SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
Of the Securities Exchange Act of 1934
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Check the appropriate box:
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(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-12
I/OMAGIC CORPORATION
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
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I/OMAGIC CORPORATION
1300 EAST WAKEHAM AVENUE
SANTA ANA, CA 92705
October , 2002
Dear Stockholders:
You are cordially invited to attend the I/OMagic Corporation 2002
Annual Meeting of stockholders that will be held on November 4, 2002 at 9:00
a.m., local time, at The Westin South Coast Plaza Hotel, 686 Anton Boulevard,
Costa Mesa, California 92626. All holders of our outstanding common stock as of
the close of business on September 6, 2002 are entitled to vote at the 2002
Annual Meeting.
Enclosed are a copy of the Notice of Annual Meeting of Stockholders, a
Proxy Statement and a Proxy Card. A current report on the business operations of
I/OMagic Corporation will be presented at the meeting, and stockholders will
have an opportunity to ask questions.
We hope you will be able to attend the 2002 Annual Meeting. Whether or
not you expect to attend, it is important that you complete, sign, date and
return the Proxy Card in the enclosed envelope in order to make certain that
your shares will be represented at the 2002 Annual Meeting.
Sincerely,
/s/ Tony Shahbaz
---------------------------
Tony Shahbaz,
Chairman, President, Chief
Executive Officer,
Chief Financial Officer
and Secretary
I/OMAGIC CORPORATION
1300 EAST WAKEHAM AVENUE
SANTA ANA, CALIFORNIA 92705
----------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 4, 2002
----------------------
NOTICE IS HEREBY GIVEN that the 2002 Annual Meeting of stockholders of
I/OMagic Corporation, a Nevada corporation, will be held at The Westin South
Coast Plaza Hotel, 686 Anton Boulevard, Costa Mesa, California 92626, on
November 4, 2002 at 9:00 a.m., local time, for the following purposes:
1. To elect six directors to the board of directors;
2. To approve the adoption of a 2002 Stock Option Plan;
3. To approve a one-for-fifteen reverse split of the issued and
outstanding shares of the common stock through which every 15
shares of common stock outstanding at the effective date of
the Amended and Restated Articles of Incorporation shall be
converted into one fully paid and nonassessable share of
common stock, with any fractional shares that result from such
reverse stock split to be rounded up to the nearest whole
share of common stock;
4. To approve the Amended and Restated Articles of Incorporation
to amend, restate and replace our current Articles of
Incorporation, to effect various changes recommended by the
board of directors in the event Proposal 3 is not approved by
the stockholders or, if approved, the board of directors
determines in its discretion to decline to implement the
reverse stock split;
5. To ratify the appointment of Singer Lewak Greenbaum &
Goldstein LLP as I/OMagic's independent auditors for the
fiscal year ending December 31, 2002; and
6. To transact such other business as may properly come before
the 2002 Annual Meeting or any adjournment or adjournments
thereof.
Our board of directors has fixed the close of business on September 6,
2002 as the record date for determining those stockholders who will be entitled
to notice of and to vote at the meeting. Only holders of our common stock at the
close of business on the record date are entitled to vote at the meeting.
Stockholders whose shares are held in the name of a broker or other nominee and
who desire to vote in person at the meeting should bring with them a legal
proxy.
As of the close of business on the record date, Tony Shahbaz, who is
our Chairman, President, Chief Executive Officer, Chief Financial Officer and
Secretary, and certain of his affiliates owned approximately 53.76% of our
issued and outstanding common stock. Mr. Shahbaz and certain of his affiliates
have already indicated that they intend to vote in favor of Proposals 1 through
5 at the meeting.
By Order of the Board of Directors,
/s/ Tony Shahbaz
-------------------------------------
Tony Shahbaz,
Chairman, President, Chief Executive
Officer, Chief Financial Officer and
Secretary
Santa Ana, California
October , 2002
I/OMAGIC CORPORATION
1300 EAST WAKEHAM AVENUE
SANTA ANA, CALIFORNIA 92705
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PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 4, 2002
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VOTING AND PROXY
We are furnishing this proxy statement in connection with the
solicitation of proxies by our board of directors for use at the 2002 Annual
Meeting of stockholders to be held at 9:00 a.m. local time on November 4, 2002,
at The Westin South Coast Plaza Hotel, 686 Anton Boulevard, Costa Mesa,
California 92626, and at any and all adjournments of the meeting. This proxy
statement and the accompanying notice of annual meeting and proxy card are first
being mailed to stockholders on or about October , 2002.
RECORD DATE; SHARES OUTSTANDING; VOTING
Only stockholders of record at the close of business on September 6,
2002, are entitled to notice of and to vote their shares at the 2002 Annual
Meeting. As of the close of business on that date, we had 67,930,291 shares of
common stock outstanding and entitled to vote at the meeting. The inspector of
election appointed for the 2002 Annual Meeting will separately tabulate the
affirmative and negative votes, abstentions and broker non-votes.
Section 2115 of the California General Corporation Law provides that
corporations such as I/OMagic Corporation that are incorporated in jurisdictions
other than California and that meet various tests are subject to several
provisions of the California General Corporation Law, to the exclusion of the
law of the jurisdiction in which the corporation is incorporated. As of December
31, 2001, we met the tests contained in Section 2115. Consequently, as of that
date we were subject to, among other provisions of the California General
Corporation Law, Section 708 which governs cumulative voting.
