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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT 5 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
I/OMAGIC CORPORATION
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(Name of Small Business Issuer in its charter)
Nevada 88-0290623
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(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
6 Autry, Irvine, California 92618
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(Address of principal executive offices) (Zip Code)
(949) 727-7466
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(Issuer's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
None None
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Securities to be registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $.001
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(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
A. BUSINESS DEVELOPMENT
1. FORM AND YEAR OF ORGANIZATION
I/OMagic Corporation, a California corporation ("I/OMagic California")
was incorporated under the laws of the State of California on September 30,
1993. I/OMagic offers products in both the personal computer and the consumer
electronics marketplace. These products include a variety of peripheral upgrades
for desktop and portable applications. I/OMagic's customers include many of the
largest North American personal computer mass merchants and consumer electronic
retailers, including, but not limited to, Comp USA, Inc., Circuit City and
OfficeMax.
The Company is currently subject to the reporting requirements of the
Securities Exchange Act of 1934. The Company intends to file its first Form 10Q
no later than 45 days from November 8, 1999. The public may read and copy any
materials filed by the Company with the Securities Exchange Commission ("SEC")
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the Sec at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC (including
the Company) at http://www.sec.gov.
2. ACQUISITION AGREEMENT
I/OMagic California entered into a Plan of Exchange and Acquisition
Agreement (the "Acquisition Agreement") with Silvercrest International, Inc., a
Nevada corporation ("Silvercrest") on March 18, 1996. Pursuant to the
Acquisition Agreement, Silvercrest issued 6,570,583 shares of common stock in
exchange for 6,570,583 shares of common stock of I/OMagic California, which
constituted 100% of the issued and outstanding shares of I/OMagic California.
Prior to the execution of the Acquisition Agreement, Silvercrest was a public
company with dormant operations. Silvercrest's common stock was listed on the
Over-The-Counter Bulletin Board market as of March 1, 1996. Silvercrest changed
its name to I/OMagic Corporation, a Nevada corporation, on March 20, 1996.
Effective as of the date of the Acquisition Agreement, the board of directors of
Silvercrest resigned and I/OMagic's directors were appointed as the new Board of
Directors. As a result of the acquisition, I/OMagic California, became a
wholly-owned subsidiary of I/OMagic Corporation, a Nevada corporation. I/OMagic
is traded publicly on the Over-The-Counter Bulletin Board ("OTC Bulletin Board")
under the symbol "IOMC". Many large brokerage firms do not make a market or
otherwise solicit orders for shares trading on the OTC Bulletin Board. As a
result of the Company trading on the OTC Bulletin Board, investors may
experience difficulty in liquidating some or all of their investment in the
stock market.
Unless otherwise indicated, all references to the "Company" and
I/OMagic include the operations and business of I/OMagic Corporation, a Nevada
corporation, and I/OMagic Corporation, a California corporation.
B. BUSINESS OF ISSUER
1. PRINCIPAL PRODUCTS AND THEIR MARKETS
I/OMagic offers products in both the personal computer and the consumer
electronics marketplace. These products include a variety of peripheral upgrades
for desktop and portable applications. I/OMagic's customers include many of the
largest North American personal computer mass merchants and consumer electronic
retailers, including, but not limited to, Comp USA, Inc., Circuit City and
OfficeMax.
The Company's product mix is constantly adjusted to reflect current
market conditions. Currently, the Company' s products include: CD ROM drives,
CD-Read/Write drives, DVD drives, audio cards, video display cards, modems,
video conferencing cameras, and other peripheral accessories. The Company's
strategy is to constantly monitor market demand and to update its product mix to
reflect after-market conditions. I/OMagic's key suppliers constitute a
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number of high volume computer peripheral manufacturers. Two key suppliers of
the Company are also large shareholders of the Company. I/OMagic believes that
it is provided extended interest free trade credit, favorable pricing and early
access to key technologies.
a. OPTICAL STORAGE DRIVES
Approximately 50% of the Company's gross revenues generated from
January 1, 1999 through September 30, 1999 were generated through the sale of a
variety of CD ROM drives. These drives include CD-Rom playback, CD
Readable/Writable ("CDRW") and DVD Playback for DVD format movies and other
applications. The primary function of all of these products is to provide an
interface between reading (playback) and writing (storing) various data formats
that are interfaced with both desktop and portable computer architecture. These
products are sold throughout North America to virtually all of the Company's
customers. This market segment tends to constantly shift toward greater speed
and functionality. The Company believes that this shift has historically been
created due to market opportunities as consumers constantly search for the most
advanced features and standards available.
b. AUDIO PERIPHERAL UPGRADE CARDS
Approximately 7% of the Company's gross revenues during the first nine
months of calendar 1999 were generated through the sale of its audio peripheral
upgrade cards. I/OMagic developed the Tempo PC Card, which was launched during
the fourth quarter of 1993 as one of the first Personal Computer Memory Card
Industry Association ("PCMCIA") audio peripheral upgrade cards to provide audio
upgrade functionality for the portable marketplace. While this product was
discontinued due to technical obsolescence, the Company changed its marketplace
position by introducing a variety of peripheral audio cards for desktop
applications to address specific marketplace demands, including computer games,
business applications and other audio applications. The Company's audio product
mix provides a range of technologies based upon specifications geared too the
specific application. These applications include the basic standard video
conferencing application to a full range of audio intensive gaming features.
c. VIDEO PERIPHERAL UPGRADE CARDS
Approximately 16% of the Company's gross revenues during the first nine
months of calendar 1999 were generated through the sale of its video peripheral
upgrade cards and solutions (e.g. video capture cameras). I/OMagic developed the
Focus Video Capture Card, which was launched during the first quarter of 1994 as
one of the first PCMCIA video capture cards to address the portable computer
market. While this product was eventually discontinued due to technical
obsolescence, the Company changed its marketplace position by offering a variety
of video display cards addressing the business and gaming market segments. The
Company's product mix currently includes three different video cards addressing
the various technological needs of the end user. In addition, the Company
markets MagicVision which is a camera intended to facilitate video conferencing
and other applications that provide video capture capabilities.
d. MODEMS, FLOPPY DISK DRIVES, SCANNERS,
KEYBOARDS AND OTHER PERIPHERALS
The balance of the Company's gross revenues during the first nine
months of calendar 1999 (approximately 27%) were generated through the sale of a
variety of products including modems, floppy disk drives, scanners, keyboards
and other peripherals. As of the date of this filing, the Company is one of the
first distributors of scanners designed specifically for portable computers by
the name of MobileScan. The composition of this product mix varies according to
market demands.
The Company believes that its primary strategic advantage is its
ability to expeditiously identify and adjust to an ever-evolving marketplace.
This ability was evidenced in its quick adjustment to changes in the CD ROM and
the video and audio card markets from 1993-1999. As retail mass merchants
consolidate, the Company believes that its ability to offer a wide assortment of
peripheral products addressing current technological needs provides it with a
competitive advantage. As noted more fully below, the Company's major
shareholders provide substantial manufacturing capacity based in Asia in a
majority of its product lines.
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e. INDUSTRY OVERVIEW
The Company believes that the recent emergence of the Internet, coupled
with the ready availability of basic, low priced personal computers and personal
device applications ("PDA") provides consumers with the platform to
technologically improve utilizing, among other things, the products provided by
the Company. In the aggregate, the Company's product mix focuses upon the
enhancement of the functionality of personal computers.
The lower priced personal computers ("PC") market had a substantial
impact on the U.S. consumer segment, as 50 percent of all U.S. households had a
PC in 1998, according to DataQuest, Inc. The PC industry has made great strides
into the home market. In 1995, just 27 percent of U.S. households had a PC. The
PC industry received a boost in the second quarter of 1999 as worldwide PC
shipments grew 26.4 percent over the second quarter of 1998, primarily because
of lower system prices, economic recovery, and the Internet, according to
DataQuest, Inc.
In 2003, the portable computer market is projected to generate $99.91
billion in worldwide revenues (Frost & Sullivan, Report 5680-71, Publication
Date: June 1997). The total revenues for the market for portable computers, pen
computers, palmtops, peripherals, and PC Cards (the "portables market") was
$33.52 billion in 1996.
2. DISTRIBUTION METHODS
a. MANUFACTURING
All of the Company's products are manufactured in Asia. Two of the
Company's major shareholders, Behavioral Technology Corporation ("BTC") and Lung
Hwa Electronics ("Lung Hwa") provide in excess of 60% of the Company's current
product mix. The combined capacity of these manufacturers is well in excess of
the current needs of the Company. Both of these manufacturers also expend
substantial sums in research and development of new computer peripheral
products. All products distributed by the Company are subject to a minimum
warranty of one year to repair or replace the product. This warranty is provided
by the manufacturer of the product.
BTC has provided a credit line in the amount of $5 million,
non-interest bearing over the initial sixty days, subordinated to any
institutional financing. As of the date of this filing, $531,399 has been
borrowed under this credit line. As of the date of this filing, the Company has
not entered into any institutional debt financing.
Lung Hwa has provided a credit line in the amount of $2 million,
non-interest bearing over the initial sixty days. Both BTC and Lung Hwa have not
encumbered any assets of the Company in connection with the foregoing credit
lines. As of the date of this filing, the balance of the Lung Hwa credit line is
$500,000.
I/OMagic provides less than 10% of the aggregate revenues of each BTC
and Lung Hwa.
b. DISTRIBUTION
Most of the Company's products are shipped directly from the Asian
manufacturer to the Company's warehouse facility in Irvine, California. The
Company is responsible for the shipping costs. These products are then shipped
either directly to the customer's retail location or to centralized distribution
centers, where they are then allocated by the customer. These shipments are made
through commercial common carriers such as United Parcel Service or Federal
Express. Most product sales are currently conducted through purchase orders
placed by large retail customers. The Company has a variety of agreements with a
number of these retailers. These agreements include terms related to pricing and
orders, advertising and marketing, returns and rebates, as applicable. These
agreements are considered industry standard and are not issued by all retailers.
