SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 000-27267
I/OMAGIC CORPORATION
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(Exact name of small business issuer as specified in its charter)
Nevada 88-0290623
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1300 WAKEHAM, SANTA ANA, CA 92705
(Address of principal executive offices)
(714) 953-3000
(Issuer's telephone number)
6 AUTRY, IRVINE, CA 92618
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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As of May 14, 2001, the number of shares of Common Stock issued and outstanding
was 67,917,791.
Transitional Small Business Disclosure Format (check one):
Yes No X
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1
I/OMAGIC CORPORATION AND SUBSIDIARY
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - December 31. 2000 and March 31, 2001 (unaudited) 3-4
Statements of Income - For the three months ended
March 31, 2000 and 2001 (unaudited) 5
Statements of Cash Flows - For the three months ended
March 31, 2000 and 2001 (unaudited) 6-7
Notes to Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations 12-14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL INFORMATION
PART 1 - ITEM 1
I/OMAGIC CORPORATION
BALANCE SHEETS
DECEMBER 31, 2000 AND MARCH 31, 2001 (UNAUDITED)
ASSETS
DECEMBER 31, MARCH 31,
2000 2001
----------- -----------
CURRENT ASSETS
Cash $ 3,502,546 $ 1,445,628
Accounts receivable, net of allowance for
doubtful accounts of $2,106,518 and $2,132,945 18,109,794 18,267,884
Accounts receivable from related parties 84,710 675,385
Inventory, net 6,783,715 8,645,995
Inventory in transit 13,011,000 8,630,300
Income tax receivable 34,311 34,311
Prepaid expenses and other current assets 184,523 121,540
Current portion of income taxes 1,556,000 1,128,909
----------- -----------
TOTAL CURRENT ASSETS 43,266,599 38,949,952
FURNITURE AND EQUIPMENT, NET 1,427,772 1,380,332
TRADEMARK, net of accumulated amortization
of $1,446,852 and $1,929,136 8,198,827 7,716,543
DEFERRED INCOME TAXES, net of current portion 165,000 165,000
OTHER ASSETS 40,240 40,240
----------- -----------
TOTAL ASSETS $53,098,438 $48,252,067
=========== ===========
The accompanying notes are an integral part of these financial statements
3
I/OMAGIC CORPORATION
BALANCE SHEETS
DECEMBER 31, 2000 AND MARCH 31, 2001 (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, MARCH 31,
2000 2001
------------ ------------
CURRENT LIABILITIES
Line of credit $ 6,996,969 $ 5,984,855
Accounts payable and accrued expenses 12,171,712 5,785,184
Due to related parties -- 5,044,704
Current portion of capital lease obligation 27,121 27,121
Reserves for customer returns and allowances 2,232,087 1,816,255
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TOTAL CURRENT LIABILITIES 21,427,889 18,658,119
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CAPITAL LEASE OBLIGATIONS, net of current portion 10,978 8,233
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Total liabilities 21,438,867 18,666,352
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
10,000,000 shares authorized, $0.001 par value
Series A, 1,000,000 shares authorized
875,000 shares issued and outstanding 875 875
Series B, 1,000,000 shares authorized
250,000 shares issued and outstanding 250 250
Additional paid-in capital 8,998,875 8,998,875
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Total redeemable convertible
preferred stock 9,000,000 9,000,000
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STOCKHOLDERS' EQUITY
Class A common stock, $0.001 par value 100,000,000 shares authorized
67,917,791 and 67,917,791 (unaudited) shares
issued and outstanding 67,918 67,918
Additional paid in capital 31,493,345 31,493,345
Deferred compensation (3,100) --
Accumulated deficit (8,898,592) (10,975,548)
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TOTAL STOCKHOLDERS' EQUITY 22,659,571 20,585,715
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,098,438 $ 48,252,067
============ ============
The accompanying notes are an integral part of these financial statements
4
I/OMAGIC CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 2001 (UNAUDITED) AND 2000 (UNAUDITED)
Three Months Ended
March 31,
----------------------------
2000 2001
