<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 June 30, 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 August 10, 2000, the number of shares of Common Stock issued and
outstanding was 39,317,671.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
1
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I/OMAGIC CORPORATION AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
Number
PART I - FINANCIAL INFORMATION ------
<S> <C>
Item 1. Financial Statements
Balance Sheets - December 31. 1999 and June 30, 2000 (unaudited) 3-4
Statements of Income - For the three months and six months ended
June 30, 2000 and 1999 (unaudited) 5
Statements of Cash Flows - For the six months ended June 30, 2000 and
1999 (unaudited) 6-7
Notes to Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations 11-14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</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 JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 1,943,522 $ 3,245,004
Accounts receivable, net of allowance for
doubtful accounts of $71,193 and $67,635 10,115,350 16,337,971
Accounts receivable from related parties 6,561,738 397,754
Inventory 3,318,422 5,317,718
Prepaid expenses and other current assets 49,120 109,870
Deferred tax 651,000 726,800
----------- -----------
TOTAL CURRENT ASSETS 22,639,152 26,135,117
FURNITURE AND EQUIPMENT, NET 255,689 286,122
OTHER ASSETS 21,488 16,488
----------- -----------
TOTAL ASSETS $22,916,329 $26,437,727
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
I/O MAGIC CORPORATION
BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30,2000 (UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, 1999 JUNE 30,2000
----------------- ------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued expenses $ 9,067,600 $ 7,904,621
Current portion of capital lease obligation 1,144 --
Accounts payable to related parties 4,720,054 842,713
Reserves for customer returns and allowances 1,145,568 1,454,913
Income taxes payable 106,000 126,500
------------ ------------
TOTAL CURRENT LIABILITIES 15,040,366 10,328,747
------------ ------------
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 39,282,451 (unaudited) shares
issued and outstanding 32,309 39,284
Additional paid in capital 10,511,897 17,639,546
Deferred compensation (15,500) (9,300)
Treasury stock, 550,000 shares, at cost (165,000) (165,000)
Accumulated deficit (2,487,743) (1,395,550)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 7,875,963 16,108,980
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,916,329 $ 26,437,727
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
I/O MAGIC CORPORATION
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 AND
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
June 30, June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 29,815,519 $ 13,083,869 $ 13,200,872 $ 7,779,153
COST OF SALES 23,706,524 9,905,027 10,467,790 6,210,849
------------ ------------ ------------ ------------
GROSS PROFIT 6,108,995 3,178,842 2,733,082 1,568,304
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, marketing, and advertising 3,016,138 1,538,911 1,478,282 783,936
General and administrative 1,928,296 1,287,418 930,522 769,000
------------ ------------ ------------ ------------
Total operating expenses 4,944,434 2,826,329 2,408,804 1,552,936
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,164,561 352,513 324,278 15,368
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 19,822 6,000 16,822 3,000
Interest expense (1,266) (11,384) (489) (4,899)
Other income 1,076 2,100 1,076 2,100
------------ ------------ ------------ ------------
Total other income (expense) 19,632 (3,284) 17,409 201
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,184,193 349,229 341,687 15,569
PROVISION FOR INCOME TAXES 92,000 800 225,000 --
------------ ------------ ------------ ------------
NET INCOME $ 1,092,193 $ 348,429 $ 116,687 $ 15,569
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.03 $ 0.01 $ 0.00 $ 0.00
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.03 $ 0.01 $ 0.00 $ 0.00
============ ============ ============ ============
BASIC WEIGHTED-AVERAGE
SHARES OUTSTANDING 38,906,793 25,058,544 39,268,673 31,904,967
============ ============ ============ ============
DILUTED WEIGHTED-AVERAGE
SHARES OUTSTANDING 39,135,433 25,608,253 39,497,313 32,454,676
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
I/O MAGIC CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-----------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,092,193 $ 348,429
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and amortization 36,555 22,998
Amortization of deferred
compensation 6,200 6,200
Provision for allowance for
doubtful accounts (3,558) 8,534
Provision for inventory
obsolescence (81,990) --
Note payable to related party -- (240,000)
Deferred tax (75,800) --
Tax effect of exercised
options 24,000 --
Reserves for customer returns
and allowances 309,345 225,295
(Increase) decrease in
Accounts receivable (6,219,063) (1,681,505)
Accounts receivable from
related parties 6,163,984 --
Inventory 3,082,693 3,770,002
Prepaid expenses and other
current assets (60,750) (48,459)
Other assets 5,000 (8,728)
Increase (decrease) in
Accounts payable and accrued
expenses (1,102,979) 1,011,830
Accounts payable to related
parties (3,877,341) (1,723,106)
Income tax payable 20,500 800
----------- -----------
Net cash provided by (used in)
operating activities (681,011) 1,692,290
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and
equipment (66,988) (61,405)
----------- -----------
Net cash used in investing
activities (66,988) (61,405)
----------- -----------
</TABLE>
6
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I/O MAGIC CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-----------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease
obligations $ (1,144) $ (892)
Payments on notes payable -- (205,000)
Purchase of treasury stock -- --
Proceeds from sale and
issuance of common stock 2,000,000 --
Proceeds from exercise of
warrants 50,625 66,706
----------- -----------
Net cash provided by (used in)
financing activities 2,049,481 (139,186)
----------- -----------
Net increase in cash 1,301,482 1,491,699
CASH, BEGINNING OF PERIOD 1,943,522 1,402,904
----------- -----------
CASH, END OF PERIOD $ 3,245,004 $ 2,894,603
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
INTEREST PAID $ 1,266 $ 11,384
=========== ===========
INCOME TAXES PAID $ 123,300 $ 800
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six months ended June 30, 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
- Issued 40,000 (unaudited) shares of common stock for $60,000 (unaudited) of
legal services
During the six months ended June 30, 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 and increased reserves by $154,388.