The Company believes that it has the opportunity to build strategic alliances
with these and other channels. These retail customers include Micro Center,
Fry's Electronics, Circuit City, COMPUSA, OfficeMax, ABC Warehouse, Navy
Exchange Service Command, PC Mall, and Midwest Micro.
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The Company has completed the initial development of two web sites
(both of which are currently fully operational): (a) www.magicbuys.com ;and
(b)www.I/O Magic.com. www.magicbuys.com is an electronic commerce internet site
which offers various products distributed by the Company. The product mix set
forth in the web site is adjusted from time to time to address perceived market
demands and trends. www.I/OMagic.com is the Company's "flagship" web site which
generally describes the capabilities and business of the Company and directs
internet traffic to www.magicbuys if a consumer is interested in acquiring
products distributed by the Company.. The Company intends that its electronic
commerce facility will provide a wide variety of peripheral applications and
brands. The Company has retained Credit Card Services, Inc. to insure the
encryption and security of all credit card data transmitted in connection with
its e commerce site.
The Company expended approximately $50,000 in developing these two web
sites. It does not anticipate expending marketing funds focused exclusively upon
the web sites as of the date of this filing. The Company will continue to expend
funds in its general marketing and sales programs to promote its various product
lines.
3. STATUS OF NEW PRODUCTS.
The Company continuously consults with its major retail customers to
identify market trends and developments. This information may include customer
preferences and technological developments which may require a peripheral
product which compliments the Company's existing product line. Once the Company
identifies such a development or trend, the Company consults with its Asian
manufacturers to determine the technical feasibility of manufacturing a
particular technology. The feasibility is then considered in conjunction with
the particular pricing structure which the Company's customers believe will sell
in the retail marketplace. The Company is currently focusing upon the following
market trends:
a. OPTICAL STORAGE DRIVES
The Company anticipates the continued release of higher performance CD
ROM drives incorporating improved functionality. For example, the Company
anticipates during the next 12 months that it will introduce faster DVD drives
with multiple functionality. During this same period, the Company further
intends to release CD read/writable drives capable of writing and rewriting at
an accelerated pace relative to currently available technology. There is no
assurance that the Company will be successful in achieving the foregoing
introduction of products. Further, there is no assurance that in the event the
Company does introduce such technologies that revenues will be generated from
such introductions.
b. AUDIO PERIPHERAL UPGRADE CARDS AND SOLUTIONS
During the 15 month period commencing September 30, 1999 the Company
plans to introduce audio cards supportive of the Dolby digital (AC-3) standard.
This is the standard which has been established for many DVD movie titles for
decoding the five channel audio signal generated by such movies. The Company
believes that this standard will eventually also be adopted by the game software
industry. During this same 15 month period, the Company intends to: (i)
introduce a line of speaker systems that integrate the functionality of audio
cards into the speaker, thereby eliminating the need for a separate audio card
and (ii) introduce MP-3 players allowing end-users to digitally record audio
data over the Internet, such as music titles. There is no assurance that the
Company will be successful in achieving the foregoing introduction of products.
Further, there is no assurance that in the event the Company does introduce such
technologies that revenues will be generated from such introductions.
c. VIDEO PERIPHERAL UPGRADE CARDS AND SOLUTIONS
During the 15 month period commencing September 30, 1999 the Company
intends to introduce a line of digital "still-shot" cameras providing the
transportation of images from a camera to a computer. During this same 15 month
period the Company intends to introduce a number of video display cards
addressing specific marketplace demands. In June, 1999 the Company introduced a
32 megabyte video display card providing increased speed, resolution and color
depth. There is no assurance that the Company will be successful in achieving
the foregoing introduction of products. Further, there is no assurance that in
the event the Company does introduce such technologies that revenues will be
generated from such introductions.
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4. COMPETITION
In general, there are three key competitive factors which impact upon
the success of personal computer peripheral distribution companies: (i) time to
market; (ii) product value and technology and (iii) market penetration typically
measured by retail "shelf-space" and after sales service.
(i) TIME TO MARKET.
Consumer demand for particular peripheral upgrade products is
constantly changing. As a result, it is critical that the Company be capable of
quickly addressing this demand. The Company does this in two ways: (a) it
monitors technological developments in the marketplace by consulting with its
retail customers and (b) it then provides this information to its Asian
suppliers. The Company then places multiple orders each month with its Asian
suppliers, thereby assuring that there is a continuous distribution channel
comprised of products reflecting products ordered by its American retail
customers.
(ii) PRODUCT VALUE AND TECHNOLOGY
The Company focuses upon this competitive factor by positioning its
products as an affordable alternative to what the market perceives as the "tier
one" brands such as Creative Labs and S3, Inc. The Company's products are
typically priced below the competing product distributed by Creative Labs and
S3, Inc., while still containing the same basic functionality and
specifications. The Company believes that this provides consumers with product
value, while still sustaining the technology contained in more expensive brand
names. While the Company's marketplace is clearly extremely price sensitive,
there are certain technological specifications which advanced applications such
as video and audio cards for internet applications require in order to achieve a
necessary level of functionality. These technological requirements typically
assure that there is a floor to pricing in the Company's marketplace.
(iii) MARKET PENETRATION AND AFTER SALES SERVICE
1999 has been a break-through year for the Company, allowing its
product "sell-through" at the retail level to provide increasing access to
shelf-space at major consumer outlets throughout North America. This provides
the Company with an expanded presence at these outlets, thereby potentially
improving brand awareness among consumers. The Company has eight employees
dedicated to providing after sales services primarily over the telephone, such
as technical assistance and return and warranty policy information.
As noted above, the Company currently maintains a broad range of
peripheral upgrades for desktop and portable applications. The Company believes
that providing this extensive vertical product mix improves its ability to
maintain critical shelf space at its major retail customers. While a number of
the competitors discussed in this section sell a portion of the Company's
product mix (and clearly, collectively, all of these competitors sell all of the
products sold by the Company), the Company is not aware of any competitor which
provides the broad range of peripheral upgrades currently offered by the
Company.
The Company's competitors include virtually all hardware multi-media
firms selling into North American retail channels. These companies include
Creative Labs (NASDAQ: CREAK) with sales mainly in CD-ROMS, DVD and Sound Cards
and speakers; Haulage (NASDAQ: HAUP) sales mainly in Multimedia cards; 3Com
(NASDAQ: COMS) sales mainly in card LAN; Xircom (NASDAQ: XIRC) sales mainly in
Notebook Netrade Solutions; 3 DFX (NASDAQ: TDFX) sales mainly in Graphics cards;
and Pinnacle Systems, Inc. (NASDAQ: PCLE) sales mainly in Multi Media cards. In
addition, there are private companies, such as Smart and Friendly, Inc., Hi-Val,
Inc., and Digital Research Technologies which directly compete with portions of
the Company's product line.
A number of these companies are better financed and have a longer
operating history then I/OMagic. The market for computer peripherals is
extremely price sensitive and competitive. The composition and identity of
I/OMagic's competitors is constantly changing based upon marketplace conditions
and changes.
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While the Company is continuing its development efforts to meet the
requirements of the marketplace, management of the Company believes that the key
to its success will be providing a full line of PC peripheral products,
including those outlined above as well as other products in development.
5. SOURCES OF RAW MATERIAL AND PRINCIPAL SUPPLIERS
The Company does not maintain its own manufacturing or production
facilities, and does not intend to do so in the foreseeable future. The Company
anticipates that its products will be manufactured, and its raw materials and
components will be supplied, by independent companies. Typically, the purchase
order is the Company's "agreement" with the manufacturer. Therefore, any of
these companies could terminate its relationship with the Company at any time.
In the event the Company were to have difficulties with its present
manufacturers and suppliers, the Company could experience delays in supplying
products to its customers. The Company has 100% of its products manufactured
overseas. Presently, the Company is dependent upon BTC and Lung Hwa for
manufacture of more than 60% of the Company's products.
While the Company has identified and has commenced utilizing certain
alternative sources for its products, clearly if either of its major suppliers:
BTC or Lung Hwa experienced manufacturing problems, the Company's business,
financial condition, and results of operations would be severely adversely
effected, unless the Company could quickly find a replacement supplier.
Management of the Company believes that should alternative sources be required,
the impact would result in a delay of shipping. While it is difficult to project
the extent of this delay, the Company believes that this delay would materially
and adversely effect its position in the marketplace. As a result, if the
Company could no longer obtain supplies from BTC or Lung Hwa it would probably
be required to pay materially more for its products and its product shipments
would be delayed. This would be a material competitive disadvantage for the
Company in the marketplace.
6. DEPENDENCE ON MAJOR CUSTOMERS.
In calendar 1998, the Company had sales with three major customers that
each represent approximately 32% (Fry's, $3,391,785), 26% (CompUSA, $2,769,503)
and 17% (Micro Center, $1,790,257) of net retail sales. Similarly, as of
December 31, 1998, the Company had three customers that accounted for 47%
(CompUSA, $1,810,765), 25% (Fry's $971,555) and 15% (Electronics Boutique,
$556,283) of accounts receivable.
During the nine month period ended September 30, 1999, the Company had
sales with three major customers that represented 36% (Circuit City,
$7,698,841), 31% (CompUSA, $6,658,665) and 16% (Office Max $3,411,031) of net
retail sales. As of September 30, 1999, the Company had three customers that
accounted for 29% (Office Max, $2,783,763), 27% (CompUSA, $2,573,586) and 17%
(Circuit City $1,637,147) of accounts receivable. In June, 1999 the Company
engaged Office Max as a national retailer of the Company's products. While there
is no assurance, the Company anticipates that the addition of Office Max will
diversify the Company's gross revenues among its top customers.
During the fourth quarter of 1998 and the first three quarters of 1999,
the Company's marketing efforts have focused upon large retail chains with a
national distribution capacity. As a result, the Company anticipates that its
future revenues will be highly dependent upon orders placed by Circuit City,
COMPUSA and Office Max
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7. PATENTS, TRADEMARKS, LICENSES, FRANCHISES,
CONCESSIONS, ROYALTY AGREEMENTS AND/OR LABOR CONTRACTS .
a. PATENTS.
