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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] 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)
NEVADA 87-0410127
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2440 West El Camino Real, Suite 520 94040-1400
Mountain View, California (Zip Code)
(Address of principal executive offices)
(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 3
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 [x] No [ ]
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, 1999 totaled
$745,000.
The aggregate market value of registrant's Common Stock held by non-affiliates
based upon the closing bid price on December 31, 1999, as reported by the OTC
Bulletin Board, was approximately $5,901,675.
As of December 31, 1999, there were 5,641,890 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 is a full service online e-commerce business developer and
incubator specializing in the architecture, management and operation of
outsourced e-commerce and e-commerce channel solutions for Fortune 500 and
middle market companies. Headquartered in Silicon Valley, I-Storm launched the
I-Storm e-store strategy in May 1998, a joint venture program to finance,
design, develop, and operate electronic commerce storefronts in partnership with
brand-name consumer, business, financial and technology product companies.
Electronic commerce or "e-commerce" is the direct retail sale of goods
and services over the Internet. Over the past five years, the Company 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 is the parent company of LVL Communications Corporation
("LVL"), a Silicon Valley Internet marketing, advertising and technology
services company. Collectively, herein, LVL shall be referred to with I-Storm as
"the Company."
I-Storm 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 from private
investors to fund its reorganization costs, and 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 e-store development. As of December 31, 1999, the Company earned
no revenue from its former advertising services business clients and limited
revenue from e-commerce activities.
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The Company is headquartered in Mountain View, California in an 11,500
square foot leased office facility. As of December 31, 1999, the Company had 19
full time employees.
INDUSTRY BACKGROUND
The Internet presents opportunities to transform businesses and entire
industries as organizations exploit their potential to extend and enhance their
electronic commerce ("e - commerce") business activities and gain competitive
advantage. Companies are using the Internet to communicate and transact business
on a one-to-one basis with existing customers and to target and acquire new
customers. At the same time, companies are using the Internet to collaborate
with their supply-chain partners and manage distribution and other strategic
relationships. The Internet has also allowed businesses to identify new product
and service offerings that extend and complement their core markets:
o Giga Information Group projects that corporations around the
world will save up to $1.25 trillion by 2002 by doing business
over the Internet.(1) The savings margins will result from
task processing, selection, fulfillment, pricing and
procurement.
o International Data Corp. ("IDC") projects that over the next
few years, the number of users in the United States alone will
nearly double, from 47 million today, to 85 million by the
year 2002.(2)
o ("IDC") also estimates that the number of Internet users was
98 million worldwide at the end of 1998 and will continue to
grow to 320 million by the end of 2002. By the year 2002, it
is projected 78% of all Internet commerce will occur in the
business-to-business sector.(3)
Despite these opportunities, 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--be they "business to business" or consumer to business companies,
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's solution is to provide significant Internet knowledge, skills
and execution capability coupled with high-level technology and pre-assembled
platforms that provide rapid time to Internet deployment and time to market for
business to business sales by traditional branded companies.
I-STORM, INC.
I-Storm 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 e-commerce storefronts in partnership with brand-name
consumer technology product companies ("Product Partners").
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(1) ABCNews.com, Companies Save from E-Commerce, The Associated Press,
August 5, 1999
(2) eMarketer, The 1998 eOverview Report, 3rd quarter 1998
(3) International Data Group, Press Release, June 28, 1999
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Over the past five years the Company's wholly owned subsidiary, LVL,
developed on-line e-commerce strategies and mechanisms 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 ("Egghead") and Cisco Systems, Inc. ("Cisco")
retail transaction sites, which are two successful e-commerce sites on the Web
today. Based upon Management's experience with these ventures, in May 1998, the
Company formally launched its "e-store" strategy.
I-Storm intends to act as a catalyst to accelerate traditional branded
business with defined "old line" distribution channels into e-commerce
opportunities. Under the I-Storm e-store 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 e-store").
Each I-Storm e-store is expected to exclusively feature an e-partner's brand
names and would be seamlessly tied to the e-partner's corporate,
product-specific and other web-sites. An I-Storm e-store would be a "company
store" dedicated to the Product Partner's entire line of products, including
parts, accessories and related products.
EFFICIENCIES AND LEVERAGE OF AN E-COMMERCE CHANNEL
The e-commerce services market is expected to grow rapidly to $64.8
billion by 2003 with an estimated compound annual growth rate of 59% during the
period(4). This growth is attributed to a growing realization that companies
need to move beyond basic web storefronts to new business models that robustly
employ the Internet if they are to thrive in this sales channel. Internal
resources will not, per se, be sufficient to provide the level of expertise and
response capability that will be required.
Businesses that wish to establish a major marketing presence on the
Internet encounter significant challenges, however. 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 building and operating a successful store; the significant capital
outlay required to enter the channel seriously; and the uncertain timeline for
profitability.
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(1) Forrester Research, Press Release, November 2, 1999
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I-STORM E-STORE STRATEGY
I-Storm's solution and strategy is to finance, design, develop, and
operate commercial Internet web-sites in partnership with business-to-business
brand-name 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 domestic and internationally-recognized branded
selling sites. The key elements of the Company's strategy to accomplish this
goal are to: (i) partner with major consumer and business-to-business brands,
(ii) provide risk capital and expertise in exchange for ownership, and (iii)
build, operate and manage branded e-stores on an outsourced basis.
I-Storm particularly offers its expertise to middle market companies
($250 million to $1 billion revenue) that desire to leverage their existing
brand and distribution capabilities to a greater degree through the Internet.
This may imply an expansion of existing distribution channels, adaptation of
products/services to fit new channels, or creation of entirely new distribution
channels utilizing the power of the Internet.
I-Storm offers a packaged approach for the e-partner that emphasizes
shared risk and reward. The components of this package are:
o Development of an e-commerce strategy in conjunction with the
e-partner through assessing existing capabilities and
opportunities to leverage brand and distribution through
Internet execution. I-Storm helps the e-partner find untapped
niche markets or new market opportunities that can be
profitably serviced utilizing the power of the Internet.
o Execution of a mutually agreed plan for operations,
infrastructure, production, sales and marketing that utilizes
the best capabilities of I-Storm and the e-partner.
o Development/modification and installation of a tailored
technology platform to meet the specific needs of the
e-partner.
o Provision of on-going management of the business
infrastructure, including the Internet site.
o Arrangements to provide investment capital when appropriate to
fund development and execution of this strategy.
Ownership of the I-Storm e-store is accordingly proposed to be
structured in one of several ways. The e-store may be structured as a joint
venture or royalty partnership that splits returns between the Company and the
e-partner in a manner permitting the Company to consolidate sales and pre-tax
profits while sharing a portion of those profits with the e-partner. The e-store
may also be structured so that the Company would purchase an equity position in
the e-store entity and receive revenue for providing professional services to
the e-store entity.
A typical I-Storm e-partnering relationship will be structured as
follows:
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<TABLE>
<CAPTION>
Partner New Venture I-Storm
- ------- ----------- -------
<S> <C> <C>
o Provides: Each party provides o Provides:
o products, expertise to a new and o technology,
o merchandising, possibly separate o Internet talent (technology and marketing),
o marketing support venture o seed capital
o Investment: Based on mutually agreed o Investment:
o development upon investment levels o development
o operating costs and budgets o operating costs
o Leverages: Use subject expertise and o Implements Internet "store"
o Product production skills to produce best o builds the store
o Product R&D of class operation. o operates the store
o Other support services o maintains the store
(example: warehousing,
shipping, etc.) Alternatives:
Spin off venture
Recapture investment
</TABLE>
In summary, the development of e-stores through an I-Storm
e-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 intends to benefit
by being able to access the massive product, manufacturing, and brand-name
investment resident in e-partners' businesses through a revenue and equity
sharing corporate or contractual entity.
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 E-store-type sites are Egghead and Cisco Internet
Junction:
EGGHEAD, INC.: In early 1995, LVL created one of the web's first online
e-commerce sites for Egghead. The site features full online shopping
and purchasing capabilities with an inventory of over 3,000 products.
In 1997 the online store outsold each of Egghead's 200 traditional
storefronts and accounting for over 10% of Egghead's total retail
sales.
CISCO SYSTEMS, INC.: In 1996, when Cisco 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.
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Management views the Egghead and Cisco e-commerce sites as
demonstrative only of the capability of the I-Storm management team to design
and build successful e-commerce sites. I-Storm does not have an ownership or
revenue interest in either the Cisco or Egghead e-commerce sites. Further, the
performance of the Egghead and Cisco e-commerce sites may not be indicative of
an average performing e-commerce website.
Competition
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I-Storm competes with the following types of entities:
VENTURE INCUBATORS: These firms represent the principal competitors in the
e-Partner space. Competitors will provide consulting assistance in areas like
business plan preparation, strategic guidance, physical space and financing.
Through other portfolio companies, the competitor is able to provide services,
platforms and hosting support, up to a fully integrated solution. CMGI, Internet
Capital Group and IdeaLabs are examples of competition in this sector.
CONSULTANTS: Organizations such as Anderson Consulting provide business and
systems consulting, re-seller solutions and implementation. These organizations
have not historically participated in joint ventures or partnering; however,
several of these organizations have established venture funds with the aim of
investing in the new company development side as opposed to client situations.
APPLICATION SERVICE PROVIDERS ("ASP"): These competitors will provide a
customized, packaged solution to establish an e-commerce presence but typically
do not provide strategy. Examples of ASP's are Pandesic and Open Market.
PACKAGED PRODUCT HOUSES: US Web/CKS is an example of an organization that will
provide a full spectrum of services, including consulting and solutions; the
focus is typically on one element of the package, for example, brand image and
advertising.
SYSTEM INTEGRATORS: Competition in this sector will include organizations that
help define needs and then recommend solutions that will be sourced from various
vendors and then integrated into a package. Companies such as IBM and SAP may
provide a majority of the solution. Competitors in this space focus on the
platform, integration with other systems and technology needs. Typically,
advertising, branding and positioning are not provided.