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Net sales $ 15,949,780 $ 10,215,151
Cost of sales 13,238,734 9,137,277
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Gross profit 2,711,046 1,077,874
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Operating expenses
Selling, marketing and advertising 872,989 549,161
General and administrative 980,181 1,425,834
Depreciation and amortization 17,593 554,911
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Total operating expenses 1,870,763 2,529,906
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Income (loss) from operations 840,283 (1,452,032)
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Other income (expense)
Interest income 3,000 29,105
Interest expense (777) (188,992)
Other income -- 10,170
Other expense -- (48,116)
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Total other income (expense) 2,223 (197,833)
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Income (loss) before provision for income taxes 842,506 (1,649,865)
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Provision for (benefit from) income taxes (133,000) 427,091
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Net income (loss) $ 975,506 $ (2,076,956)
============ ============
Basic earnings (loss) per share $ 0.03 $ (0.03)
============ ============
Diluted earnings (loss) per share $ 0.02 $ (0.03)
============ ============
Basic weighted-average shares outstanding 38,544,322 67,917,791
============ ============
Diluted weighted-average shares outstanding 39,509,114 67,917,791
============ ============
The accompanying notes are an integral part of these financial statements
5
I/OMAGIC CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 3!, 2001 (UNAUDITED) AND 2000 (UNAUDITED)
Three Months Ended
March 31,
--------------------------
2000 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from operations $ 975,506 $ (2,076,956)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 17,592 72,927
Amortization of trademark -- 482,284
Amortization of deferred compensation 3,100 3,100
Provision for allowance for doubtful accounts -- 26,427
Reserve for obsolete inventory 12,620 (187,072)
Deferred income tax (231,000) 427,091
Reserve for customer returns and allowances 213,554 (415,832)
Increase (decrease) in:
Accounts receivable (6,351,802) (184,517)
Accounts receivable from related parties 2,707,489 (590,675)
Inventory 1,929,418 2,705,492
Prepaid expenses and other current assets (939,286) 62,983
Accounts payable and accrued expenses 1,234,465 (6,386,528)
Accounts payable to related parties (415,880) 5,044,704
Tax provision 97,200 --
----------- -----------
Net cash (used in) operating activities (747,024) (1,016,572)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (43,270) (25,487)
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Net cash (used in) investing activities (43,270) (25,487)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit -- (1,012,114)
Payments on capital lease obligations (1,144) (2,745)
Proceeds from sale and issuance of common stock 2,000,000 --
Proceeds from exercise of warrants 50,625 --
----------- -----------
Net cash provided by (used in) financing activities 2,049,481 (1,014,859)
----------- -----------
Net increase (decrease) in cash and cash
Equivalents 1,259,187 (2,056,918)
Cash and cash equivalents at beginning of period 1,943,522 3,502,546
----------- -----------
Cash and cash equivalents at end of period $ 3,202,709 $ 1,445,628
=========== ===========
Supplemental cash flow information:
Interest paid $ 777 $ 188,992
Income taxes paid $ 800 $ 0
The accompanying notes are an integral part of these financial statements
6
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended March 31, 2000, the Company entered into the
following non-cash transaction:
- - Issued 6,250,000 (unaudited) shares of common stock for $5,000,000
(unaudited) in inventory
7
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
I/OMagic Corporation (the "Company"), a Nevada corporation, develops,
manufactures through subcontractors, markets, and distributes multimedia and
communication card devices for portable and desktop computers. The Company sells
its products in the United States to distributors and retail customers.