Each share of common stock entitles the holder of record to one vote on
any matter coming before the 2002 Annual Meeting. In voting for directors,
however, shares may be voted cumulatively for persons whose names have been
placed in nomination prior to the voting for the election of directors, but only
if a stockholder present at the 2002 Annual Meeting gives notice at the 2002
Annual Meeting, prior to the voting for the election of directors, of his or her
intention to vote cumulatively. Notice of intention to vote cumulatively may not
be given by simply marking and returning a proxy.
If any stockholder gives proper notice of his or her intention to vote
cumulatively, then each stockholder eligible to vote will be entitled to
cumulate his or her votes and to give any one or more of the nominees whose
names have been placed in nomination prior to the voting a number of votes equal
to the total number of directors to be elected multiplied by the number of
shares that the stockholder is entitled to vote. In addition, the person or
persons holding the proxies solicited by our board of directors will exercise
their cumulative voting rights, at their discretion, to vote the shares they
hold in such a way as to ensure the election of as many of the nominees of the
board of directors as they deem possible. This discretion and authority of the
proxy holders may be withheld by checking the box on the proxy card marked
"withhold from all nominees." However, such an instruction will also deny the
proxy holders the authority to vote for any or all of the nominees of the board
of directors, even if cumulative voting is not called for at the 2002 Annual
Meeting.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
Holders of a majority of the outstanding shares entitled to vote must
be present, in person or by proxy, at the 2002 Annual Meeting in order to have
the required quorum for the transaction of business. If the shares present, in
person and by proxy, at the meeting do not constitute the required quorum, the
meeting may be adjourned to a subsequent date for the purpose of obtaining a
quorum.
Votes cast at the 2002 Annual Meeting will be tabulated by the person
appointed by us to act as inspectors of election for the 2002 Annual Meeting.
The inspector of election will treat shares of voting stock represented by a
properly signed and returned proxy as present at the 2002 Annual Meeting for
purposes of determining a quorum, without regard to whether the proxy is marked
as casting a vote or abstaining. Likewise, the inspector of election will treat
shares of voting stock represented by "broker non-votes" as present for purposes
of determining a quorum. "Broker non-votes" are shares of voting stock held in
record name by brokers and nominees concerning which: (i) instructions have not
been received from the beneficial owners or persons entitled to vote; (ii) the
broker or nominee does not have discretionary voting power under applicable
rules or the instrument under which it serves in such capacity; or (iii) the
record holder has indicated on the proxy or has executed a proxy and otherwise
notified us that it does not have authority to vote such shares on that matter.
Although abstentions and broker non-votes are not counted either "FOR" or
"AGAINST" any proposals, if the number of abstentions or broker non-votes
results in the votes "FOR" a proposal not equaling at least a majority of the
quorum required for the proposal, the proposal will not be approved. This will
be the case even though the number of votes "FOR" the proposal exceeds the
number of votes "AGAINST" the proposal.
PROXIES
Whether or not you are able to attend the 2002 Annual Meeting, we urge
you to submit your proxy, which is solicited by our board of directors and which
when properly completed will be voted as you direct. In the event no directions
are specified, such proxies will be voted "FOR" each of the nominees of the
board of directors, "FOR" all of the other proposals and, in the discretion of
the proxy holders, "FOR" any other matters that may properly come before the
2002 Annual Meeting. You are urged to give direction as to how to vote your
shares. You may revoke or change your proxy vote at any time before the 2002
Annual Meeting by delivering a written notice of revocation or submitting
another proxy card with a later date to the Secretary of I/OMagic Corporation at
our principal executive offices located at 1300 Wakeham Avenue, Santa Ana,
California 92705 before the beginning of the 2002 Annual Meeting. You may also
revoke your proxy vote by attending the 2002 Annual Meeting and voting in
person. However, the mere presence at the 2002 Annual Meeting of a stockholder
who has previously appointed a proxy will not revoke the prior appointment.
SOLICITATION OF PROXIES
We will bear the entire cost of this solicitation of proxies, including
the preparation, assembly, printing, and mailing of this proxy statement, the
proxy, and any additional solicitation material furnished to our stockholders.
Copies of solicitation material will be furnished to brokerage houses,
fiduciaries, and custodians holding shares in their names that are beneficially
owned by others so that they may forward the solicitation material to such
beneficial owners and the corresponding forwarding expenses will be reimbursed
by us. Proxies may be solicited personally, by mail or by telephone, or by our
directors, officers and regular employees who will not be additionally
compensated for engaging in the solicitation process. We have no present plans
to hire special employees or paid solicitors to assist in obtaining proxies, but
we reserve the option to do so if it appears that a quorum otherwise might not
be obtained. The matters to be considered and acted upon at the 2002 Annual
Meeting are referred to in the proceeding notice and are discussed below more
fully.
2
INFORMATION ABOUT OUR BOARD OF DIRECTORS AND
COMMITTEES OF THE BOARD
BOARD OF DIRECTORS
Our business, property and affairs are managed under the direction of
our board of directors. Directors are kept informed of our business through
discussions with our executive officers, by reviewing materials provided to them
and by participating in meetings of our board of directors and its committees.
Our board of directors held a total of one regular meeting and took action by
unanimous written consent on one occasion during the fiscal year ended December
31, 2001. All incumbent directors attended the only meeting of the board of
directors during the fiscal year ended December 31, 2001.