DEVELOPERS: Competition is fragmented in this sector and can range from a local
shop to a national organization. These companies may focus solely on the front
end user interface or offer development around a system.
IN-HOUSE IT DEPARTMENTS: Each target company may have a strong IT department
that believes itself capable of providing the solution in conjunction with other
departments such as the target's marketing department. The internal organization
may represent the most formidable sales objection that I-Storm must overcome in
establishing a relationship with a company.
INTERNET SERVICE PROVIDERS ("ISP"): Generally, ISP's will focus on technical
hosting of the platform and maintenance of the site. However, as these types of
services become commoditized, it is envisioned that an ISP strategy might be to
expand the service offering.
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Technology and Operations
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I-Storm utilizes an approach that emphasizes technology that can be
readily adapted to achieve rapid time to market. In this context, I-Storm has
spent significant development dollars to create pre-assembled platforms that are
applicable to Business to Consumer ("B2C") and Business to Business ("B2B")
needs. These pre-assembled platforms are expected to capture at least eighty
percent of the needs of a site application. Customization can then be readily
effected.
For example, in a B2C application, database storage/housing, search
functions, order entry, inventory availability verification, payment processing,
shipping options, email, interface to finance and other "back office" functions
are pre-assembled. The front end can also be pre-designed to a certain extent.
These pre-assembled components can then be "taken off the shelf" and rapidly
deployed with a relationship. I-Storm then works with the relationship to define
the front-end "contextual" look of the site, which can then be rapidly
implemented.
I-Storm has a developer relationship with Oracle(R) Corporation for
database architecture, tools and supporting software applications. Oracle allows
for major database structures and applications that form the underpinnings of
the web site. I-Storm also licenses BroadVision, Inc.'s ("Broadvision") tools
for web site development. BroadVision, Inc. is the leading worldwide supplier of
one-to-one e-commerce applications for relationship management across the
extended enterprise. BroadVision applications enable companies to personalize
communications, transactions, and services to match the needs of employees,
partners, and customers.
I-Storm also makes extensive use of HTML and other Web oriented
software languages to provide front-end programming.
RELATIONSHIP WITH COMPUTER ASSOCIATES INTERNATIONAL, INC.
In November 1999 I-Storm, Inc. and Computer Associates International,
Inc. (NYSE: CA) ("CA") entered into a letter of intent to develop a strategic
alliance designed to leverage the strengths of I-Storm's e-commerce solution
expertise and CA's Global Professional Services Group to finance, build, and
operate e-commerce storefronts for major corporations and consumer brands. CA is
world leader in mission-critical business computing, provides software, support
and integration services in more than 100 countries around the world. CA has
more than 17,500 employees and had revenue of $5.3 billion in fiscal year 1999.
CA and I-Storm consummated this alliance on January 14, 2000. Under the
terms of the alliance, CA has made an equity investment in I-Storm, and CA will
also provide I-Storm with enterprise software development and systems
integration services. I-Storm and CA will assemble a joint business development
team focused on deploying eBusiness solutions in the business-to-consumer and
business-to-business spaces. CA will also acquire one of five seats on I-Storm's
Board of Directors.
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 electronic
marketing sites for high profile consumer brand companies. On July 6, 1999,
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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 and Oracle have not entered into
an agreement with a product partner, nor has the Company earned revenue as a
result of its relationship with Oracle.
I-STORM CORPORATE PARTNERS AND ADVISORS
In 1998 and 1999, the Company developed relationships with certain
companies and individuals which, in the opinion of Management, will help to
strengthen I-Storm's ability to develop and operate I-Storm e-stores
effectively. These companies and individuals included:
COMPUTER ASSOCIATES INTERNATIONAL, INC.
In November 1999, I-Storm, Inc. ("I-Storm" or the "Company") and
Computer Associates International, Inc. ("CA") entered into a letter of intent
to form a strategic alliance designed to leverage the strengths of I-Storm's
e-commerce solution expertise and CA's Global Professional Services Group to
finance, build, and operate eBusiness storefronts for major corporations and
consumer brands. On January 14, 2000, I-Storm and CA formally entered into this
strategic alliance.
Under the terms of the transaction, CA has made an equity investment in
I-Storm, and CA will also provide I-Storm with enterprise software development
and systems integration services. I-Storm and CA will assemble a joint business
development team focused on deploying eBusiness solutions in the
business-to-consumer and business-to-business spaces. CA will also acquire one
of five seats on I-Storm's Board of Directors.
In accordance with the I-Storm Series D Stock Purchase Agreement, CA
has initially purchased 40,817 newly issued shares of I-Storm Series D
Cumulative Convertible Preferred Stock ("Series D Preferred Stock") at a price
of $12.25 per share for a cash investment of $500,000. CA, an accredited
investor, made the purchase pursuant to the provisions of Regulation D of the
Securities and Exchange. The Series D Preferred Stock is subject to certain
demand and piggy-back registration rights as set forth in the I-Storm Series D
Preferred Stock Registration Rights Agreement.
CA also has the option under the I-Storm Series D Stock Purchase
Agreement, to make up to three additional purchases of Series D Preferred Stock
in $500,000 increments, upon I-Storm's and CA's mutual approval of three
e-commerce partnership agreements. CA's total proposed investment in I-Storm is
a maximum of 163,268 shares of Series D Preferred Stock for an aggregate
purchase price of $2,000,000.
I-Storm and CA have also entered into a Professional Services Agreement
for CA to provide a minimum of $800,000 of professional services during the
period commencing August 1, 1999 through December 31, 2001, and a License
Agreement to provide CA software products during the same time period.
I-STORM ADVISORY BOARD.
In May of 1998, I-Storm established the I-Storm Advisory Board to exist
for a year in duration . This organization was created to provide I-Storm the
new business with experience and contacts in key areas of merchandising and
marketing. Members of the Advisory Board served a one year term. Certain 1998
members of the I-Storm Advisory Board were as follows:
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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. Mr. Howard is also a director of
the Company.
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 later served as the head of Merchandising and
Marketing for Egghead(TM) Software Together with LVL, Mr. Janssen
implemented EGGHEAD.COM., one of the first e-commerce Internet
sites.
In May 1999, Mr. Howard became a director of the Company. Mr. Janssen
provided consulting services to the Company in conjunction with his advisory
Board duties, until May 1999.
I-STORM E-STORE PARTNERSHIPS
The Company has approached a targeted number of brand-name B2B and B2C
product companies regarding the I-Storm e-commerce program.
In December, 1999, I-Storm entered into negotiations with Sheridan
Reserve, Incorporated d/b/a/ Nevadabob's.com. Subsequently, on March 20, 2000,
I-Storm entered into a Professional Services Agreement with Sheridan Reserve
Incorporated d/b/a NevadaBobs.com, Inc. ("Sheridan") to build and operate
"NevadaBobs.com," the dot.com spinoff of Nevada Bob's Golf, Inc., a worldwide
specialty golf retailer. Under the Professional Services Agreement, I- Storm
will provide the technical architecture and platform for NevadaBob.com's e-store
site and will also provide development and implementation services for the site.
In connection with the transaction, I-Storm has also entered into a
subscription agreement with Sheridan to purchase up to 1,350,000 shares, or
7.94% of Sheridan's outstanding common stock at a price of $2.25 Canadian
Dollars per share. It is anticipated that the proceeds of Sheridan's payments
for I-Storm's professional services will be used for the purchase of Sheridan's
common stock. Sheridan's common stock currently trades on the Canadian Dealing
Network (CDN:SHRI) exchange.
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 e-store dedicated to exclusively selling Sun
and compatible products to retail customers for profit. As of December 31, 1999,
the Sun and the Company were still undergoing negotiations concerning whether
they would formalize an agreement for the Company to provided e-store services.
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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. To date the Company has not earned
any revenue as a result of its relationship with AIG.
In 1998, the Company signed non-binding letters of understanding and
pursued feasibility studies for the construction of e-stores with Garden
Botanika, The High-Tech Group, Abercrombie and Kent and Philips Electronics,
Inc. As of December 31, 1999, the Company has not entered into any agreements to
construct e-stores for these entities, nor has the Company received any revenue
from these entities.
LVL COMMUNICATIONS CORPORATION
LVL, a marketing, advertising and internet technology Company,
headquartered in Mountain View, California View, has had 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 has been 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.
In Management's view, LVL's business was 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 LVL 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 e-store 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.
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. The Company presently has no revenue from any former advertising
service business client or from any e-store.
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EMPLOYEES OF THE COMPANY
As of December 31, 1999, the Company and its subsidiaries employed 19
full-time and 1 part-time employees The Company employs highly skilled computer
and creative-oriented personnel from the Silicon Valley area. 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
December, 1999, 6 employees had annual salaries of $100,000.
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ADDITIONAL RISK FACTORS RELATED TO BUSINESS OPERATIONS AND CAPITAL RAISES
OPERATING LOSSES
The Company realized significant operating losses in 1998 and 1999.
There can be no assurance that the Company will generate profit or positive cash
flows from operating activities in the year 2000 or 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; PRIOR SALES TO ACCREDITED
INVESTORS ONLY; RISK OF LOSS OF ENTIRE INVESTMENT
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. To date, the Company has raised capital only through bridge
financings and the private placement offerings of Preferred Stock to accredited
investors only. To be an "accredited investor," under Securities and Exchange
Commission ("SEC" )rules, generally speaking, an individual must either have one
million dollars in net worth, not including the value of one's residence or
automobile; or one must have earned $200,000 in income in each of the previous
income tax years. An accredited investor must also be capable of understanding
and evaluating the risks of a particular investment. All shareholders investors
in I-Storm should be advised, that I-Storm is a development stage company which
has realized significant operating losses in each of the past two fiscal years,
and that he or she presently stands the risk of losing his entire investment in
the Company.
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 e-stores 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 e-store will generate sufficient revenue to produce
a profit. In addition, I-Storm's ability to maintain its partnerships with
Product Partners 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 e-stores. Further, the success of I-Storm's
e-store 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.
