOGICAL CHANGE; DEPENDENCE UPON THE INTERNET ABSENCE OF PRESENT
CYBERSTORES
The Company provides an integrated approach to meet the marketing
communications and E-commerce needs of its clients. To compete successfully
against specialized service providers, the Company believes that its products
and services in each marketing communication discipline will need to be
competitive with the services offered by the firms that specialize in each
discipline. The Company's ability to derive revenues will depend in part upon a
robust industry and the infrastructure for providing Internet access and
carrying Internet traffic. If the necessary infrastructure or complementary
products are not developed, or if the Internet does not become a viable
commercial marketplace, the Company's business, operating results and financial
condition could be materially adversely affected. There also can be no
assurance that the Company will be successful in providing competitive
solutions to clients through its integrated marketing communication services
and products, or through the establishment of E-commerce web sites. Failure to
do so could result in the loss of existing customers or the inability to
attract and retain new clients, either of which developments could have a
material adverse effect on the Company's business, financial condition and
operating results. Although the Company's strategic business plan contemplates
the development of E-commerce CyberStores in conjunction with
brand-recognizable Product Partners, there can be no assurance that any such
CyberStores will be developed.
HIGH COSTS TO MAINTAIN SKILLED LABOR FORCE
A high percentage of the Company work force is either highly-skilled
computer or creative-oriented personnel, both of which are extremely expensive
and contribute to a high monthly payroll compared to other companies of its
size and revenues. The Company is headquartered in Mountain View, one of the
most expensive areas in the already costly Silicon Valley, where demand for
skilled employees and real estate has skyrocketed. Out of the Company's 19
full-time employees, 11 of them are paid salaries of more than $60,000 per
year, and of those, 6 have annual salaries in excess of $100,000. As in most
service industry companies, the Company's fixed costs are a high percentage of
its monthly overhead and cannot be easily or quickly reduced in the event of
decrease in
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<PAGE> 14
business. Such high fixed costs can rapidly cause such a company to operate at
a deficit. The inability to attract, hire or retain the necessary technical and
managerial personnel could have a material adverse effect upon the Company's
operating result and financial condition.
GOING CONCERN QUALIFICATION
As discussed elsewhere in this 10-KSB Report, and by the Company's
Accountants in the notes to the Financial Statements, the bankruptcy
proceedings significantly affected the Company's capital structure, liquidity
and capital resources. These factors and others discussed elsewhere and in the
notes to the "Financial Statements" raise substantial doubt about the ability
of the Company to continue as a going concern and about the ability of the
Company to realize its Reorganization Asset. The Financial Statements do not
include any adjustments that might result from the outcome of this uncertainty.
VOTING CONTROL BY THE OFFICERS AND DIRECTORS OF THE COMPANY'S COMMON STOCK
As of June 30, 1999, the Company's executive officers, directors and
controlling stockholders directly or beneficially hold most of the outstanding
shares of Common Stock. The Company's officers, directors and controlling
stockholders currently are, and in the foreseeable future will continue to be,
in a position to control the Company by being able to nominate and elect a
majority of the Company's Board of Directors. The Board of Directors
establishes corporate policies and has the sole authority to nominate and elect
the Company's officers to carry out those policies.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of Calbert Lai, co-founder,
President and Director, and Stephen Venuti, co-founder, Executive Vice
President and General Manager, as well as a group of other talented employees
with industry relationships and technical knowledge of the Company's
operations. The loss of any of them or the inability of the Company to recruit
and train additional key technical and sales personnel in a timely manner,
could materially and adversely affect the business of the Company and its
future prospects. There can be no assurance that the Company will be able to
continue to attract and retain the qualified personnel necessary for the
development of its business. The Company does not maintain key person life
insurance policies on any of its officers and employees. The Company intends to
provide key man life insurance for Calbert Lai, Steven Venuti, its officers and
key employees. If the Company is unable to obtain adequate financing in the
near future, it will not be able to retain its existing personnel.
NASDAQ OR AMEX LISTING
The Plan of Reorganization imposed a requirement that the Company apply
for NASDAQ listing within 90 days of the date upon which LVL became a
subsidiary of the Company, also known as the "Effective Date" of the Plan.
The Plan of Reorganization contemplated that the Company would raise
sufficient equity financing within 90 days of the Effective Date to satisfy a
minimum NASDAQ capital listing
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<PAGE> 15
requirement of $4,000,000. Because of operational cash flow needs and the
expense and time required to prepare an audited financial statements to
accompany this Form 10-KSB and other required SEC reports, the Company did not
apply for listing on NASDAQ within this time frame, also in part because at the
time it could not satisfy the NASDAQ capital listing requirements. Although the
Company presently anticipates that it will file shortly for either NASDAQ or
AMEX listing, and will promptly complete the filing of all requisite SEC
reports, there can be no assurance that the Company will have sufficient
capital to meet NASDAQ or AMEX listing requirements or that NASDAQ or AMEX will
accept the Company for listing.
LVL's Plan of Reorganization was approved without objection from
creditors. Creditors, however, retain a right to challenge actions of LVL and
its parent, the Company, with respect to the implementation of any aspect of
the Plan of Reorganization, including a late filing of the NASDAQ application.
Presently, no creditor has voiced an objection or presented a formal challenge
to any actions taken by LVL or the Company pursuant to the Plan of
Reorganization.
ABSENCE OF CASH DIVIDENDS AND NO CASH DIVIDENDS ANTICIPATED
The future payment by the Company of cash dividends on its Preferred or
Common Stock, if any, rests within the discretion of its Board of Directors and
will depend, among other things, upon the Company's earnings, its capital
requirements and its financial condition, as well as other relevant factors.
The Company does not anticipate making any cash distributions upon its
Preferred or Common Stock in the foreseeable future. The payment of dividends
on the Shares is subordinate to the payment of dividends on Series A and B
Preferred Stock.
FUTURE SALES OF COMMON STOCK BY MANAGEMENT AND OTHERS
Under the Plan of Reorganization, 1,095,284 shares of freely tradable
Common Stock have been issued to officers, directors or to beneficial owners
holding 10% or more of the Company's Common Stock, under an exemption from
Securities Act registration, pursuant to Section 1145 of the Bankruptcy Code
and Section 3(a)(7) of the 1933 Securities Act, and 2,494,716 shares of freely
tradable Common Stock have been issued to those who are not officers, directors
or to beneficial owners holding 10% or more of the Company's Common Stock. Of
this freely tradable Common Stock, 2,290,756 shares are subject to lock-up
agreements restricting their sale for a period of until February 2000. These
lock-up agreements may be modified or waived upon the mutual consent of the
Company and the placement agent which facilitated the sale in early 1999 of the
Company's Series B Cumulative Convertible Preferred Stock.
Additionally, as of December 31, 1998, 1,597,800 shares of Common
Stock that have not been registered pursuant to the Securities Act have been
issued to officers, directors or to beneficial holders holding 10% or more of
the Company's Common Stock. In the event a public market for the Company's
Common Stock were to develop in the future, of which no assurances can be
given, sales of this unregistered Common Stock may be made by management and
others pursuant and in compliance with the provisions of Rule 144 of the
Securities Act. In general, under Rule 144, a person who has satisfied a
one-year holding period may, under certain circumstances, sell within any
three-month period a number of shares which does not exceed the greater of one
percent of the then
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<PAGE> 16
outstanding shares of Common Stock or the average weekly trading volume in
shares during the four calendar weeks immediately prior to such sales. Rule 144
also permits, under certain circumstances, the sale of shares without any
quantity or other limitation by a person who is not an affiliate of the Company
and who has satisfied a two-year holding period. Future sales of such shares
made under Rule 144 may have an adverse effect on the then prevailing market
price, if any, of the Common Stock and adversely affect the Company's ability
to obtain future financing in the capital markets as well as create a potential
market overhang.
ITEM 2. DESCRIPTION OF PROPERTY.
As of December 31, 1998, the Company's headquarters was located on
15,847 square feet of leased office space at 480 Cowper Street, Palo Alto,
California 94301. The Company was occupying the space on a month-to-month basis
following the expiration of a 15-year lease.
In March of 1999, the Company moved its headquarters to a leased office
facility at 2440 West El Camino Real, Suite 520, Mountain View, California
94040-1400. The new location consists of approximately 11,500 square feet and
the Company has entered into a two-year lease for the facility.
ITEM 3. LEGAL PROCEEDINGS.
PLAN OF REORGANIZATION AND MERGER OF LVL INTO DIGITAL'S WHOLLY-OWNED SUBSIDIARY
The Company has been reorganized pursuant to a Plan of Reorganization
("Plan of Reorganization") filed by LVL on March 23, 1998, that has recently
been confirmed by the United States Bankruptcy Court ("Bankruptcy Court") for
the Northern District of California ("Order") without creditor objection on
April 16, 1998. The Order approved the merger of LVL into Digital, an inactive
public company, or into its wholly-owned subsidiary, and to take a series of
steps to protect certain prior creditor interests.
In contemplation of the merger, on May 6, 1998, I-Storm Acquisition
Corp. entered into a Stock Purchase Agreement with the holders of a majority of
the common stock of Digital, Chiracahua Company, Melinda Johnson and Leonard
Burningham, to purchase 600,000 shares of Digital's outstanding common stock
for $150,000, with an option to purchase an additional 100,000 shares of
Digital's outstanding common stock from existing shareholders at $2.00 per
share, exercisable any time from May 6, 1998 through May 6, 1999.
Digital had been organized under the laws of the State of Nevada on
February 24, 1984, under the name "Interventure." Digital had been an inactive
public company from 1989 through 1998, and other than maintaining and restoring
the Company's good standing certificate, Digital's only material business
operation was to seek prospective business or assets to acquire. Digital had no
revenues from 1989 to 1998. In March 1998, Digital voluntarily filed a Form
10-SB with the Securities and Exchange Commission.
On July 15, 1998, pursuant to the Plan of Reorganization and with
appropriate approval from the California Secretary of State's Office, the two
wholly-owned subsidiaries of LVL, LVL Interactive, Inc. and LVL Advertising,
Inc., merged into LVL, the parent company, leaving LVL as
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<PAGE> 17
the sole surviving California corporation. On July 17, 1998, the wholly-owned
subsidiary of Digital, Digital Acquisition Corporation, merged into LVL, with
approval from the California Secretary of State's Office, resulting in LVL
becoming the wholly-owned subsidiary of Digital, a Nevada corporation. On July
20, 1998, Digital was renamed "I-Storm, Inc." by amendment to its Articles of
Incorporation.
