<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 2-93477-D
I-STORM, INC.
(FORMERLY DIGITAL POWER HOLDING COMPANY)
(Exact name of small business issuer as specified in its charter)
NEVADA 87-0410127
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2440 WEST EL CAMINO REAL, SUITE 520, MOUNTAIN VIEW, CALIFORNIA 94040-1400
(Address of principal executive offices)
(650) 962-5420
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
CLASS OUTSTANDING AT September 30, 2000
------------------------------------- ---------------------------------
Common Stock, par value $0.01 6,358,536
Traditional Small Business Disclosure Format (Check One): Yes No X
----- -----
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
ASSETS
September 30, December 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 140
Accounts receivable, net of allowance for doubtful
accounts of $31 and $31, respectively 468 87
Factored accounts receivable 109 --
Prepaid expenses and other current assets 580 71
--------- ---------
Total current assets 1,157 298
Property and equipment, net 120 174
Investment in marketable equity securities 1,517 --
Other assets 35 35
Reorganization asset, net of amortization of $559 and
$478, respectively 2,625 2,879
--------- ---------
$ 5,454 $ 3,386
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 37 $ --
Notes payable 228 40
Accounts payable 669 553
Accrued liabilities 1,162 994
Deferred Revenue 769 --
--------- ---------
Total current liabilities 2,865 1,587
--------- ---------
Long-term notes payable 194 224
Shareholders' equity:
Preferred stock, $0.01 par value
Series A cumulative convertible preferred stock; liquidation preference of
$4,002:
Designated--600 shares; outstanding--581 and 583 shares, respectively 6 6
Series B cumulative convertible preferred stock:
Designated--1,225 shares; 463 and 436 shares outstanding, respectively 5 4
Series C cumulative convertible preferred stock:
Designated--1,700 shares; 413 and 388 shares outstanding, respectively 4 4
Series D cumulative convertible preferred stock:
Designated--500 shares; 294 and 0 shares outstanding, respectively 3 --
Common stock, $0.01 par value:
Authorized--25,000
Outstanding--6,359 and 6,061 shares, respectively 64 61
Subscribed warrants to purchase common stock 49 56
Additional paid-in capital 26,092 21,690
Unrealized gain on marketable equity securities 217 --
Deficit accumulated during the development stage (24,045) (20,246)
--------- ---------
Total shareholders' equity 2,395 1,575
--------- ---------
$ 5,454 $ 3,386
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------- --------------
<S> <C> <C>
Revenues $ 838 $ 209
Costs of Revenues 603 419
-------------- --------------
Gross Margin $ 235 $ (210)
-------------- --------------
Operating Expenses:
Selling, general, and administrative 876 619
Research and development -- --
Amortization of reorganization asset 85 90
Stock compensation expense -- 674
-------------- --------------
Total operating expenses 961 1,383
-------------- --------------
Loss from operations (726) (1,593)
Other income (expense), net (9) 20
-------------- --------------
Net loss $ (735) $ (1,573)
============== ==============
Accretion/dividends related to convertible
preferred stock $ (282) $ (10,502)
-------------- --------------
Net loss attributable to common stock $ (1,017) $ (12,075)
============== ==============
Net loss per share:
Basic and diluted $ (0.16) $ (2.04)
============== ==============
Shares used in computing net loss per share:
Basic and diluted 6,254 5,928
============== ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
PERIOD FROM
NINE MONTHS NINE MONTHS INCEPTION (JULY
ENDED ENDED 17, 1998) TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 1,156 $ 546 $ 2,739
Costs of Revenues 894 966 2,352
-------------- -------------- --------------
Gross Margin 262 (420) $ 387
-------------- -------------- --------------
Operating Expenses:
Selling, general, and administrative 2,300 2,580 8,241
Research and development 724 -- 3,070
Amortization of reorganization asset 254 247 732
Stock compensation expense -- 674 496
-------------- -------------- --------------
Total operating expenses 3,278 3,501 12,539
-------------- -------------- --------------
Loss from operations (3,016) (3,921) (12,152)
Other income (expense), net (14) (65) (295)
-------------- -------------- --------------
Net loss $ (3,030) $ (3,986) $ (12,447)
============== ============== ==============
Accretion/dividends related to convertible
preferred stock $ (768) $ (10,614) $ (11,597)