BOARD COMMITTEES
Our board of directors has a compensation committee. Our board of
directors does not have an audit committee or a nominating committee. The entire
board of directors performs the functions of an audit committee and selects
nominees for our board of directors. The members and chairmanship of the
compensation committee are appointed by the board of directors annually.
The compensation committee, which consists of Tony Shahbaz and Steel Su
(who serves as its chairman), held no meetings during the last fiscal year. The
compensation committee is responsible for reviewing and approving base salaries,
bonuses and incentive awards for all executive officers, reviewing and
establishing the base salary, bonuses and incentive awards for our Chief
Executive Officer, and reviewing, approving and recommending to the board of
directors the content, terms and conditions of all employee compensation and
benefit plans, or changes to those plans.
COMPENSATION OF DIRECTORS
The Company does not provide any cash compensation to its directors for
their services on the board of directors or any committee. However, we reimburse
all directors for out-of-pocket expenses incurred in connection with attendance
at board of directors and committee meetings.
3
DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS
The names, ages and positions held by our directors, director nominees
and executive officers as of September 6, 2002 and their business experience are
as follows:
NAME AGE TITLES
---- --- ------
Tony Shahbaz(1)............................. 40 Chairman of the Board, President, Chief Executive
Officer, Chief Financial Officer, Secretary, Director
and Director Nominee
Daniel Hou.................................. 52 Director and Director Nominee
Anthony Andrews............................. 39 Vice President, Director of Engineering, Director and
Director Nominee
Steel Su(1)................................. 53 Director and Director Nominee
Young-Hyun Shin............................. 49 Director and Director Nominee
Daniel Yao.................................. 46 Director and Director Nominee
- ---------------
(1) Member of the compensation committee.
TONY SHAHBAZ is a founder of I/OMagic Corporation and has served as our
Chairman of the Board, President, Chief Executive Officer, Secretary and Chief
Financial Officer and as a director since September 1993. Prior to founding
I/OMagic Corporation, Mr. Shahbaz was employed by Western Digital Corporation
from September 1986 to March 1993. During his tenure at Western Digital
Corporation, Mr. Shahbaz held several positions including Vice President of
Worldwide Sales for Western Digital Paradise, and Regional Director of Asia
Pacific Sales and Marketing Operations. Prior to his positions with Western
Digital, Mr. Shahbaz held management positions with Tandon Corporation from 1979
to 1984. From 1985 to 1986, Mr. Shahbaz held management positions with Lapin
Technology.
DANIEL HOU has served as a director of I/OMagic Corporation since
January 1998. Since 1986, Mr. Hou has served as the President of Hou
Electronics, Inc., a computer peripheral supplier that he founded. Mr. Hou is a
prior President of the Southern California Chinese Computer Association and is
an active member of the American Chemistry Society. Mr. Hou earned a B.A.
degree in Chemistry from National Chung-Hsing University, Taiwan in 1973 and a
Masters degree in Material Science from the University of Utah in 1978.
ANTHONY ANDREWS has served as our Vice President and Director of
Engineering since he joined I/OMagic Corporation in March 1994 and has served as
a director since October 1995. From 1988 to 1994, Mr. Andrews was a principal
engineer at Western Digital Corporation, where he was involved in product and
software design and played a key role in the development of portable notebook
power management designs that are used by companies such as IBM and AST. Prior
to that, Mr. Andrews was a staff engineer with Rockwell International from 1985
to 1988. Mr. Andrews earned a B.S. degree in Math and Computer Science from the
University of California at Los Angeles in 1985.
STEEL SU has served as a director of I/OMagic Corporation since
September 2000 and is a founder of Behavior Tech Corporation and has served as
its Chairman since 1980. Mr. Su has served and continues to serve as a director
or Chairman of the following affiliates of Behavior Tech Corporation: Behavior
Design Corporation (chairman), Behavior Tech Computer (USA) Corp. (chairman),
Behavior Tech Computer Antilles, N.V. (chairman), and BTC Korea Co., Ltd.
(director). Mr. Su has served as chairman of Gennet Technology Corp., Emprex
Technologies Corp., MaxD Technology Inc., Maritek Inc. since 1992, 1998, 2000,
and 1999, respectively. Mr. Su has also served as a director of Aurora Systems
Corp. and as a director of Wearnes Peripherals International (PTE) Limited since
1998, and 2000, respectively. Mr. Su earned a B.S. degree in Electronic
Engineering from Ching Yuan Christian University in 1974, a Master degree in
Business Administration from National Taiwan University in 2001.
4
YOUNG-HYUN SHIN has served as a director of I/OMagic Corporation since
September 2000 and the Representative Director of BTC Korea Co., Ltd. since
March 1988. Mr. Shin earned a B.S. degree in electronics from Yonsei University
in 1979.
DANIEL YAO has served as a director of I/OMagic Corporation since
February 2001 and has been a Chief Strategy Officer for Ritek Corporation since
July 2000. Prior to joining Ritek, Mr. Yao served as the Senior Investment
Consultant for Core Pacific Securities Capital from July 1998 to July 2000.