Under the Plan of Reorganization, the Company will be required to pay
certain secured claims, including principal and interest, over a period of five
years, in equal quarterly annual installments. Asserted secured claims were
held by Dot Printers, Inc., for the amount of $210,000, and by George Rice &
Sons, for the amount of $24,589.71. The Company is presently challenging the
secured status of these claims, as well as the claims of certain other
creditors to approximately $386,500 as secured debt, although there can be no
assurance that the Company will prevail in its position. The Company will also
retain a prior factoring relationship with Pacific Business Funding
Corporation, which has provided a secured receivables line of credit to LVL,
prior to the Plan. The Company will also issue 600,000 shares of Series A
Preferred Stock to certain unsecured creditors under the Plan. The holders of
such Series A Preferred Stock shall have the right to receive cumulative
dividends at a rate of $0.05 per share, per year, prior and in preference to
any payment of any dividend on the Common Stock of the Company or any other
equity security of the Company. The dividends, rights and preferences of the
Series A Preferred Stock will also be senior to those of the Common Stock and
of any other equity security of the Company. Upon the occurrence of certain
Liquidation Preference Events, the holders of Series A Preferred Stock are
entitled to receive a preference payment equal to $6.67 per share for each
share of Series A Preferred Stock, plus an amount equal to all declared but
unpaid dividends thereon, prior to any distribution of funds and assets to any
other class of shareholder. Such Liquidation Preference Events are the
liquidation, dissolution or winding up of the Company, or the sale, merger or
combination of Company, a public offering in excess of $25 million, a merger or
consolidation of the Company in which its shareholders do not retain a majority
of the voting power in the surviving corporation, or a sale of all or
substantially all of Company's assets. Should there be insufficient assets to
permit payment of the foregoing in full to all holders of the Series A
Preferred Stock, then the assets of the Company will be distributed ratably to
the holders of Series A Preferred Stock and then to the Common Stock of the
Company.
Although the Board of Directors authorized the issuance of 600,000
shares of Series A Preferred Stock on July 23, 1998, the Company has awaited
the final determination by the Bankruptcy Court of the pool of unsecured
creditors that will be entitled to share on a pro rata basis in accordance with
their claims, in order to make an appropriate issuance of such Series A
Preferred Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth
quarter of 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol "ISTM." The Company's shares of Preferred Stock are not listed on any
exchange or quoted on the OTC Bulletin Board. Prior to the third quarter of
1998, there was no public market for the Company's Common Stock. Only a limited
public market for the Company's Common Stock existed in the third and fourth
quarters of 1998 and bid prices may not be indicative of fair market value or a
sustained trading market. The range of high and low bid information for the
Company's Common Stock for each full quarterly period during the Company's last
two fiscal years, is as follows:
<TABLE>
<CAPTION>
PERIOD HIGH BID LOW BID
------ -------- -------
<S> <C> <C>
Fiscal 1997
-----------
1st quarter - -
2nd quarter - -
3rd quarter - -
4th quarter - -
Fiscal 1998
-----------
1st quarter - -
2nd quarter - -
3rd quarter $7.00 $0.25
4th quarter $4.00 $0.25
Fiscal 1999
-----------
1st quarter $10.75 $3.25
2nd quarter $8.00 $3.50
</TABLE>
These quotations were obtained from OTC Electronic Bulletin Board
quarterly quote summaries, and reflect interdealer prices, without retail
markup, markdown, or commission and may not represent actual transactions.
Trades were not made on a daily basis. On December 30, 1998, the closing bid
price for the Company's Common Stock was $3.50. As of the same date, there were
274 holders of record of Common Stock. As of June 30, 1999, the closing bid
price was $4.125 and the number of holders of record was 244.
The trading price of the Company's Common Stock has been and in the
future is expected to be subject to extreme fluctuations in response to both
business-related issues, such as quarterly variations in operating results, the
timing of commencement or completion of client projects, reductions or
increases in client spending on marketing communications services,
announcements of new services or business acquisitions by the Company or its
competitors, and the gain or loss of client accounts, and stock market related
influences, such as changes in estimates of securities analysts, the presence
or absence of short-selling of the Company's stock, and events affecting other
companies that
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the market deems to be comparable to the Company. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations that
have particularly affected the market price of many technology-oriented
companies and that often have been unrelated or disproportionate to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. The trading
prices of many high technology and Internet-related companies' stocks are at or
near their historical highs and reflect price/earning ratios substantially
above historical norms. There can be no assurance that the trading price of the
Company's Common Stock will remain at or near any current or previous level.
The Company currently intends to retain future earnings to fund the
development and growth of its business and therefore does not anticipate paying
cash dividends within the foreseeable future. Any future payment of dividends
will be determined by the Company's Board of Directors and will depend on the
Company's financial condition, results of operations and other factors deemed
relevant by its Board of Directors.
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, a total of $4,004,000 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 common 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.
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<PAGE> 20
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.
PRIVATE PLACEMENT OFFERING OF SERIES B PREFERRED STOCK
The Company raised a total of $4,996,439 in gross proceeds from a
private placement offering of Series B Cumulative Convertible Preferred Stock
("Series B Preferred Stock"), made pursuant to Section 506 of Regulation D, at
a price per share of $12.25. The offering of such Series B Preferred Stock
("the Offering") commenced on December 11, 1998 and concluded on February 18,
1999. A total of 407,900 Shares of Series B Preferred Stock were offered and
sold through Weatherly Securities Corp. ("Weatherly"), a placement agent which
received a 10% placement fee and a 3% non-accountable expenses allowance, or
13% of the gross proceeds of the sale of such Series B Preferred Stock
Offering, less certain expenses, for a total of $599,512. Weatherly also
received as compensation for the Offering Warrants to purchase 40,790 shares of
Series B Preferred Stock. After deducting the placement agent's fees and
expenses, a total of $4,396,927 in proceeds was received by the Company from
the Offering. The majority of such proceeds was used to fully retire its
outstanding bridge loans, which had been incurred both pre- and
post-bankruptcy; to almost fully retire its loans under a factoring agreement,
and to pay down many of its outstanding expenses and professional fees. The
balance of the proceeds is being used for the development of I-Storm
CyberStores and for general working capital purposes.
The Series B 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 B Preferred Stock or in cash. The right of the Series B Preferred Stock
to payment of either cash or common stock dividends is subordinate to the right
to cash or stock dividend payments of Series A Preferred Stock. The shares of
Series B 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 four years 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.
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<PAGE> 21
BRIDGE FINANCING
Prior to confirmation of the Plan of Reorganization, Trident III, L.L.C.
("Trident") provided LVL $600,000 in pre-confirmation bridge financing, which
has been used for reorganization costs and for working capital purposes. In
consideration and repayment of this pre-confirmation bridge financing, Trident
has been issued 600,000 shares of non-voting Common Stock in the Company,
redeemable at $1.00 per share, and 440,000 shares of non-redeemable voting
Common Stock. These shares were issued pursuant to the Order and Plan of
Reorganization and are exempt from registration under the federal securities
laws pursuant to Section 1145 of the Bankruptcy Code.
Trident has also provided $258,000 in post-confirmation bridge financing
to the Company for reorganization and working capital purposes. In partial
consideration for this post-confirmation bridge financing, Trident has been
issued an additional 91,200 shares of non-redeemable non-voting Common Stock in
the Company which is unregistered Common Stock subject to Rule 144
restrictions. Trident was also entitled to receive interest, at a rate of 10%
per annum, on any outstanding unpaid balance of the total of $258,000 in
post-confirmation bridge financing which it has provided to the Company in
connection with the reorganization. In January 1999, Trident was repaid all
post-confirmation bridge financing with accrued interest from the proceeds of
the Series B Preferred Stock offering.
The Company also received $100,000 in pre-confirmation bridge financing,
used for reorganization costs and working capital purposes as follows: a
$50,000 Promissory Note from Pac Rim Access Group, Inc., repayable with accrued
interest at a rate of 10% per annum; and a $50,000 Promissory Note from
Masamitsu Ishihara, repayable with accrued interest at a rate of 10% per annum.
In January 1999, these amounts were repaid in full from the proceeds of the
Series B Preferred Stock offering.
The Company has received an additional $300,000 in post-confirmation
bridge financing (the "July 1998 Bridge Financing") as follows: (i) a $150,000
Promissory Note from Four M International, repayable with accrued interest at a
rate of 10% per annum; and (ii) $75,000 in Promissory Notes from each of
Frederick Meyers and Richard David, for a total of $150,000, repayable with
accrued interest at a rate of 10% per annum. Each of the foregoing Promissory
Notes will be paid from the earlier of the First Closing of this Offering, or
July 31, 1999. As part of the July 1998 Bridge Financing, the Company issued
warrants to purchase Common Stock of the Company, exercisable at $0.001 per
share to each of these bridge financiers as follows: (i) 60,000 warrants to
Four M International; and (ii) 30,000 warrants, to each of Frederick Meyers and
Richard David, for a total of 60,000 warrants. The proceeds of this bridge
financing was used for reorganization costs and working capital purposes. In
January 1999, these amounts were repaid in full from the proceeds of the Series
B Preferred Stock offering.
The Company received an additional $425,000 in post-confirmation bridge
financing (the "September 1998 Bridge Financing") as follows: (i) a $300,000
Promissory Note from the Security Trust IRA for Robert L. Wilson, repayable
with accrued interest at a rate of 10% per annum; (ii) a $100,000 Promissory
Note from Wink Capital Management, Ltd., repayable with accrued interest at a
rate of 10% per annum; and (iii) a $25,000 Promissory Note from Philip Cory
Roberts, repayable
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<PAGE> 22
with accrued interest at a rate of 10% per annum. As part of the September 1998
Bridge Financing, the Company issued warrants to purchase Common Stock of the
Company, exercisable at $0.001 per share to each of these bridge financiers as
follows: (i) 120,000 warrants to Security Trust IRA for the benefit of Robert
L. Wilson, or its designees; (ii) 40,000 warrants to Wink Capital Management,
Ltd.; and (iii) 10,000 warrants to Philip Cory Roberts. The proceeds of this
bridge financing were used for working capital purposes. In January 1999, these
amounts were repaid in full from the proceeds of the Series B Preferred Stock
offering.
ISSUANCE OF COMMON STOCK AND OPTIONS TO CONSULTANTS
In August 1998, the Board approved the issuance of shares of Common
Stock to certain consultants for strategic management and financial consultants
of the Company as follows: Benchmark Equity Group, Inc. ("Benchmark"), 557,800
shares; Jeffrey W. Tomz, 42,200 shares; Fordham Financial Management, Inc.,
100,000 shares; Weatherly Securities Corp. 1,000,000 shares; Pound Capital,
Inc, 225,000 shares; and New Leaf, L.L.C., 75,000 shares. Benchmark received an
additional 40,000 shares in January 1999 related to further bridge financing
services.
In July 1999, the Board approved the grant of performance based options
to purchase 150,000 shares of Common Stock of the Company to NSA, a provider of
business consulting services, 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 approved the grant of performance based options
to purchase 10,000 shares of Common Stock of the Company to each of Mary Su and
Jerry Klemushin, a provider of business consulting services, 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 April 1999, consultant Michael Kane became entitled, subject to Board
approval, for services rendered, to 10,000 options exercisable at $6.37 per
share.
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.
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.