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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 E-STORES
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 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
e-stores in conjunction with brand-recognizable Product Partners, there can be
no assurance that any such e-stores will be developed.
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
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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 CMGI, 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 e-store concept, 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.
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 were 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
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 December 31, 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
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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
On September 15, 1999, the United States Bankruptcy Court for the
Northern District of California issued an order closing the Chapter Eleven
bankruptcy proceedings for LVL Communications Corporation, the wholly owned
subsidiary of I-Storm, based upon the Company's satisfaction of substantial
payments required under the April 16, 1998 Plan of Reorganization. No creditor
interposed an objection to the closing of the bankruptcy proceeding on September
15, 1999.
The Plan of Reorganization had imposed a condition that the Company
apply for NASDAQ listing within 90 days of July 17, 1998, the date upon which
LVL became a wholly owned subsidiary of the Company, also known as the
"Effective Date" of the Plan. This condition was imposed based upon the Plan of
Reorganization's assumption that the Company would raise sufficient equity
financing within 90 days of the Effective Date to satisfy a minimum NASDAQ
capital listing requirement of $4,000,000.
The Company made an immediate and good faith effort to raise such
equity financing, and did raise over $4 million dollars by February 18, 1999
through its Series B Preferred Stock Offering. Because of operational cash flow
needs stemming from the implementation of e-commerce strategy and the expense
and time required to prepare audited financial statements to accompany the 1998
Form 10-KSB and other required SEC reports, the Company has not been able to
meet applicable requirements to apply for listing on NASDAQ or AMEX. Substantial
time was required to prepare these reports, in part, because of fresh start
accounting requirements imposed upon bankruptcy reorganization.
The Board of Directors is actively negotiating with financial
consultants to raise sufficient capital to permit the Company to apply for
NASDAQ or AMEX listing at the end of the first quarter of the Year 2000, or
within the second quarter of Year 2000. The Company was current in all SEC
reporting by December 31, 1999. Nevertheless, there can be no assurance that the
Company will have sufficient capital in the first or second quarter of the Year
2000 to meet NASDAQ or AMEX listing requirements or that NASDAQ or AMEX will
accept the Company for listing even if the Company should meet NASDAQ or AMEX's
capital requirements at that time.
LVL's Plan of Reorganization was initially approved, and its bankruptcy
proceeding was recently closed in September 1999, by the Bankruptcy Court
without objection from its creditors. Creditors may retain a right under state
or federal law to challenge actions of LVL and its parent, the Company, with
respect to the implementation of the Plan of Reorganization, including a late
filing of the NASDAQ or AMEX 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. The United States Bankruptcy
Court for the Northern District of California found on September 15, 1999 that
the Plan had been substantially implemented.
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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, 1999, 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 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.
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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 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 has been 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 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 has
issued 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
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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. In the event of liquidation, 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.
RETIREMENT OF CONTINGENT LIABILITY UNDER THE PLAN OF REORGANIZATION
As of September 1, 1999, the Company had entered into agreements with
certain creditors of LVL Communications Corporation to retire in their entirety
certain alleged secured claims which they had made in connection with the LVL
Plan of Reorganization, in the aggregate amount of $588,775. Such creditors
agreed that they would retire their claims in their entirety for an aggregate
sum of $149,694. As of September 10, 1999, the Company has paid this aggregate
sum of $149,694 in its entirety.
CLOSING OF BANKRUPTCY ESTATE
On September 15, 1999, the United States Bankruptcy Court for the
Northern District of California issued an order closing the Chapter Eleven
bankruptcy proceedings for LVL Communications Corporation, the wholly owned
subsidiary of I-Storm, based upon the satisfaction of substantial payments
required under the April 16, 1998 Plan of Reorganization.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 13, 1999, a majority of the holders of I-Storm's Common
Stock executed a written consent in lieu of an annual meeting to approve the
establishment of the Company's 1998 B Stock Option plan and to appoint the
following directors to the Board of Directors of I-Storm: Calbert Lai, Matthew
Howard, Warren Flick, Joseph Hoffman and Tommy Bennett. The company mailed a
14-C Information Statement to all common stockholders of record on or about
February 2, 2000, and the 14-C Information Statement was also filed on February
2, 2000 with the SEC.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq Over The Counter
("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 three fiscal years, is as follows:
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PERIOD HIGH BID LOW BID
------ -------- -------
Fiscal 1997
-----------
1st quarter - -
2nd quarter - -
3rd quarter - -
4th quarter - -
Fiscal 1998
-----------
1st quarter - -
2nd quarter - -
3rd quarter $5.75 $1.50
4th quarter $4.00 $1.50
Fiscal 1999
-----------
1st quarter $11.25 $3.12
2nd quarter $6.87 $2.00
3rd quarter $4.88 $1.75
4th quarter $4.00 $1.50
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, 1999, the closing bid
price for the Company's Common Stock was $3.125. As of the same date, there were
259 holders of record of Common Stock. As of June 30, 1999, the closing bid
price was $4.125 and the number of holders of Common Stock 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
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.
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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 SERIES D PREFERRED STOCK
Subsequent to 1999 fiscal year end, on January 14, 2000, in accordance
with the I-Storm Series D Stock Purchase Agreement with Computer Associates
International, Inc. ("CA"), CA has initially purchased 40,817 newly issued
shares of I-Storm Series D Cumulative Convertible Preferred Stock ("Series D
Preferred Stock") at a price of $12.25 per share for a cash investment of
$500,000. CA, an accredited investor, made the purchase pursuant to the
provisions of Regulation D of the Securities and Exchange. The Series D
Preferred Stock is subject to certain demand and piggy-back registration rights
as set forth in the I-Storm Series D Preferred Stock Registration Rights
Agreement.
The Series D Preferred Stock is entitled to receive a quarterly
dividend of $0.28 (9% per annum) on February 15, May 15, August 15 and November
15, of each year, payable in cash, or at the option of the Company, in Series D
Preferred Stock of the Company, when and as declared by the Board of Directors.
The right of the Series D Preferred Stock to payment of either cash or Series D
Preferred stock dividends is subordinate to the right to cash or stock dividend
payments of the Series A Preferred Stock, and then to the Series B Preferred
Stock; and is PARI PASSU with the right of the Series C Preferred Stock to cash
or stock dividend payments. The Series D Preferred Stock is convertible into
shares of the Company's Common Stock: (i) at the option of the holder, any time
after the purchase closing date, (ii) and by the Company four years after the
purchase closing date, into such number of shares of the Company's Common Stock
as shall equal $12.25 divided by the lower of (i) $3.50, or (ii) the closing bid
price for any five consecutive trading days during the period commencing eleven
months after the purchase closing and ending one month thereafter (the
"Conversion Price"), however, in no event shall the Conversion Price be reduced
below $2.80. The Conversion Price is also subject to further adjustment to
prevent dilution.
CA also has the option under the I-Storm Series D Stock Purchase
Agreement, to make up to three additional purchases of Series D Preferred Stock
in $500,000 increments, upon I-Storm's and CA's mutual approval of three
e-commerce partnership agreements. CA's total proposed investment in I-Storm is
a maximum of 163,268 shares of Series D Preferred Stock for an aggregate
purchase price of $2,000,000.
PRIVATE PLACEMENT OFFERING OF THE SERIES C PREFERRED STOCK
In May 1999, the Company 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 to 18 accredited investors. 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.
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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 eleven 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 twelve
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, to 84 accredited investors. 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 e-stores and for general
working capital purposes.
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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 eleven 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 twelve months thereafter.
BRIDGE FINANCING
LVL's Plan of Reorganization was confirmed by the Bankruptcy Court on
April 16, 1998 (the "Confirmation Date"). Events occurring prior to the
Confirmation Date are referred to herein as "Pre-Confirmation" events. Events
occurring after the Confirmation Date are referred to herein as
"Post-Confirmation" events
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 had 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.
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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 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 or their designees 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, subject to shareholder approval of the 1998
Incentive and Non-Statutory Stock Option Plan ("1998-B Plan") approved the
contingent 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 such market price per share as shall be in effect at the time, if
any, that shareholder approval shall be obtained for the 1998-B Plan. The
Company's Common Stockholders approved the 1998-B Plan on December 13, 1999 and
the price of the Common Stock was$2.00. The options will cliff-vest in five
years, subject to performance conditions and are also accelerable, based upon
certain performance conditions. "Cliff-vest" means that all of the options
granted shall vest in their entirety at a certain point in time in the future,
rather than ratably over a period of time, except that, in this instance, the
options may vest earlier if certain performance conditions are met.
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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 Marv Su and
Jerry Klemushin, a provider of business consulting services, exercisable at such
market price per share as shall be in effect at the time, if any, that
shareholder approval shall be obtained for the 1998-B Plan. The Company's Common
Stockholders approved the 1998-B Plan on December 13, 1999 and the price of the
Common Stock was $2.00. 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 Kanas became entitled, subject to
Board approval, for services rendered, to 10,000 options exercisable at such
market price per share as shall be in effect at the time, if any, that
shareholder approval shall be obtained for the 1998-B Plan. The Company's Common
Stockholders approved the 1998-B Plan on December 13, 1999 and the price of the
Common Stock was $2.00.
In May 1999, Mackenzie Shea, Inc. or its designees became entitled to a
warrant to purchase 2,040 shares of Series C Preferred Stock, exercisable for
five years for a price of $12.25 per share for financial consulting services
rendered.
The Company has subsequently issued common stock options pursuant to
the 1998 B-Plan, exerciseable at a price of $2.00 per share, to the following
employees in the year 2000: David Beach, 250,000 options, Jeffrey Ho, 125,000
options, Santanu Ray, 78,000 options, Becky Schulz, 16,000 options, Mandy
Hailey, 10,000 options and Ben Taheri, 27,750 options. Each of these awards is
subject to ratable vesting over a 36-month period, and is contingent upon
continued service and employment. David Beach has acceleration clauses dependent
on the "go live" date of each e-commerce website.