The Company does not have any issued or pending patents.
There can be no assurance that the Company will in fact apply for
patents and, even if it were to do so, that such patents would be awarded.
Currently, the Company does not hold patents on any of its products or processes
under development. The Company does, however, treat its technical data as
confidential and relies on internal nondisclosure safeguards, as well as on laws
protecting trade secrets, to protect its proprietary information. There can be
no assurance that these measures will adequately protect the confidentiality of
the Company's proprietary information or that others will not independently
develop products or technology that are equivalent or superior to those of the
Company. The Company may receive in the future communications from third parties
asserting that the Company's products infringe the proprietary rights of third
parties. There can be no assurance that any such claims would not result in
protracted and costly litigation. Furthermore, the Company has not filed for
patent law protection in foreign countries.
b. TRADEMARKS
The Company has provided substantial sums to establish its brand
identification in the marketplace. While it is difficult to estimate the exact
amount expended since the Company's inception in 1993, during the 15 month
period terminating upon September 30, 1999, the Company expended in excess of $2
million in supporting its brand identification and market presence. These
expenditures have included, but are not limited to, participation in industry
trade shows such as Comdex, RetailVision and Retail Exchange, rebate programs,
promotional advertisements through national retail outlets, slotting fees which
reserve shelf space for the Company's products and participation in various
customer marketing programs and events. The Company does not have any registered
trademarks at this time.
8. GOVERNMENT APPROVAL.
No government approval is required for any of the Company's current
products or services.
9. EFFECT OF ANY EXISTING OR PROPOSED GOVERNMENT
REGULATIONS.
Other than normal government regulations that any business encounters,
the Company's business is not effected by government regulations.
10. RESEARCH AND DEVELOPMENT COSTS
The research and development efforts underlying the technology
comprising the eventual products sold by the Company are funded by the Company's
manufacturers (primarily BTC and Lung Hwa). Typically, the Company identifies a
market or technology trend occurring in the marketplace through consultation
with its large retail customers. The Company then provides its Asian
manufacturers with the technical specifications or market trends which it has
identified. The Asian manufacturers then conduct the actual research and
development (in Asia, at their cost) to determine the technical and financial
feasibility of the proposed product. The Company does conduct limited research
and development in designing driver software providing a user friendly
installation, user manual, installation guides, product packaging, marketing
literature and market and sales research. The Company estimates that it expended
approximately $220,000 in connection with these efforts during the 15 month
period ending September 30, 1999.
11. COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL
LAWS AND REGULATIONS
I/OMagic's business does not involve the use of materials in a
manufacturing process where such materials are likely to result in the violation
of any existing environmental rules and/or regulations. Further, I/OMagic does
not own any real property which would lead to liability as a land owner.
Therefore, I/OMagic does not anticipate any costs associated with the compliance
of environmental laws and regulations.
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12. EMPLOYEES
As of the date hereof, the Company has approximately 55 full-time
employees. While the Company does anticipate a small increase in its number
of employees, it does not anticipate that it will hire more than 10-20
additional employees during calendar year 2000. The Company has hired
independent contractors on an "as needed" basis, to develop its web site and
to fill short-term staffing needs such as data entry and product assembly.
The Company has no collective bargaining agreements with its employees. The
Company believes that its employee relationships are satisfactory.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The Company can indefinitely finance its current level of sales through
its own internal resources, as well as the credit lines provided by BTC and Lung
Hwa. In the event the Company continues with the revenue growth it has
experienced between 1998 and 1999 the Company believes that it will need
additional capital during the first quarter of 2000. 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. This additional capital would be utilized to acquire additional
inventory to be resold by the Company and to increase marketing and sales
efforts toward national retail chains. In the event the Company is unsuccessful
in securing such financing, it may be required to curtail its sales growth.
While the Company will continue with its business plan at least through calendar
year 2000 in providing a broad range of desk top and portable computer
peripherals and upgrades, the Company anticipates that it will increasingly
focus upon two aspects of its business: (1) marketing to national retail chains;
the Company believes that such chains constitute less credit risk than smaller
retail operations; and (2) that the average order from such chains will be
substantially larger than smaller retail chains, thereby allowing the Company to
take advantage of the economies of scale associated with distributing a single
product-line in large volume.
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Nine Months Nine Months
Ended Ended Year Ended Year Ended
September 30, September 30, December 31, December 31,
1999 1998 1998 1997
(unaudited) (unaudited) (audited) (audited)
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<S> <C> <C> <C> <C>
Statement of Operations Data
Revenue $21,569,160 $6,180,170 $ 10,714,363 $ 4,034,701
(Net Loss)/Net Profit 787,299 (10,660) (338,018) (1,459,527)
(Net Loss)/Net Profit
per share 0.03 0.00 (0.02) (0.12)
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Balance Sheet Data
Current Assets 12,353,908 3,682,306 5,973,859 1,931,750
Total Property &
Equipment, Net 197,577 125,134 133,231 120,007
Total Assets 12,571,473 3,828,600 6,128,250 2,072,917
Total Current
Liabilities 5,925,763 2,665,333 5,344,407 1,197,567
Accumulated Deficit (3,563,242) (3,751,586) (4,350,541) (4,012,523)
Stockholder's Equity
(Capital Deficiency) 6,643,429 1,155,727 777,120 (875,350)
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</TABLE>
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The Company offers rebate programs for various products through its
retail customers. The products offered change from time to time. The purpose of
the rebates is to accelerate the sale of inventory, assist in the customer's
advertising campaign or provide for the joint marketing of related products.
Rebate programs typically last one or two weeks. These rebates averaged 7% of
gross revenues of the Company during the nine month period ended September 30,
1999. If the Company offers a rebate, the amount of the rebate typically ranges
between 4% to 8% of the retail price of the product. The rebate concept is
prevalent among the Company's competitors and the Company anticipates that it
will continue indefinitely with different products offered at various times.
Periodically, the Company enters into various agreements for services
including, but not limited to, public relations, financial consulting and
manufacturing consulting. The agreements generally are on going until such time
they are terminated, as defined. Compensation for services is paid either on a
fixed monthly rate or based on a percentage, as specified.
A. NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
Revenues for the period ended September 30, 1999 ("1999") were
$21,569,160, compared to revenues for the period ended September 30, 1998
("1998") of $6,180,170. The increase in revenues is primarily attributable to
the addition of several significant customers including: CompUSA in June 1998
(representing $6,658,665 of revenue in 1999 and $485,662 in 1998), Circuit City
in April 1999 (representing $7,698,841 of revenue in 1999 solely) and Office Max
in June 1999 (representing $3,411,031 of revenue in 1999 solely). In addition,
there has been an increase in OEM sales in 1999 to $881,438 compared to $498,236
in 1998. The Company did not have any sales backlog as of September 30, 1998 and
it had a sales backlog of $4,224,023 as of September 30, 1999.
Sales for the nine months ended September 30, 1999 sales increased to
$21,569,160 from $6,180,180 for the same period in 1998; this is an increase of
$15,388,980 . The increase in revenues is primarily attributable to the addition
of several significant customers including: CompUSA in June 1998 (representing
$6,658,665 of revenue in 1999 and $485,662 in 1998), Circuit City in April 1999
(representing $7,698,841 of revenue in 1999 solely) and Office Max in June 1999
(representing $3,411,031 of revenue in 1999 solely). In addition, there has been
an increase in OEM sales in 1999 to $881,438 compared to $498,236 in 1998. Sales
to other smaller customers decreased to $2,919,185 in 1999 from $5,196,272 in
1998. The offsetting decrease is primarily due to Fry's Electronics
(representing $2,364,391 of revenue in 1998 and $1,364,151 in 1999). This
offsetting decrease is due to the Company's emphasis and shift of resources and
product with the larger national customers. The Company did not have any sales
backlog as of September 30, 1998 and is had a sales backlog of $4,224,023 as of
September 30, 1999.
Cost of sales as a percentage of revenues increased from 71.62%
($4,426,379) in 1998 to 75.32% ($16,244,908) in 1999. Cost of product as a
percentage of revenues increased from 69.82% in 1998 to 71.00% in 1999. This was
primarily due to increased price protection (which decreased net revenue) in
1999. Price protection totaled $153,723 in 1998 and $852,384 in 1999. Freight
expenses as a percentage of revenues increased from 1.80% in 1998 to 4.32% in
1999. 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 at this
9
<PAGE>
time, and anticipates lower future freight expenses.
The Company did not "write down" any of its inventory during the nine
months ended September 30, 1998. During the nine months ended September 30,
1999, the Company wrote down $72,715 of its inventory due to obsolescence. . The
inventory that was marked down at the end of a fiscal year (as discussed below)
constituted discontinued items for which the Company was responsible for such
costs.
Operating expenses as a percentage of revenues decreased from 32.60%
($2,015,021) in 1998 to 21.13% ($4,558,338) in 1999.
Selling, marketing and advertising as a percentage of revenues
decreased from 19.59% ($1,210,801) in 1998 to 13.83% ($2,983,691) in 1999.
Rebates increased from $602,158 in 1998 to $1,471,904 in 1999, COOP
advertising(advertising costs which are shared between the retailer and the
Company; the eventual allocation of such costs changes between retailers)
increased from $290,152 in 1998 to $638,916 in 1999, slotting fees (fees paid to
retailers to reserve shelf space in their facilities for the Company's products)
increased from $0 in 1998 to $100,002 in 1999 and sales department expenses
increased from $318,491 in 1998 to $772,870 in 1999. The percentage decrease is
primarily due to a reduction in the number of rebate programs relative to 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 13.01% ($804,220) in 1998 to 7.30% ($1,574,647) in 1999. 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 sales revenue. Salaries and related expenses
increased from $455,453 in 1998 to $934,910 in 1999. The increase in the amount
expensed is due primarily to additional personnel added in 1999, although as a
percentage of revenues the amounts declined. Outside services increased from
$88,911 in 1998 to $159,958 in 1999 due to additional expenditures for financial
relations services. Other factors in the change in general and administrative
expenses were rent which increased from $51,320 in 1998 to $83,172 in 1999 and
travel which increased from $24,448 in 1998 to $69,580 in 1999. The remaining
general and administrative expenses represent utilities and support functions
whereby no one account or area fluctuated significantly.
