<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 000-27267
I/OMAGIC CORPORATION
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0290623
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6 AUTRY, IRVINE, CA 92618
(Address of principal executive offices)
(949) 727-7467
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of May 11, 2000, the number of shares of Common Stock issued and outstanding
was 39,282,451.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
1
<PAGE>
I/OMAGIC CORPORATION AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - December 31. 1999 and March 31, 2000 (unaudited) 3-4
Statements of Income - For the three months ended
March 31, 2000 and 1999 (unaudited) 5
Statements of Cash Flows - For the three months ended
March 31, 2000 and 1999 (unaudited) 6-7
Notes to Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations 13-16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL INFORMATION
PART 1 - ITEM 1
I/O MAGIC CORPORATION
BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,943,522 $ 3,202,709
Accounts receivable, net of allowance for
doubtful accounts of $71,193 and $71,193 10,115,350 16,467,152
Accounts receivable from related parties 6,561,738 3,854,249
Inventory 3,318,422 6,376,384
Prepaid expenses and other current assets 49,120 988,406
Deferred income taxes 651,000 882,000
----------- -----------
TOTAL CURRENT ASSETS 22,639,152 31,770,990
FURNITURE AND EQUIPMENT, NET 255,689 281,366
OTHER ASSETS 21,488 21,488
----------- -----------
TOTAL ASSETS $22,916,329 $32,073,754
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
I/O MAGIC CORPORATION
BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31,2000 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31,2000
LIABILITIES AND STOCKHOLDERS' EQUITY ----------------- -------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued expenses $ 9,067,600 $ 10,302,065
Current portion of capital lease obligation 1,144 --
Accounts payable to related parties 4,720,054 4,304,174
Reserves for customer returns and allowances 1,145,568 1,359,122
Income taxes payable 106,000 203,200
------------ ------------
TOTAL CURRENT LIABILITIES 15,040,366 16,168,561
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value
10,000,000 shares authorized
none issued and outstanding -- --
Class A common stock, $0.001 par value
50,000,000 shares authorized
32,307,039 and 39,242,451 (unaudited) shares
issued and outstanding 32,309 39,244
Additional paid in capital 10,511,897 17,555,586
Deferred compensation (15,500) (12,400)
Treasury stock, 550,000 shares, at cost (165,000) (165,000)
Accumulated deficit (2,487,743) (1,512,237)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 7,875,963 15,905,193
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,916,329 $ 32,073,754
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
I/O MAGIC CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 2000 (UNAUDITED) AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 16,614,647 $ 5,304,716
Cost of sales 13,238,734 3,694,178
------------ ------------
Gross profit 3,375,913 1,610,538
------------ ------------
Operating expenses
Selling, marketing and advertising 1,537,856 754,975
General and administrative 997,774 518,438
------------ ------------
Total operating expenses 2,535,630 1,273,413
------------ ------------
Income from operations 840,283 337,125
------------ ------------
Other income (expense)
Interest income 3,000 3,000
Interest expense (777) (6,485)
Income from related party -- --
Other income -- --
------------ ------------
Total other income (expense) 2,223 (3,485)
------------ ------------
Income before provision for income taxes 842,506 333,640
------------ ------------
Provision for income taxes (133,000) 800
------------ ------------
Net income $ 975,506 $ 332,860
============ ============
Basic earnings per share $ 0.03 $ 0.01
============ ============
Diluted earnings per share $ 0.02 $ 0.01
============ ============
Basic weighted-average shares outstanding 38,544,322 25,486,880
============ ============
Diluted weighted-average shares outstanding 39,506,114 26,047,594
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
I/O MAGIC CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 2000 (UNAUDITED) AND 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Income from continuing operations $ 975,506 $ 332,860
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 17,592 11,131
Amortization of deferred compensation 3,100 3,100
Provision for allowance for doubtful accounts -- (12,617)
Reserve for obsolete inventory 12,620 154,388
Note payable to related party -- (345,500)
Deferred income tax (231,000) --
Reserves for customer returns and
allowances 213,554 163,652
Increase (decrease) in cash due to changes in:
Accounts receivable (6,351,802) (504,012)
Accounts receivable from related parties 2,707,489 --
Inventory 1,929,418 (457,972)
Prepaid expenses and other current assets (939,286) (5,205)
Other assets -- (8,728)
Accounts payable and accrued expenses 1,234,465 2,460,207
Accounts payable to related parties (415,880) (2,060,967)
Tax provision 97,200 800
----------- -----------