-------------- -------------- --------------
Net loss attributable to common stock $ (3,798) $ (14,600) $ (24,044)
============== ============== ==============
Net loss per share:
Basic and diluted $ (0.61) $ (2.46) $ (4.14)
============== ============== ==============
Shares used in computing net loss per share:
Basic and diluted 6,176 5,934 5,810
============== ============== ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
NINE MONTHS PERIOD FROM INCEPTION NINE MONTHS
ENDED (JULY 17, 1998) TO ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,030) $ (12,447) $ (3,986)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of fixed assets -- -- 33
Depreciation and amortization 317 931 305
Cashless exercise of common stock -- 9 --
Stock compensation expense 77 929 674
Provision for bad debts -- 284 25
Changes in assets and liabilities:
Accounts receivable (1,681) (1,577) (165)
Factored accounts receivable (109) 11 105
Prepaid expenses and other assets (509) (428) 77
Reorganization asset -- (150) --
Bank overdraft 37 37 --
Accounts payable 116 (243) (768)
Deferred revenue 769 1,264 --
Accrued liabilities 168 641 (353)
----------------------------------------------------------
Net cash used in operating activities (3,845) (10,739) (4,053)
----------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (8) (200) (514)
----------------------------------------------------------
Net cash used in investing activities (8) (200) (514)
----------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 215 874 105
Repayment of notes payable (145) (1,443) (1,436)
Factoring liability, net 87 (613) (1,144)
Proceeds from issuance of redeemable common stock -- -- 8,224
Proceeds from issuance of preferred stock, net 3,501 11,748 --
Payment on notes receivable from shareholders -- -- (24)
Proceeds from the exercise of options 10 22 --
Proceeds from the exercise of warrants 45 56 --
----------------------------------------------------------
Net cash provided by financing activities 3,713 10,644 5,725
----------------------------------------------------------
Net decrease in cash and cash equivalents (140) (295) 1,158
Cash and cash equivalents at beginning of period 140 295 5
----------------------------------------------------------
Cash and cash equivalents at end of period $ -- $ -- $ 1,163
==========================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Unrealized gains on marketable equity securities $ 217 $ 217 $ --
Exchange of accounts receivable for marketable
equity securities $ 1,300 $ 1,300 $ --
Valuation of common stock related to debt financing $ -- $ 41 $ 10
Valuation of warrants issued in conjunction with debt
financing $ -- $ 73 $ --
Notes payable issued to secured creditors for pre-
petition claims and taxes $ -- $ 275 $ --
Valuation of redeemable common stock $ -- $ 600 $ 600
Valuation of preferred stock dividends $ 768 $ 11,597 $ 10,614
----------------------------------------------------------
The accompanying notes are an integral part of
these consolidated financial statements.
</TABLE>
5
<PAGE>
I-STORM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
The condensed consolidated financial statements included herein have
been prepared by I-Storm, Inc. ("I-Storm" or the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations; however,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The condensed consolidated financial statements
included herein should be read in conjunction with the financial statements and
the notes thereto included in the Company's report on Form 10-KSB as of December
31, 1999.
In the opinion of management, the accompanying interim financial
statements contain all material adjustments necessary to present fairly the
consolidated financial condition, results of operations, and changes in cash
flows and shareholders' equity of the Company for interim periods. Certain
amounts in the prior interim consolidated financial statements have been
reclassified to conform to the current period presentation.
2. DESCRIPTION OF THE COMPANY:
COMPANY FORMATION AND FINANCIAL REORGANIZATION
I-Storm is an e-commerce business integrator, consultant, solution
seller and technology re-seller to middle market companies in select markets who
have the opportunity to leverage their brand and distribution capabilities over
the Internet. The Company is headquartered in Mountain View, California and
currently leases an 11,500 square foot office facility. The Company's lease will
expire in February 2000, and the Company is currently seeking a new leased
office facility.
