<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 SEPTEMBER 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) 727-7466
--------------
(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 November 9, 2000, the number of shares of Common Stock issued and
outstanding was 39,355,529.
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 September 30, 2000 (unaudited) 3-4
Statements of Income - For the three months and nine months ended
September 30, 2000 and 1999 (unaudited) 5
Statements of Cash Flows - For the nine months ended
September 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 11-13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14-15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</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 SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------ ------------------
CURRENT ASSETS
Cash $1,943,522 $2,020,206
Accounts receivable, net of allowance for
doubtful accounts of $71,193 and $67,664 10,115,350 16,878,583
Accounts receivable from related parties 6,561,738 -
Inventory 3,318,422 6,458,004
Prepaid expenses and other current assets 49,120 97,242
Deferred tax provision 651,000 766,000
--------------- --------------
TOTAL CURRENT ASSETS 22,639,152 26,220,035
FURNITURE AND EQUIPMENT, NET 255,689 339,745
OTHER ASSETS 21,488 16,488
--------------- --------------
TOTAL ASSETS $22,916,329 $26,576,268
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
I/O MAGIC CORPORATION
BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30,2000 (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30,2000
------------------ -------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $9,067,600 $5,990,875
Current portion of capital lease obligation 1,144 -
Accounts payable to related parties 4,720,054 2,327,865
Reserves for customer returns and allowances 1,145,568 1,556,927
Income taxes payable 106,000 44,142
-------------- -------------
TOTAL CURRENT LIABILITIES 15,040,366 9,919,809
-------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value
10,000,000 shares authorized
none issued and outstanding - -
Common stock, $0.001 par value
50,000,000 shares authorized
32,307,039 and 39,335,529 (unaudited) shares
issued and outstanding 32,309 39,338
Additional paid in capital 10,511,897 17,669,926
Deferred compensation (15,500) (6,200)
Treasury stock, 550,000 shares, at cost (165,000) (165,000)
Accumulated deficit (2,487,743) (881,605)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 7,875,963 16,656,459
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,916,329 $26,576,268
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
I/O MAGIC CORPORATION
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 AND
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ----------------------------
2000 1999 2000 1999
-------------- -------------- --------------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 40,747,330 $ 21,569,160 $ 10,931,810 $ 8,485,291
COST OF SALES 32,364,411 16,244,908 8,657,887 6,339,881
------------ ------------ ------------ ------------
GROSS PROFIT 8,382,919 5,324,252 2,273,923 2,145,410
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, marketing, and advertising 4,071,081 2,983,691 1,054,941 1,236,037
General and administrative 2,729,391 1,574,647 801,096 495,572
------------ ------------ ------------ ------------
Total operating expenses 6,800,472 4,558,338 1,856,037 1,731,609
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,582,447 765,914 417,886 413,801
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 33,145 9,587 13,323 3,587
Interest expense (1,266) (12,786) - (1,402)
Income from related party - 21,938 - 21,938
Other income 1,076 3,446 - 1,346
------------ ------------ ------------ ------------
Total other income (expense) 32,955 22,185 13,323 25,469
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 1,615,402 788,099 431,209 439,270
PROVISION (BENEFIT) FOR INCOME TAXES 9,264 800 (82,736) 400
------------ ------------ ------------ ------------
NET INCOME $ 1,606,138 $ 787,299 $ 513,945 $ 438,870
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.04 $ 0.03 $ 0.01 $ 0.02
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.03 $ 0.01 $ 0.02
============ ============ ============ ============
BASIC WEIGHTED-AVERAGE SHARES
OUTSTANDING 39,015,695 29,778,974 39,306,951 25,058,544
============ ============ ============ ============
DILUTED WEIGHTED-AVERAGE SHARES
OUTSTANDING 39,553,630 30,107,233 39,844,886 25,386,803
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
I/O MAGIC CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,606,138 $ 787,299
Adjustments to reconcile net
income to net cash provided
by operating activities`
Depreciation and amortization 56,361 36,026
Amortization of deferred
compensation 9,300 9,300
Provision for allowance for
doubtful accounts (3,529) 29,725
Provision for inventory
obsolescence (41,544) -
Note payable to related party - (345,500)
Deferred income tax (115,000) -
Reserves for customer returns
and allowances 411,359 625,136
Tax effect of exercised
Options 52,000 -
(Increase) decrease in
Accounts receivable (6,759,704) (4,270,281)
Accounts receivable from
related parties 6,561,738 (767,228)
Inventory 1,901,962 3,508,896
Prepaid expenses and other
current assets (48,122) (80,261)
Other assets 5,000 1,172
Increase (decrease) in
Accounts payable and accrued
expenses (3,016,723) 2,433,188
Accounts payable to related
parties (2,392,189) (1,882,641)
Income tax provision (61,860) 800
----------- -----------
Net cash provided by (used in)
operating activities (1,834,813) 85,631
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and
equipment (140,417) (100,372)
----------- -----------
Net cash used in investing
activities (140,417) (100,372)
----------- -----------
</TABLE>
6
<PAGE>
I/O MAGIC CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease
obligations (1,144) (4,069)
Payments on notes payable - (250,000)
Purchase of treasury stock - -
Proceeds from sale and
issuance of common stock 2,000,000 -
Proceeds from exercise of
warrants 53,058 69,710
----------- -----------
Net cash provided by (used in)
Financing activities 2,051,914 (184,359)
----------- -----------
Net increase (decrease) in cash 76,684 (199,100)
CASH, BEGINNING OF PERIOD 1,943,522 1,402,904
----------- -----------
CASH, END OF PERIOD $ 2,020,206 $ 1,203,804
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
INTEREST PAID $ 1,266 $ 12,786
=========== ===========
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 nine months ended September 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 nine months ended September 30, 1999, the Company entered into the
following non-cash transaction:
- Issued 16,666,667 (unaudited) shares of common stock for $5,000,000
(unaudited) in inventory.