Net cash provided by operating activities (747,024) (268,863)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (43,270) (19,848)
----------- -----------
Net cash used in investing activities (43,270) (19,848)
----------- -----------
Cash FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (1,144) (577)
Proceeds from sale and issuance of common stock 2,000,000 --
Proceeds from exercise of warrants 50,625 5,550
----------- -----------
Net cash provided by financing activities 2,049,481 4,973
----------- -----------
Net increase (decrease) in cash and cash
Equivalents 1,259,187 (283,738)
Cash and cash equivalents at beginning of
period 1,943,522 1,402,904
----------- -----------
Cash and cash equivalents at end of period $ 3,202,709 $ 1,119,166
=========== ===========
Supplemental cash flow information:
Interest paid $ 777 $ 6,486
Income taxes paid $ 800 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended March 31, 2000, the Company entered into the
following non-cash transactions:
- - Issued 6,250,000 (unaudited) shares of common stock for $5,000,000
(unaudited) in inventory
During the three months ended March 31, 1999, the Company entered into the
following non-cash transaction:
- - Issued 16,666,667 shares of common stock for $5,000,000 in inventory.
- - Reflected the reduction of a related party note payable as a reduction to cost
of sales of $240,000.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
I/O Magic Corporation (the "Company"), a Nevada corporation, develops,
manufactures through subcontractors, markets, and distributes multimedia and
communication card devices for portable and desktop computers. The Company sells
its products in the United States to distributors and retail customers.
In March 1996, I/O Magic Corporation, a California corporation ("I/O Magic
California"), originally incorporated on September 30, 1993 entered into a Plan
of Exchange and Acquisition Agreement (the "Acquisition Agreement") with
Silvercrest International, Inc. ("Silvercrest"), a Nevada corporation. Pursuant
to the Acquisition Agreement, Silvercrest acquired all of the outstanding stock
of I/O Magic California totaling 6,570,583 shares in exchange for an aggregate
6,570,583 shares of newly-issued common stock. In connection with the
Acquisition Agreement, the Company issued 624,704 shares of common stock. For
accounting purposes, the acquisition has been treated as a recapitalization of
I/O Magic California, with I/O Magic California as the accounting acquirer
(reverse acquisition). The reverse acquisition was recorded at the historical
cost of I/O Magic California. Prior to the execution of the Acquisition
Agreement, Silvercrest was a public company listed on NASDAQ's over-the-counter
market with dormant operations and no assets or liabilities. Silvercrest
subsequently changed its name to I/O Magic Corporation, a Nevada corporation.
8
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-QSB and therefore, do not include
all information and notes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The unaudited condensed financial statements
include the accounts of I/O Magic Corporation. The operating results for interim
periods are unaudited and are not necessarily an indication of the results to be
expected for the full fiscal year. In the opinion of management, the results of
operations as reported for the interim periods reflect all adjustments which are
necessary for a fair presentation of operating results.
USE OF ESTIMATES
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 the disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Significant estimates made by management include, but are not limited
to, the provisions for allowance of doubtful accounts and price protection on
accounts receivable, the net realizability of inventory, the evaluation of
potential impairment of furniture and equipment, and the provision for sales
returns and warranties. Actual results could materially differ from those
estimates.
STOCK BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current implicit
value accounting method specified in Accounting Principles Bulletin ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," to account for
stock-based compensation issued to employees. The Company has elected to use the
implicit value based method and has disclosed the pro forma effect of using the
fair value based method to account for its stock-based compensation. For
stock-based compensation issued to non-employees, the Company uses the fair
value method of accounting under the provisions of SFAS No. 123.
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." SFAS No. 128 replaced the presentation of primary and
fully diluted earnings per share with the presentation of basic and diluted
earnings (loss) per share. Basic earnings (loss) per share excludes dilution and
is calculated by dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings (loss) per share includes the potential dilutive effects that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock ("potential common stock") that would then share in
the earnings (loss) of the Company.