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. All
certificates representing such securities were appropriately legended.
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.
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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. As of February 1, 2000, the lock-up has expired. 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, 1998,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 ten 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, 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 approved by the Board
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, 100,000 options. The remaining
197,500 options were distributed among approximately 35 employees and
consultants with no single recipient being distributed more than 30,000 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.
APPROVAL OF 1998 SUPPLEMENTAL INCENTIVE STOCK OPTION AND NON-STATUTORY OPTION
PLAN
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Effective as of December 13, 1999, I-Storm's 1998 Supplemental
Incentive Stock Option and Non-Statutory Option Plan, which had been adopted by
the Company's Board of Directors on July 27, 1999 subject to shareholder
approval ("the 1998-B Plan"), was approved by written consent in lieu of meeting
by a majority of the holders of the Company's Common Stock.
The Board of Directors adopted the 1998 B-Plan on the grounds that in
order for the Company and its subsidiaries to attract and retain the services of
executive and other key employees, it was necessary for the Company to have the
ability and flexibility to provide a compensation package which compared
favorably with those offered by other Silicon Valley companies. The number of
shares of Common Stock reserved and issuable pursuant to the 1998-B Plan are One
Million Five Hundred Thousand (1,500,000) shares. Awards under the 1998-B Plan
may be made to key employees, including officers and directors of and
consultants to the Company and its subsidiaries. Members of the Compensation
Committee are also eligible for options granted under the 1998-B Plan. The
1998-B Plan imposes no limit on the number of officers and other key employees
to whom awards may be made. The exercise price of each Incentive Stock Option
shall be not less than one hundred percent (100%) of the Fair Market Value of
the stock subject to the Option on the date the Option is granted. The exercise
price of each Non-statutory Stock Option shall be not less than eighty-five
percent (85%) of the Fair Market Value of the stock subject to the Option on the
date the Option is granted.
Grants of options to certain officers and directors of the Company in
employment or consulting agreements were also approved by majority written
consent action of the holders of the Company's Common Stock. Pursuant to their
employment agreements, Messrs. Irfan Salim, Gordon Leong, and Richard Lin became
entitled to receive options to purchase 350,000, 150,000 and 150,000 shares of
Common Stock, respectively, and pursuant to a consulting agreement, Matthew
Howard is entitled to receive 100,000 options to purchase Common Stock, in each
instance at the market price of the Common Stock on the date of shareholder
approval. Each of these awards is subject to ratable vesting over a 36 month
period, and is contingent upon continued service and employment. Each of such
options are also accelerable if certain performance objectives have been met at
that time. Those performance objectives relate to the establishment of each of
three on-line e-commerce stores by the Company. The Company has also granted
476,000 additional options, pursuant to the 1998 B-Plan, to approximately 15
employees and 6 consultants.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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.
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REORGANIZATION ASSET
The Company has adopted foregoing "fresh start" accounting policies in
accordance with Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code (SOP 90-7)."
In accordance with SOP 90-7, the Company's Balance Sheet reflects a
"Reorganization Asset" of 2,879,000. The Reorganization Asset was determined by
the Company in connection with the consummation of the Plan of Reorganization.
The calculation of the Reorganization Asset was reviewed by Arthur Andersen, LLP
which concurred with the methodology, and assumptions used in this calculation.
The purpose of developing the "Reorganization Asset" is to aid parties in
interest in the bankruptcy proceeding in fairly determining their respective
allocations of value under the Plan of Reorganization. Under SOP 90-7, a
reorganization asset must approximate the fair value of the Company at the time
of the confirmation of the Plan of Reorganization, before considering the
liabilities of the Company at that time. It is intended in theory to approximate
the amount a willing buyer would pay for the assets immediately following
bankruptcy restructuring. The Reorganization Asset is effectively allocated
amongst creditors and shareholders, as reflected in the Company's Equity section
of the Balance Sheet, in accordance with their legal priorities under the Plan
of Reorganization.
The Reorganization Asset is derived from estimates of future net cash
flows, discounted to present basis, that are reasonably predicted to be earned
by the Company over time, based upon such factors as market share and position,
projected sales growth, potential profitability, competition, general economic
considerations, seasonality and working capital requirements at the time of the
confirmation of the Plan of Reorganization. Because the Company was changing its
focus from an advertising service business to an internet e-commerce business,
the Company also took into account a phase-out of its traditional advertising
services business to refocus on its new strategy of financing, designing,
developing and operating e-commerce storefronts, the growth rate of the internet
market, and projected sales and profitability growth within that internet
market.
The Reorganization Asset is not a liquid asset. The Reorganization
Asset does not reflect the Company's actual current cash flow, cash equivalents
or current accounts. It is only a reasonable estimate of the future performance
of the Company that may or may not be achieved. It is an intangible asset that
is valued only upon Management's future estimates of discounted cash flows based
upon the foregoing enumerated factors. The Reorganization Asset is being
currently amortized or written down over a period of ten years.The
Reorganization Asset and its amortization time period will be evaluated
periodically, and may be decreased dependent upon the Company's actual
performance.
All other assets of the Company, excluding the intangible
Reorganization Asset, were reflected on the Company's Balance Sheet at current
market value, rather than historical value, as a result of applicable SOP 90-7
bankruptcy reorganization accounting policies.
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
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restructuring transaction and the implementation of Fresh Start Reporting, the
Company's results of 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 1999, 1998, and 1997, 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, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
RESULTS OF OPERATIONS
The Company's net loss for the year ended December 31, 1999 was
approximately $6,497,000 and arose primarily as a result of operating losses
which included the expensing of $1.65 million of Oracle and Computer Associates
consulting fees related to the research and development of an e-commerce store
platform. The Company's net loss for the year ended December 31, 1998 was
approximately $5,183,000, primarily as a result of operating losses and expenses
associated with the Company's reorganization and subsequent merger with Digital.
The Company's operating loss for the year ended December 31, 1999 was $6,436,000
as compared to an operating loss of $4,701,000 for the year ending December 31,
1998. The increase in operating loss of approximately $1,735,000 was caused
primarily by an increase in research and development costs of $3,147,000 related
to the e-commerce store platform. Included in the fiscal 1999 net loss is
non-cash depreciation and amortization of approximately $827,000 due primarily
to amortization of the Company's Reorganization asset of $2,879,000 million as
of December 31, 1999.
Revenue for the years ended December 31, 1999 and 1998 were $745,000
and $2,913,000, respectively, a decrease of approximately $2,168,000 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, 1999 and 1998 were
$670,000 and $439,000, or 90% and 15% of sales, respectively. The increase 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, 1999 and 1998 were
$7,181,000 and $7,614,000, respectively. The decrease in operating expenses of
approximately $433,000 from the period a year earlier was primarily due to a
reduction in staff relating to a shift away from advertising services to
E-Commerce site development and a reduction in facilities expenses due to the
relocation of the Company's corporate headquarters.
Interest and Other expenses for the years ended December 31, 1999 and
1998 were $61,000 and $482,000, respectively. The reduction in interest expense
is due to the retirement of $985,000 of long-term debt in January of 1999. As of
December 31, 1999, the outstanding debt of the Company was approximately
$264,000, of which $40,000 is classified as current.
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The Company's auditors issued a going concern report.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had current assets of $298,000
compared to $312,000 in December, 31, 1998, while cash and cash equivalents were
$140,000 at year end 1999 compared to $5,000 at year end 1998. The Company's
working capital (deficit) at December 31, 1999 was $(1,378,000) as compared with
a working capital (deficit) of $(3,445,000) at December 31, 1998. This decrease
in the working capital (deficit) of approximately $2,067,000 is the result of a
reduction of Current Liabilities of $2,081,000 offset by a decrease of Current
Assets of $14,000.
As of December 31, 1999, the Company owed $264,000 under notes payable
to various entities. The Company had a Factoring Agreement in place at the end
of 1998 which was secured by the Company's accounts receivable and other assets.
This factoring liability as of December 31, 1999 was $0, down from $1,144,000 as
of December 31, 1998. The Company is in compliance with all material covenants
of notes payable as of year end 1999.
For the year ended December 31, 1999, net cash utilized by operations
was $5,549,000 compared to cash utilization of $1,907,000 for the year ended
December 31, 1998, primarily as a result of the Company's Reorganization and
deferred revenue in 1998 and a net loss for 1999 of $6,684,000 which included
research and development costs for the e-commerce store platform.
As of December 31, 1999, 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, 1999 and 1998
were $184,000 and $12,000, respectively.
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, 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
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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.
The Company's auditors issued a going concern report. There can be no
assurance that Management's plans to reduce the Company's working capital
deficiency or to 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.
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<PAGE>
INVESTING
Capital expenditures for the years ended December 31, 1998 and 1997
were $12,000 and $287,000, respectively.
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.
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 certifying
accountants, Jones, Jensen & Co. 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. The former
accountants letter is attached as Exhibit 16.2.
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
December 31, 1999, members of the Board of Directors were as follows:
NAME AGE OFFICE
---- --- ------
Frank M. DeLape 45 Director and
Chairman of the Board
Calbert Lai 43 Director
Thomas A. Schultz 49 Director
John Matthews 39 Director
Matthew Howard 59 Director
32
<PAGE>
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 PalmPilotTM, in 1996.
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. Subsequent to December 31, 1999, Matthew Howard has
replaced Mr. DeLape as Chairman of the Board of Directors.
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. Subsequent to
December 31, 1999, Warren Flick has replaced Mr. Schultz as a Director of the
Company.
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. Subsequent to December 31, 1999,
Mr. Howard assumed Chairmanship of the Board of Directors.
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 Moynihan (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. Subsequent to
December 31, 1999, Joseph Hoffman has replaced Mr. Matthews as a member of the
Board of Directors.
33
<PAGE>
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 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. Directors Thomas Schultz, Matthew Howard and Richard Snyder were
original members of the 1999 Audit Committee, and John Matthews joined as a
member upon Mr. Snyder's departure.
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
1999 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.