Other income (expense) decreased as a percentage of sales from 4.07%
($251,370 income) to 0.10% ($22,185). 1998 included one time other income of
$250,000 from the sale of a modem design.
Income taxes for both periods ended September 30, 1999 and 1998
represent minimum state income taxes. This is due to the fact the Company has
net operating loss carryforwards expiring through 2018 and alternative minimum
tax credits to offset taxable income for both federal and state purposes.
Net profits increased from a net loss of $10,660 for the nine months
ended September 30, 1998 to a net profit of $787,299 for the nine months ended
September 30, 1999.
B. FISCAL YEAR ENDED DECEMBER 31, 1998 (AUDITED) COMPARED TO FISCAL YEAR
ENDED DECEMBER 31, 1997 (AUDITED)
Revenues for the year ended December 31, 1998 ("1998") were $10,714,363
compared to revenues for the year ended December 31, 1997 ("1997") of
$4,034,701. The increase in revenues is attributable to the increase in sales
to: COMPUSA from $0 in 1997 to $2,769,503 in 1998; to Fry's Electronics from
$1,051,894 in 1997 to $3,391,785; and to Micro Center from $1,061,800 in 1997 to
$1,790,257 in 1998; and smaller increases in sales to other existing customers.
The Company did not have a sales back log at the end of 1997 or 1998.
Cost of sales as a percentage of revenues decreased from 84.71%
($3,417,984) to 73.99% ($7,927,553). This was primarily due to decreased product
costs charged by suppliers.
The Company "wrote-down" $93,700 in inventory in 1997 and $54,842 of
its inventory in 1998. Once a product is shipped by the Company to the customer,
then the Company is typically obligated to provide price protection
10
<PAGE>
or accept returned products which are unsold by the retail customer. The term
"price protection" refers to an agreement between the Company and the retailer
that in the event the market price for a particular item of inventory declines
during a period of time, then the Company shall either accept a return of this
item or reduce the cost charged by the Company to the retailer in order to allow
the retailer to maintain its profit margin. Price protection is typically not
incorporated into any formal agreement between the Company and the retailer,
rather it is an industry method of conducting business. The Company then
attempts to resell this returned inventory to another customer. If the Company
has not yet accepted delivery of a product from its overseas manufacturer, then
the manufacturer is responsible for all price reductions and obsolescence of
such inventory.
Operating expenses as a percentage of revenues decreased from 51.03%
($2,059,066) in 1997 to 31.51% ($3,376,021) in 1998. This percentage decrease is
primarily due to the fixed cost nature of the majority of operating expenses. In
summary, as revenues increase, the general and administrative expenses decrease
as a percentage of revenues. General and administrative expenses in 1997 were
$1,416,792 and in 1998 were $1,263,390. Bad debt increased by $227,517 in 1998
from 1997 and audit expense decreased by $151,030 in 1998 from 1997 due to
replacement of auditors during the 1997 audit. Both are expected to be one-time
non-recurring expenses. In 1998 the Company incurred $140,498 in connection with
service agreements. Amounts incurred in connection with service agreements in
1997 were insignificant. Selling expenses in 1997 were $642,274 and in 1998 were
$2,112,631. Rebates increased to $1,224,919 in 1998 from $24,117 in 1997, as
rebates were not initiated until late December 1997. Advertising expenses
increased to $369,678 in 1998 from $287,398 in 1997. Sales administrative
expenses increased to $518,034 in 1998 from $330,759 in 1997 primarily due to
higher sales commissions
Other income (expense) increased from (0.41%) ($16,378) expense in 1997
to 2.35% ($251,993) income in 1998. Calendar 1998 revenues included a
non-recurring revenue amount of $250,000 arising from the sale of a modem
design.
Income taxes for both years ended December 31, 1998 and 1997, represent
minimum state income taxes due to the Company's loss position during both
periods.
Although the Company had an increase in revenues and receivables in
1998 compared with 1997, the Company experienced a net loss of $338,018 for the
year ended December 31, 1998 as compared to a net loss of $1,459,527 for the
year ended December 31, 1997. The decrease in the net loss is due to improved
sales, expansion of marketing activities, improved product costs and the fact
that the operating expenses did not increase at the same rate as sales. Rebate
programs typically last one or two weeks. The rebate concept is prevalent among
the Company's competitors and the Company anticipates that it will continue
indefinitely with different products offered at various times.
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 (see "Private
Placement Offerings"). 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 these arrangements
provided the Company interest free for up to 75 days as defined. The Company
does not have any outstanding balance on either of these lines as of September
30, 1999.
The Company is in the process of signing an asset based lending
agreement for up to $10,000,000 with IBM Credit in order to continue its growth.
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.
For the nine months ended September 30, 1999 the Company had a net
decrease in cash in the amount of $199,100. this was due to cash used for
investing activities of $100,372 and cash used for financing activities of
$184,359 offset by cash provided from operations of $85,631. Cash used for
investing activities was for leasehold
11
<PAGE>
improvements, furniture and computer equipment. Cash used for financing
activities was primarily for payment on notes payable ($250,000) offset by
proceeds from exercise of warrants ($69,710).
For the year ended December 31, 1998 the Company had a net increase in
cash relative to December 31, 1997 in the amount of $689,435. This was primarily
due to cash flow from operating activities of $829,771 being offset by investing
activities of $51,945 and financing activities of $88,391. While the Company
experienced a loss for 1998 of $338,018, cash from operating activities
increased primarily through the utilization of substantial lines of trade credit
provided by the Company's major vendors. Cash used for investing activities was
for furniture and computer equipment. Cash used for financing activities was
primarily for advances to related parties ($192,982) and purchase of treasury
stock ($165,000) offset by proceeds from issuance of notes payable ($250,000).
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 1998 and 1999 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.
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.
PREVIOUS PRIVATE OFFERINGS
(a) SUMMARY OF OFFERINGS.
The proceeds from all of the following offerings were utilized to
acquire inventory and create brand awareness through various marketing and sales
programs. All of the following offerings were offered and sold exclusively to
accredited investors.
In October 1995, I/OMagic California conducted an offering of Units
(the "Bridge Units"). Each Bridge Unit consisted of a $25,000 9% secured
promissory note (the "Bridge Notes"), 805,000 warrants to purchase common stock
of the Company containing an exercise price of $0.05 per share (the "A Bridge
Warrants"), and 805,000 warrants to purchase common stock containing an exercise
price of $0.95 per share (the "B Bridge Warrants"). The exercise price of the B
Bridge Warrants was reduced by the amount of $0.04 per month for every 30 days
after the first six months that the Bridge Notes were outstanding to a minimum
of $0.50 . The Bridge Notes were due at the earlier of: (i) one year from
issuance or (ii) upon the completion of certain subsequent offerings of
securities. The Bridge Notes were secured by all tangible and intangible assets
of the Company with a first lien, perfected UCC-1 Financing Statement. The
Company raised $805,000 in connection with its sale of the Bridge Units. As of
September 30, 1999, 255,375 A Bridge Warrants are outstanding and zero B Bridge
Warrants are outstanding having been called and canceled by the Company
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<PAGE>
on September 11, 1998. The Bridge Notes have been repaid in full and all UCC
filings terminated. The Company relied upon Section 4(2) of the 1933 Act and
this offering was sold to 35 accredited investors. It was offered only to
accredited investors.
On May 6, 1996, the Company entered into a strategic Alliance Agreement
with Lung Hwa Electronics Co., Ltd., whereby for a consideration of $342,000
from Lung Hwa, the Company issued 1,000,000 shares of restricted Company common
stock. For this agreement, Lung Hwa also agreed to establish a $1,000,000 line
of unsecured credit in favor of I/OMagic, which was later increased to
$2,000,000. As of December 31,1998, there were no outstanding borrowings under
this agreement. As of the date of this filing there is a balance of $500,000
under this line of credit. The Company relied upon Section 4(2) of the 1933 Act
in connection with this transaction and Lung Hwa is an accredited investor.
In connection with a March 1996 private placement of units consisting
of common stock and warrants, the Company issued 568,002 shares of common stock
for cash at $1.45 per share and 577,335 warrants for cash at $0.05 per warrant,
or $1.50 per unit totaling $853,500. Concurrent with this offering, the Company
converted $627,500 of its Bridge Notes into 598,328 shares of common stock at $1
per share and 598,328 warrants at $0.05 per warrant. These warrants allow the
holder to purchase common stock at $2.50 per share, exercisable for a period of
three years from the date of issuance. The Company is obligated to register the
common stock issuable upon exercise of these warrants in any subsequent
Registration Statement filed with the Securities and Exchange Commission.
Through September 30, 1999, none of these warrants have been exercised and such
warrants expired. The full amount due on all nonconverted Bridge Notes has been
paid by the Company, and all UCC-1 Financing Statements have been terminated.
The Company relied upon Section 4(2) of the 1933 Act. There were 35 accredited
investors in this offering and offers were made only to accredited investors.
As consideration for placement agent services rendered in connection
with the March, 1996 private placement, the Company issued to the placement
agents the following warrants: 58,000 warrants to purchase common stock at an
exercise price of $0.70 per share, 131,850 warrants to purchase common stock at
an exercise price of $0.01 per share, and 151,850 warrants to purchase common
stock at an exercise price of $1.65 per share. The term of these warrants is
three years from the date of issuance, and these warrants carry Piggyback
Registration Rights. As of September 30, 1999 none of these warrants have been
exercised and such warrants have expired.
On December 16, 1996, the Company entered into a private Stock Purchase
Agreement whereby the Company sold 250,000 units at a price of $1.00 per unit.