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.
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
8
<PAGE>
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 per share. Basic earnings per share excludes dilution and is calculated
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings 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 of the Company.
For the six months ended June 30, 2000 (unaudited) and 1999 (unaudited), the
Company had potential common stock as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Basic weighted-average common shares
outstanding during the period (unaudited) 38,906,793 25,058,544
Incremental shares assumed to be
outstanding since the beginning of the
period related to stock options and warrants
outstanding (unaudited) 228,640 549,709
---------- ----------
FULLY DILUTED WEIGHTED-AVERAGE COMMON SHARES
AND POTENTIAL COMMON STOCK (UNAUDITED) 39,135,433 25,608,253
---------- ----------
</TABLE>
9
<PAGE>
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consisted of the following:
June 30,
2000
----------
(unaudited)
Accounts payable $3,935,250
Accrued rebates and marketing 3,345,502
Accrued compensation and related benefits 331,951
Other 291,918
----------
TOTAL $7,904,621
==========
NOTE 4 - 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 June 30, 2000:
Year Ending
December 31,
------------
2000 $93,876
2001 186,742
2002 86,524
2003 11,412
2004 6,069
--------
$384,623
--------
Rent expense was $41,541 and $25,664 for the three months ended June 30, 2000
and 1999, respectively, and is included in general and administrative expenses
in the accompanying statements of income.
NOTE 5 - CAPITAL TRANSACTIONS
COMMON STOCK ISSUED FOR CASH
During the six months ended June 30, 2000, the Company issued an aggregate of
632,912 (unaudited) restricted shares of common stock for cash totaling
$2,000,000, or at a per share price of $3.16 (unaudited).
COMMON STOCK ISSUED FOR SERVICES
During the three months ended June 30, 2000, the Company issued an
aggregate of 40,000 (unaudited) unrestricted shares of common stock, valued at
$1.50 per share for $60,000 in payment of prior legal services.
NOTE 6 - RELATED PARTY TRANSACTIONS
During the three months ended June 30, 2000 and 1999, the Company had
revenues from a related party totaling approximately $1,139,001 (unaudited) and
$177,218 (unaudited), respectively.
During the three months ended June 30, 2000, the Company had purchases from
related parties totaling approximately $6,907,264 (unaudited) and $6,997,769
(unaudited), respectively.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
RESULTS OF OPERATIONS
Revenues for the period ended June 30, 2000 ("2000") were $13,200,872, compared
to revenues for the period ended June 30, 1999 ("1999") of $7,779,153. The
increase in revenues is primarily attributable to the addition of several
significant customers including: Office Max in June 1999 , Staples in January,
2000, Best Buy in March, 2000, and Office Depot in June, 2000. In addition,
there has been an increase in OEM sales in 2000 from 1999. The Company did not
have any sales backlog as of June 30, 1999 and it had a sales backlog of
$1,951,665 as of June 30, 2000.
Cost of sales as a percentage of revenues decreased from 79.84% ($6,210,849)
in 1999 to 79.30% ($10,467,790) in 2000. This was primarily due to freight in
decreasing as a percentage of sales. Less inventory was brought in by more
expensive air freight and more inventory was brought in by less expensive ocean
freight.
The Company wrote down $83,372 in inventory during the three months ended June
30, 2000 The inventory that was marked down constituted discontinued items for
which the Company was responsible for such costs.
Operating expenses as a percentage of revenues decreased from 19.96%
($1,552,936) in 1999 to 18.25% ($2,408,804) in 2000.
Selling, marketing and advertising as a percentage of revenues increased
slightly from 10.08% ($783,936) in 1999 to 11.20% ($1,478,282) in 2000.
General and administrative expenses as a percentage of revenues decreased from
9.89% ($769,000) in 1999 to 7.05% ($930,522) 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.
Other income (expense) increased as a percentage of sales from (0.00%) ($201
income) to 0.13% ($17,409 income).
Provision for income taxes for the three months ended June 30, 1999 represents
minimum state income taxes. Provision for income taxes for the period ended June
30, 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 benefit. Provision for income taxes
for the three months ended June 30, 2000 represents the beginning tax effect the
Company will have as its net operating loss carryforward has been fully
utilized.
Net income increased from $15,569 for the three months ended June 30, 1999 to
$116,687 for the three months ended June 30, 2000.