9
<PAGE>
As of March 31, 2000 (unaudited) and 1999 (unaudited), the Company had potential
common stock as follows:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
---------- ----------
(unaudited) (unaudited)
<S> <C> <C>
Weighted-average common shares
Outstanding during the period 38,544,322 25,486,880
Incremental shares assumed to be
outstanding since the beginning of the
period related to stock options and warrants
outstanding (unaudited) 964,792 560,714
---------- ----------
FULLY DILUTED WEIGHTED-AVERAGE COMMON
SHARES AND POTENTIAL COMMON STOCK
(UNAUDITED) 39,509,114 26,047,594
---------- ----------
</TABLE>
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
Accounts payable $ 6,123,724 $ 5,509,415
Accrued rebates and marketing 3,321,744 2,802,664
Accrued compensation and related benefits 553,485 427,430
Other 303,111 328,091
----------- -----------
TOTAL $10,302,064 $ 9,067,600
=========== ===========
</TABLE>
NOTE 4 - CREDIT LINES FROM RELATED PARTIES
In connection with a 1997 Strategic Alliance Agreement, the Company has
available a trade line of credit through a stockholder and supplier for
purchases up to $2,000,000. Purchases are non-interest bearing and are due 75
days from the date of receipt. The credit agreement can be terminated or
changed at any time. As of December 31, 1999 and March 31, 2000, there were
$366,486 and $779,918 (unaudited) respectively, of trade payables outstanding
under this arrangement.
10
<PAGE>
In connection with an April 1999 subscription agreement, the Company also has
available an additional trade line of credit through a stockholder and vendor
that provides a trade credit facility of up to $5,000,000 carrying net 75 day
terms, as defined. As of December 31, 1999 there were $829,009 of outstanding
trade payables under this arrangement. As of March 31, 2000 (unaudited), there
were no outstanding trade payables borrowings under this arrangement.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities and certain equipment under non-cancelable,
operating lease agreements, expiring through May 2003.
Future aggregate minimum annual lease payments under operating lease
arrangements are as follows as of March 31, 2000:
<TABLE>
<CAPTION>
Year Ending
December 31,
- ------------
<S> <C>
2000 $ 171,456
2001 171,456
2002 71,440
2003 -
---------
$ 414,352
---------
</TABLE>
Rent expense was $39,863 and $23,012 for the three months ended March 31, 2000
and 1999, respectively, and is included in general and administrative expenses
in the accompanying statements of income.
EMPLOYMENT CONTRACT
The Company has entered into an employment contract with one of its officers
which expires upon written termination. The agreement calls for a minimum
base salary and provides for certain expense allowances. In addition, the
agreement provides for a bonus based on the "net profits" of the Company, as
defined. The bonus amount ranges from $20,000 to $70,000 for net profits up
to $500,000. For net profits in excess of $500,000, the bonus is 7% of such
excess. No bonus amounts were paid during the three months ended March 31,
2000 or 1999. As of December 31, 1999 and March 31, 2000, the accrued bonus
was approximately $105,000 and $192,500 (unaudited) respectively.
RETAIL AGREEMENTS
In connection with certain retail agreements, the Company has agreed to pay for
certain marketing development and advertising on an ongoing basis. Marketing
development and advertising costs are generally agreed upon at the time of the
event. The Company also records a liability for co-op marketing based on
management's evaluation of historical experience and current industry and
Company trends. During the three months ended March 31, 2000 and 1999, the
Company incurred $409,667 (unaudited) and $78,431 (unaudited), respectively,
related to these agreements.
11
<PAGE>
Such is included in selling, marketing, and advertising in the accompanying
statements of income.
NOTE 6 - CAPITAL TRANSACTIONS
COMMON STOCK ISSUED FOR CASH
During the three months ended March 31, 2000, the Company issued an aggregate
of 632,912 (unaudited) restricted shares of common stock for cash totaling
$2,000,000 (unaudited), or at a per share price of $3.16 (unaudited). As of
March 31, 2000, inventory that had not been received by the Company totaled
$919,967. Accordingly, such is reflected as a prepaid expense in the
accompanying financial statements.