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ISSUANCE OF COMMON STOCK, OPTIONS AND WARRANTS PURSUANT TO THE ORDER AND PLAN
OF REORGANIZATION
On July 23, 1998, the Board of Directors approved the issuance of
certain shares of Common Stock, Series A Preferred Stock and warrants in
accordance with the Order of the Bankruptcy Court, confirming the Plan of
Reorganization. Such shares of Common Stock, Series A Preferred Stock, and
warrants, and the Common Stock underlying such warrants are or will be issued
pursuant to Section 1145 of the United States Bankruptcy Code, and as such, are
exempt from registration under the federal securities laws, except with respect
to an underwriter of such securities.
The Board approved issuances of Shares of Common Stock, Series A
Preferred Stock and warrants as follows: Calbert Lai, 297,642 shares of Common
Stock; Stephen Venuti, 297,642 shares of Common Stock; Don Sanders, 4,016
shares of Common Stock; Mackenzie Shea, Inc., or its designees, 500,000 shares
of Common Stock; Thomas A. Schultz, or his designees, 500,000 shares of Common
Stock; and 440,000 shares of Common Stock to Trident III, L.L.C.
The Company, pursuant to the Order and Plan of Reorganization, also
issued 600,000 shares of non-voting common Stock to Trident III, L.L.C. which
was initially redeemable at $1.00 per share. In January 1999, Trident III,
L.L.C. notified the Company that it wished to waive the right to redeem this
Common Stock; accordingly, Trident III, L.L.C. presently holds 600,000 shares
of non-redeemable non-voting stock, issued pursuant to the Order and Plan of
Reorganization.
In accordance with the Order and Plan of Reorganization, the Company
also issued 25,000 warrants to purchase Common Stock, exercisable at $0.50 per
share, to Mascia and Associates and 50,000 warrants to Pacific Business
Funding, Inc., both creditors under the Plan. The Company also authorized the
issuance of 275,000 service warrants, exercisable at $0.50 per share, to
various service providers, all in accordance with the Plan.
Each of the foregoing shares of Common Stock, Series A Preferred Stock,
and the common stock underlying the exercise of the warrants, except for shares
of Common Stock issued to Trident III, L.L.C., were issued subject to an
eighteen-month lock-up agreement negotiated between the Company and its
placement agent for Series B Preferred Stock, as required by the Bankruptcy
Court. Pursuant to the Bankruptcy Court's instructions, releases from the
lock-up agreement were on a pro rata basis. As of December 31, 1998, the
placement agent and the Company had agreed to release ten percent (10%) of the
foregoing securities from the lock-up. The shares of Calbert Lai and Stephen
Venuti are also subject to a further lock-up imposed by the Bankruptcy Court .
Shares of Messrs. Lai and Venuti may only be released the earlier of the time
of thirty-six months after July 17, 1999,a liquidation preference event, or the
date the closing bid price reported on the NASDAQ market system for the common
stock of I-Storm has exceeded the conversion price of the Series A Preferred
Stock for the consecutive trading days.
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,
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pursuant to the Plan of Reorganization, and the options and underlying stock
set aside for issuance upon exercise of such warrants are also exempt from
registration under Section 1145 of the Bankruptcy Code. As of December 31,
1998, options to be issued from the 1998 A Stock Option Plan were as follows:
Calbert Lai, 600,000 options, Stephen Venuti, 300,000 options Timothy Cohrs,
75,000 options, Stuart Mangrum, 127,500 options, David Beach, 100,00 options.
The remaining 197,500 options were distributed among 30,000 employees and
consultants with no recipient being distributed more than 10,000 options.
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 an employee stock
option plan proposed in 1998 consisting of 1.5 million shares of common stock.
Such options and the stock underlying such options shall not be exempt from
registration under the federal securities laws.
FORWARD LOOKING STATEMENT
This Management's Discussion and Analysis contains certain
forward-looking statements and information relating to the Company that are
based on the beliefs of the Company or management as well as assumptions made
by and information currently available to the Company or management. When used
in this document, the words "anticipate", "believe, " "estimate, " "expect" and
"intend" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such
statements reflect the current view of the Company regarding future events and
are subject to certain risks, uncertainties and assumptions, including the
risks and uncertainties noted. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. In each instance, forward-looking
information should be considered in light of the accompanying meaningful
cautionary statements herein.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATION
On April 16, 1998, the Company's Reorganization Plan was confirmed by
the United States Bankruptcy Court and the Company emerged from bankruptcy
reorganization. The Plan of Reorganization resulted in a net reduction of
approximately $6,734,000 in principal and accrued interest on the Company's
Accounts Payable. As a result of the Reorganization, the recording of the
restructuring transaction and the implementation of Fresh Start Reporting, the
Company's results of
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<PAGE> 25
operations after July 17, 1998 (the cutoff date used for financial reporting
purposes) are not comparable to results reported in prior periods. See Note 1
to the accompanying consolidated financial statements for information on
consummation of the Plan of Reorganization and implementation of Fresh Start
Reporting. To facilitate a meaningful comparison of the Company's operating
performance in fiscal years 1998, 1997 and 1996, the following discussion of
results of operations on a consolidated basis is presented on a traditional
comparative basis for all periods. Consequently, the prior years' information
presented below does not comply with accounting requirements for companies upon
emergence from bankruptcy, which requirements call for separate reporting for
the newly reorganized company and the predecessor company.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
The Company's net loss for the year ended December 31, 1998 was
approximately $5,183,000 and arose primarily as a result of operating losses
and expenses associated with the Company's reorganization and subsequent merger
with Digital. The Company's net loss for the year ended December 31, 1997 was
approximately $2,872,000, primarily due to operating losses. The Company's
operating loss for the year ended December 31, 1998 was $4,701,000 as compared
to an operating loss of $2,438,000 for the year ending December 31, 1997. The
increase in operating loss of approximately $2,263,000 was caused primarily by
a decline in gross profit from the prior year of approximately $1,563,000 and
an decrease in operating expenses of approximately $932,000. Included in the
fiscal 1998 net loss is non-cash depreciation and amortization of approximately
$280,000 due primarily to amortization of the Company's Reorganization asset of
$3,060,000 million as of December 31, 1998.
Revenue for the years ended December 31, 1998 and 1997 were $2,913,000
and $6,108,000, respectively, a decrease of approximately $3,195,000 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-commence
partnerships. Gross profit for the years ended December 31, 1998 and 1997 were
$439,000 and $2,002,000, or 15% and 33 % 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.
Operating expenses for the years ended December 31, 1998 and 1997 were
$7,614,000 and $8,546,000, respectively. The decrease in operating expenses of
approximately $932,000 from the period a year earlier was primarily due to
financial consultants fees and attorneys' fees of $406,000 related to the
Company's reorganization, merger, and financing activities.
Interest and Other expenses for the years ended December 31, 1998 and
1997 were $482,000 and $434,000, respectively. As of December 31, 1998, the
outstanding debt of the Company was approximately $1,457,000, primarily all of
which is classified as current.
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The Company's auditors issued a going concern report. There can be no
assurance that management's plans to reduce working capital deficiency or
obtain additional financing will be successful.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had current assets of $312,000 and
$778,000 in December, 31, 1997, while cash and cash equivalents were $5,000 at
year end 1998 compared to $0 at year end 1997. The Company's working capital
(deficit) at December 31, 1998 was $(3,445,000) as compared with a working
capital (deficit) of $(7,956,000) at December 31, 1997. This decrease in the
working capital (deficit) of approximately $4,558,000 is the result of a
reduction of Current Liabilities of $5,010,000 offset by an decrease of Current
Assets of $462,000.
As of December 31, 1998, the Company owed $1,457,000 under notes payable
to certain shareholders. The Company also has a Factoring Agreement in place
with a lender secured by the Company's accounts receivable and other assets,
with a factoring liability as of December 31, 1998 of $1,144,000 up from
$821,000 as of December 31, 1997. The Company is in compliance with all
material covenants of the shareholder notes payable and Factoring Agreement as
of year end 1998.
For the year ended December 31, 1998, net cash utilized by operations
was $1,907,000 compared to cash utilization of $321,000 for the year ended
December 31, 1997, primarily as a result of the Company's Reorganization and a
net loss for the year of $5,183,000.
As of December 31, 1998, Company management believes that the current
cash balance, cash from operations, and anticipated borrowings will not be
sufficient to meet the Company's liquidity needs for the next 12 months. The
Company is pursuing additional equity investment to fund its operating expenses
and working capital needs for the coming year. There can be no assurance that
the Company will be able to obtain sufficient capital under acceptable terms to
fund its operations and investment strategy. Without additional capital, there
is substantial doubt about the ability of the Company to continue as a going
concern and about the ability of the Company to realize its Reorganization
Asset.
INVESTING
Capital expenditures for the years ended December 31, 1998 and 1997 were
$12,000 and $287,000, respectively.
FINANCING
PRIVATE PLACEMENT OFFERING OF 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
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<PAGE> 27
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 the gross proceeds or $546,000.
After deducting the consulting fees, a total of $4,004,000 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 common stock dividends is subordinate to the right
to cash or stock dividend payments of Series A 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.
PRIVATE PLACEMENT OFFERING OF SERIES B PREFERRED STOCK
The Company raised a total of $4,996,775 in gross proceeds from a private
placement offering of Series B Cumulative Convertible Preferred Stock ("Series
B Preferred Stock"), made pursuant to Section 506 of Regulation D, at a price
per share of $12.25. The offering of such Series B Preferred Stock ("the
Offering") commenced on December 11, 1998 and concluded on February 18, 1999. A
total of 407,900 Shares of Series B Preferred Stock were offered and sold
through Weatherly Securities Corp. ("Weatherly"), a placement agent which
received a 10% placement fee and a 3% non-accountable expenses allowance, or
13% of the gross proceeds of the sale of such Series B Preferred Stock
Offering, less certain expenses, for a total of $599,512. Weatherly also
received as compensation for the Offering Warrants to purchase 40,790 shares of
Series B Preferred Stock. After deducting the placement agent's fees and
expenses, a total of $4,259,306 in proceeds was received by the Company from
the Offering. The majority of such proceeds was used to fully retire its
outstanding bridge loans, which had been incurred both pre- and
post-bankruptcy; to almost fully retire its loans under a factoring agreement,
and to pay down many of its outstanding expenses and professional fees.
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The balance of the proceeds is being used for the development of I-Storm
CyberStores and for general working capital purposes.
The Series B 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 B Preferred Stock or in cash. The right of the Series B Preferred Stock
to payment of either cash or common stock dividends is subordinate to the right
to cash or stock dividend payments of Series A Preferred Stock. The shares of
Series B 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 four years 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.
BRIDGE FINANCING
Prior to confirmation of the Plan of Reorganization, Trident III, L.L.C.