In March 1996, I/O Magic Corporation, a California corporation ("I/OMagic
California"), originally incorporated on September 30, 1993 entered into a Plan
of Exchange and Acquisition Agreement (the "Acquisition Agreement") with
Silvercrest International, Inc. ("Silvercrest"), a Nevada corporation. Pursuant
to the Acquisition Agreement, Silvercrest acquired all of the outstanding stock
of I/O Magic California totaling 6,570,583 shares in exchange for an aggregate
6,570,583 shares of newly-issued common stock. In connection with the
Acquisition Agreement, the Company issued 624,704 shares of common stock. For
accounting purposes, the acquisition has been treated as a recapitalization of
I/OMagic California, with I/OMagic California as the accounting acquirer
(reverse acquisition). The reverse acquisition was recorded at the historical
cost of I/O Magic California. Prior to the execution of the Acquisition
Agreement, Silvercrest was a public company listed on NASDAQ's over-the-counter
market with dormant operations and no assets or liabilities. Silvercrest
subsequently changed its name to I/OMagic Corporation, a Nevada corporation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q and therefore, do not include all
information and notes necessary for a fair presentation of financial position,
results of operations, and cash flows in conformity with generally accepted
accounting principles. The unaudited condensed financial statements include the
accounts of I/OMagic Corporation. The operating results for interim periods are
unaudited and are not necessarily an indication of the results to be expected
for the full fiscal year. In the opinion of management, the results of
operations as reported for the interim periods reflect all adjustments which are
necessary for a fair presentation of operating results.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period.
Significant estimates made by management include, but are not limited to, the
provisions for allowance of doubtful accounts and price protection on accounts
receivable, the net realizability of inventory, the evaluation of potential
impairment of furniture and equipment, and the provision for sales returns and
warranties. Actual results could materially differ from those estimates.
STOCK BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current implicit
value accounting method specified in Accounting Principles Bulletin ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," to account for
stock-based compensation issued to employees. The Company has elected to use the
implicit value based method and has disclosed the pro forma effect of using the
fair value based method to account for its stock-based compensation. For
stock-based compensation issued to non-employees, the Company uses the fair
value method of accounting under the provisions of SFAS No. 123.
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." SFAS No. 128 replaced the presentation of primary and
fully diluted earnings per share with the presentation of basic and diluted
8
earnings (loss) per share. Basic earnings (loss) per share excludes dilution and
is calculated by dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings (loss) per share includes the potential dilutive effects that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock ("potential common stock") that would then share in
the earnings (loss) of the Company.
As of March 31, 2001 (unaudited) and 2000 (unaudited), the Company had potential
common stock as follows:
2001 2000
Weighted-average common shares
Outstanding during the period 67,917,791 38,544,322
Incremental shares assumed to be
outstanding since the beginning of the
period related to stock options and warrants
outstanding (unaudited) -- 964,792
---------- ----------
FULLY DILUTED WEIGHTED-AVERAGE COMMON
SHARES AND POTENTIAL COMMON STOCK
(UNAUDITED) 67,917,791 39,509,114
---------- ----------
Since the Company had a net loss for the three months ended March 31, 2001,
basic and diluted shares are the same.
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consisted of the following:
March 31,
2001
-----------
(unaudited)
Accounts payable $1,464,093
Accrued rebates and marketing 3,044,771
Accrued compensation and related benefits 454,455
Other 821,865
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TOTAL $5,785,184
===========
NOTE 4 - INVENTORY
Inventory consisted of the following:
March 31,
2001
-----------
(unaudited)
Component parts $ 5,095,168
Finished goods 5,198,181
Reserves for inventory (1,647,354)
-----------
TOTAL $ 8,645,995
===========
9
NOTE 5 - LINE OF CREDIT
The credit facility provides for a revolving line of credit allowing the Company
to borrow the lesser of a) $20,000,000, less $9,000,000, representing the stated
value of preferred stock issued to the financial institution and less any
floorplan loan balances or b) the sum of 70% of eligible receivables, plus 30%
of eligible inventory less any loan reserves, less any floorplan loan balances.
Advances on the revolving line of credit bear interest at the base rate (8.00%
as of March 31, 2001) plus 0.5%. As of March 31, 2001, the outstanding balance
under the revolving line of credit was $5,984,855.