COMMON STOCK ISSUED IN CONNECTION WITH THE EXERCISE OF WARRANTS
During the three months ended March 31, 2000, the Company issued an aggregate
of 52,500 (unaudited) restricted shares of common stock in connection with
the exercise of warrants for cash totaling $50,624 (unaudited), or at a per
share price ranging from $0.05 (unaudited) to $2.00 (unaudited).
COMMON STOCK ISSUED FOR INVENTORY
During the three months ended March 31, 2000, the Company issued 6,250,000
(unaudited) shares of restricted common stock to a stockholder and vendor,
valued at $0.80 (unaudited) per share for $5,000,000 (unaudited) of inventory,
as defined (valued at transferor's cost basis).
STOCK OPTION PLANS
During the three months ended March 31, 2000, the Company granted
non-qualified and incentive stock options to purchase a total of 2,012,500
(unaudited) shares of common stock to officers and employees and certain
consultants under the Company's stock option plans. The stock options vest
either immediately or ratably over five years. Exercise prices range from
$2.00 (unaudited) to $3.00 (unaudited) and the options expire five years from
the date of grant.
NOTE 7 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2000 and 1999, the Company had
revenues from a related party totaling approximately $0 (unaudited)and $262,000
(unaudited), respectively.
During the three months ended March 31, 2000 and 1999, the Company had
purchases from related parties totaling approximately $8,299,542
(unaudited)and $1,624,943 (unaudited), respectively.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
RESULTS OF OPERATIONS
Revenues for the period ended March 31, 2000 ("2000") were $16,614,647, compared
to revenues for the period ended March 31, 1999 ("1999") of $5,304,716. The
increase in revenues is primarily attributable to the addition of several
significant customers including: Office Max in June 1999 (representing
$3,597,065 of revenue in 2000 solely), Staples in January, 2000 (representing
$1,382,071 of revenue in 2000 solely), and Best Buy in March, 2000 (representing
$704,055 of revenue in 2000 solely). Also, sales to CompUSA increased from
$2,787,254 in Q1 1999 to $5,417,539 in Q1 2000. In addition, there has been an
increase in OEM sales in 2000 to $3,546,809 compared to $267,550 in 1999. The
Company did not have any sales backlog as of March 31, 1999 and it had a sales
backlog of $42,433,309 as of March 31, 2000.
Cost of sales as a percentage of revenues increased from 69.64% ($3,694,178)
in 1999 to 79.68% ($13,238,734) in 2000. Cost of product as a percentage of
revenues increased from 71.21% in 1999 to 76.06% in 2000. This was primarily
due to a change in product mix to products with lower gross margin in 2000.
Price protection totaled $156,603 in 1999 and $164,180 in 2000. Freight
expenses as a percentage of revenues increased from 3.30% in 1999 to 3.62% in
2000. This was primarily due to more expensive air freight of products (as
opposed to ocean freight) due to late production by a major vendor. The
Company believes that this situation has been resolved as this time and
anticipates lower future freight expenses. During 1999, the Company had a one
time reduction to cost of sales totaling 7.52% ($345,500) representing a note
payable. The Company had a note payable to a related party for inventory
purchases which the company disputed as the inventory was not received. In
March 1999, the statute of limitations for collection on this note expired.
Management believes that no litigation will arise from this transactions as
there has been contact with the related party. This was partially offset by a
reserve for obsolete inventory of $154,388.
The Company did not "write down" any of its inventory during the three months
ended March 31, 2000 The inventory that was marked down at the end of a fiscal
year constituted discontinued items for which the Company was responsible for
such costs.
Operating expenses as a percentage of revenues decreased from 24.01%
($1,273,413) in 1999 to 15.26% ($2,535,630) in 2000.