("Trident") provided LVL $600,000 in pre-confirmation bridge financing, which
has been used for reorganization costs and for working capital purposes. In
consideration and repayment of this pre-confirmation bridge financing, Trident
has been issued 600,000 shares of non-voting Common Stock in the Company,
redeemable at $1.00 per share, and 440,000 shares of non-redeemable voting
Common Stock. Trident has also provided $228,000 in post-confirmation bridge
financing to the Company for reorganization and working capital purposes. In
partial consideration for this post-confirmation bridge financing, Trident has
been issued additional 91,200 shares of non-redeemable non-voting Common Stock
in the Company. Trident is also entitled to receive interest, at a rate of 10%
per annum, on any outstanding unpaid balance of the total of $228,000 in
post-confirmation bridge financing which it has provided to the Company in
connection with the reorganization. In January 1999, Trident converted $600,000
in pre-confirmation bridge financing into 600,000 shares of non-voting Common
Stock. In January 1999, Trident has been repaid all post-confirmation bridge
financing with accrued interest.
The Company also received $100,000 in pre-confirmation bridge financing
as follows: a $50,000 Promissory Note from Pac Rim Access Group, Inc.,
repayable with accrued interest at a rate of 10% per annum; and a $50,000
Promissory Note from Masamitsu Ishihara, repayable with accrued interest at a
rate of 10% per annum. Each of the foregoing Promissory Notes will be paid from
the
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earlier of the First Closing of this Offering or April 8, 1999. In January
1999, these amounts were repaid in full.
The Company has received an additional $300,000 in post-confirmation
bridge financing (the "July 1998 Bridge Financing") as follows: (1) a $150,000
Promissory Note from Four M International, repayable with accrued interest at a
rate of 10% per annum; (2) $75,000 in Promissory Notes from each of Frederick
Meyers and Richard David, for a total of $150,000, repayable with accrued
interest at a rate of 10% per annum. Each of the foregoing Promissory Notes
will be paid from the earlier of the First Closing of this Offering, or July
31, 1999. As part of the July 1998 Bridge Financing, the Company issued
warrants to purchase Common Stock of the Company, exercisable at $0.001 per
share to each of these bridge financiers as follows: (1) 60,000 warrants to
Four M International; and (2) 30,000 warrants, to each of Frederick Meyers and
Richard David, for a total of 60,000 warrants. In January 1999, these amounts
were repaid in full.
The Company has received an additional $425,000 in post-confirmation
bridge financing (the "September 1998 Bridge Financing") as follows: (1) a
$300,000 Promissory Note from the Security Trust IRA for Robert L. Wilson,
repayable with accrued interest at a rate of 10% per annum; (2) a $100,000
Promissory Note from Wink Capital Management, Ltd., repayable with accrued
interest at a rate of 10% per annum; and (3) a $25,000 Promissory Note from
Philip Cory Roberts, repayable with accrued interest at a rate of 10% per
annum. As part of the September 1998 Bridge Financing, the Company is presently
issuing warrants to purchase Common Stock of the Company, exercisable at $0.001
per share to each of these bridge financiers as follows: (1) 120,000 warrants
to Security Trust IRA for the benefit of Robert L. Wilson, or its designees;
(2) 40,000 warrants to Wink Capital Management, Ltd.; and (3) 10,000 warrants
to Philip Cory Roberts. In January 1999, these amounts were repaid in full.
The Company owed approximately $1,083,000 in short-term debt financing
at December 31, 1998. All of such short-term debt was subsequently repaid from
the proceeds of the Series B Stock Offering in January 1999.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
The Company's operating loss for the year ended December 31, 1997 was
$2,438,000 as compared to an operating loss of $3,497,000 for the same period
in 1996. This decrease in operating loss was primarily attributable lower
operating expenses resulting from the downsizing of Company operations.
The Company's sales for the years ended December 31, 1997 and 1996 were
$6,108,000 and $8,321,000, respectively. The decrease in sales of approximately
$2,213,000 is primarily attributable to the loss of a major client and the
Company's inability to replace lost revenue with new clients during the year.
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Cost of sales for the years ended December 31, 1997 and 1996 were
$4,106,000 and $3,805,000 or 67% and 46% of sales, respectively. Gross profit
for the years ended December 31, 1997 and 1996 were $2,002,000 and $4,516,000
or 33% and 54% of sales, respectively.
Operating expenses for the years ended December 31, 1997 and 1996 were
$4,440,000 and $8,013,000, respectively. Interest expense for the years ended
December 31, 1997 and 1996 was $320,000 and $225,000, respectively. As of
December 31, 1997, the outstanding debt of the Company was approximately
$8,161,000.
CASH USED FOR OPERATIONS
For the year ended December 31, 1997, cash used for operations was
$321,000 as compared to $959,000 of cash generated from operations for the year
ended December 31, 1996. The Company intends to use future debt or equity
financing or debt-to-equity conversions to help satisfy past due amounts and to
pay down its debt obligations. There is no assurance that the Company will be
able to raise the necessary capital under acceptable terms, in any, or succeed
in its attempt to convert debt to equity. Should the Company fail to raise
necessary cash, it runs the risk of ceasing operations or being forced to
reorganize through bankruptcy.
YEAR 2000 READINESS DISCLOSURE
This Readiness Disclosure is provided to advise of I-Storm's Year 2000
Compliance program for both I-Storm's internal systems and web sites designs.
As used herein, "Year 2000 Compliant" means that I-Storm has confirmed that
under the conditions of I-Storm's internal testing, I-Storm's internal systems
and web sites designs will perform as follows: (i) date calculations will
neither cause any abnormal termination of performance nor generate inconsistent
results and (ii) when sorting by date, all records will be sorted in accurate
sequence. Please note that this Readiness Disclosure is not provided as a
certification, representation, warranty or guarantee, express or implied,
regarding Year 2000 Compliance and does not create or modify any contractual
relationships.
I-Storm has allocated both personnel and other resources towards
achieving the Year 2000 Compliance of all of I-Storm's internal systems. In
implementing its Year 2000 Compliance program, I-Storm has identified and
inventoried all Year 2000 sensitive components in our internal systems and are
working to achieve the Year 2000 Compliance of all its components. I-Storm has
also made reasonable efforts to contact all vendors and suppliers that provide
I-Storm with Year 2000 sensitive components in order to determine the
compliance of such components. It is the intent of I-Storm's Year 2000
Compliance program to either repair or replace any components of our internal
systems which are determined not to be Year 2000 Compliant.
I-Storm is working towards full Year 2000 Compliance for all of its
products and services. Because I-Storm does not control other companies'
products, including other companies' hardware and software, I-Storm does not
promise that any other companies' products or software will not suffer any
errors or malfunctions related to Year 2000. While I-Storm tests all of its web
site designs, I-Storm does not certify that these sites will perform as tested
when used with other companies' products, when modified or customized, or when
used under circumstances not reflected in the testing
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I-Storm has performed. To date, I-Storm has not encountered any problems
associated with Year 2000 Compliance in its products, services, or internal
systems, and will continue to take all reasonable steps to ensure the same.
In 1998, I-Storm incurred insignificant costs with respect to Year 2000
compliance expenses. I-Storm expects that it may incur approximately $70,000 in
1999 for Year 2000 compliance costs Although I-Storm foresees no other
significant Year 2000 compliance expenses, there is always a possibility of
unforeseen further expenses in 1999 and beyond with respect to Year 2000
compliance.
ITEM 7. FINANCIAL STATEMENTS.
See Index to Consolidated Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 23, 1998, the Board of Directors of the Company approved the
engagement of Arthur Andersen LLP as independent public accountants for the
Company. The Company had no disagreements with its former accountants,
Petrovich and Pugh (former accountants for LVL), or Jones, Jensen & Co. (former
accountants for Digital). The former accountants did not resign or decline to
stand for reelection. The former accountants' reports on the financial
statement did not for either of the past two years contain an adverse opinion
or disclaimer of opinion other than a report of risk of failure to continue as
an ongoing concern; nor were such reports modified as to uncertainty, audit
scope or accounting principles. There were no disagreements with the former
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Company has established a five-member Board of Directors. On June
30, 1999, members of the Board of Directors were as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Frank M. DeLape 44 Director and Chairman of the Board
Calbert Lai 42 Director
Thomas A. Schultz 48 Director
John Matthews 38 Director
Matthew Howard 58 Director
</TABLE>
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FRANK M. DELAPE, Chairman of the Board. Mr. DeLape has served as the
CEO of Benchmark Equity Group, Inc. (Benchmark) since its formation in April
1994. Through Benchmark and its affiliates, Mr. DeLape has financed a number
of public companies in a multiple of industries such as telecommunications,
internet-services, retailing, business services and computer technology. Mr.
DeLape also served as a director of THINK New Ideas, Inc. from January 1996
until February 1998. Mr. DeLape has served as President, Secretary, Treasurer
and a director of Oak Tree Capital, Inc., a financial consulting firm, since
its formation in January 1996.
CALBERT LAI, Director. Co-founder and President of the Company since
1986, Mr. Lai has developed and expanded LVL's core business and product lines,
and has directed the Company's strategic marketing and consulting business for
highly recognizable brand names in the technology industry, such as IBM,
Netscape, Hewlett-Packard, Sun Microsystems, Cisco Systems, Mitsubishi
Electronics America, Acer Group, Fujitsu PC Corporation, 3COM/PalmPilot, NEC,
Philips Mobile Computer Group and Egghead.Com. A recognized expert in the
marketing of technology products to consumers and end users, Mr. Lai was
responsible for the launch into U.S. retail channels of the Acer PC, in 1993,
and the PalmPilot(TM), in 1996.
THOMAS A. SCHULTZ, Director. Mr. Schultz is a consultant to the Company
and a director. He has been the President and Chief Executive Officer of Vista
Technologies, Inc., a public surgical center firm from February 1996 to March
1997. Prior to joining Vista Technologies, Inc., Mr. Schultz served as
Chairman/Chief Executive Officer of Crystallume, a public corporation, from
February 1986 to January 1996. Mr. Schultz also serves on the Board of
Directors of Adrenalin Corporation, a public company. He is a CEO and director
of Cellgate, Inc., a private corporation and a director of Security Capital
Management and Electronic Design, Inc., also private corporations.
MATTHEW HOWARD, Director. Mr. Howard is a thirty-year veteran in
executive management for major U.S. retailers. Mr. Howard has served as Senior
Executive Vice President of both Marketing and Merchandising for Sears, as
President of Computer City, a subsidiary of Tandy Corporation, and as an
Executive Vice President of Montgomery Ward.
JOHN MATTHEWS, Director. In June 1999, the Board appointed John Matthews
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.
From August 1, 1998 to April 1999, Richard Snyder, 53, served as a
member of the Board of Directors. Mr. Snyder had served as Senior Vice
President and General Manager of Dell Computers Americas and as Senior Vice
president of World Wide Sales, Marketing and Support for Compaq Computer
Corporation. Mr. Snyder also spent 18 years at Hewlett-Packard where he headed
the $5
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<PAGE> 33
billion Ink Jet printer business and was responsible for achieving a 65% market
share and creating the "Desk Jet" brand. Mr. Snyder currently serves on the
Board of Directors of VTEL Corp., InfinOp, Inc. and Guardian-On-Board, Inc. Mr.
Snyder left the Board of Directors in April 1999, and his vacancy was filled by
the appointment of John Matthews in June 1999.