34
<PAGE>
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 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; Steven Venuti: one late report; Thomas Schultz,
one late report; Frank DeLape, one late report; Matthew Howard, one late report
and John Matthews, one late report. Such Form 5 reports shall be filed
immediately following the filing of this 1999 Form 10-K.
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, 1999 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(#) ($)
- --------------- ---- -------- -------- --------------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Calbert Lai 1999 150,000 0 N/A 0 600,000 0 N/A
President and 1998 150,000 0 N/A 0 600,000 0 N/A
Treasurer 1997 124,719 0 N/A 0 - 0 N/A
1996 332,500 0 N/A 0 - 0 N/A
Stephen Venuti 1999 150,000 0 N/A 0 300,000 0 N/A
Vice President 1998 150,000 0 N/A 0 300,000 0 N/A
1997 124,719 0 N/A 0 - 0 N/A
1996 332,500 0 N/A 0 - 0 N/A
Timothy Cohrs 1999 XXX,XXX(1) 0 N/A 0 75,000 0 N/A
Vice President 1998 260,000(1) 0 N/A 0 75,000 0 N/A
1997 180,520 0 N/A 0 - 0 N/A
1996 87,670(1) 0 N/A 0 - 0 N/A
Stuart Mangrum 1999 104,428 0 N/A 0 127,500 0 N/A
Vice President 1998 104,428 0 N/A 0 127,500 0 N/A
1997 59,492(2) 0 N/A 0 0 N/A
1996 - 0 N/A 0 0 N/A
David Beach 1999 97,435 0 N/A 0 100,000 0 N/A
Chief Information 1998 97,435 0 N/A 0 100,000 0 N/A
Architect 1997 74,374 0 N/A 0 0 N/A
1996 63,587 0 N/A 0 0 N/A
</TABLE>
(1) Mr. Cohrs entered into an employment agreement with LVL Communications
Corporation in July 1996. Mr. Cohrs left the employment of I-Storm in March
1999, and he received a pro rata portion of his annual compensation to March 31,
1999.
(2) Mr. Mangrum was employed by the Company from April 1997 - December 1997.
35
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to the
options granted during the year ended, for the persons named in the Summary
Compensation Table (the "Named Executive Officers"):
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/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% $.50 8/1/03
- --------------------------------------------------------------------------------------------------------
</TABLE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information with respect to
options exercised during 1999 by the Named Executive Officers and with respect
to unexercised options held by such persons at the end of 1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)
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>
*Mr. Cohrs terminated his employment with the Company in March, 1999. All of his
unvested options were forfeited.
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.
36
<PAGE>
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.
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 Beach, Vice President of Creative Services, 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. In February 2000, Mr.
Mangrum terminated his employment relationship with the Company.
FURTHER EXECUTIVE COMPENSATION
The Board of Directors, as of December 31, 1999, had approved 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. The issuance of these options is subject to shareholder
approval.
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 paid $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 597,400 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. In 1999, Benchmark completed its consulting
services.
37
<PAGE>
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 in 1998
and 1999 a total $170,500 cash fee in compensation for services through December
31, 1998. The shares are exempt from registration under the federal securities
laws, in accordance with Section 1145 of the Bankruptcy Code.
Additionally, MSI or its designees received 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. 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 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 fully vested unregistered shares of Common Stock of the
Company, valued at $0.25 per share. Weatherly designated the issuance of such
shares to JSM Holdings, Inc. John Matthews, a director of the Company, is a
controlling shareholder of both Weatherly and JSM Holdings, Inc. Weatherly
completed its consulting services in 1999.
In August 1998, the Company engaged Pound Capital Corp. ("Pound") to
provide investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of 225,000
fully vested unregistered 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. Pound completed its consulting services in 1999. 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 fully vested unregistered 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. Pound
completed its consulting services in 1999.
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 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.
38
<PAGE>
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 and to Shareholder
approval of the 1998B-Plan, Mr. Salim received 15,000 warrants exercisable over
a period of five years, to purchase Common Stock of the Company, subject to
Shareholder approval of the 1998-B Plan. Shareholder approval of the 1998-B Plan
occurred by majority written consent on December 13, 1999. The Company and Mr.
Salim terminated this consulting agreement in February 2000.
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, , granted options to purchase 100,000 shares of Common
Stock of the Company to Mr. Howard, in further consideration of his performance
under the consulting agreement, exercisable at such market price per share as
shall be in effect at the time, if any, that shareholder approval shall be
obtained for the 1998-B Plan. Shareholder approval of the 1998-B Plan occurred
by majority written consent on December 13, 1999 and the price of the Common
stock was $2.00. Such options will vest ratably on a monthly basis over a period
of thirty six months.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
I-Storm, Inc. ("I-Storm" or the "Company") was formerly named "Digital
Power Holding Company." The following table sets forth certain information with
respect to the beneficial ownership of the Company's outstanding Common Stock
owned as of by: (i) beneficial owners of more than 5% of the Company's Common
Stock; (ii) each executive officer and director of the Company; and (iii) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON STOCK PERCENTAGE OF
BENEFICIAL OWNER(1) BENEFICIALLY OWNED BENEFICIAL OWNERSHIP
- ------------------- ------------------ --------------------
<S> <C> <C>
Calbert Lai 462,081(2) 8.2%
Stephen Venuti 368,473(3) 6.5%
Thomas A. Schultz 150,000(4) 2.7%
Benchmark Equity Group, Inc. 597,800(5) 10.6%
I-Storm Acquisition, Inc. 600,000(6) 10.6%
Frank M. DeLape 647,800(7) 11.5%
Trident III, L.L.C. 400,000(8) 7.1%
JSM Holding, Inc. 1,000,000(9) 17.7%
Richard Snyder 0 0.0%
John Matthews 1,000,000(10) 17.7%
Matthew Howard 125,000(11) 2.2%
All Officers and Directors as a Group 2,753,354
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, and is generally determined by
voting powers and/or investment powers with respect to securities. Unless
otherwise noted, all of such shares of Common Stock listed above are owned of
record by each individual named as beneficial owner and such individual has sole
voting and dispositive power with respect to the shares of Common Stock owned by
each of them. Such person or entity's percentage of ownership is determined by
assuming that any options or convertible securities held by such person or
entity which are exercisable within 60 days from the date hereof have been
exercised or converted as the case may be.
39
<PAGE>
(2) Includes 141,661 vested options to purchase common stock exercisable at
$0.50 per share.
(3) Includes 70,831 vested options to purchase common stock exercisable at $0.50
per share.
(4) Includes 25,000 vested options to purchase Common Stock exercisable at $3.50
per share. Does not include 200,000 shares of Common Stock held by Kayne
International Corporation, a Cayman Islands corporation, and 175,000 shares of
Common Stock held by LaPlaza Capital, Inc. ("La Plaza"), a Cayman Islands
corporation that were designated by Mr. Schultz in August 1998 to each of Kayne
and La Plaza, respectively.
(5) Mr. DeLape, a director of the Company, is the President and controlling
shareholder of Benchmark Equity Group, Inc ("Benchmark").
(6) Includes 600,000 shares held in a voting trust for the benefit of the
shareholders of I-Storm Acquisition Corp., which is a wholly-owned subsidiary of
Lighthouse Capital Insurance Company ("Lighthouse"), a Cayman Island unlimited
licensed insurance company. Frank M. DeLape and his children are remote
contingent beneficiaries of a variable universal life insurance contract issued
by Lighthouse. Mr. DeLape disclaims beneficial ownership of such shares and does
not have voting or dispositive power with respect to such shares.
(7) Includes 597,800 shares of Common Stock held by Benchmark. Mr.Delape, a
director of the Company is the President and controlling stockholder of
Benchmark. Includes 25,000 vested options to purchase Common Stock exercisable
at $3.50 per share. Does not include 600,000 shares of Common Stock beneficially
held by Lighthouse. Mr. DeLape disclaims beneficial ownership of such shares
held by Lighthouse and does not have voting or dispositive power with respect to
such shares.
(8) Does not include 600,000 shares of non-voting Common Stock held by Trident
III, L.L.C.
(9) John Matthews, a director of the Company, is the controlling stockholder of
JSM Holdings, Inc.
(10) Includes 1,000,000 shares of Common Stock held by JSM Holdings, Inc. Mr.
Matthews is a director of the Company.
(11) Includes 25,000 vested options exercisable at $3.50 per share and 100,000
vested options exercisable at $2.00 per share. Does not include 50,000
non-vested options exercisable at $2.00 per share.
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.
40
<PAGE>
Certain grants of options have been made to the Board of Directors as
follows and approved by the shareholders as follows. 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. Such options vested on
August 7, 1999.
The Board of Directors approved as of December 31, 1999, 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.
The proposal is subject to Shareholder approval.
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, 1999, Mr. Schultz had
received an additional $100,000 in consulting fees. Mr. Schultz, or his
designees, were 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.
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 per share, subject to shareholder approval of the 1998B-Plan: 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 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. Mr. Howard was also granted an additional
100,000 options for his services at a price of $2.00. Mr. Howard's options have
begun to vest ratably from August 1, 1999 over a 36 month period.
The Company was a party to a 12-month consulting agreement with
Benchmark Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to
which the Company paid $175,000 in twelve monthly installments to Benchmark for
consulting services rendered to the Company, commencing as of March 1, 1998. As
of March 1, 1999, the Consulting Agreement have been paid in full.
The Company entered into a consulting agreement with Weatherly
Securities, Inc. ("Weatherly") on August 1, 1999 for a one year period to
provide strategic financial consulting services in consideration of the
immediate issuance of 1,000,000 fully vested unregistered shares of the
Company's Common Stock to Weatherly or its designees. John Matthews, a director
of the Company from 1998 to 1999, is the President and controlling shareholder
of Weatherly and its parent company, JSM Holdings, Inc ("JSM"). The Board of
Directors approved the issuance of the shares to JSM on August 1, 1998.