The credit facility provides for a floorplan loan that allows the Company to
borrow up to $5,000,000. Advances against floorplanned inventory are not to
exceed at any time $5,000,000, less the amount of any outstanding approvals
given by the financial institution to any manufacturer of floorplanned
inventory. Borrowings advanced under the line are interest free until the
expiration of the subsidized free period pursuant to the agreement. Interest
charged on the amounts past due bear interest at the base rate plus 6%. As of
March 31, 2001, the floorplan loan was not utilized.
NOTE 6 - CREDIT LINES FROM RELATED PARTIES
In connection with a 1997 Strategic Alliance Agreement, the Company has
available a trade line of credit through a stockholder and supplier for
purchases up to $2,000,000. Purchases are non-interest bearing and are due 75
days from the date of receipt. The credit agreement can be terminated or changed
at any time. As of December 31, 2000 and March 31, 2001 (unaudited), there were
$0 and $0, respectively, in trade payables outstanding under this arrangement.
In connection with an April 1999 subscription agreement, the Company also has
available an additional trade line of credit through a stockholder and vendor
that provides a trade credit facility of up to $5,000,000 carrying net 75 day
terms, as defined. As of December 31, 2000 and March 31, 2001 (unaudited), there
were $2,369,220 and $2,780,352, respectively, in trade payables outstanding
under this arrangement.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities and certain equipment under non-cancelable,
operating lease agreements, expiring through March 2010.
Rent expense was $149,858 and $39,863 for the three months ended March 31, 2001
and 2000, respectively, and is included in general and administrative expenses
in the accompanying statements of income.
EMPLOYMENT CONTRACT
The Company has entered into an employment contract with one of its officers
which expires upon written termination. The agreement calls for a minimum base
salary and provides for certain expense allowances. In addition, the agreement
provides for a bonus based on the "net profits" of the Company, as defined. The
bonus amount ranges from $20,000 to $70,000 for net profits up to $500,000. For
net profits in excess of $500,000, the bonus is 7% of such excess. No bonus
amounts were paid during the three months ended March 31, 2001 or 2000. As of
March 31, 2001, there was $97,865 accrued under this agreement.
RETAIL AGREEMENTS
In connection with certain retail agreements, the Company has agreed to
10
pay for certain marketing development and advertising on an ongoing basis.
Marketing development and advertising costs are generally agreed upon at the
time of the event. The Company also records a liability for co-op marketing
based on management's evaluation of historical experience and current industry
and Company trends. During the three months ended March 31, 2001 and 2000, the
Company incurred $166,645 (unaudited) and $409,667 (unaudited), respectively,
related to these agreements. Such is included in selling, marketing, and
advertising in the accompanying statements of income.
NOTE 8 - CAPITAL TRANSACTIONS
COMMON STOCK ISSUED FOR CASH
During the three months ended March 31, 2000, the Company issued an aggregate of
632,912 (unaudited) restricted shares of common stock for cash totaling
$2,000,000, or at a per share price of $3.16 (unaudited).
COMMON STOCK ISSUED IN CONNECTION WITH THE EXERCISE OF WARRANTS
During the three months ended March 31, 2000, the Company issued an aggregate of
52,500 (unaudited) restricted shares of common stock in connection with the
exercise of warrants for cash totaling $50,624 (unaudited), or at a per share
price ranging from $0.05 (unaudited) to $2.00 (unaudited).
COMMON STOCK ISSUED FOR INVENTORY
During the three months ended March 31, 2000, the Company issued 6,250,000
(unaudited) shares of restricted common stock to a stockholder and vendor,
valued at $0.80 per share for $5,000,000 of inventory, as defined (valued at
transferor's cost basis).
STOCK OPTION PLANS
During the three months ended March 31, 2000, the Company granted non-qualified
and incentive stock options to purchase a total of 2,012,500 shares of common
stock to officers and employees and certain consultants under the Company's
stock option plans. The stock options vest either immediately or ratably over
five years. Exercise prices range from $2.00 to $3.00 and the options expire
five years from the date of grant. No stock options were granted during the
three months ended March 31, 2001.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2001 and 2000, the Company had purchases
from related parties totaling approximately $4,380,700 (unaudited)and $8,299,542
(unaudited), respectively.