Prior to that, Mr. Yao was an Executive Vice President for ABN Amro Bank in
Taiwan from July 1996 to July 1998. Mr. Yao earned a B.A. degree in Business
Management from National Taiwan University in 1978 and a M.B.A. degree from the
University of Rochester in New York.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table provides information concerning the annual and
long-term compensation for the years ended December 31, 2001, 2000 and 1999
earned for services in all capacities as an employee by Tony Shahbaz, our
President, Chief Executive Officer, Chief Financial Officer and Secretary. Mr.
Shahbaz is our only executive officer.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARD
------------------- -----
SECURITIES OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
--------------------------- ---- ------ ----- ------------------ ------------
Tony Shahbaz.................................
Chairman, President, Chief Executive 2001 $140,004 -- -- $40,853 (1)
Officer, Chief Financial Officer and 2000 $140,004 -- 1,110,000 (2) $21,231 (1)
Secretary 1999 $140,000 $165,396 -- ___
- ---------------
(1) Consists of salary earned by Mr. Shahbaz as an employee of IOM
Holdings, Inc., a subsidiary of I/OMagic Corporation.
(2) Includes 510,000 shares of common stock underlying options
granted to Mr. Shahbaz's wife, Fedra Shahbaz. The options
granted to Mr. Shahbaz and Fedra Shahbaz were immediately
exercisable upon the date of grant.
OPTION GRANTS IN LAST FISCAL YEAR
The executive officer named in the summary compensation table above did
not receive any option grants or stock appreciation rights in the year ended
December 31, 2001.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information regarding the value of
unexercised options held by the named executive officer as of December 31, 2001.
The named executive officer did not acquire shares through the exercise of any
options during the year ended December 31, 2001.
5
NUMBER OF
SECURITIES UNDERLYING VALUE ($) OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 2001 DECEMBER 31, 2001 (3)
----------------- ---------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Tony Shahbaz................. 990,567 (1) 719,433 (2) $0 $0
- --------------
(1) Includes 227,567 shares of common stock underlying options
held by Mr. Shahbaz's wife, Fedra Shahbaz.
(2) Includes 282,433 shares of common stock underlying options
held by Mr. Shahbaz's wife, Fedra Shahbaz.
(3) Based upon the last reported sale price of our common stock of
$0.60 per share on December 31, 2001 (the last trading day
during 2001) as reported on the OTC Bulletin Board(R), minus
the exercise price of the options.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
On October 22, 1993, we entered into an employment agreement with Tony
Shahbaz for Mr. Shahbaz to serve as our President and Chief Executive Officer.
Under the terms of the employment agreement, Mr. Shahbaz is entitled to receive
an initial annual salary of $140,000 and, if our net profits exceed at least
$100,000 in any fiscal year, an annual bonus. The amount of the bonus payable to
Mr. Shahbaz is equal to: (i) $20,000 for each fiscal year in which the net
profits exceed $200,000; (ii) $50,000 for each fiscal year in which the net
profits exceed $400,000; or (iii) $70,000, for each fiscal year in which the net
profits exceed $500,000.
If we terminate Mr. Shahbaz without cause, Mr. Shahbaz will be entitled
to a portion of the bonus that the number of months during such fiscal year that
he was employed bears to twelve months. If we terminate Mr. Shahbaz for cause,
our obligation to pay any further salary, bonus or other amounts payable under
the agreement terminates on the date of termination. Pursuant to the employment
agreement, "cause" is defined as the habitual neglect of the duties which are
required to be performed.
The purpose of the employment agreement is to ensure that we will have
the continued dedication of Mr. Shahbaz by providing certain compensation
arrangements, competitive with those of other corporations, to incentivize Mr.
Shahbaz to remain with I/OMagic Corporation and to enhance his financial
security.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Tony Shahbaz, our Chairman, President, Chief Executive Officer, Chief
Financial Officer and Secretary, is a member of our compensation committee.
No member of our board of directors has a relationship that constitutes
an interlocking relationship with executive officers and directors of another
entity.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive any compensation for their
services. However each director is entitled to reimbursement of his reasonable
expenses incurred in attending board of directors' meetings.
6
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION POLICIES FOR EXECUTIVE OFFICERS
Our compensation program's goals are to:
o Attract, retain and motivate highly-qualified executive
officers who can provide operational and strategic excellence
that will produce on-going success for the company;
o Align compensation for the executive officers with our
business objectives and performance; and
o Align incentives for executive officers with the interests of
stockholders to enhance financial performance and stockholder
value.
We emphasize performance-based compensation that is competitive with
the marketplace, and the importance of clearly communicating performance
objectives. Our compensation program for employees includes both cash and
equity-based elements. Consistent with competitive practices, we also use a cash
bonus plan based on achievement of financial performance and key operational
objectives.
The compensation committee did not meet during the fiscal year ended
December 31, 2001. Nevertheless, the compensation policies adopted by the
compensation committee during prior fiscal years were carried over to fiscal
2001.
CASH COMPENSATION
SALARY. We set individual salaries for each executive officer based on
sustained individual performance, contribution to our results and internal
comparison of duties and responsibilities.
CASH BONUS. In order to help recruit, retain and motivate executives
with market-competitive incentives in the current business environment, during
fiscal 2001, we provided a cash bonus program for Mr. Shahbaz, our only
executive officer, based on performance. During fiscal 2002, we will employ
similar performance measures for cash bonus incentives.