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.
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.
6
<PAGE>
I-STORM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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, and the Company has been operating at a
substantial loss in the first nine months of year 2000. 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 $2.8 million bankruptcy Reorganization Asset through the year
2008.
The Company is in the development stage, has yet to generate any
significant revenues and has no assurance of future revenues. The Company is
subject to the risks and challenges associated with other companies at a similar
stage of development, including, but not limited to: dependence on key
individuals, successful development, marketing and sales of products and
services, and competition from larger companies with greater financial,
technical, management, marketing, and sales resources; 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 partnership concept.
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. 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.
7
<PAGE>
I-STORM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying condensed 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.
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 condensed
consolidated balance sheets of I-Storm and will be amortized on a straight-line
basis over ten years. Pursuant to Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code," the
Reorganization Asset was determined by discounting future cash flows for I-Storm
at rates reflecting the business and financial risks involved and it
approximates the amount a willing buyer would pay for the assets of the Company
immediately after the restructuring. The carrying value of the Reorganization
Asset will be reviewed periodically for impairment, and if the facts and
circumstances suggest that it may not be recoverable, as determined based on the
undiscounted cash flows of I-Storm over the remaining amortization period, the
carrying value of the Reorganization Asset will be adjusted in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." As of December 31, 1999, the
reorganization value, after accounting for amortization, was $2,879,000, and as
of September 30, 2000 was $2,625,000.
8
<PAGE>
I-STORM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
COMPREHENSIVE LOSS
Comprehensive income (loss) unrealized gains and losses that have been
previously excluded from net loss and reflected instead in shareholders' equity.
A summary of comprehensive loss follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ---------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss.............................. $ (735) $ (1,573) $ (3,030) $(3,986)
Unrealized gain on investments........ 217 -- 217 --
-------- --------- --------- --------
Comprehensive loss................ $ 518 $ (1,573) $ (2,813) $(3,986)
======== ========= ========= ========
</TABLE>
REVENUE RECOGNITION
The Company recognizes service revenues at the time services are
performed. Maintenance revenue is recognized ratably over the maintenance
period. On fixed price contracts, revenues are recorded using the
percentage-of-completion method of accounting by relating contract costs
incurred to date to total estimated contract costs at completion. Contract costs
include both direct and indirect costs. Contract losses are provided for in
their entirety in the period they become known, without regard to the
percentage-of-completion.
9
<PAGE>
I-STORM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements." SAB No. 101 and related
interpretations summarize the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The Company is
required to apply the guidance in SAB No. 101 to the financial statements no
later than the fourth quarter of fiscal 2000. The Company currently is reviewing
the impact of SAB No. 101 on the revenue recognition policy and the related
impact on the consolidated financial statements. At this time, the Company does
not believe SAB No. 101 will have a material impact on the financial position or
results of operations.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving
Stock Compensation - an interpretation of APB Opinion No. 25" (FIN 44). FIN 44
is effective July 1, 2000. The interpretation clarifies the application of APB
Opinion No. 25 for certain issues, specifically, (a) the definition of an
employee, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange or stock compensation awards in a business combination. The
adoption of FIN 44 had no material impact on our financial position or the
results of our operations.
4. EQUITY FUNDING
In August of 2000, I-Storm raised net proceeds from iVisionary Venture,
LLC of $500,000 in connection with the issuance of 40,816 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 receive a quarterly cumulative
dividend at 9% per annum, payable in cash or Series D preferred stock at the
option of the Board of Directors and shall be convertible into common stock at a
conversion price of not greater than $3.50 per share and not less than $2.80 per
share.
10
<PAGE>
I-STORM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's net loss for the nine months ended September 30, 2000
was approximately $3,030,000, compared to a loss of $3,986,000 for the nine
months ended September 30, 1999, a decrease of $956,000 or 24%. The Company's
net loss for the three months ended September 30, 2000 was $735,000 as compared
to a net loss of $1,573,000 for the three months ended September 30, 1999. The
decrease in net loss of approximately $838,000 was caused primarily by
increased revenues in the third quarter of fiscal 2000 and the issuance of
common stock to consultants in lieu of cash for $674,000 that occurred during
the quarter ended September 30, 1999.