11
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
RESULTS OF OPERATIONS
Revenues for the period ended June 30, 2000 ("2000") were $29,815,519, compared
to revenues for the period ended June 30, 1999 ("1999") of $13,083,869. The
increase in revenues is primarily attributable to the addition of several
significant customers including: Office Max in June 1999, Staples in January,
2000, Best Buy in March, 2000, and Office Depot in June, 2000. In addition,
there has been an increase in OEM sales in 2000. The Company did not have any
sales backlog as of June 30, 1999 and it had a sales backlog of $1,951,665 as of
June 30, 2000.
Cost of sales as a percentage of revenues increased from 75.70% ($9,905,029) in
1999 to 79.51% ($23,706,524) in 2000. This was primarily due to two factors.
First, there was a change in product mix to products with lower gross margin in
2000. Second, during 1999, the Company had a one time reduction to cost of sales
totaling $240,000 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.
The Company wrote down $83,372 of its inventory during the six months ended June
30, 2000. The inventory that was marked down constituted discontinued items for
which the Company was responsible for such costs.
Operating expenses as a percentage of revenues decreased from 21.60%
($2,826,329) in 1999 to 16.58% ($4,944,434) in 2000.
Selling, marketing and advertising as a percentage of revenues decreased from
11.76% ($1,538,911) in 1999 to 10.12% ($3,016,138) in 2000.
General and administrative expenses as a percentage of revenues decreased from
9.84% ($1,287,418) in 1999 to 6.47% ($1,928,296) 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.
Other income (expense) increased as a percentage of sales from (0.03%) ($3,284
expense) to 0.07% ($19,632 income).
Provision for income taxes for the period ended June 30, 1999 represents minimum
state income taxes. Provision for income taxes for the period ended June 30,
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 benefit. Provision for income taxes
for the three months ended June 30, 2000 represents the beginning tax effect the
Company will have as its net operating loss carryforward has been fully
utilized.
Net income increased from $348,429 for the six months ended June 30, 1999 to
$1,092,193 for the six months ended June 30, 2000.
12
<PAGE>
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 a $2,000,000
line of credit with one of its major suppliers, Lung Hwa. Borrowings under this
arrangement are interest free for up to 60 days. The Company has trade accounts
payable outstanding balances on this line of $555,460 and $1,261,996,
respectively, as of June 30, 2000 and 1999.
In addition, certain of the Company's stockholders and vendors continue to
provide inventory in exchange for common stock of the Company.
For the six months ended June 30, 2000 the Company had a net increase in
cash in the amount of $1,301,482. This was due to cash used by operating
activities of $681,011, cash used in investing activities of $66,988 and cash
provided by financing activities of $2,049,481. Cash from all accounts
receivable changes decreased by $55,079 and cash from inventory changes
increased by $3,082,694. 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 it 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.
13
<PAGE>
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 six month period ended June 30, 2000 the Company had five major
customers which accounted for approximately 88% of the Company's net sales. The
amounts due from these major customers on June 30, 2000 amounted to
approximately $15,538,062. The Company's strategy is to constantly attempt 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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in a complaint filed by Delta
Products Corporation ("Delta") on June 15, 2000. The complaint of Delta alleges
causes of action against the Company and others for: (1) intentional
misrepresentation; (2) negligent misrepresentation; and (3) negligence. The
claims alleged by Delta relate to alleged representations made by Tony Shahbaz,
the president of the Company, during negotiations for the purchase of the assets
of Hi-Val, Inc, during the summer of 1999. The Company intends to oppose the
claims asserted in the complaint and denies the validity of the allegations
contained therein.
The Company has also been named as a defendant in a complaint filed by
Mitsumi Electronics Corporation ("Mitsumi") on June 15, 2000. The allegations
and claims against the Company in the complaint of Mitsumi are identical to
those alleged by Delta. The Company intends to oppose the claims asserted in the
complaint and denies the validity of the allegations contained therein.
The Company is also a party to an arbitration proceeding with its former
accountants, Ernst & Young. The Company filed a Demand for Arbitration due to
Ernst & Young's refusal to complete the 1997 audit of the books and records of
the Company. The claim of the Company alleges claims for: (1) breach of written
contract; (2) breach of implied covenant, good faith and fair dealing; (3)
professional negligence; (4) conversions; (5) breach of fiduciary duty; and (6)
negligent misrepresentation.
In response to the arbitration filing, Ernst & Young filed a counterclaim
for unpaid fees and loss of profits incurred by Ernst & Young for work performed
in connection with the 1997 audit of the books and records of the Company. The
Company has conducted discovery and prepared to proceed to an arbitration
hearing in this matter. The parties are currently in the process of obtaining a
mutually agreeable date on which to conduct the arbitration hearing on the
liability phase of the arbitration. In the event either party is found liable in
the first phase of the hearing, a second phase will be scheduled to address the
issue of damages.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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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
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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: August 10, 2000 By: /s/ Tony Shahbaz
----------------------------------------
Tony Shahbaz, President and Chief Executive
Officer, Chief Financial Officer
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