- Reflected the reduction of a related party note payable as a reduction to
cost sales of $240,000 (unaudited).
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 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
8
<PAGE>
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.
As of September 30, 2000 (unaudited) and 1999 (unaudited), the Company had
potential common stock as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Weighted-average common shares
outstanding during the period (unaudited) 39,015,695 29,778,974
Incremental shares assumed to be
outstanding since the beginning of the
period related to stock options and warrants
outstanding (unaudited) 537,935 328,259
----------- -----------
FULLY DILUTED WEIGHTED-AVERAGE COMMON SHARES
AND POTENTIAL COMMON STOCK (UNAUDITED) 39,553,630 30,107,233
------------ -----------
</TABLE>
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
September 30,
2000
------------
(unaudited)
<S> <C>
Accounts payable $2,868,548
Accrued channel promotions and marketing 2,481,684
Accrued compensation and related benefits 237,081
Other 403,562
----------
TOTAL $5,990,875
==========
</TABLE>
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 September 30, 2000:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000 $93,876
2001 186,742
2002 86,524
2003 11,412
2004 6,069
-------- -------
$384,623
----------
</TABLE>
9
<PAGE>7
Rent expense was $41,541 and $42,863 for the three months ended September 30,
2000 and 1999, respectively, and is included in general and administrative
expenses in the accompanying statements of income.
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 September 30, 2000 and 1999, the
Company incurred $381,416 (unaudited) and $565,963 (unaudited), respectively,
related to these agreements. Such is included in selling, marketing, and
advertising in the accompanying statements of income.
NOTE 5 - CAPITAL TRANSACTIONS
COMMON STOCK ISSUED FOR CASH
During the nine months ended September 30, 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).
COMMON STOCK ISSUED FOR SERVICES
During the nine months ended September 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.
COMMON STOCK ISSUED UPON EXERCISE OF WARRANTS
During the nine months ended September 30, 2000, 105,578 warrants were exercised
for cash of $53,058.
NOTE 6 - RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2000 and 1999, the Company had
revenues from two related parties totaling approximately $1,036,997
(unaudited)and $2,074,000 (unaudited), respectively.
During the nine months ended September 30, 2000 and 1999, the Company had
purchases from related parties totaling approximately $22,105,625 (unaudited)
and $10,143,000 (unaudited), respectively.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
RESULTS OF OPERATIONS
Revenues for the period ended September 30, 2000 ("2000") were $10,931,810,
compared to revenues for the period ended June 30, 1999 ("1999") of $8,485,291.
The increase in revenues is primarily attributable to the addition of several
significant customers including: Staples in January, 2000, Best Buy in March,
2000, and Office Depot in June, 2000.
Cost of sales as a percentage of revenues increased from 74.72% ($6,339,881) in
1999 to 79.20% ($8,657,887) in 2000. This was primarily due to a change in
product mix to more units with lower gross margin percent.
Operating expenses as a percentage of revenues decreased from 20.41%
($1,731,609) in 1999 to 16.98% ($1,856,037) in 2000.
Selling, marketing and advertising as a percentage of revenues decreased from
14.57% ($1,236,037) in 1999 to 9.65% ($1,054,941) in 2000.
General and administrative expenses as a percentage of revenues increased
from 5.84% ($495,572) in 1999 to 7.33% ($801,096) in 2000. The increase
on a percentage basis is primarily due to expenses related to becoming a
reporting company and increased payroll to position the Company for increased
growth.
Other income (expense) decreased as a percentage of sales from (0.30%) in 1999
($25,469 income) to 0.12% ($13,323 income) in 2000.