Selling, marketing and advertising as a percentage of revenues decreased from
14.23% ($754,975) in 1999 to 9.26% ($1,537,856) in 2000. Rebate expense
increased from $565,500 in 1999 to $664,870 in 2000, COOP advertising
increased from $78,431 in 1999 to $409,667 in 2000, slotting fees increased
from $0 in 1999 to $99,999 in 2000 and sales department expenses increased
from $111,044 in 1999 to $363,320 in 2000. The sales department expenses
increased primarily due to higher commissions due to higher sales in Q1 2000
and higher travel and trade show expenses in Q1 2000. The percentage decrease
is primarily due to a reduction in the number of rebate programs relative to
13
<PAGE>
the increase in revenues and the fact that marketing expenses are not a direct
function of sales, although related.
General and administrative expenses as a percentage of revenues decreased
from 9.77% ($518,438) in 1999 to 6.01% ($997,774) in 2000. The decrease on a
percentage basis is primarily due to many general and administrative expenses
being indirect and thus increasing at a far smaller percentage than the
increase in revenues. Salaries and related expenses increased from $239,787
in 1999 to $560,833 in 2000. The increase in the amount expensed is due
primarily to additional personnel added in 2000, although as a percentage of
revenues the amounts declined. Temp help increased from $11,879 in 1999 to
$81,095 in 2000 due to the increased use of temp help in production and
shipping during peak times of Q1 2000. Financial relations expenses increased
from $42,012 in 1999 to $55,138 in 2000 to increase the Company's visibility
to investors. Production supplies increased from $4,838 in 1999 to $32,792 in
2000 due to increased sales. The remaining general and administrative
expenses each represent less than 3% of the total change from Q1 1999 to Q1
2000.
Other income (expense) increased as a percentage of sales from (0.01%) ($3,485
expense) to 0.01% ($2,223 income).
Provision for income taxes for the period ended March 31, 1999 represents
minimum state income taxes. Provision for income taxes for the period ended
March 31, 2000 represents Federal taxes as a result of the Company's taxable
income being subject to Alternative Minimum Taxes (AMT), California state
franchise tax estimate, and the current period deferred tax benefit. The
Company has available regular net operating loss carryforwards, which are
expected to be fully utilized during Q2 2000.
Net profits increased from $332,860 for the three months ended March 31, 1999 to
$975,506 for the three months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and capital
expenditures primarily with cash provided by operating activities, private
securities issuances and securities issuances for product. The Company believes
that working capital generated from operations is sufficient to meet current
activity. However, should the Company grow significantly in size through
additional large customers or acquisitions, securities issuances or other
financing arrangements may be necessary. The Company currently has two lines of
credit with its major suppliers: $5 million with BTC and $2 million with Lung
Hwa. Borrowings under those arrangements provided the Company interest free for
up to 60 days. The Company has trade accounts payable outstanding balances on
these lines of $0 and $779,918, respectively, as of March 31, 2000 and 1999.
In March 2000, the Company entered into a letter of intent for a revolving
credit agreement for up to $15,000,000 with IBM Credit in order to continue its
growth. The effectiveness of the revolving credit agreement is subject to the
satisfaction of certain conditions precedent. To date, these conditions
precedent have not been satisfied and, accordingly, the agreement is not
effective, and no credit facility exists between IBM Credit and the Company.
14
<PAGE>
The Company believes that its current cash flow from operations and the amounts
available under its existing vendor lines of credit are sufficient to meet its
working capital and capital expenditure requirements at the current sales volume
for the next twelve months.
In addition, certain of the Company's stockholders and vendors continue to
provide inventory in exchange for common stock of the Company.
For the three months ended March 31, 2000 the Company had a net increase in
cash in the amount of $1,259,187. This was due to cash used by operating
activities of $747,024, cash used in investing activities of $43,270 and cash
provided by financing activities of $2,049,481. Cash from all accounts
receivable changes decreased by $3,644,313 and cash from inventory changes
increased by $1,929,418. Cash provided used for investing activities was for
leasehold improvements, furniture and computer equipment. Cash provided by
financing activities was primarily by issuance of 632,912 shares of common
stock for $2,000,000 and exercise of 52,500 warrants for $50,625.
As the Company expands its distribution activities, it may experience net
negative cash flows from operations, pending an increase in gross margins,
and may be required to obtain additional financing to fund operations through
proceeds from offerings, to the extent available, or to obtain additional
financing to the extent necessary to augment its working capital through public
or private issuance of equity or debt securities.