The Company pays outside Board members a per diem of $1,000 per day and
reimburses directors for any reasonable expenses pertaining to attending
meetings, including travel, lodging and meals. In addition, for services as a
Board member, the Company has granted outside Board members options to purchase
25,000 shares of the Company's Common Stock at $3.50 per share which vest over
one year, and the Chairman of the Board will receive options to purchase 50,000
shares at $3.50 per share which shall also vest over one year.
All directors hold office for terms of one (1) year and until the next
annual meeting of stockholders scheduled to vote on such class of Directors and
the election and qualification of their respective successors. Officers are
elected annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Company's audit committee (the "Audit Committee")
is responsible for making recommendations to the Board of Directors concerning
the selection and engagement of the Company's independent certified public
accountants and for reviewing the scope of the annual audit, audit fees, and
results of the audit. The Audit Committee also reviews and discusses with
management and the Board of Directors such matters as accounting policies and
internal accounting controls, and procedures for preparation of financial
statements. Thomas Schultz, Chairman of the Audit Committee, Matthew Howard and
Richard Snyder were members of the 1998 Audit Committee. Mr. Matthews has
replaced Mr. Snyder as a member of the 1999 Audit Committee.
COMPENSATION COMMITTEE. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive employees of
the Company. Frank DeLape, Thomas Schultz and Matthew Howard were members of
the Compensation Committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
that they file.
Except as set forth below, based solely upon a review of Forms 3 and
Forms 4 furnished to the Company pursuant to Rule 16a-3 under the Exchange Act
during its most recent fiscal year and Forms 5 with respect to its most recent
fiscal year, the number of (i) late reports, (ii) transactions that were not
reported on a timely basis during the fiscal year ended March 31, 1998, and
(iii) any known
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<PAGE> 34
failure to file a required report by officers, directors and beneficial owners
of more than 10% of the Company's common stock is as follows: Calbert Lai: one
late report and one transaction not reported on a timely basis; Steven Venuti:
one late report and two transactions not reported on a timely basis: Thomas
Schultz, one late report; Frank DeLape, one late report; Matthew Howard, one
late report and Richard Snyder, one late report. Such late reports have
subsequently been filed.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three years by each person
serving as the Company's Chief Executive Officer during the last year and the
Company's three most highly compensated executive officers serving at the end
of the year ended December 31, 1998 whose compensation was in excess of
$100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------- ------------------------ ---------
SECURITIES
NAME AND OTHER RESTRICTED UNDERLYING LTIP ALL OTHER
PRINCIPAL YEAR SALARY($) BONUS($) ANNUAL STOCK OPTIONS/ PAYOUTS($) COMPENSATION
POSITION COMPENSATION($) AWARDS($) SARS(#) ($)
- --------------- ------- --------- --------- ---------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Calbert Lai 1998 150,000 0 N/A 0 600,000 0 N/A
President and 1997 124,719 0 N/A 0 - 0 N/A
Treasurer 1996 332,500 0 N/A 0 - 0 N/A
1998 150,000 0 N/A 0 300,000 0 N/A
Stephen Venuti 1997 124,719 0 N/A 0 - 0 N/A
Vice President 1996 332,500 0 N/A 0 - 0 N/A
1998 260,000(1) 0 N/A 0 75,000 0 N/A
Timothy Cohrs 1997 180,520 0 N/A 0 - 0 N/A
Vice President 1996 87,670(1) 0 N/A 0 - 0 N/A
Stuart Mangrum 1998 104,428 0 N/A 0 127,500 0 N/A
Vice President 1997 59,492(2) 0 N/A 0 0 N/A
1996 - 0 N/A 0 0 N/A
David Beach 1998 97,435 0 N/A 0 100,000 0 N/A
Chief Information 1997 74,374 0 N/A 0 0 N/A
Architect 1996 63,587 0 N/A 0 0 N/A
</TABLE>
(1) Mr. Cohrs entered into an employment agreement with LVL Communications
Corporation in July 1996. Mr. Cohrs left the employ of I-Storm in March
1999, and he received a pro rata portion of his annual compensation to
March 31, 1999.
(2) Mr. Mangrum was employed by the Company from April 1997 - December 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to the
options granted during the year ended, for the persons named in the Summary
Compensation Table (the "Named Executive Officers"):
33
<PAGE> 35
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Calbert Lai 600,000 61.0% $.50 8/1/03
- ---------------------------------------------------------------------------------------------------------------------
Stephen Venuti 300,000 30.5% $.50 8/1/03
- ---------------------------------------------------------------------------------------------------------------------
Timothy Cohrs 75,000 8.5% $.50 8/1/03
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information with respect to
options exercised during 1998 by the Named Executive Officers and with respect
to unexercised options held by such persons at the end of 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Calbert Lai - 0 50,000 550,000 $175,000 $1,925,000
- ---------------------------------------------------------------------------------------------------------------------
Stephen Venuti - 0 25,000 275,000 $87,500 $962,500
- ---------------------------------------------------------------------------------------------------------------------
Timothy Cohrs - 0 6,252 68,748 $21,882 $239,618
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS
In 1998, the Company entered into employment agreements with Calbert Lai,
President and Treasurer, Stephen Venuti Vice President, and Timothy Cohrs Vice
President. As of March 1999, Mr. Cohrs ceased his employment with the Company as
a result of the Company's decision to pursue the E-commerce line of business,
and to terminate the advertising line of business.
Mr. Lai entered into an employment agreement with the Company, dated
July 15, 1998, for a term of 36 months at an annual base salary of $150,000,
with eligibility for a performance bonus of up to 50% of base salary, as
determined by performance criteria to be established by the Board of Directors.
Mr. Lai has received employee stock options, pursuant to the 1998 A Stock
Option Plan to purchase 600,000 common shares of the Company at $0.50 per
share, of which 300,000 shares will shall vest ratably over a period of 36
months from the Employment Date; and of which 300,000 shares will only vest
upon the Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve-month period from the Employment Date and upon the
Company's quarterly revenue exceeding operating expenses for the same
twelve-month period.
Mr. Venuti entered into an employment agreement with the Company, dated
July 15, 1998, for a term of 36 months at an annual base salary of $150,000,
with eligibility for a performance bonus of up to 50% of base salary, as
determined by performance criteria to be established by the Board of Directors.
Mr. Venuti has also received employee stock options, , pursuant to the 1998 A
Stock Option Plan, to purchase 300,000 common shares of the Company at $0.50
per share, of which 150,000 shares will shall vest ratably over a period of 36
months from the Employment Date; and of which 150,000 shares will only vest
upon the Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve-month period from the Employment Date and upon the
Company's quarterly revenue exceeding operating expenses for the same
twelve-month period.
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<PAGE> 36
Mr. Cohrs entered into an employment agreement with the Company on July
15, 1998, for a term of 36 months at a current annual salary of $240,000 per
year, with eligibility for a performance bonus of up to 50% of base salary, as
determined by performance criteria to be established by the Board of Directors.
Mr. Cohrs also received employee stock options, , pursuant to the 1998 A Stock
Option Plan, to purchase 75,000 common shares of the Company at $0.50 per
share, of which 37,500 shares will shall vest ratably over a period of 36
months from the Employment Date; and of which 37,500 shares will only vest upon
the Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve-month period from the Employment Date and upon the
Company's quarterly revenue exceeding operating expenses for the same
twelve-month period. Mr. Cohrs and the company mutually terminated this
agreement in March 1999 upon the cessation of the advertising services
business. At the time of termination, 7,292 of Mr. Cohrs' options were vested,
and no further warrants were due him.
In August 1998, David Currie, Vice President of Technology, was granted
100,000 employee stock options to purchase Common Stock, exercisable at $0.50
per share, pursuant to the 1998 A Stock Option Plan.
In August 1998, Stuart Mangrum, Vice President of Technology, was
granted 125,500 employee stock options to purchase Common Stock, exercisable at
$0.50 per share, pursuant to the 1998 A Stock Option Plan.
FURTHER EXECUTIVE COMPENSATION
Pending before the Board of Directors, as of June 30, 1999, is a
proposal to issue options to purchase Series C Preferred Stock, exercisable at
$12.25 per share, as follows: Calbert Lai, 255,000 options; Steven Venuti,
126,000 options.
CONSULTING AGREEMENTS
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 $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 a 12-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
$170,500 cash fee in compensation for such services through December 31, 1998.
The shares are exempt from registration under the federal securities laws, in
accordance with Section 1145 of the
35
<PAGE> 37
Bankruptcy Code. The shares are subject to an 18-month lock-up agreement,
commencing August 1, 1998. Ten percent of such shares to date have been
released from the lock-up agreement.
Additionally, MSI or its designees will receive 2,040 options to
purchase Series C Preferred Stock, exercisable at $12.25 per share, for
consulting services rendered to the Company, as of June 30, 1999.
In September 1997, the Company engaged Thomas Schultz as a consultant to
assist the Company in structuring a reorganization and post-organization
operating entity. Mr. Schultz or his designees were issued 500,000 shares of
the Company's Common Stock in August 1998, 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 18-month lock-up
agreement, commencing August 1, 1998. Ten percent of such shares to date have
been released from the lock-up agreement. Mr. Schultz also was paid a total
cash fee of $166,365 in full compensation for such services to December 31,
1998. Mr. Schultz has also received $100,000 in consulting fees from January 1,
1999 through June 30, 1999. Mr. Schultz is a director of the Company.
In March 1998, the Company engaged Fordham Financial Management, Inc.
("Fordham") as a consultant for financial consulting services in connection
with certain bridge financings. Fordham was paid a fee of 100,000 shares of
Common Stock of the Company as of August 1, 1998. Fordham's shares of Common
Stock are unregistered and are subject to an 18-month lock-up restriction
commencing August 1, 1998.
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.
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 18-month lock-up agreement.
In August 1998, the Company engaged New Leaf, L.L.C. ("New Leaf") to
provide investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of 75,000
shares of Common Stock of the Company, valued at $0.25 per share. The shares of
Common Stock issued to New Leaf were fully vested as of August 1, 1998, are
unregistered shares and are subject to an 18-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 12 months commencing
January 11, 1999. Mr. Tomz also served briefly as Acting Chief Financial
36
<PAGE> 38
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.
A financial consulting agreement was entered into between the Company
and Irfan Salim to provide managerial and financial consulting services to the
Company commencing April 1, 1999 on a month-to-month basis at a rate of $16,666
per month. Subject to approval of the Board of Directors, Mr. Salim also
received 15,000 warrants exercisable over a period of five years, which vested
in January 1999 to purchase Common Stock of the Company at an exercise price of
$8.50.
A business consulting agreement was entered into between Peter Janssen
and the Company in June 1998. Under this consulting agreement, Mr. Janssen was
paid $35,000 in 1998. Mr. Janssen's consulting agreement has been extended for
the year of 1999 for a monthly fee of $16,666.
A business consulting agreement was entered into between Matthew Howard,
a director, and the Company in June 1998. Under this consulting agreement, Mr.