41
<PAGE>
Michael Rudolph entered into a consulting agreement to provide
executive financial and management services to the Company on January 7, 2000,
whereby he is entitled to receive hourly compensation of $125.00 per hour for
hours worked. 64% of such aggregate compensation or $80.00 per hour will be paid
in cash and the remaining 36% of such aggregate compensation will be paid in the
form of monthly stock option grants of I-Storm's Common Stock, valued at the
average of the lowest monthly bid price for I-Storm's common stock the month
prior to grant. Mr. Ruldoph's options will be immediately vested.
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. MacKenzie Shea,
Inc., 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, at which time the
Company had raised over $3 million in equity financing.
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.*
4.4 Certificate of Designation for Series D Preferred Stock***
10.1 Employment Agreement dated July 15, 1998 between the Company and
Calbert Lai.*
42
<PAGE>
10.2 Employment Agreement dated July 15, 1998 between the Company and
Stephen Venuti.*
10.6 Consulting Agreement dated December 9, 1998 between the Company
and Robert L. Tomz and Amendment thereto, dated March 19, 1999.*
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. Bankruptcy Stock Option Plan, dated July 23, 1998.*
10.12 I-Storm, Inc. 1998 Supplemental Incentive Stock Option and
Non-Statutory Option Plan.*
10.13 Professional Services Agreement with Computer Associates
International, Inc., dated January 14, 2000***
10.14 Stock Purchase Agreement between Computer Associates
International, Inc. and I-Storm, Inc., dated January 14, 2000.***
10.15 Professional Service Agreement and Subscription Agreement with
Sheridan d/b/a NevadaBobs.com, dated March 17, 2000+
16.1 July 23, 1998 Board resolution approving change in Independent
Public Accountant**.
16.2 Letter on change in certifying accountant*
27 Financial data schedule.
* The denoted foregoing documents were filed with the Company's 1998 Form
10-K, dated December 15, 1999.
** The denoted documents were filed with the Company's Form 8-K, dated
December 16 , 1999.
*** The denoted documents were filed with the Company's Form 8-K, dated
January 19, 2000.
+ The denoted documents were filed with the Company's Form 815, dated
March 28, 2000.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K in the last quarter of the
fiscal year ended December 31, 1999 to report the Company's change of
independent accountant. This report was filed on December 16, 1999 and amended
on January 7, 2000. Subsequent to year end, the Company filed a report on Form
8-K on January 19, 2000 to report a transaction with Computer Associates,
International, Inc., as also detailed in this 10-K Report. The Company also
filed an 8-K report on February 22, 2000 to reflect the appointment of a new
board of directors and the approval of the Company's 1998 Supplemental Incentive
Option and Non-Qualified Option Plan by the written consent of a majority of the
Company's shareholders. The company also filed a Form 8-K on March 28, 2000 to
report a transaction with Sheridan Reserve International d/b/a NevadaBobs.com,
as also detailed in this 10-K Report.
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
43
<PAGE>
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.
I-STORM, INC.
(Registrant)
Dated: April , 2000 By: /s/ Calbert Lai
----------------------------------------
Calbert Lai, CEO, President and Director
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.
Signature Title Date
- --------- ----- ----
/s/ Calbert Lai President, CEO and Director April 14, 2000
- --------------------------
Calbert Lai
/s/ Calbert Lai Treasurer and Chief April 14, 2000
- -------------------------- Financial Officer
Calbert Lai
/s/ Matthew Howard Director and Chairman April 14, 2000
- --------------------------
Matthew Howard
/s/ Tommy Bennett Director April 14, 2000
- --------------------------
Tommy Bennett
/s/ Warren Flick April 14, 2000
- --------------------------
Warren Flick
44
<PAGE>
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, 1999 and 1998,
and the related consolidated statements of operations and comprehensive loss,
shareholders equity (deficit) and cash flows for the year ended December 31,
1999, the period from inception (July 17, 1998) to December 31, 1998, the period
from January 1, 1998 to July 16, 1998, and the period from inception to December
31, 1999. These financial statements and schedule 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 auditing standards generally accepted
in the United States. 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, 1999, and the results of its operations and its cash flows for the year
ended December 31, 1999, the period from inception (July 17, 1998) to December
31, 1998, the period from January 1, 1998 to July 16, 1998, and the period from
inception to December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
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.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed under Item 14(a)(2) is
presented for purposes of complying with the Securities and Exchange Commission
rules and is not part of the basic financial statements. The schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
February 29, 2000
F-1
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
<TABLE>
Consolidated Balance Sheet
(In thousands, except per share amounts)
<CAPTION>
Assets
------
Post-Emergence
------------------------------
December 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 140 $ 5
Accounts receivable, net of allowance for doubtful accounts of $31 and $51 87 44
Factored accounts receivable, net of allowance for doubtful accounts of none
and $349 -- 105
Prepaid expenses and other current assets 71 158
------------- -------------
Total current assets 298 312
Property and Equipment, net 174 81
Other Assets 35 32
Reorganization Asset, net of amortization of $478 and $147 2,879 3,060
------------- -------------
Total assets $ 3,386 $ 3,485
============= =============
Liabilities and Shareholders' Equity (Deficit)
----------------------------------------------
Current Liabilities:
Notes payable $ 40 $ 1,197
Factoring liability -- 1,144
Accounts payable 551 912
Accrued liabilities 1,085 504
------------- -------------
Total current liabilities 1,676 3,757
------------- -------------
Long-term Notes Payable 224 260
------------- -------------
Redeemable Common Stock, at $1.00 per share, -0- and 600,000 shares outstanding
at December 31, 1999 and 1998, respectively -- 600
------------- -------------
Commitments and Contingencies (Note 5)
Shareholders' Equity (Deficit):
Preferred stock, $0.01 par value:
Series A cumulative convertible preferred stock; liquidation preference of
$4,002: Authorized--600 shares; outstanding--583 and 600 shares at
December 31, 1999 and 1998, respectively 6 6
Series B cumulative convertible preferred stock; liquidation preference of
$11,339: Authorized--1,700 shares; outstanding--436 shares at December 31, 1999 4 --
Series C cumulative convertible preferred stock; liquidation preference of $8,171
Authorized--1,225 shares; outstanding--388 shares at December 31, 1999 4 --
Common stock, $0.01 par value:
Authorized--25,000; outstanding--6,061 and 5,208 shares at December 31, 1999
and 1998, respectively 61 51
Subscribed warrants to purchase common stock 56 110
Additional paid-in capital 21,440 1,461
Accumulated deficit (20,085) (2,760)
------------- -------------
Total shareholders' equity (deficit) 1,486 (1,132)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 3,386 $ 3,485
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
<TABLE>
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share amounts)
<CAPTION>
Post-Emergence Predecessor
--------------------------------------------------------- ---------------
Period from Period from
Inception Inception Period from
(July 17, 1998) Year Ended (July 17, 1998) January 1, 1998
to December 31, December 31, to December 31, to July 16,
1999 1999 1998 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 1,582 $ 745 $ 837 $ 2,076
--------------- --------------- --------------- ---------------
Costs and expenses:
Cost of revenues 986 75 911 1,563
Selling, general, and administrative 4,845 2,953 1,892 2,672
Research and development 4,005 3,576 429 --
Amortization of reorganization asset 478 331 147 --
Stock compensation expense 246 246 -- --
--------------- --------------- --------------- ---------------
Total operating expenses 10,560 7,181 3,379 4,235
--------------- --------------- --------------- ---------------
Loss from operations (8,978) (6,436) (2,542) (2,159)
Other expense, net (279) (61) (218) (264)
--------------- --------------- --------------- ---------------
Net loss $ (9,257) $ (6,497) $ (2,760) $ (2,423)
=============== =============== =============== ===============
Accretion/dividends related to
convertible preferred stock (10,828) (10,828) -- --
--------------- --------------- --------------- ---------------
Net loss attributable to common stock $ (20,085) $ (17,325) $ (2,760) $ (2,423)
=============== =============== =============== ===============
Net loss per common share:
Basic and diluted $ (3.57) $ (2.93)
=============== ===============
Shares used in computing net loss
per share:
Basic and diluted 5,621 5,918
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Consolidated Statement of Shareholders' Equity (Deficit)
(In thousands)
<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, 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 6 3,040 30 47 --
Application of fresh-start accounting -- -- (11,590) (2,342) -- 2,332
------------------------------------------------------------------------------
POST-EMERGENCE
- --------------
Balance at inception (July 17, 1998) 600 6 3,040 30 47 --
Issuance of common stock for services -- -- 2,000 20 -- --
Issuance of common stock related to
debt financing -- -- 170 2 -- --
Issuance of warrants related to debt
financing -- -- -- -- 73 --
Exercise of warrants -- -- 251 3 (64) --
Issuance of Series B preferred stock, net
of issuance costs of $737 408 4 -- -- -- --
Issuance of Series C preferred stock, net
of issuance costs of $554 371 4 -- -- -- --
Conversion of redeemable common stock into
non-redeemable common stock -- -- 600 6 -- --
Repurchase of Series A preferred stock (17) -- -- -- -- --
Stock dividends paid by Series B preferred
stock 28 -- -- -- -- --
Stock dividends paid by Series C preferred
stock 17 -- -- -- -- --
Accretion related to convertible preferred
stock -- -- -- -- -- --
Stock compensation expense -- -- -- -- -- --
Deficit accumulated during the development
stage -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1999 1,407 $ 14 6,061 $ 61 $ 56 $ --
==============================================================================
</TABLE>
continued on next page
<PAGE>
Consolidated Statement of Shareholder's Equity (Deficit) - continued
<TABLE>
<CAPTION>
Total
Additional Shareholders'
Paid-in Accumulated Equity
PREDECESSOR Capital Deficit (Deficit)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 1,084 -- 1,167
Application of fresh-start accounting -- 9,363 9,353
----------------------------------------------
POST-EMERGENCE
- --------------
Balance at inception (July 17, 1998) 1,084 -- 1,167
Issuance of common stock for services 336 -- 356
Issuance of common stock related to
debt financing 41 -- 43
Issuance of warrants related to debt
financing -- -- 73
Exercise of warrants 72 -- 11
Issuance of Series B preferred stock, net
of issuance costs of $737 4,255 -- 4,259
Issuance of Series C preferred stock, net
of issuance costs of $554 3,992 -- 3,996
Conversion of redeemable common stock into
non-redeemable common stock 594 -- 600
Repurchase of Series A preferred stock (8) -- (8)
Stock dividends paid by Series B preferred