EQUITY-BASED COMPENSATION
Historically, options granted to our current sole executive officer
were exercisable immediately. In the future, options granted to our executive
officers will be subject to vesting over time. In addition, we expect that
initial or "new-hire" options will be granted to executive officers when they
first join us. All options to be granted to executive officers will be issued
with an exercise price at the then-current fair market value and thus become
valuable only if the executive officer continues to serve at I/OMagic
Corporation and the price of our stock subsequently increases.
CHIEF EXECUTIVE OFFICER COMPENSATION
Our Chief Executive Officer's base annual salary for fiscal 2001 and
2000 was $140,000. For fiscal 2002, our Chief Executive Officer's target annual
incentive will be consistent with market cash incentives. Our Chief Executive
7
Officer's compensation package is designed to be strongly aligned with the
interests of stockholders by making his cash incentives directly tied to
achieving specific targets. In the event we grant stock options to our Chief
Executive Officer, these stock options will become valuable only if he continues
to serve at I/OMagic Corporation and the price of our stock subsequently rises.
Respectfully submitted,
Compensation Committee
I/OMagic Corporation
Steel Su, Chairman
Tony Shahbaz, Member
REPORT OF THE BOARD OF DIRECTORS ON AUDIT MATTERS
We do not have an audit committee of the board of directors. Our entire
board of directors oversees our financial reporting process. Management has the
primary responsibility for our financial statements and the overall reporting
process, including our system of financial controls. Prior to the inclusion and
filing with the Securities and Exchange Commission of the audited financial
statements in our annual report on Form 10-K for the year ended December 31,
2001, our board of directors discussed with management but did not review our
audited financial statements. In addition, our board of directors obtained from
the independent auditors a formal written statement describing all relationships
between the auditors and our company that might bear on the auditors'
independence consistent with Independence Standards Board Standard No. 1,
"Independent Discussions with Audit Committees." The board of directors did not
have an opportunity prior to the filing of our Form 10-K to discuss with the
auditors our audited financial statements and related matters.
However, subsequent to the filing of our Form 10-K and prior to the
filing of an amendment to our Form 10-K, our board of directors reviewed and
discussed with management and the auditors our restated audited financial
statements. In addition, our board of directors obtained from the auditors an
updated formal written statement describing all relationships between the
auditors and our company that might bear on the auditors' independence
consistent with Independence Standards Board Standard No. 1, "Independent
Discussions with Audit Committees" and discussed with the auditors any
relationships that may impact the auditors' objectivity and independence and
satisfied itself as to the auditors' independence. Also, prior to the filing of
the amendment to our Form 10-K, our board of directors discussed with the
auditors all matters required to be discussed by generally accepted auditing
standards, including those described in Statement on Auditing Standards No. 61,
as amended, "Communication with Audit Committees." In addition, prior to the
filing with the Securities and Exchange Commission of the amendment to our Form
10-K, our board of directors recommended to management that our restated audited
financial statements should be included in the amendment to our Form 10-K. Our
board of directors also approved the reappointment of the auditors for the year
ended December 31, 2002.
Respectfully submitted,
Board of Directors
I/OMagic Corporation
Tony Shahbaz, Director
Daniel Hou, Director
Anthony Andrews, Director
Steel Su, Director
Young-Hyun Shin, Director
Daniel Yao, Director
8
PRINCIPAL ACCOUNTING FIRM FEES
The following table sets forth the aggregate fees billed or expected to
be billed to us for services rendered to us for the year ended December 31, 2001
by our independent auditors, Singer Lewak Greenbaum & Goldstein LLP:
Audit Fees $ 250,000 (1)
Financial Information Systems Design and
Implementation Fees $ --
All Other Fees $ 46,000
- --------------------------
(1) Includes fees for the audit of our annual financial statements for the
year ended December 31, 2001, the audit of our financial statements for
the six months ended June 30, 2001 as required by one of our investors,
and the reviews of the condensed financial statements included in our
quarterly reports on Forms 10-Q for the year ended December 31, 2001.
9
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total
stockholder return on our common stock, based on its market price, with the
cumulative total return on companies on the Nasdaq Stock Market (U.S.) and the
Nasdaq Computer & Data Processing Index, assuming reinvestment of dividends for
the period beginning December 31, 1997 and ending December 31, 2001. This graph
assumes that the value of the investment in our common stock and each of the
comparison groups was $100 on December 31, 1996.
[PERFORMANCE GRAPH HERE]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CUMULATIVE TOTAL RETURN
12/97 12/98 12/99 12/00 12/01
--------------- -------------- -------------- ------------- ------------
I/OMagic Corporation..................... $ 45.00 $ 17.50 $ 45.00 $ 40.00 $ 24.00
Nasdaq Stock Market (U.S.)............... 122.48 172.68 320.89 193.01 153.15
Nasdaq Computer & Data Processing........ 122.87 219.20 481.81 221.85 178.69
10
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of August 28, 2002, a total of 67,930,291 shares of our common stock
were outstanding. The following table sets forth information as of that date
regarding the beneficial ownership of our common stock by:
o each person known by us to own beneficially more than five
percent, in the aggregate, of the outstanding shares of our
common stock as of the date of the table;
o each of our directors and director nominees;
o the named executive officer in the Summary Compensation Table
contained elsewhere in this document; and
o all of our directors, director nominees and executive officers
as a group.