Each unit consisted of one share of common stock and one warrant to purchase
Company stock exercisable at a price of $1.00 per share for a term of two years.
The warrants were not exercised and have expired. The Company relied upon
Section 4(2) of the 1933 Act and this offering was to a single accredited
investor.
In February 1997, the Company commenced an offering of a minimum of
100,000 and a maximum of 600,000 units, consisting of one share of restricted
common stock for cash at $1.24 per share and one warrant for cash of $0.01 per
warrant for a total price of $1.25 per unit, as amended. The warrants are
exercisable in whole or in part at any time during the three years from date of
issuance at an exercise price of $4.50 and are callable by the Company, as
defined. These units carry piggy-back registration rights and the shares
underlying the warrants have not been registered under the Securities Act of
1933. The offering closed in September 1997, at which time the Company had sold
364,000 units for total proceeds of $455,000. Offering costs related to this
private placement totaled approximately $25,000. As of September 30, 1999 none
of these warrants have been exercised. The Company relied upon Section 4(2) of
the 1933 Act and this offering was sold to three accredited investors and was
offered only to accredited investors.
As consideration for placement services rendered in connection with the
February 1997 private placement, the Company issued to a placement agent 13,200
warrants carrying the same terms as the warrants issued in the offering.
On September 19, 1997, the Company entered into a Strategic Alliance
Agreement with Hou Electronics, Inc., a California corporation ("Hou"), whereby
the Company issued two million restricted shares of common stock in exchange for
$250,000 in cash and $1,250,000 of inventory for a total value of $1,500,000, or
$0.75 per share. Of the $1,250,000, $481,260 was credited toward inventory
purchased prior to the agreement. The remaining $768,740 was
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<PAGE>
to be applied to future inventory purchases. As of December 31, 1998, all of the
inventory had been received by the Company. In connection with this Agreement,
Hou provided the Company with a $1 million line of credit and provided Hou with
a right to designate a single member to the Board of Directors of the Company.
As of September 30, 1999 there are no outstanding borrowings under this line of
credit. The Company relied upon Section 4(2) of the 1933 Act in connection with
this transaction and Hou is an accredited investor.
In May 1998, the Company offered up to $250,000 worth of units of its
securities with each unit consisting of a $10,000 note bearing interest at a
rate of 10% per annum, repayable in full ninety days after the declaration of
effectiveness of a registration statement, as defined, or twelve months from the
date of sale whichever comes first; and, one warrant which shall expire thirty
days after the declaration of effectiveness of a Registration Statement of the
Company registering the shares underlying the warrants or twelve months from the
date of issue, whichever comes first. The warrants entitled the holder to
purchase that certain number of shares which was equal to one third of the note
amount divided by the price per shares of common stock registered in the
Registration Statement, all at the aggregate exercise price of $1.00. The
warrants were deemed by management to be contingent consideration based on the
requirement of an effective Registration Statement. As no Registration Statement
was effected, none of these warrants were exercisable at any time prior to their
expiration in May and June 1999. Under the provisions of APB 12, management
determined the relative fair value of the warrants to be nominal due to the
contingent nature of the warrants. Accordingly, none of the proceeds were
allocated to these warrants. The Company sold 25 units for proceeds of $250,000.
As of December 31, 1998, accrued interest totaled $14,375, and is included in
accounts payable and accrued expenses on the accompanying balance sheets. As of
September 30, 1999, all principal and interest had been paid (unaudited).
Effective February 3, 1999, I/OMagic entered into a Subscription
Agreement with BTC wherein BTC received 16,666,667 shares of restricted Common
Stock valued at $0.30 per share in exchange for $5 million in inventory. The
Company relied upon Section 4(2) of the 1933 Securities Act in connection with
this transaction and BTC is an accredited investor.
(b) STATUS OF WARRANT ISSUANCES
As of September 30, 1999 the Company had the following warrants to
purchase common stock outstanding:
(1) 805,000 Class A and 805,000 Class B Warrants were issued in
the October, 1995 private placement. The Class A Warrants have an exercise price
of $0.05 and the Class B Warrants have an exercise price of $0.95. 542,500 of
the Class A Warrants were exercised as of September 30, 1999 and 255,375 Class A
Warrants remain outstanding. 25,001 of the Class B Warrants were exercised and
the remainder were called and terminated in September, 1998.
(2) 125,125 Class A Warrants were issued to Pellet Investments,
Inc. as the placement agent in the October, 1995 offering at an exercise price
of $0.10, with an expiration date of October 17, 2000 and 125,125 Class B
Warrants were issued to Pellet investments with an exercise price of $1.10
(these warrants were called and terminated). 33,232 of the Class A Warrants have
been exercised and the balance remain outstanding.
(3) 577,335 warrants with an exercise price of $2.50 were issued
in the March, 1996 offering. None of these warrants were exercised and they all
expired, in accordance with their terms. An additional 598,398 warrants were
issued in the March, 1996 offering arising from the conversion of the Notes
issued in the 1995 Offering. None of these warrants were exercised and all
expired in accordance with their terms.
(4) An aggregate 341,700 warrants were issued to West America
Securities, Inc. as the placement agent for the 1996 Offering at exercise prices
ranging from $0.01 to $1.65. None of these warrants were exercised and all
expired in accordance with their terms.
(5) 70,000 warrants were issued to Redfield Miller, Inc. (between
February and June, 1997) for services associated with the financial management
of the company with an exercise price of $1.65 and an expiration
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<PAGE>
date of November 1, 2000. None of these warrants have been exercised as of
September 30, 1999.
(6) 15,000 warrants with an exercise price of $0.01 and 15,000
warrants with an exercise price of $1.00 per share were issued to Incentive
Business Channel ("IBC") for public relation services. The warrants expire
between January 1999 and December 1999. As of September 30, 1999, IBC exercised
20,000 of such warrants. The remaining 10,000 warrants are exercisable at $1.00
with 5,000 warrants expiring in November, 1999 and 5,000 expiring in December,
1999.
(7) 60,000 warrants with an exercise price of $1.12 and 30,000
warrants with an exercise of $2.24 were issued to Marketing Pathways for public
relation services. None of the warrants were exercised and the warrants expired
in August, 1999.
(8) 364,000 warrants with an exercise price of $4.50 which expire
January 31, 2000.
(9) 13,200 warrants with an exercise price of $4.50 were issued to
Bob Pett for placement agent services. These warrants were exercisable through
January 31, 2000. None of the warrants have been exercised.
In summary, the Company has the following warrants which remain
outstanding as of September 30, 1999:
(1) 255,375 Class A warrants exercisable at $.05 which expire on
October 17, 2000;
(2) 364,000 warrants exercisable at $4.50 which expire on
January 31, 2000;
(3) 70,000 warrants exercisable at $1.65 which expire on
November 1, 2000;
(4) 5,000 warrants exercisable at $1.00 which expire on
November 1, 1999;
(5) 5,000 warrants exercisable at $1.00 which expire on
December 31, 1999;
(6) 13,200 underwriters warrants which expire on January 31, 2000;
(7) 91,893 underwriter warrants that expire on October 31, 2000.
(c) INDEBTEDNESS
In March, 1995, the Company repurchased 15,783,392 shares of common
stock from H.T. Hong for cash of $0.029 per share. In connection with this
agreement, the Company agreed to settle an accounts payable to a vendor, Tera
Electronics (which was affiliated with Mr. Hong), on behalf of Mr. Hong and
accept inventory purchased by this vendor. This was accomplished with the
issuance of an 8% promissory note in the original principal amount of $345,000.
Pursuant to the terms of the agreement, the Company recorded the inventory (as a
receivable) and the liability. The Company and its legal counsel attempted to
contact Mr. Hong on an on going basis commencing the first quarter of 1996
through the first quarter of 1999 (he resided in Taiwan at the time of the
transaction), however Mr. Hong was not located. In 1996, the Company wrote off
the inventory receivable as it was determined by management that it did not
receive the required inventory. As a promissory note was issued, management of
the Company determined that the liability should remain on the records of the
Company. In March 1999, the statute of limitations expired for M.T. Hong to
attempt collection on this note.
YEAR 2000
The Company has developed and acquired its computer systems with an
objective to be Year 2000 compliant. The Company has engaged the services of
qualified technicians to determine the extent to which it may be vulnerable to
third party Year 2000 issues. All computer equipment purchased recently are Year
2000 compliant. The internal software written by the Company's programmers is
written with the long-date format included and consequently is Year 2000
compliant. The Company uses Microsoft software and has installed all the
available "patches" to up-date this software. Further, Microsoft "patches" will
be installed as they become available from Microsoft in 1999, but this affects
the Company's software and does not impact on the on-going operation of the
Company. The Company has assessed and continues to asses whether its information
and non-information technology systems will be effected by the Year 2000 issues.
The Company has investigated its third party communications suppliers such as
the telephone company and its Internet service provider and found that all are
in the process of becoming Year 2000 compliant in 1999. Based upon current
information, management believes that the necessary modifications have been made
internally to effectively
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<PAGE>
continue the Company into the Year 2000, however, management is continuing to
monitor internal systems, and to assess the readiness of its systems, to ensure
Year 2000 compliance. As a contingency, the Company has identified other
communication suppliers who could provide the necessary service at a minimal
cost to the Company, and a minimal effect on the operations of the Company. In
the event no other communication suppliers can be found, there could be a
material adverse effect on the Company and its operations. Based upon current
information, the Company does not believe that the costs associated with Year
2000 compliance is material for the Company.
The Company does not distribute any product which maintains a calendar,
therefore all products currently distributed by the Company would be Year 2000
compliant. The worst case scenario for the Company would be an installation of
its peripheral products into a computer system which is not Year 2000 compliant.
The Company believes that if this were to occur, that the functionality of the
computer system and therefore all installed peripherals would be adversely
effected.
ITEM 3. DESCRIPTION OF PROPERTY
As of July 1, 1999 the Company leases approximately 22,000 square feet
located at a facility in Irvine, California, which includes offices, storage,
and package assembly space. All of the Company's operations are conducted from
this facility. The lease expires July 1, 2000, and requires monthly payments of
approximately $15,000 per month.