Howard was paid $20,000 in 1998. Mr. Howard's consulting agreement has been
extended for the year of 1999 for a monthly fee of $5,000. As of July 1999, the
Board is presently considering the grant of options to purchase 150,000 shares
of Common Stock of the Company exercisable at $2.00 per share to Mr. Howard in
further consideration of his performance under the consulting agreement. Under
this proposal, 50,000 options would vest immediately upon grant, and the
remainder would vest ratably over a twenty-four month period.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ISSUANCE OF STOCK TO DIRECTORS AND OFFICERS
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. Schultz, or his designees, as set forth
below. Further, Benchmark Equity Group, Inc., an affiliate of Frank DeLape, a
director, has been issued 597,800 shares of Common Stock, as of June 30, 1999.
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, 1998, 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, 1998.
Pending before the Board of Directors, as of June 30, 1999, is a
proposal to issue options to purchase Series C Preferred Stock , exercisable at
$12.25 per share, as follows: Calbert Lai, 255,000 options; Steven Venuti,
126,000 options.
In September 1997, the Company engaged Thomas Schultz as a consultant to
assist the Company in structuring a reorganization and post-organization
operating entity. Mr. Schultz was paid a fee of $166,365 in 1998 in
compensation for such services until December 31, 1998. As of June 30,
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<PAGE> 39
1999, Mr. Schultz had received an additional $100,000 in consulting fees. Mr.
Schultz is a director of the Company. Mr. Schultz or his designees was also
issued 500,000 shares of the Company's Common Stock in August 1998, pursuant to
the Plan of Reorganization. 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 18-month lock-up agreement, commencing August 1,
1998. Ten percent of such shares to date have been released from the lock-up
agreement.
Since June 30, 1998, members of the I-Storm Advisory Board have each
been paid $5,000 per month for their services on the board. Members of the
Advisory Board. as of June 30, 1999 were Peter Janssen, Matthew Howard, Cary
Beighley and Joseph John. Mr. Richard Snyder also served on the Advisory Board
in 1998, and received $35,000 for his services. The following members of the
Advisory Board have received options to purchase Common Stock, exercisable at
$3.50: Peter Janssen, 50,000 options; Cary Beighley, 25,000 options; Matthew
Howard, 25,000 options; and Joseph John, 25,000 options.
CONSULTING AGREEMENTS
The Company is a party to a 12-month consulting agreement with Benchmark
Equity Group, Inc. ("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 February 1, 1999, 11 months of the
Consulting Agreement have 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 is party to a management
consulting agreement with Matthew Howard, a director, for a fee of $5,000 per
month. Mr. Howard's consulting arrangement commenced August 1, 1998.
PROXY AGREEMENTS
In August 1998, Benchmark Equity Group, Inc. ("Benchmark") entered into
an irrevocable proxy agreement with each of Thomas A. Schultz, and/or his
designees, Calbert Lai and Stephen Venuti, which irrevocably appoints Benchmark
as a proxy with full substitution power to vote all of the Common Stock of the
Company which Calbert Lai, Stephen Venuti and Thomas A. Schultz, and/or his
designees own, for a period that commenced on August 19, 1998, and will
continue until the earlier of (i) twelve months from the date of commencement,
or (ii) the receipt by the Company of $3,000,000 in equity financing. MSI,
and/or its designees, also entered into an irrevocable proxy agreement with
Benchmark on substantially similar terms, which commenced March 1998 for a
period of 12 months. These proxy agreements were released upon the first
closing of the Series B Preferred Stock Offering in January 1999.
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<PAGE> 40
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The following is a list of exhibits filed as part of this filing. Where
so indicated by asterisk, the exhibits were previously filed and are
hereby incorporated by reference.
Exhibit No.
2.1 Plan of Merger Among LVL Advertising, Inc., LVL Interactive,
Inc. and LVL Communications Corporation effective as of July
15, 1998.*
2.2 Plan of Merger Among LVL Communications Corporation and Digital
Acquisition Corp. effective as of July 17, 1998.
2.3 Order and Plan of Reorganization of LVL Communications
Corporation as confirmed by the United States Bankruptcy Court
for the Northern District of California, dated April 16, 1998.
3.1 Certificate of Incorporation of the Company, as amended.*
3.3 By-laws, as amended.*
4.1 Certificate of Designation for Series A Preferred Stock.
4.2 Certificate of Designation for Series B Preferred Stock.
4.3 Certificate of Designation for Series C Preferred Stock.
9.1 Form of Voting Trust Agreement, dated May 6, 1998.
10.1 Employment Agreement dated July 15, 1998 between the Company
and Calbert Lai.
10.2 Employment Agreement dated July 15, 1998 between the Company
and Stephen Venuti.
10.3 Employment Agreement dated July 15, 1998 between the Company
and Timothy Cohrs.
10.4 Stock Purchase Agreement dated May 6, 1998 among I-Storm
Acquisition Corp., Digital Power Holding Company, Chiricahua
Company, Melinda Johnson and David C. Merrell.
10.5 Consulting Agreement dated March 31, 1998 between the Company
and Benchmark Equity Group, Inc.
10.6 Consulting Agreement dated December 9, 1998 between the Company
and Robert L. Tomz and Amendment thereto, dated March 19, 1999.
10.7 Form of Note between the Company and each of Four M
International, Richard David, Frederick Meyers, PacRim Access
Group, Masamitsu Ishihara, Wink Capital Management, Ltd.,
Security Trust IRA for the Benefit of Robert L. Wilson and
Philip Cory Roberts.
10.8 Form of Lock-Up Agreement
10.9 Convertible Note issued by the Company to Trident III, L.L.C.,
dated February 5,1998 and Amendment thereto, dated July 28,
1998.
10.10 Office Lease Agreement dated March 10, 1999 between the Company
and Sobrato Development Companies #850 for offices in Mountain
View, California.
10.11 I-Storm, Inc. Stock Option Plan, dated July 23, 1998.
39
<PAGE> 41
16 July 23, 1998 Board resolution approving change in Independent
Public Accountant.*
21 Subsidiaries of the registrant.
27 Financial data schedule.
- --------------
* The foregoing documents were filed with the Company's form 8-K dated August
21, 1998.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K in the last quarter of the
fiscal year ended December 31, 1998. Subsequent to year end, the Company filed
a report on Form 8-K on March 4, 1999. Such report covered the Company's
closing of a private placement of Series B Preferred Stock.
* * * * *
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
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<PAGE> 42
SIGNATURES
In accordance with Section 13 of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
<TABLE>
<CAPTION>
I-STORM, INC.
(Registrant)
<S> <C>
Dated: September 3, 1999 By: /s/ Calbert Lai
---- --------------------------------------
Calbert Lai, President and Director
</TABLE>
In accordance with Section 13 of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Calbert Lai President and Director September 3, 1999
- -------------------------- ----
Calbert Lai
/s/ Calbert Lai Treasurer and Chief September 3, 1999
- -------------------------- Financial Officer ----
Calbert Lai
/s/Stephen Venuti Secretary and Vice President September 3, 1999
- -------------------------- ----
Stephen Venuti
/s/ Frank DeLape Director September 3, 1999
- -------------------------- ----
Frank DeLape
/s/ John Matthews Director September 3, 1999
- -------------------------- ----
John Matthews
/s/Thomas Schultz Director September 3, 1999
- -------------------------- ----
Thomas Schultz
</TABLE>
41
<PAGE> 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To I-Storm, Inc.:
We have audited the accompanying consolidated balance sheets of I-Storm, Inc.
(a Nevada corporation in the development stage) as of December 31, 1998, July
17, 1998, and December 31, 1997, and the related consolidated statements of
operations and comprehensive loss, shareholders equity (deficit) and cash flows
for the periods then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of I-Storm, Inc. as of December
31, 1998, July 17, 1998, and December 31, 1997, and the results of its
operations and its cash flows for the periods then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company emerged from Chapter 11 bankruptcy
effective July 17, 1998 and is in the development stage with no significant
operating results to date. The bankruptcy proceedings significantly affected
the Company's capital structure, liquidity, and capital resources. These
factors and others discussed in Note 1 raise substantial doubt about the
ability of the Company to continue as a going concern and about the ability of
the Company to realize its Reorganization Asset. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
San Jose, California
July 16, 1999
<PAGE> 44
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998, JULY 17,1998, AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
Post Emergence Predecessor
---- --------- -----------
December 31, July 17, December 31,
1998 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5 $ 295 $ --
Accounts receivable, net of allowance for doubtful
accounts of $51, $50 and $31 44 86 85
Factored accounts receivable, net of allowance for
doubtful accounts of $349, $66, and $0 105 508 571
Prepaid expenses and other current assets 158 92 122
---------------------------------------------
Total current assets 312 981 778
Property and equipment, net 81 122 974
Other assets 32 54
Reorganization asset, net of amortization of $147, $0, and $0 3,060 3,131 --
---------------------------------------------
Total assets $ 3,485 $ 4,234 $ 1,806
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations $ -- $ 32 $ --
Notes payable 1,197 100 157
Factoring liability 1,144 700 821
Accounts payable 912 417 7,151
Accrued liabilities 504 690 605
---------------------------------------------
Total current liabilities 3,757 1,939 8,734
---------------------------------------------
Long-term notes payable (Note 4) 260 528 --
Capital lease obligation, less current portion -- -- 2
---------------------------------------------
Total noncurrent liabilities 260 528 2
---------------------------------------------
Redeemable common stock, at $1.00 per share, 600,000 shares
outstanding at December 31, 1998 and July 17, 1998 and
none outstanding at December 31, 1997 (Note 6) 600 600 --
---------------------------------------------
Commitments and contingencies (Note 5)
Shareholders' equity (deficit):
Preferred stock, $0.01 par value and paid in capital
Series A cumulative convertible preferred stock;
liquidation preference of $4,002:
Designated--600 share; outstanding--0 shares
Subscribed--600 shares at December 31, 1998 and
July 17, 1998 and 0 shares at December 31, 1997 600 600 --
Series B cumulative convertible preferred stock:
Designated--1,700 shares; outstanding--none -- -- --
Series C cumulative convertible preferred stock:
Designated--1,225 shares; outstanding--none -- -- --
Common stock, $0.01 par value:
Authorized--25,000
Outstanding--3,726 shares in 1998, 1,000 shares at July
17, 1998, and 11,590 shares in 1997
Subscribed 1,482 shares in 1998, 2,040 shares at July
17, 1998, none in 1997 51 30 2,342
Notes receivable from holders of common stock -- -- (2,332)
Subscribed warrants to purchase common stock 110 47 --
Additional paid-in capital 867 490 --
Accumulated deficit (2,760) -- (6,940)
--------------------------------------------
Total shareholders' equity (deficit) (1,132) 1,167 (6,930)
--------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 3,485 $ 4,234 $ 1,806
============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
<PAGE> 45
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Post-Emergence Predecessor
Period from
Inception Period from
(July 17, 1998) January 1, 1998 Year Ended
to December 31, to July 16, December 31,
1998 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Revenues 837 2,076 6,108
Costs and expenses:
Cost of revenues 911 1,563 4,106
Selling, general, and administrative 1,892 2,672 4,440
Research and development 429 -- --
Amortization of reorganization asset 147 -- --
----------------------------------------------------------
Total operating expenses 3,379 4,235 8,546
----------------------------------------------------------
Loss from operations (2,542) (2,159) (2,438)
Interest expense (218) -- (320)
Other income (expense), net -- (264) (114)
----------------------------------------------------------
Total other income (expense) (218) (264) (434)
----------------------------------------------------------
Net loss and comprehensive loss (2,760) (2,423) (2,872)
==========================================================
Net loss per share:
Basic and diluted (0.56) (0.21) (0.25)
==========================================================
Shares used in computing net loss per share:
Basic and diluted 4,914 11,590 11,590
==========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 46
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Convertible Warrants to