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. Except as indicated in the footnotes to the
table, we believe each security holder possesses sole voting and investment
power with respect to all of the shares of common stock owned by such security
holder, subject to community property laws where applicable. In computing the
number of shares beneficially owned by a security holder and the percentage
ownership of that security holder, shares of common stock subject to options,
warrants or preferred stock held by that person that are currently exercisable
or convertible or are exercisable or convertible into shares of common stock
within 60 days after the date of the table are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person or group.
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER(1) TITLE OF CLASS OWNERSHIP OF CLASS OF CLASS
---------------------- -------------- ------------------ --------
Tony Shahbaz........................................ Common 37,439,417 (2) 53.76%
Steel Su............................................ Common 9,610,000 (3) 14.10%
Young-Hyun Shin..................................... Common 5,632,912 (4) 8.29%
Daniel Yao.......................................... Common 5,112,262 (5) 7.53%
Daniel Hou.......................................... Common 2,035,000 (6) 2.99%
Anthony Andrews..................................... Common 221,666 (7) *
All executive officers, directors and director
nominees as a group (6 persons)................. Common 60,051,257 (8) 85.63%
- ---------------
* Less than 1.00%
(1) Unless otherwise indicated, the address of each person in this table is
c/o I/OMagic Corporation, 1300 Wakeham Avenue, Santa Ana, California
92705. Mr. Shahbaz is the sole executive officer of I/OMagic
Corporation. Messrs. Shahbaz, Andrews, Hou, Su, Shin and Yao are
current directors and director nominees.
(2) Consists of: (i) 7,860,000 shares of common stock and 1,200,000 shares
of common stock underlying options held individually by Mr. Shahbaz;
(ii) 510,000 shares of common stock underlying options held
individually by Mr. Shahbaz's wife, Fedra Shahbaz; (iii) 18,356,340
11
shares of common stock held by Susha, LLC, a California limited
liability company; (iv) 8,250,000 shares of common stock held by Susha,
LLC, a Nevada limited liability company; and (v) 1,263,077 shares of
common stock held by King Eagle Enterprises, Inc., a California
corporation. Mr. Shahbaz has sole voting and sole investment power over
the shares held by Susha, LLC, a California limited liability company
("Susha California"), Susha, LLC, a Nevada limited liability company
("Susha Nevada") and King Eagle Enterprises, Inc. Mr. Shahbaz and
Behavior Tech Computer (USA) Corp. are the only members of Susha
California. Mr. Shahbaz and Behavior Tech Computer Corp. are the only
members of Susha Nevada.
(3) Consists of 6,860,000 shares of common stock and 250,000 shares of
common stock underlying options held individually by Mr. Su, and
2,500,000 shares of common stock held by Behavior Tech Computer Corp.
("BTC Taiwan"). Mr. Su is the Chief Executive Officer of BTC Taiwan and
has sole voting and SOLE investment power over the shares held by BTC
Taiwan.
(4) Represents 5,632,912 shares of common stock held by BTC Korea Co., Ltd.
("BTC Korea"). Mr. Shin has sole voting and sole investment power over
the shares held by BTC Korea. The address for Mr. Shin is c/o BTC Korea
Co., Ltd., 160-5, Kajwa-Dong Seo-Ku, Incheon City, Korea.
(5) Represents 5,112,262 shares of common stock held by Citrine Group
Limited ("Citrine"), a wholly owned subsidiary of Ritek Corporation.
Mr. Yao is currently serves as the Chief Strategy Officer of Ritek
Corporation. Mr. Yao has sole voting and sole investment power over the
shares held by Citrine Group Limited. The address for Mr. Yao is c/o
Citrine Group Limited, No. 42, Kuanfu N. Road, 30316 R.O.C., HsinChu
Industrial Park, Taiwan.
(6) Consists of 35,000 shares of common stock underlying options held
individually by Mr. Hou, and 2,000,000 shares of common stock held by
Hou Electronics. Mr. Hou has sole voting and sole investment power over
the shares held by Hou Electronics.
(7) Consists of 16,666 shares of common stock and 150,000 shares of common
stock underlying options held individually by Mr. Andrews, and 55,000
shares of common stock underlying options held individually by Mr.
Andrews' wife, Nancy Andrews.
(8) Includes 2,200,000 shares of common stock underlying options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Citrine, BTC Taiwan and Behavior Tech Computer (USA) Corp. ("BTC USA"),
an affiliate of BTC Taiwan, in the aggregate, manufacture a significant amount
of our optical storage and related media products.
Each of Citrine, BTC Taiwan and BTC USA provide us with favorable
payment terms in connection with our purchases of inventory from each of these
manufacturers. Citrine has agreed to allow us to purchase up to $3,000,000 of
inventory upon net 60 day terms. BTC Taiwan and BTC USA, in the aggregate, have
agreed to allow us to purchase up to $5,000,000 of inventory upon net 75 day
terms. In addition, Hou Electronics has agreed to allow us to purchase up to
$2,000,000 of inventory upon net 75 day terms.
On February 3, 1999, we entered into a subscription agreement with BTC
USA. In this transaction, BTC USA contributed $5 million worth of inventory in
exchange for 16,666,667 shares of our common stock valued at $0.30 per share.
Subsequent to this issuance of shares of common stock, BTC USA contributed the
shares of common stock to Susha LLC, a California limited liability company.