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<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
PERCENTAGE
NAME NUMBER OF SHARES (1) BENEFICIALLY OWNED
- ---- -------------------- ------------------
<S> <C> <C>
Tony Shahbaz(2) 22,766,667 72%
Lung Hwa Electronics Co., Ltd. 1,000,000 3%
3F, No. 59 Tsao Ti Wei
Shen Keng Shiang
Taipei Hsein, Taiwan
Anthony Andrews(2) 74,999 *
Daniel Hou(3)(2) -0- *
Hou Electronics Inc.(2) 2,000,000 6%
All officers and directors as a group (3 persons) 2,074,999 72%
</TABLE>
- ---------------
* Less than one percent
1 Except as otherwise indicated, the Company believes that the beneficial
owners of Common Stock listed above, based on information furnished by
such owners, have sole investment and voting power with respect to such
shares, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options or warrants currently exercisable, or exercisable within 60
days, are deemed outstanding for purposes of computing the percentage
of the person holding such options or warrants, but are not deemed
outstanding for purposes of computing the percentage of any other
person.
2 c/o Company's address: 6 Autry, Irvine, CA 92618. 20,766,667 of these
shares are held in the name of Susha, LLC. Susha was created as a
holding company to hold certain securities contributed by BTC and Mr.
Shahbaz. While Mr. Shahbaz has certain voting powers associated with
the shares held by Susha, 50% of all financial benefits derived from
the shares held by Susha are for the benefit of BTC and 50% of the
financial benefits derived from the shares held by Susha are for the
benefit of Mr. Shahbaz.
3 Pursuant to a written agreement, Hou Electronics, Inc. has a Board seat
on the Board of Directors of the Company.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the date of this Statement by: (i)
each stockholder known by the Company to be the beneficial owner of more than
five percent of the outstanding Common Stock, (ii) each director of the Company,
and (iii) all directors and officers as a group.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------ --- ----------------------------------------------------
<S> <C> <C>
Tony Shahbaz 37 Chairman, President, Chief Executive Officer
Daniel Hou 50 Director
Anthony Andrews 37 Vice President, Director of Engineering, Director
</TABLE>
Mr. Hou and Mr. Andrews shall serve until the next annual meeting of the
shareholders of the Company, which is currently scheduled to occur during
February-April, 2000. Mr. Shahbaz is next scheduled for election in April, 2002
17
<PAGE>
MR. TONY SHAHBAZ, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, is the
Company's founder. In addition, he has played a key role in developing the
Company's multimedia strategy. Mr. Shahbaz has a technical background with over
15 years experience in sales and marketing of computer peripheral products. He
was employed by Western Digital Corporation from September 1986 to March 1993.
At Western Digital Corporation, he held several positions including Vice
President of Worldwide Sales for Western Digital Paradise, and Regional Director
of Asia Pacific Sales and Marketing Operations. While at Western Digital
Paradise's business unit, he established a multichannel world wide retail
distribution structure, with a full line of multimedia products. As Regional
Director of Asia Pacific Sales, he managed two of the company's wholly owned
subsidiaries that developed chip sets and peripherals for the marketplace. Since
1993 Mr. Shahbaz has been the president of I/O Magic Corporation. Prior to his
positions with Western Digital, he held management positions with Tandon
Corporation and Lapin Technology, in the marketing and sales divisions of these
companies.
DANIEL HOU, DIRECTOR, Mr. Hou is the Founder of Hou Electronics, Inc. a computer
peripheral supplier. This company was formed in 1986 and has continually grown
to have revenues of $45 million in 1998. Mr. Hou has been the president of Hou
Electronics from 1986 through the present. He is responsible for all business
activities associated with Hou Electronics. Mr. Hou is active in related
organizations such as holding the office of President with the Southern
California Chinese Computer Association as well as a membership in American
Chemistry Society. Mr. Hou received his Masters in Science from University of
Utah.
MR. ANTHONY ANDREWS, VICE PRESIDENT, DIRECTOR OF ENGINEERING, joined the Company
in February 1994. Mr. Andrews has over 12 years of experience in the computer
industry. His background includes product and software design, with his most
recent position as Principal Engineer at Western Digital Corporation from March
1988 to February 1994. As Principal Engineer, he pioneered the development of
portable notebook designs for companies such as IBM and AST. He also played a
lead role in developing power management features that are being commonly used
in the industry today. Mr. Andrews has his own software design company which has
developed embedded system designs as well as game software. Mr. Andrews works
closely with the Company's sales channels to identify product/market
opportunities for the Company. He is responsible for bringing products from
concept to market launch. This includes sourcing manufacturers for hardware,
developing any necessary software, and packaging designs and specification
sheets. He received a Bachelor of Science in Math and Computer Science from the
University of California at Los Angeles.
18
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
Set forth below is a summary of compensation for the Company's officers for
fiscal years 1999, 1998 and 1997. There are no annuity, pension or retirement
benefits proposed to be paid to officers, directors or employees of the Company
in the event of retirement at normal retirement date pursuant to any presently
existing plan provided or contributed to by the Company or its subsidiary.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
Name Other All
and Annual Restricted Options LTIP Other
Principal Position Year Salary Bonus Compensation Stock Awards SARs Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tony Shahbaz 1999 $140,000 -0- -0- 6,000 (auto)
CEO, President, 1 98 $140,000 11,500(1) 300,000(2) 6,000 (auto)
Secretary & CFO 1997 $140,000 -0- -0- 300,000(3) 6,000 (auto)
Anthony Andrews 1999 $ 74,286 -0- -0- -0- -0- -0- -0-
Vice President 1998 $ 70,269 3,000 -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's By-laws state that Directors of the Company shall not
receive any stated salary for their services, but, by resolution of the Board of
Directors, a fixed sum and expense of attendance, if any, may be allowed for
attendance at each regular and special meeting of the Board of Directors. The
Company maintains directors and officers liability insurance.
- -------------------
(1) Mr. Shahbaz received a bonus of $11,500 for Design Sale of a modem
to Hewlett Packard in May 1998.
(2) On January 2, 1997 the Company issued 300,000 warrants to purchase
common stock of the Company at an exercise price of $1.82 for a term of five
years to Mr. Shahbaz under the Company's 1997 Incentive and Nonstatutory Stock
Option Plan.
(3) On January 2, 1998 the Company issued 300,000 warrants to purchase
common stock of the Company at an exercise price of $1.13 for a term of five
years to Mr. Shahbaz under the Company's 1998 Incentive and Nonstatutory Stock
Option Plan.
19
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Tony Shahbaz,
its Chairman, President and Chief Executive Officer on October 25, 1993 pursuant
to which the Company has agreed to pay Mr. Shahbaz an annual salary of $140,000
per year payable in twelve equal payments on the first day of each month. 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%. No bonuses
were paid under the net profits calculation contained in the employment
agreement.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE BTC ACQUISITION
On February 3, 1999, I/OMagic entered into a subscription agreement
with Behavior Technology Corporation (USA), a California corporation ("BTC"). In
this transaction, BTC: (i) contributed $5 million worth of inventory in exchange
for 16,666,667 shares of restricted Common Stock of I/OMAGIC and (ii) provided a
$5 million credit line for the purchase of additional inventory. Borrowings are
non-interest bearing and are due 75 days from the date of borrowing. As of
December 31, 1998, the Company had no debt outstanding, other than its trade
payables generated in the ordinary course of business.
ITEM 8. DESCRIPTION OF SECURITIES
On February 18, 1999, SUSHA, LLC, a California limited liability
company, was formed. The LLC holds 20,766,667 shares of I/OMagic Corporation.
The purpose of creating this LLC is to provide the President of I/OMagic with
more voting control of the Company.
The authorized capital stock of the company currently consists of
50,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares of
preferred stock. No preferred shares have been issued.
The following summary of certain terms of the common stock does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of the company's Articles of Incorporation and By-laws which are
attached to this Statement.
THE EXCHANGE TRANSACTION
I/OMAGIC Corporation, a California corporation ("I/OMAGIC California")
entered into a Plan of Exchange and Acquisition Agreement (the "Acquisition
Agreement") with Silvercrest International, Inc., a Nevada corporation
("Silvercrest") on March 18, 1996. Pursuant to the Acquisition Agreement,
Silvercrest issued 6,570,583 shares of common stock in exchange for 6,570,583
shares of common stock of I/OMAGIC California, which constituted 100% of the
issued and outstanding shares of I/OMAGIC California. Prior to the execution of
the Acquisition Agreement, Silvercrest was a public company with dormant
operations and had 625,000 shares of common stock outstanding. Silvercrest's
common stock was listed on the Over-The-Counter Bulletin Board System as of
March 1, 1996. Silvercrest changed its name to I/OMAGIC Corporation, a Nevada
corporation, on March 20, 1996. Effective as of the date of the Acquisition
Agreement, the board of directors of Silvercrest resigned and I/OMagic's
directors were appointed as the new Board of Directors. As a result of the
acquisition, I/OMAGIC California, became a wholly-owned subsidiary of I/OMAGIC
Corporation, a Nevada corporation.
COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of
50,000,000 shares of Common Stock, $.001 par value per share, of which
32,091,151 shares of are outstanding as of September 30, 1999. Including 550,000
treasury shares. As of the date of this filing, assuming the exercise of all
currently outstanding Options and Warrants, 33,995,619 shares would be
outstanding.
20
<PAGE>
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Holders of common
stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities. Holders of Common Stock have no right to convert their Common Stock
into any other securities. The Common Stock has no preemptive or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are duly
authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of
10,000,000 shares of preferred stock with a par value of $0.001. The Company's
Board of Directors has authority, without action by the shareholders, to issue
all or any portion of the shares of authorized but unissued preferred stock in
one or more series and to determine the voting rights, preferences as to
dividends and liquidation, conversion rights, and other rights of such series.