stock 336 (336) --
Stock dividends paid by Series C preferred
stock 205 (205) --
Accretion related to convertible preferred
stock 10,287 (10,287) --
Stock compensation expense 246 -- 246
Deficit accumulated during the development
stage -- (9,257) (9,257)
----------------------------------------------
Balance, December 31, 1999 $ 21,440 $ (20,085) $ 1,486
==============================================
</TABLE>
F-4
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
<TABLE>
Consolidated Statement of Cash Flows
(In thousands)
<CAPTION>
Post-Emergence Predecessor
--------------------------------------------------------- ---------------
Period from Period from
Inception Inception Period from
(July 17, 1998) Year Ended (July 17, 1998) January 1, 1998
to December 31, December 31, to December 31, to July 16,
1999 1999 1998 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,257) $ (6,497) $ (2,760) $ (2,423)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of fixed assets -- -- -- 30
Depreciation and amortization 614 422 192 88
Forgiveness of current obligations in
exchangefor fixed assets -- -- -- 738
Valuation of common stock issued for
services 356 -- 356 --
Cashless exercise of common stock 9 9 -- --
Stock compensation expense 246 246 -- --
Provision for bad debts 284 -- 284 85
Changes in assets and liabilities:
Accounts receivable 104 62 42 (20)
Factored accounts receivable 120 -- 120 (3)
Prepaid expenses and other assets 81 84 (3) 84
Reorganization asset (150) (150) -- --
Accounts payable (361) (361) -- --
Deferred revenue 495 -- 495 655
Accrued liabilities 565 581 (16) 149
--------------- --------------- --------------- ---------------
Net cash used in operating activities (6,894) (5,604) (1,290) (617)
--------------- --------------- --------------- ---------------
Cash flows from investing activities:
Purchases of fixed assets (192) (184) (8) (4)
--------------- --------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable 659 105 554 528
Repayment of notes payable (1,298) (1,298) -- (57)
Factoring liability, net (700) (1,144) 444 (121)
Payments on capital leases -- -- -- (34)
Proceeds from issuance of redeemable
common stock -- -- -- 600
Proceeds from issuance of common stock
and exercise of options 12 12 -- --
Proceeds from issuance of preferred
stock, net 8,247 8,247 -- --
Proceeds from the exercise of warrants 11 1 10 --
--------------- --------------- --------------- ---------------
Net cash provided by financing
activities 6,931 5,923 1,008 916
--------------- --------------- --------------- ---------------
Net increase (decrease) in cash and cash
equivalents (155) 135 (290) 295
Cash and cash equivalents at beginning of
period 295 5 295 --
--------------- --------------- --------------- ---------------
Cash and cash equivalents at end of period $ 140 $ 140 $ 5 $ 295
=============== =============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Valuation of common stock related to debt
financing $ 41 $ 10 $ 31 $ --
Valuation of warrants issued in conjunction
with debt financing $ 73 $ -- $ 73 $ --
Notes payable issued to secured creditors
for pre-petition claims and taxes $ 275 $ -- $ 275 $ --
Accretion/dividends related to convertible
preferred stock $ 10,828 $ 10,828 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
December 31, 1999
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 had 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 and e-commerce service provider which is developing
a joint venture program to finance, design, develop, and operate electronic
commerce storefronts in partnership with brand-name consumer and business
to business product companies.
On March 23, 1998, LVL and its two wholly owned subsidiaries, LVL
Advertising, Inc. ("LVLA"), and LVL Interactive, Inc. ("LVLI"), filed a
voluntary petition in the United States Bankruptcy Court for the Northern
District of California ("Bankruptcy Court") seeking protection under
Chapter 11 of the U.S. Bankruptcy Code. The Chapter 11 proceedings of the
Companies were jointly administered by the Bankruptcy Court. LVL and its
subsidiaries operated their business as debtors-in-possession, subject to
Bankruptcy Court approval for certain transactions, while they developed a
reorganization plan to restructure LVL. On April 16, 1998, the Bankruptcy
Court confirmed the First Amended Plan of Reorganization ("POR") which
became effective on July 17, 1998. The principal terms of the POR are as
follows:
1. LVLA and LVLI merged into LVL.
2. LVL became a wholly owned subsidiary of Digital.
3. The outstanding shares of common stock of LVL ("Old Common
Stock") and options to purchase Old Common Stock were canceled
effective July 17, 1998.
4. Certain founders and shareholders of LVL received 600,000 shares
of common stock of the Company, subject to certain restrictions
on the sale and disposition of these shares.
5. Certain secured claims are to be repaid by the Company pursuant
to the original terms of the agreements or will be repaid over
five years in equal quarterly installments at an annual interest
rate of 10%.
6. An investor in LVL, Trident III, LLC ("Trident") that provided
$600,000 in pre-confirmation bridge financing was issued 600,000
shares of redeemable non-voting common stock and 440,000 shares
of non-redeemable common stock.
7. All unsecured claims will receive a pro rata portion of 600,000
shares of Series A Cumulative Convertible Preferred Stock
("Series A"). Claims of less than $5,000 may elect to receive 10%
of their claim in cash in lieu of receiving shares of Series A
("Cash Option"). Claims exceeding $5,000 may elect to reduce
their claim to $5,000 and receive $500 in lieu of receiving
shares of Series A. The pool of 600,000 shares of Series A was
reduced by the percentage dollar amount of claims electing the
Cash Option.
8. The Company issued warrants to purchase common stock to certain
investors and service providers during the reorganization.
F-6
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
December 31, 1999
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 1998 and 1999, 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 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 but not limited to: dependence on key individuals,
successful development, marketing and sales of products, 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 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 e-Commence store concept.
Fresh Start Accounting
----------------------
AICPA Statement of Position ("SOP") 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. T
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. 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>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
<TABLE>
Notes to Consolidated Financial Statements
December 31, 1999
<CAPTION>
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
---------------------
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
Series A preferred stock -- -- 600 (g) 600
Common stock 11 -- 19 (h) 30
Warrants -- -- 47 (i) 47
Paid-in capital 724 234 (j) -- 490
Accumulated deficit (9,045) -- 9,045 (k) --
------------- ------------- ------------- -------------
Total liabilities & equity $ 1,667 $ 7,869 $ 10,436 $ 4,234
============= ============= ============= =============
</TABLE>
Explanation of the above adjustment columns are as follows:
(a) To adjust current assets to fair market value.
(b) To adjust property and equipment to fair market value.
(c) To establish the reorganization value in excess of identifiable
assets as follows (in thousands):
New debt $ 125
New equity 1,266
----------
Reorganization value 1,391
Plus: Fair value of liabilities 2,842
Less: Fair value of assets (1,102)
----------
$ 3,131
==========
(d) To reflect the cancellation of old accounts payable and notes
payable.
(e) To reflect the addition of bridge debt pursuant to the
Reorganization Plan.
(f) To reflect the issuance of 600,000 shares of Redeemable Common
pursuant to the Reorganization Plan.
(g) To reflect the issuance of 600,000 shares of Convertible
Preferred A pursuant to the Reorganization Plan.
(h) To reflect the net issuance of Common shares pursuant to the
Reorganization Plan.
(i) To reflect the issuance of 350,000 shares of Common Warrants
pursuant to the Reorganization Plan.
(j) To reflect net adjustments to Capital pursuant to the
Reorganization Plan.
(k) To reflect the elimination of shareholders' deficit of the
Predecessor Company.
F-8
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
December 31, 1999
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.
Reclassification
----------------
Certain reclassifications were made to prior year amounts to conform to the
current year presentation.
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 approximately $18,000, $80,000 and $58,000 for
interest in the year ended December 31, 1999 and the periods ended December
31, 1998 and July 17, 1998, respectively. I-Storm paid cash of $0, $0 and
$4,000 for taxes in the year ended December 31, 1999 and periods ended
December 31, 1998 and July 17, 1998, respectively.
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.
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):
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Computer equipment and software $ 248 $ 61
Furniture and fixtures 59 61
------------ ------------
306 122
Less: Accumulated depreciation (132) (41)
------------ ------------
$ 174 $ 81
============ ============
F-9
<PAGE>
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 sheets of I-Storm and will be amortized
on a straight-line basis over ten years. As of December 31, 1999 and 1998,
the value of the Reorganization Asset was approximately $2,879,000 and
$3,060,000, respectively. Pursuant to SOP 90-7, the Reorganization Asset
was determined by discounting future cash flows for I-Storm at rates
reflecting the business and financial risks involved, and it approximates
the amount a willing buyer would pay for the assets of the Company
immediately after the restructuring. The carrying value of the
Reorganization Asset will be reviewed periodically for impairment, and if
the facts and circumstances suggest that it may not be recoverable, as
determined based on the undiscounted cash flows of I-Storm over the
remaining amortization period, the carrying value of the Reorganization
Asset will be adjusted in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of."
Accrued Liabilities
-------------------
Accrued liabilities consist of the following (in thousands):
December 31, December 31,
1999 1998
------------ ------------
Professional fees $ 191 $ 175
Payroll and payroll-related liabilities 62 139
Other accrued liabilities 832 190
------------ ------------
$ 1,085 $ 504
============ ============
Stock-Based Compensation
------------------------
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation," in October 1995. This accounting
standard permits the use of either a fair value based method of accounting
or the method defined in Accounting Principles Board Opinion 25 ("APB 25"),
"Accounting for Stock Issued to Employees" to account for stock-based
compensation arrangements. Companies that elect to employ the method
prescribed by APB 25 are required to disclose the pro forma net income
(loss) that would have resulted from the use of the fair value based
method. I-Storm has elected to account for its stock-based compensation
arrangements under the provisions of APB 25, 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
--------------------
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 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 is the total of net income and all other non-owner
changes in equity. For the year ended December 31, 1999 and the periods
ended December 31, 1998 and July 17, 1998, I-Storm's comprehensive loss was
equal to net loss.