Preferred Stock Common Stock Purchase
----------------------------------------------- Common Notes
PREDECESSOR Shares Amount Shares Amount Stock Receivable
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 -- $ -- 11,590 $ 2,342 $ -- $ (2,332)
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1997 -- -- 11,590 2,342 -- (2,332)
Net loss -- -- -- -- -- --
Issuance of new preferred and common stock and
warrants in accordance with the POR 600 600 3,040 30 47 --
Application of fresh-start accounting -- -- (11,590) (2,342) -- 2,332
------------------------------------------------------------------------------
POST-EMERGENCE
- --------------
Balance at inception (July 17, 1998) 600 600 3,040 30 47 --
Issuance of common stock for services -- -- 2,000 20 -- --
Issuance of common stock related to
debt financing -- -- 128 1 -- --
Issuance of warrants related to debt
financing -- -- -- -- 73 --
Exercise of warrants -- -- 40 -- (10) --
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1998 600 $ 600 5,208 $ 51 $ 110 $ --
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Additional Shareholders'
Paid-in Accumulated Equity
PREDECESSOR Capital Deficit (Deficit)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1997 $ -- $ (4,068) $ (4,058)
Net loss -- (2,872) (2,872)
----------------------------------------------
Balance, December 31, 1997 -- (6,940) (6,930)
Net loss -- (2,423) (2,423)
Issuance of new preferred and common stock and
warrants in accordance with the POR 490 -- 1,167
Application of fresh-start accounting -- 9,363 9,353
----------------------------------------------
POST-EMERGENCE
- --------------
Balance at inception (July 17, 1998) 490 -- 1,167
Issuance of common stock for services 336 -- 356
Issuance of common stock related to
debt financing 31 -- 32
Issuance of warrants related to debt
financing -- -- 73
Exercise of warrants 10 -- --
Net loss -- (2,760) (2,760)
----------------------------------------------
Balance, December 31, 1998 $ 867 $ (2,760) $ (1,132)
==============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 47
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Post Emergence
Predecessor
Period from
Inception Period from
(July 17, 1998) January 1, 1998 Year Ended
to December 31, to July 16, December 31,
1998 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,760) $ (2,423) $ (2,872)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of fixed assets -- 30 200
Depreciation and amortization 192 88 252
Forgiveness of current obligations in exchange for fixed
assets -- 738 --
Valuation of common stock issued for services 356 -- --
Provision for bad debts 284 85 --
Changes in assets and liabilities:
Accounts receivable 42 (20) 2,698
Unbilled receivables -- -- 98
Factored accounts receivable 120 (3) (571)
Prepaid expenses and other assets (3) 84 34
Accounts payable (756)
Deferred revenue 495 655 2,025
Accrued liabilities (16) 149 (1,429)
------------------------------------------------------
Net cash used in operating activities (1,290) (617) (321)
------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (8) (4) (287)
------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 554 528 --
Repayment of notes payable -- (57) (52)
Factoring liability, net 444 (121) 612
Payments on capital leases -- (34) (125)
Proceeds from issuance of redeemable common stock -- 600 --
Payment on notes receivable from shareholders -- -- 100
Proceeds from the exercise of warrants 10 -- --
------------------------------------------------------
Net cash provided by financing activities 1,008 916 535
------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (290) 295 (73)
Cash and cash equivalents at beginning of period 295 -- 73
------------------------------------------------------
Cash and cash equivalents at end of period $ 5 $ 295 $ --
======================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Valuation of common stock related to debt financing $ 32 $ -- $ --
Valuation of warrants issued in conjunction with debt $ 63 $ -- $ --
Notes payable issued to secured creditors for pre-petition
claims and taxes (See Note 5) $ 275 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 48
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF THE COMPANY:
COMPANY FORMATION AND FINANCIAL REORGANIZATION
I-Storm, Inc. (the "Company" or "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. 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 has not engaged in any material business
operations. Its only activities since that time have consisted of restoring and
maintaining its good standing in the State of Nevada.
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 as of
December 31, 1998. 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.
F-5
<PAGE> 49
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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.
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
F-6
<PAGE> 50
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 achieve successful operations, the Company will require additional
capital to sustain and expand its business. I-Storm has raised net proceeds of
approximately $5.7 million since December 31, 1998. 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; significant concentration of revenue from a
few customers; highly competitive markets with limited barriers to entry; and
implementation of its new E-Commence CyberStore concept.
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-7
<PAGE> 51
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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):
UNAUDITED INFORMATION
<TABLE>
<CAPTION>
Reorganization and
Predecessor Fresh Start Adjustments Reorganized
Company ----------------------- Company
July 17, 1998 Debit Credit July 17, 1998
--------------- ------------ -------------- -----------------
<S> <C> <C> <C> <C>
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
=============== ============= ============== =================
Liabilities and equity: $ 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):
<TABLE>
<S> <C>
New debt $ 125
New equity 1,266
--------------
Reorganization value 1,391
Plus: Fair value of liabilities 2,842
Less: Fair value of assets (1,102)
--------------
$ 3,131
==============
</TABLE>
(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-8
<PAGE> 52
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(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.
2. 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.
I-Storm paid cash of $80,360, $57,797 and $208,328, for interest in the periods
ended December 31, and July 17, 1998, and the year ended December 31, 1997.
I-Storm paid cash of $0, $4,176 and $11,028, for taxes in the periods ended
December 31, 1998 and July 17, 1998, and the year ended December 31, 1997.
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-9
<PAGE> 53
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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.
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, July 17, December 31,
1998 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Computer equipment $ 61 $ 61 $ 141
Furniture and fixtures 61 61 241
Leasehold improvements 0 0 875
---------------------------------------------------
122 122 1,257
Less: Accumulated depreciation (41) 0 (283)
---------------------------------------------------
$ 81 $ 122 $ 974
===================================================
</TABLE>
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. As of December 31, 1998, the value of the Reorganization
Asset was approximately $3,060,000. 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 SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
F-10
<PAGE> 54
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, July 17, December 31,
1998 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Professional fees $ 175 $ 367 $ 176
Payroll and payroll-related liabilities 139 162 115
Sales taxes 0 35 17
Other accrued liabilities 190 158 265
-----------------------------------------------------
$ 504 $ 722 $ 573
=====================================================
</TABLE>
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("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, and accordingly, it
has included the pro forma disclosures required under SFAS No. 123 in Note 8.
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.
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
F-11
<PAGE> 55
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
changes in equity. For the periods ended December 31, 1998 and July 17, 1997,
and the year ended December 31, 1997, I-Storm's comprehensive loss was equal to
net loss.
COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE AND PRO FORMA 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 using the weighted average number of shares of
common stock outstanding during the period less shares subject to repurchase.
Basic and diluted pro forma net loss per common share, as presented in the
statements of operations, has been computed as described above and also gives
effect to the conversion of the convertible preferred stock if anti-dilutive
(using the if-converted method) from the original date of issuance.
<TABLE>
<CAPTION>
Period Ended Period Ended Year Ended
December 31, July 16, December 31,
(in thousands) 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
Basic and diluted: $ (2,760) $ (2,423) $ (2,872)
Weighted average shares used in computing basic
and diluted net loss per common share $ 4,914 $ 11,590 $ 11,590
=====================================================
Basic and diluted net loss per common share $ (0.56) $ (0.21) $ (0.25)
=====================================================
</TABLE>
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 periods ended December 31, 1998 and July 17, 1998, and the year
ended December 31, 1997, I-Storm's revenue was generated in the United States.
F-12
<PAGE> 56
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedging accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or January 1, 2001 for I-Storm). This Statement
will not have a material impact on the financial condition or results of the
operations of I-Storm.
3. 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 December 31, 1998, July
17, 1998, and December 31, 1997, I-Storm had $1,144,000, $700,000, and
$821,000, respectively, outstanding in factoring liability related to the
factoring agreement. Subsequent to December 31, 1998, I-Storm has completely
paid off the factoring liability.
The following table shows the component elements of factored accounts
receivable from customers (in thousands):
<TABLE>
<CAPTION>
December 31, July 17, December 31,
1998 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Factored accounts receivable:
Billed $ 454 $ 512 $ 477
Unbilled -- 62 94
-------------------------------------------------------
454 574 571
Less: Allowance for doubtful accounts (349) (66) --
-------------------------------------------------------
$ 105 $ 508 $ 571
=======================================================
</TABLE>
F-13
<PAGE> 57
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Factored unbilled accounts receivable represents revenue recognized on a
percentage-of-completion basis for which billings had not been presented to the
customer because the amounts were not billable at the balance sheet date. The
unbilled accounts receivable are generally billable upon completion of the
respective project.
4. NOTES PAYABLE:
As of December 31, 1998, I-Storm had a note payable agreement with Trident,
under which I-Storm was able to borrow up to $1 million at 10% per annum. As
discussed in Note 1, Trident provided $600,000 in pre-confirmation bridge
financing and $228,000 in post-confirmation bridge financing. In consideration
for the pre-confirmation bridge financing, I-Storm issued Trident 600,000
shares of redeemable common stock and 440,000 shares of non-redeemable common
stock. In partial consideration for the post-confirmation bridge financing,
Trident has been issued additional 91,200 shares of non-redeemable non-voting
common stock. At December 31, 1998, I-Storm had $321,000 outstanding under this
note payable agreement classified as notes payable in the accompanying balance
sheet and $600,000 outstanding classified as redeemable common stock.
Subsequent to December 31, 1998, these notes have been repaid.
As of December 31, 1998, I-Storm had notes payable agreements with certain
individuals in amounts aggregating $250,000 at 10% per annum. The notes are
collateralized via a security interest in all of I-Storm's assets, subject to
certain other security interests. In conjunction with the issuance of the notes
payable, I-Storm issued warrants to purchase 60,000 shares of common stock in
I-Storm exercisable at $0.50 per share. The warrants expire on March 31, 2003.
At December 31, 1998, the outstanding balance under these agreements was
$250,000 and is classified as notes payable in the accompanying balance sheet.
Subsequent to December 31, 1998, these notes have been repaid.
As of December 31, 1998, I-Storm also had notes payable agreements with certain
individuals in amounts aggregating $275,000 at 10% per annum. I-Storm issued
warrants to purchase 50,000 shares of common stock, exercisable at $0.001 per
share. At December 31, 1998, the balance outstanding under these agreements was
$275,000 and is classified as notes payable in the accompanying balance sheet.