The preferred stock, if and when issued, may carry rights superior to those of
common stock, however, no preferred stock may be issued with rights equal or
senior to the preferred stock without the consent of a majority of the holders
of preferred stock.
The Company considers it desirable to have preferred stock available to
provide increased flexibility in structuring possible future acquisitions and
financings and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either
public offering or private placements, the provisions for preferred stock in the
Company's Certificate of Incorporation would avoid the possible delay and
expense of a shareholder's meeting, except as may be required by law or
regulatory authorities. Issuance of the preferred stock could result, however,
in a series of securities outstanding that will have certain preferences with
respect to dividends and liquidation over the common stock which would result in
dilution of the income per share and net book value of the common stock.
Issuance of additional common stock pursuant to any conversion right which may
be attached to the terms of any series of preferred stock may also result in
dilution of the net income per share and the net book value of the common stock.
The specific terms of any series of preferred stock will depend primarily on
market conditions, terms of a proposed acquisition or financing, and other
factors existing at the time of issuance. Therefore, it is not possible at this
time to determine in what respect a particular series of preferred stock will be
superior to the Company's common stock or any other series of preferred stock
which the Company may issue. The Board of Directors does not have any specific
plan for the issuance of preferred stock at the present time and does not intend
to issue any preferred stock, except on terms which it deems to be in the best
interest of the Company and its shareholders.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of Nevada law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company. While such provisions are intended to enable the Board of Directors to
maximize stockholder value, they may have the effect of discouraging takeovers
which could be in the best interest of certain stockholders. There is no
assurance that such provisions will not have an adverse effect on the market
value of the Company's stock in the future.
On October 31, 1996, the Board of Directors of the Company authorized
and approved the designation of 1,000,000 shares of Class A Convertible
Preferred Stock and 1,000,000 shares of Class B Convertible Preferred Stock to
be sold in a previous offering. The Class A Convertible Preferred Shares have a
9% coupon attached, which interest is payable quarterly, and are convertible
into shares of Common Stock of the Company at $2.50 per share. The Class B
Convertible Preferred Shares have a 9% coupon attached, which interest is
payable quarterly, and are redeemable by the investor only after one year from
date of issuance and convertible into Common Shares at $2.00 per share. The
offering was terminated and there were no sales under the offering and,
therefore, no preferred stock is issued or outstanding.
WARRANTS AND OPTIONS
In October 1995, the Company conducted an offering of Units (the
"Bridge Units"). Each Bridge Unit consisted of
21
<PAGE>
a $25,000 9% secured promissory note (the "Bridge Notes"), 25,000 warrants to
purchase Common Stock at an exercise price of $0.05 per share (the "A Bridge
Warrants") and 25,000 warrants to purchase Common Stock at an exercise price of
$0.95 per share (the "B Bridge Warrants"). The exercise price of the B Bridge
Warrants was reduced by the amount of $0.04 per month, for every 30 days after
the first six months that the Notes were outstanding to a minimum of $0.50. As
of the date hereof, 255,375 A Bridge Warrants are outstanding and zero B Bridge
Warrants are outstanding. The Bridge Notes were repaid in full.
As consideration for placement agent services rendered in connection
with the 1995 offering of Bridge Units, the Company issued 125,125 A Bridge
Warrants to purchase shares of the Common Stock of the Company at $0.10 per
share and 125,125 B Bridge Warrants to purchase shares of Common Stock of the
Company at $1.10 per share to Pellet Investments, Inc. The terms of these A and
B Bridge Warrants issued to the placement agents are the same as the A and B
Bridge Warrants issued to the investors. 91,893 A Bridge Warrants issued to
placement agents are currently outstanding. No Bridge Warrants are outstanding.
On October 30, 1995, the Company entered into a Consulting Agreement
with Redfield Miller, Inc. whereby Redfield Miller earned cash compensation of
$6,000 per month and 5,000 warrants per month, each exercisable for one share of
Common Stock at an exercise price of $1.65 per share for a three year term, for
every month of the Agreement which continues on a month-to-month basis. As of
the date of this Memorandum, Redfield Miller earned 100,000 warrants under the
Consulting Agreement, 30,000 of which were exercised, leaving Redfield Miller
with 70,000 warrants. All shares earned under the Consulting Agreement may
qualify for S-8 Registration Rights. Edward Hanson, former Chief Financial
Officer of the Company, is a principal of Redfield Miller. The Consulting
Agreement was terminated effective June 1, 1997.
During the first half of 1996, the Company conducted an offering of
Units (the "Secondary Units"). Each Secondary Unit consisted of one share of
Common Stock (the "Common Stock") and one Warrant exercisable for one share of
Common Stock at an exercise price of $2.50 per share, subject to adjustment (the
"Secondary Warrants"). The minimum investment was 16,667 Units at $1.50 per Unit
($25,000). The Company raised $853,500 in connection with its sale of the
Secondary Units. In addition, the Company offered each of the holders of the
Bridge Notes the right to exchange their Bridge Notes for Secondary Units at a
price of $1.05 per Unit. $627,500 worth of Bridge Notes were converted, leaving
$177,500 due and payable by the Company on the Bridge Notes by October 31, 1996.
The Bridge Notes were paid in full. The warrants expired and none have been
exercised.
As consideration for placement agent services rendered in connection
with the 1996 Secondary Offering, the Company issued to the placement agents the
following warrants: 58,000 warrants to purchase Common Stock at an exercise
price of $0.70 per share; 131,850 warrants to purchase Common Stock at an
exercise price of $0.01 per share; and 151,850 warrants to purchase Common Stock
at an exercise price of $1.65 per share. The terms of these warrants are the
same as the Secondary Warrants, and all have expired.
On April 1, 1996, the Company enacted the 1996 Incentive and
Nonstatutory Stock Option Plan (the "Plan") which has reserved for issuance
750,000 options to purchase shares of Common Stock of the Company at an exercise
price of $0.01 for key employees and consultants. To date, 750,000 options have
been issued under the plan and 650,000 options have been exercised.
Anthony Andrews, Vice President of the Company, holds 50,000 options,
each exercisable for one share of Common Stock at an exercise price of $0.01 per
share for a period of five years from April 1, 1996, issued pursuant to the
Plan. During the nine months ended September 30, 1999, no such options were
exercised.
Michael Cone, an employee of the Company, holds 50,000 warrants, each
exercisable for one share of Common Stock at an exercise price of $0.01 per
share for a period of two years from April 1, 1996, issued pursuant to the Plan,
such warrants have expired.
On January 2, 1997, the Company enacted the 1997 Incentive and
Nonstatutory Stock Option Plan (the "Plan") which has reserved for issuance
1,000,000 options to purchase shares of Common Stock of the Company at a an
22
<PAGE>
minimum exercise price of $1.65 for key employees and consultants. To date,
300,000 options have been issued under the plan Such options are outstanding.
On January 2, 1998, the Company enacted the 1998 Incentive and
Nonstatutory Stock Option Plan (the "Plan") which has reserved for issuance
1,401,976 options to purchase shares of Common Stock of the Company at a minimum
exercise price of $1.03 for key employees and consultants. To date, 300,000
options have been issued under the Plan. As of September 30, 1999 such options
are all outstanding.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS' COMMON EQUITY
AND OTHER STOCKHOLDERS MATTERS
A. MARKET INFORMATION
The Common Stock is currently quoted on the Over-The-Counter Bulletin
Board under the Symbol "IOMC". Set forth below is the trading history of the
Company's Common Stock without retail mark up, mark-down or commissions:
<TABLE>
<CAPTION>
BID PRICES
-----------------------------
1997 HIGH LOW
---- ---- ---
<S> <C> <C>
January 1 - January 31 $4 1/4 $2 3/8
February 1 - February 28 $3 3/4 $3 1/4
March 1 - March 31 $3 1/4 $2 1/8
April 1 - April 30 $2 3/4 $2
May 1 - May 31 $2 5/8 $1 5/32
June 1 - June 30 $1 3/8 $1
July 1 - July 31 $1.75 $0 3/4
August 1 - August 31 $1.37 $0 13/32
September 1 - September 30 $1.37 $0 11/16
October 1 - October 31 $2.75 $1 1/4
November 1 - November 30 $2.62 $1 7/16
December 1 - December 31 $1.93 $0 3/4
1998
----
January 1 - January 31 $1 5/8 $0 11/16
February 1 - February 28 $1 5/16 $0 3/4
March 1 - March 31 $1 1/2 $0 3/8
April 1 - April 30 $1 3/16 $0 7/16
May 1 - May 31 $0 13/16 $0 3/8
June 1 - June 30 $1 1/2 $0 3/8
July 1 - July 31 $1 1/4 $5/8
August 1 - August 31 $11/16 $3/8
September 1 - September 30 $11/16 $7/32
October 1 - October 31 $9/16 $5/16
November 1 - November 30 $1/2 $11/32
December 1 - December 31 $1/2 $9/32
1999
----
January 1 - January 31 $7/16 $15/64
February 1 - February 28 $1 1/8 $0 5/16
23
<PAGE>
March 1 - March 31 $3 1/8 $0 7/8
April 1 - April 30 $2 5/8 $1 1/2
May 1 - May 31 $2 1/2 $1 7/8
June 1 - June 30 $2 5/16 $1 3/4
July 1 - July 31 $1 31/32 $1 21/32
August 1- August 31 $2 $1 1/16
September 1-September 30 $2 1/16 $1 1/2
October 1- October 31 $1 5/8 $1 1/16
</TABLE>
The above quotations are inter-dealer quotations from market makers of
the Company's stock. At certain times the actual closing or opening quotations
may not represent actual trades that took place.
Except for 7,170,807 free trading shares, all shares issued by the
Company are "restricted securities" within the meaning of Rule 144 under the
1933 Act. Ordinarily, under Rule 144, a person holding restricted securities for
a period of one year may, every three months, sell in ordinary brokerage
transactions or in transactions directly with a market maker an amount equal to
the greater of one percent of the Company's then-outstanding Common Stock or the
average weekly trading volume during the four calendar weeks prior to such sale.