The high technology requirements of the Internet increasingly require that
consumers upgrade their personal computers to take full advantage of audio and
video streaming capabilities. Further, there are increasing Internet
applications for digitally based graphics data, such as pictures taken by
digital cameras. The Company believes that its current distribution channels
currently fulfill and will continue to fulfill these trends in the computer
peripherals marketplace. In the event the Company continues with the revenue
growth its has experienced between 1999 and 2000 the Company believes that it
will need additional capital. While there is no assurance that it will be
successful in raising additional capital, the Company is currently actively
seeking both institutional debt, as well as private sources of equity capital in
order to assure that it will be capable of financing such growth. In the event
the Company is unsuccessful in securing such financing, it may be required to
curtail its sales growth.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business, financial condition and results of operations may be
impacted by a number of factors including, without limitation, those listed
below.
Significant Customer Concentration
During the three month period ended March 31, 2000 the Company had three
major customers which accounted for approximately 76% of the Company's net
sales (CompUSA $5,417,539, 33%, Office Max $3,597,065, 22%, Digital Research
Technology $3,346,869, 21%). The amounts due from these major customers on
March 31, 2000 amounted to approximately $13,382,247 (CompUSA $6,624,694,
Digital Research Technology $3,638,679, Office Max $3,118,874). The Company's
strategy is to constantly attempt
15
<PAGE>
to sign new major retail customers in order to both increase the Company's
growth and to reduce the impact of any one customer.
The Company has no firm long-term sales commitments from any of its customers
and enters into individual purchase orders with its customers. The Company has
experienced cancellations of orders and fluctuations in order levels from period
to period and expects it will continue to experience such cancellations and
fluctuations in the future. In addition, customer purchase orders may be
canceled and order volume levels can be changed, canceled or delayed with
limited or no penalties. The replacement of canceled, delayed or reduced
purchase orders with new business cannot be assured. Moreover, the Company's
business, financial condition and results of operations will depend upon its
ability to obtain orders from new customers, as well as the financial condition
and success of its customers, its customers products and the general economy.
The factors affecting any of the Company's major customers or their customers
could have a material adverse effect on the Company's business, financial
condition and results of operations.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1999, the Company filed an arbitration proceeding in
Orange County, California against its former accountants and
auditors, Ernst & Young, LLP, for failure to complete the 1997
audit of the Company in a timely fashion and for excessive billing
in connection with the 1997 audit. Arbitration proceedings are
anticipated to take place during the year 2000.
To the best knowledge of management, there are no legal
proceedings pending or threatened against the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Incorporated by reference from Registrant's Report on Form 10-KSB
filed with the Securities and Exchange Commission on March 30, 2000
(see Management's Discussion and Analysis and Liquidity and Capital
Resources). See Financial Statement Supplemental Schedule of Non-Cash
Investing and Financing Activities and Note 6.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
1. The following Exhibits are filed herein: 27.1 Financial Data
Schedule
2. Reports on Form 8-K filed: None
17
<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, duly authorized.
I/OMAGIC CORPORATION
DATED: May 12, 2000 By: /s/ Tony Shahbaz
-----------------------------
Tony Shahbaz, President and
Chief Executive Officer,
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF I/O MAGIC CORPORATION AS CONTAINED IN ITS FORM 10-Q FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,202,709
<SECURITIES> 0
<RECEIVABLES> 20,392,594
<ALLOWANCES> (71,193)
<INVENTORY> 6,376,384
<CURRENT-ASSETS> 31,770,990
<PP&E> 457,067
<DEPRECIATION> (175,701)
<TOTAL-ASSETS> 32,073,754
<CURRENT-LIABILITIES> 16,168,561
<BONDS> 0
0
0
<COMMON> 39,244
<OTHER-SE> 15,865,949
<TOTAL-LIABILITY-AND-EQUITY> 32,073,754
<SALES> 16,614,647
<TOTAL-REVENUES> 16,617,647
<CGS> 13,238,734
<TOTAL-COSTS> 15,774,364
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 777
<INCOME-PRETAX> 842,506
<INCOME-TAX> (133,000)
<INCOME-CONTINUING> 975,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 975,506
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.02
</TABLE>