F-10
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
December 31, 1999
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. Basic and diluted net loss
per common share, as presented in the statements of operations, has been
computed by dividing net loss after deduction of preferred stock dividends
by the weighted average number of common shares outstanding during the
period. Common equivalent shares have not been included in the calculation
of net loss per share as their inclusion would be antidilutive.
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 year ended December 31, 1999 and the periods ended December 31,
1998 and July 17, 1998, I-Storm's revenue was generated in the United
States.
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted
accounting principle to revenue recognition issues in financial statements.
The Company will adopt SAB 101 as required in the second quarter of 2000.
Management does not expect the adoption of SAB 101 to have a material
impact on its consolidated results of operations and financial position.
3. Factored Accounts Receivable
----------------------------
In 1998, I-Storm 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, 1999 and 1998, I-Storm had $0 and $1,144,000, respectively, outstanding in
factoring liability related to the factoring agreement.
4. Notes Payable
-------------
As of December 31, 1998, I-Storm 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.
These notes were repaid in 1999.
F-11
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
December 31, 1999
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.
These notes were repaid in 1999.
As of December 31, 1999 and 1998, I-Storm had federal and state payroll and
sales taxes due totaling $207,000 and $202,000, respectively. 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
(in thousands):
December 31, December 31,
1999 1998
------------ ------------
Note payable agreement with Trident at 10%
per annum $ -- $ 321
Notes payable agreements with certain
individuals at 10% per annum -- 861
Federal and State payroll and sales taxes 207 202
Secured creditors 57 73
------------ ------------
Total debt outstanding 264 1,457
Less: Current portion 40 1,197
------------ ------------
Total long-term notes payable $ 224 $ 260
============ ============
5. Commitments and Contingencies
-----------------------------
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):
2000 $ 449
2001 57
-------
$ 506
=======
In conjunction with I-Storm's bankruptcy proceedings in 1998, I-Storm's
creditors had filed claims of approximately $621,000 as secured creditors. In
1999, 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 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 were initially redeemable at $1.00 per share, at
Trident's option, in the event that I-Storm raises $3 million in debt or equity
financing. In January 1999, Trident elected to convert the redeemable common
stock into non-redeemable common stock.
7. Convertible Preferred Stock
---------------------------
As of December 31, 1999, I-Storm was authorized to issue 3,525,000 shares of
preferred stock of which 600,000 shares are designated Series A Cumulative
Convertible Preferred Stock ("Series A"), 1,700,000 shares are designated Series
B Cumulative Convertible Preferred Stock ("Series B") and 1,225,000 shares are
designated Series C Cumulative Convertible Preferred Stock ("Series C").
F-12
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
December 31, 1999
Series A Preferred Stock
- ------------------------
Pursuant to the POR, Series A have been issued on a pro rata basis to the class
of unsecured creditors. The shares of Series A have been issued pursuant to the
POR and have been valued at $1.00 per share as determined in good faith by the
board of directors.
The rights, restrictions, and preferences of Series A are as follows:
o 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 Series A has been paid, any remaining funds and assets of
I-Storm legally available for distribution shall be paid pro rata
solely among other equity shareholders, in accordance with their
respective preferences. 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.
o The Series A preferred stock 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.
o 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.
o 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.
Series B and Series C Preferred Stock
The Company has recorded a preferred stock dividend of $10.3 million
representing the value of the beneficial conversion feature on the approval of
the issuance of Series A in 1999. The beneficial conversion feature was
calculated at the commitment date based on the difference between the conversion
price of $3.25 per share and the estimated fair value of the common stock at
that date. The rights, restrictions, and preferences of Series A is as follows:
The rights, restrictions, and preferences of Series B and Series C are as
follows:
o The holders of Series B and Series C shall, upon the vote of the
majority of the board of directors, be entitled to receive, out of
funds legally available therefor, cumulative annual dividends at a
rate of 9% 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 Series B and Series C shall be
senior to those of common stock, but not to Series A. After the
dividend preferences of Series B and Series C 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.
o Series B and Series C shall be converted at the option of the holder
at any time after the closings of the respective offerings of these
Series, and after four years from the closings of these offerings, at
the option of the Company. Series B and Series C 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.
F-13
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
December 31, 1999
8. Common Stock
------------
At December 31, 1999, common stock consists of 6,061,000 shares outstanding. 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.
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. As of December
31, 1999, 10% of such shares had been released from lock-up, and 40% will be
released on February 1, 2000.
1998 Bankruptcy Stock Option Plan and the 1998 Supplemental Incentive and
-------------------------------------------------------------------------
Non-Statutory Stock Option Plan
-------------------------------
As provided in the POR and subject to shareholder approval, in 1998,
I-Storm established the 1998 Bankruptcy Stock Option Plan (the "1998 Option
Plan") covering 1,400,000 shares of common stock. In 1998, the Company
further established a Supplemental incentive and Non-Statutory Stock Option
Plan which received common shareholder approval in December 1999.
Options granted under each of the 1998 Option Plans may be either incentive
stock options or nonstatutory stock options, as designated by the board of
directors. Options granted under the 1998 Option Plans expire on the tenth
anniversary of the date of grant. The 1998 Option Plans 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 Plans 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, 1999,
there were no shares outstanding under any of the 1998 Option Plans. Thus,
no compensation expense has been recognized related to options granted to
employees.
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, 1999, warrants for 251,000 shares have been exercised.
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.
F-14
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
December 31, 1999
Reserved for future issuance
----------------------------
The following shares of common stock are reserved for future issuance:
Series A preferred stock 600,000
Series B preferred stock 1,700,000
Series C preferred stock 1,225,000
1998 Stock Option Plan 1,400,000
Warrants 389,000
----------
5,314,000
==========
9. Income Taxes
------------
The Company did not provide any current or deferred United States federal, state
or foreign income tax provision or benefit for any of the periods presented
because it has experienced operating losses since inception. The Company has
provided a full valuation allowance on the deferred tax asset, consisting
primarily of net operating loss carryforwards, because of uncertainty regarding
its realizability and limitations on the utilization of net operating losses due
to I-Storm's reorganization.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $5 million related to U.S. federal, foreign and state
jurisdictions. Utilization of net operating loss carryforwards may be subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended. Substantially all of these carryforwards will begin to expire at
various times starting in 2018.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets are approximately as
follows:
December 31,
--------------------------
1999 1998
------------ ------------
Net operating loss carryforwards $ 3,607 $ 1,055
Other 46 38
------------ ------------
Total deferred tax assets 3,653 1,093
Valuation allowance for deferred tax assets (3,653) (1,093)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
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 six month lock-up agreement.
In September 1997, the Company engaged Mackenzie Shea, Inc. ("MSI") as a
consultant to assist the Company in structuring a reorganization and
post-organization operating entity. MSI or its designees were issued 500,000
shares of the Company's Common Stock in August 1998, and MSI was paid a $20,000
cash fee in 1998 in full compensation for such services. The shares are exempt
from registration under the federal securities laws, in accordance with Section
1145 of the Bankruptcy Code. The shares are subject to an eighteen month lock-up
agreement, commencing August 1, 1998. Ten percent of such shares to date were
released from the lock-up agreement as of December 31, 1999, and the remainder
will be released on February 1, 2000.
F-15
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
December 31, 1999
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 was 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 as of December 31, 1999, and the
remainder will be released on February 1, 2000.
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, and are unregistered shares of stock subject to Rule 144 under the
Securities and Exchange Act of 1934.
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, and are
unregistered shares of stock subject to Rule 144 under the Securities and
Exchange Act of 1934.
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
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, issued on July 23, 1999.
The Company was 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 December 31, 1999, the Consulting Agreement has been paid
in full. Benchmark also entered into an earlier agreement, in April 1998, to
provide consulting services to LVL and its successor entity in consideration of
600,000 shares of Common Stock, and the board of directors approved the issuance
of this Common Stock to Benchmark or its designees on July 23, 1998. Frank
DeLape, Chairman of the Board, is the President of Benchmark Equity Group, Inc.
The Company has a management consulting agreement with Matthew Howard, a
director, for a fee of $5,000 per month. Mr. Howard's consulting arrangement
commenced August 1, 1998.
11. Subsequent Events
-----------------
Subsequent to December 31, 1999, I-Storm raised net proceeds of $500,000 in
connection with the issuance of 40,817 shares of Series D Cumulative Convertible
Preferred Stock ("Series D") 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 D
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.
These shares were issued in association with the stock purchase agreement with
Computer Associates International, Inc. ("CA"). Under the terms of the
agreement, CA has agreed to purchase up to 163,268 shares of Series D for an
aggregate purchase price of $2,000,000, contingent upon the achievement of
certain e-commerce partnership milestones.
F-16
<PAGE>
I-STORM, INC.
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
December 31, 1999
Schedule II
Valuation and Qualifying Accounts
Allowance for Balance at Additions Balance at
Doubtful Beginning Charged to the End of
Accounts of the Period Expense Write-Offs the Period
- ------------- ------------- ------------- ------------- --------------
1998 $ 31 $369 $ -- $400
1999 $400 $ 31 $400 $ 31
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 140
<SECURITIES> 0
<RECEIVABLES> 87
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 298
<PP&E> 174
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,386
<CURRENT-LIABILITIES> 1,676
<BONDS> 0
0
14
<COMMON> 61
<OTHER-SE> 1,411
<TOTAL-LIABILITY-AND-EQUITY> 3,386
<SALES> 745
<TOTAL-REVENUES> 745
<CGS> 75
<TOTAL-COSTS> 7,181
<OTHER-EXPENSES> 61
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,325)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,325)
<EPS-BASIC> (2.93)
<EPS-DILUTED> (2.93)
</TABLE>