Future sales of such shares and sales of shares purchased by holders of options
or warrants could have an adverse effect on the market price of the Common
Stock.
B. HOLDERS
As of November 16, 1999 there are 95 shareholders who currently hold
certificates securities (approximately 70 of these shareholders hold restricted
securities) and 317 shareholders currently listed in the Depository Trust
Company as holding shares in brokerage accounts.
C. DIVIDENDS
The Company has not paid any dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its business, and therefore
does not anticipate paying cash dividends in the foreseeable future.
24
<PAGE>
ITEM 2. 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 first quarter of the year
2000.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
(1) DISMISSAL OF PRINCIPAL ACCOUNTANTS.
The Company dismissed Ernst & Young LLP, Certified Public Accountants
("Ernst & Young") as its principal accountants on October 7, 1998.
Ernst & Young only performed an audit for the year ended December 31,
1996. Ernst & Young's report of independent auditors for the year ended
December 31, 1996 contained no adverse opinion or a disclaimer of
opinion, nor was qualified nor modified as to uncertainty, audit scope,
or accounting principles. The principal accountant's report on the
financial statements for either of the past two years contained no
adverse opinion or a disclaimer of opinion, nor was qualified nor
modified as to uncertainty, audit scope, or accounting principles. The
decision to change principal accountants of the Company was approved by
the Board of Directors of the Company.
During the Company's year ended December 31, 1996, and through the
dismissal of Ernst & Young on October 7, 1998, there were no
disagreements with Ernst & Young on any matter of accounting principles
or practices, financial statement disclosures, or auditing scope or
procedure. There is nothing to report under Item 304 (a) (1) (iv) (B)
through (E).
During the Company's two most recent fiscal years and any subsequent
interim period preceding such dismissal, there were no disagreements with the
former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. There is nothing
to report under Item 304(a)(1)(iv)(B) through (E).
Subsequent to the completion of the audit by Ernst & Young,
and as of December 31, 1996, the Company recorded the valuation of
certain options and warrants as compensation expense resulting in an
increase to additional paid-in-capital and an increase to the
accumulated deficit totaling $136,833. Ernst & Young has not expressed
any opinion on the December 31, 1996 financial statements, as restated,
as they have not performed any procedures with respect to the
adjustments recorded by the Company. The financial statements and
financial information included herein reflect these entries. These
entries are not part of the arbitration proceedings discussed above
(Item 2 - Legal Proceedings).
(2) ENGAGEMENT OF NEW PRINCIPAL ACCOUNTANTS.
The Company has engaged Singer, Lewak, Greenbaum & Goldstein, LLP,
("SLGG") on October 9, 1998 as its principal accountants. SLGG's business
address is 2700 North Main Street, Suite 200, Santa Ana, California. SLGG
replaces Ernst & Young. SLGG conducted both the 1997 and 1998 audit which are
attached. Neither the Company nor anyone on its behalf has consulted SLGG during
the two most recent past fiscal years regarding any matter for which reporting
is required under Regulation S-B, Item 304(a)(2)(i) or (ii) and the related
instructions.
25
<PAGE>
The decision to engage SLGG was approved by the Board of Directors.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished with regard to all securities
issued by the Company during calendar year 1999 which were not registered under
the Securities Act of 1933, as amended (the "Act"). Each of the following
transactions was exempt from under the Act by virtue of the provisions of
Section 4(2) of the Act. Each purchaser of the securities described below
represented prior to the purchase of the securities that he or she understood
that the securities acquired may not be sold or otherwise transferred absent
registration under the Act or the availability of an exemption from the
registration requirements of the Act, and each certificate evidencing the
securities owned by each purchaser bears or will bear upon issuance the legend
to that effect. None of the foregoing transactions involved a distribution or
public offering.
Effective February 3, 1999, I/OMagic entered into a subscription
agreement with Behavior Technology Corporation, a Taipei, Taiwan corporation
("BTC"). In this transaction, BTC contributed $5 million worth of inventory in
exchange for 16,666,667 shares of restricted Common Stock. The Company relied
upon Section 4(2) of the Securities Act of 1933 as of this transaction only
involved accredited investors.
Effective February 3, 1999, the Company issued 200,000 warrants valued
at the closing price of $0.30 per share on the date of sale to Horwitz & Beam,
the Company's law firm. On April 1, 1999, Horwitz & Beam exercised all 200,000
warrants for $60,000 cash paid to the Company. The Company relied upon Section
4(2) of the Securities Act of 1933 as of this transaction only involved
accredited investors.
26
<PAGE>
ITEM 5. TERMS OF INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has adopted provisions in its Articles of Incorporation and
bylaws that limit the liability of its directors and provide for indemnification
of its directors and officers to the full extent permitted under the Nevada
General Corporation Law. Under the Company's Articles of Incorporation, and as
permitted under the Nevada General Corporation Law, directors are not liable to
the Company or its stockholders for monetary damages arising from a breach of
their fiduciary duty of care as directors. Such provisions do not, however,
relieve liability for breach of a director's duty of loyalty to the Company or
its stockholders, liability for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, liability for transactions
in which the director derived as improper personal benefit or liability for the
payment of a dividend in violation of Nevada law. Further, the provisions do not
relieve a director's liability for violation of, or otherwise relieve the
Company or its directors from the necessity of complying with, federal or state
securities laws or affect the availability of equitable remedies such as
injunctive relief or recession.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that may result in a claim for indemnification by any director or
officer.
27
<PAGE>
PART F/S
FINANCIAL STATEMENTS
The following financial statements are included herein:
Audited Financial Statements for the Years ended December 31, 1998 and 1997
Unaudited Financial Statements for the Nine Months Ended September 30, 1999 and
September 30, 1998
PART III
ITEM 1 AND
ITEM 2. INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT DESCRIPTION
- ------- --------------------
<S> <C>
3.1 Articles of Incorporation of Asian-Inter American Development
Corporation, dated October 20, 1992*
3.2 Certificate of Amendment to Articles of Incorporation of Asian-Inter
American Development Corporation changing name to Silvercrest
International, Inc., dated August 30, 1993*
3.3 Restated Articles of Incorporation of Silvercrest International, Inc.,
dated January 10, 1996*
3.4 Certificate of Amendment to the Articles of Incorporation of
Silvercrest International, Inc. changing name to I/OMagic Corporation,
Inc. dated March 19, 1996*
3.5 Bylaws of Asian-Inter American Development Corporation, dated October
20, 1992, adopted by I/OMagic Corporation, Inc.*
3.6 Amendment to the Bylaws of I/OMagic Corporation, Inc. dated November
13, 1996*
4.1 Certificate of Designation of Preferred Stock, dated October 31, 1996*
10.1 Employment Agreement by and between I/OMagic Corporation, Inc., a
California Corporation, and Tony Shahbaz, dated October 22, 1993*
10.2 I/OMagic Corporation 1997 Incentive and Nonstatutory Stock Option Plan
dated January 2, 1997*
10.3 Plan of Exchange and Acquisition Agreement by and between Silvercrest
International and I/OMagic Corporation, a California corporation, dated
March 8, 1996*
10.4 I/OMagic Corporation 1998 Incentive and Nonstatutory Stock Option Plan,
dated January 2, 1998*
10.5 Strategic Alliance Agreement between I/OMagic Corporation and Hou
Electronics, Inc., dated September 19, 1997*
10.6 Macola Software Agreement between I/OMagic Corporation and Enterprise
Wide Computing, Inc., dated October 13, 1997*
10.7 BTC Acquisition Agreement, dated February 3, 1999*
10.8 Lease Agreement by and between I/OMagic Corporation and Autry
Properties.*
10.9 I/OMagic Corporation 1996 Incentive and Nonstatutory Stock Option Plan
dated February 1, 1996.*
16.0 Opinion Letter From Ernst & Young*
16.1 Opinion Letter From Ernst & Young Dated January 5, 2000
23.1 Consent of Horwitz & Beam*
24.1 Power of Attorney (see signature page)*
27.0 Financial Data Schedule*
</TABLE>
* Previously filed
28
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: January 10, 2000 I/OMAGIC CORPORATION
/s/ Tony Shahbaz
-------------------------
BY: Tony Shahbaz
ITS: Chief Executive Officer, President
Secretary and Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears appoints Tony Shahbaz, as his
agents and attorneys-in-fact, with full power of substitution to execute for him
and in his name, in any and all capacities, all amendments (including
post-effective amendments) to this Registration Statement to which this power of
attorney is attached.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/Tony Shahbaz Chief Executive Officer, President January 10, 2000
- --------------- Secretary and Chief Financial Officer
Tony Shahbaz
/S/ Tony Andrews Vice President January 10, 2000
- ------------------
Anthony Andrews
</TABLE>
29
<PAGE>
Exhibit 16.1
Opinion Letter From Ernst & Young Dated January 5, 2000
<PAGE>
ERNST & YOUNG LLP -Suite 800 -Phone: 949 794 2300
18400 Von Karman Avenue
Irvine, California 92612-1551
January 5, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
`We have read Part II, Item 3. (1) of Amendment 4 to Form 10-SB dated January 5,
2000, of I/OMagic Corporation (I/OMagic) and are in agreement with the
statements contained in the first three sentences of the first paragraph, the
first sentence of the second paragraph, and the second sentence of the fourth
paragraph.
In addition, we have no basis to agree or disagree with other statements of the
registrant contained in paragraphs one through four of the above referenced
filing,
Subsequent to the issuance of our Report of Independent Auditors dated March 14,
1997, except for Note 9, as to which the date is July 8, 1997, with respect to
the balance sheet of I/OMagic as of December 31, 1996 and the related statements
of operations, shareholders' equity (deficiency), and cash flows for the year
ended December 31, 1996 (the December 31, 1996 financial statements), I/OMagic
recorded certain entries to restate the December 31, 1996 financial statements.
We are unable to express an opinion on the December 31, 1996 financial
statements, as restated, as we have not performed any procedures with respect to
the adjustments recorded by I/OMagic.
ERNST & YOUNG LLP