Revenue for the nine months ended September 30, 2000 and 1999 were
$1,156,000 and $546,000, respectively, an increase of $610,000 or 112%. This
increase was due to several factors including the development of Nbobs.com
e-commerce platform and business planning services for LESCO, JC Whitney,
Norstan and Computer Associates. Gross margin for the nine months ended
September 30, 2000 and 1999 were approximately $262,000 and ($420,000),
respectively.
Revenue for the three months ended September 30, 2000 and 1999 were
$838,000 and $209,000, respectively, an increase of $629,000 or 301%. Gross
profit for the three months ended September 30, 2000 and September 30, 1999 were
approximately $235,000 and $(210,000) respectively. The increase in gross margin
was primarily a result of the Company shifting from advertising revenues to
e-commerce web development.
Operating expenses for the nine months ended September 30, 2000 and
1999 were $3,278,000 and $3,501,000, respectively. The decrease in operating
expenses of approximately $223,000 was due to the stock compensation expense for
common stock issued to consultants in lieu of cash recognized in last year's
operating expenses.
Operating expenses for the three months ended September 30, 2000 and
1999 were $961,000 and $1,383,000, respectively. The decrease in operating
expenses of approximately $422,000 from quarter to quarter was due to the stock
compensation expense for common stock issued to consultants in lieu of cash
recognized in last year's operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had no cash or cash equivalents and
current assets of $1,157,000 as compared with $298,000 at December 31, 1999. The
increase in current assets was due to a prepaid software license from
PurchasePro.com, Inc. for $500,000 and receivables from our e-commerce
development and business planning services.
As of September 30, 2000, the Company owed $194,000 in long term notes
payable, $228,000 in current notes payable and a bank overdraft of $37,000.
Included in current notes payable were a promissory notes for $100,000 and a
factoring liability of $87,000 with a lender secured by the Company's accounts
receivable and other assets as of September 30, 2000. The Company is in
compliance with all covenants of the factoring agreement as of September 30,
2000.
ADDITIONAL FINANCING AND COMPANY PLANS
The company has plans to raise additional capital through corporate
partners, as well as venture capital investors. We are supplementing our
business model which was an equity sharing model with cash generating model that
involves cash and revenue sharing for our services
11
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
SEPTEMBER 30, 2000
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The information and events reported in the Company's 1999 Form 10-KSB
filed on April 14, 2000, and the 8-K Reports filed September 22, 2000 and July
31, 2000 are hereby incorporated by reference and should be read in conjunction
with this Form 10-QSB.
SALES OF UNREGISTERED STOCK
PRIVATE PLACEMENT OFFERING OF THE SERIES D PREFERRED STOCK
In July 2000, I-Storm, Inc. closed a stock purchase agreement with
Purchase Pro.com, Inc. ("Purchase Pro") (Nasdaq: PPRO), a leading provider of
Internet business-to-business electronic commerce services. Under the terms of
the stock purchase agreement, Purchase Pro made an equity investment of
$1,000,000, which was prepaid in June 2000, by purchasing 81,633 shares of
I-Storm's Series D Cumulative Convertible Preferred Stock ("Series D Preferred
Stock") at a price of $12.25 per share.
I-Visionary Ventures, LLC ("I-Visionary") entered into a Series D Stock
Purchase Agreement with I-Storm. I-Visionary initially purchased 40,816 newly
issued shares of I-Storm Series D Preferred Stock at a price of $12.25 per
share, for an aggregate cash investment of $500,000. I-Visionary, an accredited
investor, made the purchase pursuant to the provisions of Regulation D of the
Securities Act of 1933. The Series D Preferred Stock is subject to certain
demands 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 of 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.
PRIVATE PLACEMENT NOTE OFFERING
On September 18, 2000, the Company issued an unsecured promissory note
to Daniel Boutcher in the principal amount of $100,000 repayable within 60 days
at 10% interest.