On January 4, 2000, we entered into a subscription agreement with BTC
Taiwan. In this transaction, BTC Taiwan contributed $5,000,000 worth of
inventory in exchange for 6,250,000 shares of our common stock valued at $0.80
per share. Subsequent to this issuance of shares of common stock, BTC Taiwan
contributed the shares of common stock to Susha LLC, a Nevada limited liability
company.
On March 7, 2000, we entered into a subscription agreement with BTC
Korea. In this transaction, BTC Korea purchased 632,912 shares of our common
stock for $2,000,000 in cash.
12
On December 10, 2000, we entered into a subscription agreement with
Citrine whereby Citrine contributed $8,000,000 worth of inventory in exchange
for 5,112,262 shares of our common stock valued at $1.56 per share.
On December 31, 2000, we acquired all of the common stock of IOM
Holdings, Inc. ("IOMH") in exchange for 24,000,000 shares of our common stock
valued at $0.64 per share. IOMH owned the Hi-Val brand name and was the
exclusive licensee of the Digital Research Technologies brand name. The stock of
IOMH was held by Mr. Tony Shahbaz, Mr. Steel Su and BTC Korea. Mr. Shahbaz and
Mr. Su each received 9,600,000 shares of our common stock in exchange for their
shares of IOMH. BTC Korea received 4,800,000 shares of our common stock.
On December 31, 2000, Mr. Shahbaz and Mr. Su had outstanding certain
obligations which were satisfied by transferring an aggregate of 7,300,000 of
the shares they received in the transaction with IOMH. 2,700,000 of these shares
were transferred to BTC Korea. After payment of these obligations, Mr. Shahbaz
and Mr. Su netted 5,950,000 shares each of the 9,600,000 shares transferred in
the IOMH transaction. The remaining shares issued by us were used to satisfy
creditors of IOMH. The acquisition of IOMH by I/OMagic Corporation was approved
by a vote of the stockholders at the annual stockholders meeting held on
September 12, 2000.
On April 1, 2000, IOMH and Alex Properties, a California general
partnership, entered into a commercial lease agreement for the premises located
at 1300 Wakeham Avenue, Santa Ana, California. Under the terms of the lease,
Alex Properties leased the premises to IOMH for an initial term of ten years
from April 1, 2000 to March 31, 2010, with an option for IOMH to renew the lease
for another ten year term. The rental rate for the premises during the initial
term is $0.45 per square foot during the period from April 1, 2000 to March 31,
2003 and $0.50 per square foot during the period from April 1, 2003 to March 31,
2006, with an increase of $0.05 per square foot for each subsequent year. We
acquired all of the outstanding common stock of IOMH on December 31, 2000, and
as a result, IOMH became our wholly owned subsidiary and assigned the lease to
us.
On January 22, 2001 we issued to Finova Capital Corporation 875,000
shares of our Series A Preferred Stock and 250,000 shares of our Series B
Preferred Stock. The original value of these shares was $9 million in the
aggregate. We are obligated to redeem these shares at $8.00 per share upon the
third anniversary of the issuance of the Series A Preferred Stock and upon the
second anniversary of the issuance of the Series B Preferred Stock. If the
shares of our common stock trade at a price of $3.00 per share for 15
consecutive trading days, then we have the right to force conversion of the
shares of Series A Preferred Stock and Series B Preferred Stock into shares of
our common stock at a price equal to the weighted average trading price (which
shall be not less than $2.50 per share nor more than $7.00 per share, subject to
adjustment for stock splits and similar reclassifications of our common stock)
of the shares of common stock during the 20 day period of time prior to the
notice of conversion issued by us. If we are unable to require the conversion of
the preferred stock or to otherwise negotiate a discounted redemption of the
preferred stock, then we would be required to expend $2.0 million to redeem the
Series B Preferred Stock on January 22, 2003 and $7.0 million to redeem the
Series A Preferred Stock on January 22, 2004.
We have entered into indemnification agreements with our directors and
certain officers containing provisions that may in some respects be broader than
the specific indemnification provisions contained in the Nevada Revised
Statutes. These agreements provide, among other things, for indemnification of
these individuals in proceedings brought by third parties and in stockholder
derivative suits. Each agreement also provides for advancement of expenses to
the indemnified party.
We are or have been a party to employment and indemnification
arrangements with related parties, as more particularly described above under
the headings "Compensation of Executive Officers," "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" and "Compensation
of Directors."
13
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers, directors and persons who beneficially own more
than 10% of a registered class of our securities to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission. These officers, directors and stockholders are required by the
Securities and Exchange Commission regulations to furnish us with copies of all
reports that they file.
Based solely upon a review of copies of the reports furnished to us
during 2001 and thereafter, or any written representations received by us from
directors, officers and beneficial owners of more than 10% of our common stock
that no other reports were required, we believe that all Section 16(a) filing
requirements applicable to our reporting persons were complied with.
Each of our directors is in the process of reviewing all filings made
prior to January 1, 2001, pursuant to Section 16(a) in an effort to determine
whether any additional and/or amended filings are required to be made.
14
PROPOSAL 1
ELECTION OF DIRECTORS
Our bylaws currently provide for a board of directors of six directors.