NOTE 10 - SUBSEQUENT EVENTS
On April 18, 2001, the Company initiated a new line of credit with a new
institution which paid off the balance owed under the line of credit assumed
under the IOM Holdings acquisition. The amount of the payoff was $5,285,621.
The new credit facility provides for a revolving line of credit allowing the
Company to borrow the lesser of a) $8,000,000 or b) 65% of eligible receivables.
Advances on the revolving line of credit bear interest at the base rate (8.00%
as of April 18, 2001) plus 0.25%.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
RESULTS OF OPERATIONS
Revenues for the period ended March 31, 2001 ("2001") were $10,215,151, compared
to revenues for the period ended March 31, 2000 ("2000") of $15,949,780. The
decrease in revenues is primarily attributable to the slowdown in the national
economy, which has affected the Company's customers and thus the Company. The
Company believes that if current economic conditions continue, then the
Company's second quarter may be adversely affected. The Company had a sales
backlog as of March 31, 2001 of $1,903,770 and it had a sales backlog of
$2,774,371 as of March 31, 2000.
Cost of sales as a percentage of revenues increased from 83.00% ($13,238,734) in
2000 to 89.45% ($9,137,277) in 2001. This was primarily due to much higher
rebate costs in 2001 than 2000 (the Company changed its policy to offset rebates
against revenues). Cost of product as a percentage of revenues before rebates
decreased in 2001 from 2000 due to no OEM revenues in 2001, which have a lower
margin. The Company did not "write down" any of its inventory during the three
months ended March 31, 2001 or March 31, 2000.
Operating expenses as a percentage of revenues increased from 11.73%
($1,870,763) in 2000 to 24.77% ($2,529,906) in 2001.
Selling, marketing and advertising as a percentage of revenues decreased from
5.47% ($872,989) in 2000 to 5.38% ($549,161) in 2001.
General and administrative expenses as a percentage of revenues increased from
6.15% ($980,181) in 2000 to 13.96% ($1,425,834) in 2001. The increase is
primarily due to redundant expenses resulting from the Company's acquisition of
IOM Holdings on December 31, 2000. The Company has begun to reduce excess
expenses in the second quarter of 2001 and expects such to continue throughout
the year 2001.
Depreciation and amortization increased from $17,593 (0.11% of revenues) in 2000
to $554,911 (5.43% of revenues) in 2001. This is due to the acquisition of IOM
Holdings fixed assets on December 31, 2000 and $482,284 for the amortization of
the Hi-Val and Digital Research Technology trademarks acquired in the
acquisition.
Other income (expense) decreased as a percentage of sales from (0.01%) ($2,223
income) to 1.94% ($197,833 expense). This was primarily due to interest expense
from the line of credit the Company took over in the acquisition of IOM
Holdings.
Provision for income taxes for the period ended March 31, 2000 represents
Federal taxes as a result of the Company's taxable income being subject to
Alternative Minimum Taxes (AMT), California state franchise tax estimate, and
the current period deferred benefit. Provision for income taxes for the period
ended March 31, 2001 represents Federal taxes as a result of the Company's
estimated annualized taxable income being subject to Alternative Minimum Taxes
(AMT), California state franchise tax estimate, and the current period deferred
benefit.
Net profits decreased from $975,506 for the three months ended March 31, 2000 to
a loss of $2,076,956 for the three months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and capital
expenditures primarily with cash provided by operating activities, private
securities issuances and securities issuances for product. The Company believes
that working capital generated from operations is sufficient to meet current
activity. However, should the Company grow significantly in size
12
through additional large customers or acquisitions, securities issuances or
other financing arrangements may be necessary. The Company currently has two
lines of credit with its major suppliers: $5 million with BTC and $2 million
with Lung Hwa. Borrowings under those arrangements provided the Company interest
free for up to 60 days. The Company has trade accounts payable outstanding
balances on these lines of $2,780,352 and $779,918, respectively, as of March
31, 2001 and 2000.