Provision for income taxes for the three months ended September 30, 1999
represents minimum state income taxes. Provision for income taxes for the period
ended September 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 September 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 $438,870 for the three months ended September 30, 1999
to $513,945 for the three months ended September 30, 2000, primarily due to a
tax benefit of $82,736 in 2000 versus tax of $400 in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
RESULTS OF OPERATIONS
Revenues for the period ended September 30, 2000 ("2000") were $40,747,330,
compared to revenues for the period ended September 30, 1999 ("1999") of
$21,569,160. 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.
Cost of sales as a percentage of revenues increased from 75.32% ($16,244,908) in
1999 to 79.43% ($32,364,411) in 2000. This was primarily due to two factors.
First, there was a change in product mix to products with lower gross margin in
11
<PAGE>
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 transaction as there has been contact with the related party.
The Company wrote down $72,715 of its inventory during the nine months ended
September 30, 1999 and wrote down $83,372 of its inventory during the nine
months ended September 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 21.13%
($4,558,338) in 1999 to 16.69% ($6,800,472) in 2000.
Selling, marketing and advertising as a percentage of revenues decreased from
13.83% ($2,983,691) in 1999 to 9.99% ($4,071,081) in 2000.
General and administrative expenses as a percentage of revenues decreased from
7.30% ($1,574,647) in 1999 to 6.70% ($2,729,391) 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) decreased as a percentage of sales from (0.10%) ($22,185
income) to 0.08% ($32,955 income).
Provision for income taxes for the period ended September 30, 1999 represents
minimum state income taxes. Provision for income taxes for the period ended
September 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 nine months ended September 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 $787,299 for the nine months ended September 30, 1999
to $1,606,138 for the nine months ended September 30, 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 a line of
credit with Lung Hwa, a major supplier, of $2 million. Borrowings under this
arrangement are interest free for up to 60 days.
In addition, certain of the Company's stockholders and vendors continue to
provide inventory in exchange for common stock of the Company.
For the nine months ended September 30, 2000 the Company had a net increase in
cash in the amount of $76,684. This was due to cash used in operating activities
of $1,834,813, cash used in investing activities of $140,417 and cash provided
by financing activities of $2,051,914. Cash from all accounts receivable changes
decreased by $197,966, cash from inventory changes increased by $1,901,962 and
cash from all accounts payable decreased by $5,408,914. Cash used for investing
activities was for leasehold improvements, furniture, computer equipment and
software. Cash provided by financing activities was primarily by issuance of
632,912 shares of common stock for $2,000,000 and exercise of 105,578 warrants
for $53,058.
12
<PAGE>
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.
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 nine month period ended September 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 September 30, 2000 amounted to
approximately $15,777,735. 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.
13
<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 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 has proceeded to an arbitration hearing in
this matter. The liability phase is currently ongoing. In the event either party
is found liable in the first phase of the hearing (the liability phase), 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.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company had its annual meeting of shareholders on September 12, 2000.
At that meeting and by proxy, a quorum was present and the Company received the
following votes on its proposals:
<TABLE>
<CAPTION>
Proposal Yes No Abstain Shares Voted
Result
<S> <C> <C> <C> <C>
Board of Directors
Tony Shahbaz 22,381,122 0 0 22,381,122
YES (100%)
Anthony Andrews 22,381,122 0 0 22,381,122
YES (100%)
Young-Hyun Shin 22,381,122 0 0 22,381,122
YES (100%)
Daniel Hou 22,381,122 0 0 22,381,122
YES (100%)
Steel Su 22,381,122 0 0 22,381,122
YES (100%)
Acquisition of
IOM Holdings Corp. 22,378,622 2,500 0 22,381,122
YES (99.9%)
Increase in
Authorized Shares 22,335,955 45,167 0 22,381,122
YES (99.8%)
Ratification of
Independent 22,379,722 400 1,000 22,381,122
Auditors
YES (99.9%)
</TABLE>
ITEM 5. OTHER INFORMATION
On August 8, 2000, the Company announced it had selected Tech Data
Corporation to distribute the Company's full line of computer peripheral
products in North America.
On August 10, 2000, the Company announced that Office Depot had joined the
national retailers that offer the Company's products.
On August 15, 2000, the Company announced that it had signed a letter of
intent to acquire the Hi-Val Multimedia brand and become the exclusive licensee
of the Digital Research Technologies brand. This acquisition is expected to take
place in the fourth quarter 2000, subject to: shareholder approval, fairness
opinion and restructuring of debt with Finova Capital. The shareholder approval
has been obtained.
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:
On September 1, 2000, the Company filed a report on Form 8-K
announcing that it intends to acquire the HiVal Multimedia brand
and the Digital Research Technologies brand, subject to
shareholder approval and a fairness opinion.
15
<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: November 9, 2000 By: /s/ Tony Shahbaz
-------------------------------------
Tony Shahbaz, President and Chief
Executive Officer, Chief Financial
Officer
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