12
<PAGE>
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
JUNE 30, 2000
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Board of Directors approved on September 13, 2000 the circulation
of separate shareholder consent requests to each of the classes of Series A, B
and C Preferred Stock to obtain each classes' consent to the conversion of its
class from Preferred Stock to Common Stock under the terms set forth in each
classes' respective Certificate of Designation. Such consent requires a majority
consent by the Series A Preferred Stock class to convert the Series A Preferred
Stock into Common Stock; a 66 2/3% consent by the Series B Preferred Stock class
to convert the Series B Preferred Stock into Common Stock, and a 66 2/3% consent
by the Series C Preferred Stock to convert the Series C Preferred Stock into
Common Stock. The Board of Directors approved an additional year's dividends
commencing as of November 15, 2000 to any of the classes that choose to convert.
As of October 25, 2000, the Company had completed a mailing of applicable
consent requests to the holders of the Company's A, B and C Preferred Stock.
The conversion of one class of preferred stock is not dependent upon
obtaining the consent of any other class. Currently the Series A Preferred Stock
Class has dividend, liquidation and redemption rights superior to the rights of
the Series B and C Preferred Stock and the Common Stock Classes. The Series B
Preferred Stock has dividend, liquidation and redemption rights superior to the
rights of the Series C Preferred Stock. The Series C Preferred Stock has
dividend, liquidation and redemption rights on a pari passu basis with the
Series D Preferred Stock and on a superior basis to the Common Stock. The Series
D Preferred Stock, currently held by three strategic alliance partners of the
Company, Computer Associates International, Inc., PurchasePro.com, Inc. and
I-Visionary Ventures, LLC, are not being asked by the Company to convert at this
time. Each of the purchases of the Series D Preferred Stock have been made in
2000 at a purchase price of $12.25 per share with conversion ratios identical to
those of the Series B and Series C Preferred Stock. The Company intends to raise
additional funds through further offerings of Series D Preferred Stock.
ITEM 5. OTHER INFORMATION
BRIDGE LOANS
On September 18, 2000, the Company issued an unsecured promissory note
to Daniel Boutcher in the principal amount of $100,000 repayable within 60 days
at 10% interest. The Company had repaid a previous promissory note of $100,000
to Daniel Boutcher during the third quarter of 2000.
CHANGE IN AUTHORIZED PREFERRED STOCK
On September 13, 2000, the Board of Directors of I-Storm approved a
decrease in the number of authorized shares of Series B Preferred Stock from
1,225,000 to 500,000 shares, a decrease in the number of shares of Series C
Preferred Stock from 1,700,000 to 500,000 shares, and an increase in the number
of Series D Preferred Stock from 500,000 to 1,400,000 shares. The action was
taken pursuant to authority granted to the Board in the Company's Articles of
Incorporation. The Company expects to accomplish these actions in the fourth
quarter of 2000.
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STOCK AUTHORIZED FOR TO CONSULTANT AND ACTING CFO
Pursuant to the consulting agreement of acting Chief Financial Officer,
Michael Rudolph, the Board of Directors authorized the issuance to Mr. Rudolph
of 80,588 shares of common stock of the Company for services rendered from March
2000 through August 2000.
FACTORING AGREEMENTS
During the third quarter of 2000, the Company received funds in the
amount of $87,413 pursuant to an accounts receivable factoring arrangement with
Pacific Business Funding, Inc. This total factoring liability remained
outstanding as of September 30, 2000.
DECLARATION OF DIVIDENDS ON SERIES A, B, C AND D PREFERRED STOCK
At the Board's special meeting on September 13, 2000, the Board
approved the declaration of quarterly dividends, as of August 15, 2000, on a 9%
annual basis upon the Company's outstanding shares of Series B, Series C and
Series D Preferred Stock, in shares of Series B, Series C and Series D Preferred
Stock, respectively. The Board also declared a 5% annual dividend upon the
Company's Series A Preferred Stock for the year 2000, payable in Common Stock of
the Company. The Common Stock will be issued during the fourth quarter of fiscal
2000.
REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
Date: November 20, 2000
I-STORM, INC.
By: /s/ Calbert Lai
-------------------------------------
Calbert Lai, President