In April 2000, the Company assumed a line of credit in the acquisition of IOM
Holdings (see NOTE 5). The Company believes that its current cash flow from
operations, the amount available under the assumed line of credit and the
amounts available under its existing vendor lines of credit are sufficient to
meet its working capital and capital expenditure requirements at the current
sales volume for the next twelve months.
In addition, certain of the Company's stockholders and vendors continue to
provide inventory in exchange for common stock of the Company.
For the three months ended March 31, 2001 the Company had a net decrease in
cash in the amount of $2,056,918. This was due to cash used by operating
activities of $1,016,572, cash used in investing activities of $25,487 and cash
used in financing activities of $1,014,859. Cash from all accounts receivable
changes decreased by $775,192 and cash from inventory changes increased by
$2,705,492. Cash used in investing activities was for leasehold improvements,
furniture and computer equipment. Cash used in financing activities was
primarily for payments on the line of credit.
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 resumes the revenue growth it
experienced in 1999 and 2000, the Company believes that it will need additional
capital. While there is no assurance that it will be successful in raising
additional capital, the Company is currently actively seeking both institutional
debt, as well as private sources of equity capital in order to assure that it
will be capable of financing such growth. In the event the Company is
unsuccessful in securing such financing, it may be required to curtail its sales
growth.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business, financial condition and results of operations may be
impacted by a number of factors including, without limitation, those listed
below.
Significant Customer Concentration
During the three month period ended March 31, 2001 the Company had three major
customers which accounted for approximately 81% of the Company's net sales. The
amounts due from these major customers on March 31, 2001 amounted to
approximately $12,664,418. The Company's strategy is to constantly attempt to
sign new major retail customers in order to both increase the Company's
13
growth and to reduce the impact of any one customer.
The Company has no firm long-term sales commitments from any of its customers
and enters into individual purchase orders with its customers. The Company has
experienced cancellations of orders and fluctuations in order levels from period
to period and expects it will continue to experience such cancellations and
fluctuations in the future. In addition, customer purchase orders may be
canceled and order volume levels can be changed, canceled or delayed with
limited or no penalties. The replacement of canceled, delayed or reduced
purchase orders with new business cannot be assured. Moreover, the Company's
business, financial condition and results of operations will depend upon its
ability to obtain orders from new customers, as well as the financial condition
and success of its customers, its customers products and the general economy.
The factors affecting any of the Company's major customers or their customers
could have a material adverse effect on the Company's business, financial
condition and results of operations.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1999, the Company filed an arbitration proceeding in Orange
County, California against its former accountants and auditors, Ernst & Young,
LLP, for failure to complete the 1997 audit. Ernst & Young, LLP counter-claimed
to recover fees in connection with the audit. In February 2001, the arbitrator
ruled that there was potential liability for both parties. The damage phase of
the arbitration is currently scheduled for May 2001.
In June 2000, lawsuits were filed against the Company in Orange County,
California, by Delta Products Corp. and Mitsumi Electronics Corp. in relation to
the acquisition of the Hi-Val brand by IOM Holdings and the then proposed
acquisition of IOM Holdings by the Company. The Company believes that both
lawsuits are without merit and intends to vigorously defend the actions.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Incorporated by reference from Registrant's Report on Form 10-K filed with
the Securities and Exchange Commission on March 31, 2001 (see Management's
Discussion and Analysis and Liquidity and Capital Resources). See Financial
Statement Supplemental Schedule of Non-Cash Investing and Financing Activities
and Note 6.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
1. Reports on Form 8-K filed: None
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SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, duly authorized.
I/OMAGIC CORPORATION
DATED: May 17, 2001 By: /s/ Tony Shahbaz
-----------------------------------
Tony Shahbaz, President and Chief
Executive Officer, Chief Financial Officer
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