Subsequent to December 31, 1998, these notes have been repaid.
As of December 31, 1998, I-Storm also had notes payable agreements with certain
individuals in amounts aggregating $300,000 at 10% per annum. I-Storm issued
warrants to purchase 120,000 shares of common stock, exercisable at $0.001 per
share. At December 31, 1998, the balance outstanding under these agreements was
$300,000 and is classified as notes payable in the accompanying balance sheet.
Subsequent to December 31, 1998, these notes have been repaid.
All of the notes payable agreements listed above expire upon the earlier of:
(i) various dates from March 31, 1999 through October 31, 1999; (ii) the date
of I-Storm's receipt of $3 million
F-14
<PAGE> 58
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
from one or more debt or equity financings; or (iii) upon the sale, transfer or
disposition of any or all of the assets of I-Storm.
As of December 31, 1998, I-Storm had federal and state payroll and sales taxes
due totaling $202,000. As a result of the Chapter 11 filing, I-Storm has five
years to pay the taxes.
Under the POR, the Company is required to pay secured claims totaling $73,000,
including principal and interest (10% per annum), over a period of five years,
in equal quarterly installments.
I-Storm's notes payable obligations described above are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
(in thousands)
------------------------
<S> <C>
Note payable agreement with Trident at 10% per annum $ 321
Notes payable agreements with certain individuals at
0% per annum 861
Federal and State payroll and sales taxes 202
Secured creditors 73
-----------------
Total debt outstanding 1,457
Less: Current portion 1,197
-----------------
Total long-term notes payable $ 260
=================
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
As of December 31, 1998, I-Storm leases its facility on a month to month basis.
There are no future minimum required payments for this facility.
In March 1999, I-Storm entered into a two year operating lease for a new
facility. The future minimum required payments under this lease are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $ 253
2000 348
2001 29
-----------
$ 630
===========
</TABLE>
In conjunction with I-Storm's bankruptcy proceedings in 1998, I-Storm's
creditors had filed claims of approximately $621,000 as secured creditors.
Subsequent to December 31, 1998, claims for approximately $548,000 were
converted to unsecured claims and were allocated their pro rata portion of
Series A Cumulative Convertible Preferred Stock. The remaining
F-15
<PAGE> 59
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
claims of $73,000 will be repaid in equal quarterly installments over five
years at 10% per annum (see Note 4).
6. REDEEMABLE COMMON STOCK:
In conjunction with the POR, I-Storm issued 600,000 shares of redeemable common
stock to Trident in consideration for $600,000 of pre-confirmation bridge
financing. These shares are redeemable at $1.00 per share, at Trident's option,
in the event that I-Storm raises $3 million in debt or equity financing.
Subsequent to December 31, 1998, Trident elected to convert the redeemable
common stock into non-redeemable common stock.
7. PREFERRED STOCK:
As of December 31, 1998, I-Storm was authorized to issue 2,000,000 shares of
preferred stock of which 600,000 shares are designated Series A Cumulative
Convertible Preferred Stock ("Series A"). Pursuant to the POR, these shares
will be issued on a pro rata basis to the class of unsecured creditors. These
shares will be issued upon the identification of these claims and the
determination of shares to be issued or the Cash Option elected, and have been
reflected as subscribed shares in the accompanying balance sheet. The shares of
Series A to be issued pursuant to the POR have been valued at $1.00 per share
as determined in good faith by the Board of Directors. Pursuant to the POR,
these shares may not be transferred or sold until twelve months after the
merger of LVL into Digital.
The rights, restrictions, and preferences of Series A are as follows:
- The holders of Series A shall, upon the vote of the majority of the
Board of Directors, be entitled to receive, out of funds legally
available therefore, cumulative annual dividends at a rate of $0.05 per
annum per share, respectively, prior and in preference to any payment
of any dividend on the common stock, payable in cash or common stock
at the option of the Board of Directors. Such dividends shall be paid
when and as declared by the Board of Directors, and unpaid dividends
shall accumulate for the benefit of the holders. The dividend rights
and preferences of the Series A shall be senior to those of common
stock. After the dividend preferences of the Series A due in a given
year have been paid in full, all remaining dividends in such year, if
any, shall be paid according to preference to remaining equity
interests.
- In the event of any liquidation, dissolution, or winding up of
I-Storm, or the sale, merger, or combination of I-Storm, a public
offering in excess of $25 million, and merger or consolidation of
I-Storm in which its shareholders do not retain a majority of the
voting power in the surviving corporation, or a sale of substantially
all of I-Storm's assets (singularly or collectively referred to as a
"Liquidation Preference Event"), the holders of the Series A will be
entitled to receive an amount equal to $6.67 per share for the Series
A, plus an amount equal to all declared but unpaid dividends (the
"Preference Amount"). After the Preference Amount on all outstanding
shares of
F-16
<PAGE> 60
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Series A has been paid, any remaining funds and assets of I-Storm
legally available for distribution shall be paid pro rata solely among
the holders of common stock. If I-Storm has insufficient assets to
permit payment of the Preference Amount in full to all holders of
Series A, then the assets of I-Storm shall be distributed ratably to
the holders of Series A in proportion to the Preference Amount each
such holder would have been entitled to receive.
- The Series A shall be redeemable in part or in full at the option of
I-Storm on thirty days advance written notice to the holders of Series
A at a redemption price of $6.67 per share. Upon receipt of notice of
I-Storm's intention to redeem the Series A, each holder of Series A
shall have an option to convert to common stock as described below.
Any partial redemption shall be made on a pro rata basis.
- Each holder of Series A shall have the right to convert the Series A
into shares of common stock in part or in full at any time, including
within thirty days after notice by I-Storm of its intention to redeem
the Series A or of a Liquidation Preference Event. The initial
conversion rate for the Series A shall be one-to-one. All rights
incident to a share of Series A (including but not limited to rights
to any declared but unpaid dividends) will terminate automatically
upon any conversion of such share into common stock. The number of
shares of common stock issuable upon conversion of each share of
Series A shall be subject to adjustment from time to time upon the
occurrence of certain events.
- The holders of Series A shall have the right to vote as a class on (i)
the merger, sale, liquidation, or dissolution of I-Storm, (ii) a sale
of all or substantially all of I-Storm's assets, (iii) any increase in
the number of authorized shares of any class or series of equity
securities of I-Storm, (iv) creation of any new class or series of
equity securities in LVL, (v) any increase in the number of members of
the Board of Directors of I-Storm and LVL, and (vi) election of one
member of the Board of Directors of I-Storm and LVL.
8. COMMON STOCK:
At December 31, 1998, common stock consists of 3,326,000 shares outstanding,
and an additional 1,482,000 shares subscribed. The subscribed shares consist of
shares to be issued pursuant to the POR that had not been issued as of December
31, 1998. The Board of Directors authorized the issuance of these shares on
July 23, 1998. The shares of common stock to be issued pursuant to the POR have
been valued at $0.25 per share, as determined in good faith by I-Storm's Board
of Directors. Each issued and outstanding share of common stock entitles the
holder to one vote on all matters submitted to a vote of stockholders. Upon any
liquidation, dissolution or winding up of the affairs of I-Storm, holders of
common stock are entitled to receive pro rata all of the assets available for
distribution to shareholders, only after payment or provision for payment of
all debts and other liabilities of I-Storm, including a pro-rata distribution
of assets, first, to the holders of Series A.
F-17
<PAGE> 61
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Shares of common stock issued pursuant to the POR and shares issued upon the
exercise of warrants issued pursuant to the POR may not be transferred or sold
within six months of the merger of LVL and Digital for holders of common stock
that had provided financing to I-Storm. Shares may not be transferred or sold
within eighteen months of the merger of LVL and Digital for holders of common
stock that had not provided financing to I-Storm. The Board of Directors may
release all or a portion of these restrictions at its discretion.
1998 STOCK OPTION PLAN
As provided in the POR and subject to stockholder approval, in 1998, I-Storm
established the 1998 Stock Option Plan (the "1998 Option Plan") covering
1,400,000 shares of common stock. 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 expire on
the tenth anniversary of the date of grant. The 1998 Option Plan provides that
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
has the authority to set exercise dates, payment terms and other provisions for
each grant. As of December 31, 1998, there were no shares outstanding under the
1998 Option Plan. In accordance with APB No. 25, no compensation expense has
been recognized related to options granted to employees, as there were no
options granted to employees as of December 31, 1998.
SUBSCRIBED WARRANTS TO PURCHASE COMMON STOCK
I-Storm has issued 350,000 warrants to purchase common stock at $0.50 per share
to creditors and to other entities and individuals as specified by the POR. The
warrants are exercisable for a period of five years commencing from their issue
date pursuant to the POR. The Board of Directors authorized the issuance of
these warrants on July 23, 1998. I-Storm has valued these warrants at
approximately $0.13 per share based on an option pricing model.
WARRANTS TO PURCHASE COMMON STOCK
I-Storm has issued warrants to purchase 290,000 shares of common stock at an
exercise price of $0.001 per share in connection with a bridge financing of
$825,000. The warrants are exercisable for a period of five years commencing
from their issue date. I-Storm has valued these warrants at approximately $0.25
per share based on an option pricing model. As of December 31, 1998, warrants
for 40,000 shares have been exercised.
F-18
<PAGE> 62
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
COMMON STOCK ISSUED FOR SERVICES
During 1998, the Board of Directors authorized the issuance of 2,000,000 shares
of common stock valued at $0.25 per share to entities in consideration for
financial services and financing provided to I-Storm.
RESERVED FOR FUTURE ISSUANCE
The following shares of common stock are reserved for future issuance:
<TABLE>
<CAPTION>
<S> <C>
Subscribed common stock 2,040,000
1998 Stock Option Plan 1,400,000
Conversion of preferred stock 600,000
Warrants 600,000
---------------
4,640,000
===============
</TABLE>
9. INCOME TAXES:
I-Storm accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes." A valuation allowance has been recorded for the total deferred
tax assets as a result of uncertainties regarding the realization of the assets
based upon the lack of profitability in recent years, the uncertainty of future
profitability, and limitations on the utilization of net operating losses due
to I-Storm's reorganization.
10. 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 instalments
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 a 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
F-19
<PAGE> 63
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 fully as of August
1, 1998, are unregistered shares and are subject to an eighteen month lock-up
agreement.
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.
F-20
<PAGE> 64
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
The Company is a party to a twelve month consulting agreement with Benchmark
Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to which the
Company is obligated to pay $175,000 in twelve monthly instalments to Benchmark
for consulting services rendered to either LVL or the company, commencing as of
March 1, 1998. As of February 1, 1999, 11 months of 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 1, 1998.
11. SUBSEQUENT EVENTS:
Subsequent to December 31, 1998, I-Storm raised net proceeds of $4,396,927 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 common 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.
Subsequent to December 31, 1998, I-Storm raised net proceeds of $4,004,000 in
connection with the issuance of 371,429 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 common 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.
Subsequent to December 31, 1998, the Board of Directors authorized 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-21