All six directors are to be elected at the 2002 Annual Meeting. Unless otherwise
instructed, the proxy holders will vote the proxies received by them for
management's nominees named below. Each nominee has consented to be named as a
nominee in the proxy statement and to serve as a director if elected. In the
event that any management nominee becomes unable or declines to serve as a
director, the proxies will be voted for any nominee who shall be designated by
the current board of directors to fill the vacancy. In the event that additional
persons are nominated at the time of the 2002 Annual Meeting, the proxy holders
intend to vote all proxies received by them in such a manner (in accordance with
cumulative voting) as will ensure the election of as many of the nominees listed
above as possible (or, if new nominees have been designated by the board of
directors, in such a manner as to elect such nominees). In such event, the
specific nominees for whom such votes will be cumulated will be determined by
the proxy holders. We are not aware of any reason that any nominee will be
unable or will decline to serve as a director. The term of office of each person
elected as a director will continue until the next annual meeting or until a
successor has been elected and qualified. There are no arrangements or
understandings between any director or executive officer and any other person
pursuant to which he is or was to be selected as a director or officer of
I/OMagic Corporation.
The names of the nominees, and certain information about them, are set
forth above under the caption "Directors, Director Nominees and Executive
Officers." All nominees for director are, at present, directors of I/OMagic
Corporation.
REQUIRED VOTE OF STOCKHOLDERS
The six nominees for director who receive the highest number of
affirmative votes shall be elected as directors.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE ELECTION
OF THE NOMINEES SET FORTH HEREIN.
15
PROPOSAL 2
ADOPTION OF 2002 STOCK OPTION PLAN
GENERAL
In each of the years from 1996 through 2001, we adopted and granted
options under six separate incentive stock option and non-qualified stock option
plans. Each of those plans has expired by its own terms.
Effective as of September 27, 2002, the board of directors approved our
2002 Stock Option Plan (the "2002 Plan") by unanimous written consent. The 2002
Plan is designed to enable us to offer an incentive-based compensation system to
employees, officers and directors of I/OMagic Corporation and to consultants who
do business with I/OMagic Corporation. The 2002 Plan provides for the grant of
incentive stock options, or ISOs, and nonqualified stock options, or NQOs. As of
September 3, 2002, no options to purchase shares of common stock were
outstanding under the 2002 Plan, and 2,000,000 shares were available for
issuance under the 2002 Plan. As soon as practicable following stockholder
approval of this proposal, we intend to register on Form S-8 under the
Securities Act of 1933 the issuance of our securities under the 2002 Plan. A
copy of the 2002 Plan is attached as APPENDIX A to this proxy statement and is
described below.
SHARES SUBJECT TO THE 2002 PLAN
A total of 2,000,000 shares of common stock are authorized for issuance
under the 2002 Plan. On September 3, 2002, the closing sale price of a share of
our common stock on the OTC Bulletin Board(R) was $0.66. Any shares of common
stock that are subject to an award but are not used because the terms and
conditions of the award are not met, or any shares that are used by participants
to pay all or part of the purchase price of any option, may again be used for
awards under the 2002 Plan.
ADMINISTRATION
The 2002 Plan is administered by a committee of not less than two nor
more than five persons appointed by the board of directors, each of whom must be
a director of I/OMagic Corporation. The board of directors also may act as the
committee at any time or from time to time. It is the intent of the 2002 Plan
that it be administered in a manner such that option grants and exercises would
be "exempt" under Rule 16b-3 of the Securities Exchange Act of 1934 (the
"Exchange Act").
The committee is empowered to select those eligible persons to whom
options shall be granted under the 2002 Plan, to determine the time or times at
which each option shall be granted, whether options will be ISOs or NQOs, and
the number of shares to be subject to each option, and to fix the time and
manner in which each such option may be exercised, including the exercise price
and option period, and other terms and conditions of such options, all subject
to the terms and conditions of the 2002 Plan. The committee has sole discretion
to interpret and administer the 2002 Plan, and its decisions regarding the 2002
Plan are final.
The 2002 Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time and from time to time by the board of
directors. The board of directors may not materially impair any outstanding
options without the express consent of the optionee or increase the number of
shares subject to the 2002 Plan, materially increase the benefits to optionees
under the 2002 Plan, materially modify the requirements as to eligibility to
participate in the 2002 Plan or alter the method of determining the option
exercise price without stockholder approval. No option may be granted under the
2002 Plan after September 3, 2012.
16
OPTION TERMS
ISOs granted under the 2002 Plan must have an exercise price of not
less than 100% of the fair market value of the common stock on the date the ISO
is granted and must be exercised, if at all, within ten years from the date of
grant. In the case of an ISO granted to an optionee who owns more than 10% of
the total voting securities of I/OMagic Corporation on the date of grant, such
exercise price shall be not less than 110% of fair market value on the date of
grant, and the option period may not exceed five years. NQOs granted under the
2002 Plan must have an exercise price of not less than 85% of the fair market
value of the common stock on the date the NQO is granted.
Options may be exercised during a period of time fixed by the
committee, except that no option may be exercised more than ten years after the
date of grant and no option shall vest at less than 20% per year over a
consecutive five-year period. In the discretion of the committee, payment of the
purchase price for the shares of stock acquired through the exercise of an
option may be made in cash, shares of I/OMagic Corporation common stock or a
combination of cash and shares of I/OMagic Corporation common stock.
FEDERAL INCOME TAX CONSEQUENCES
NQOS
----
Holders of NQOs do not realize income as a result of a grant of the
option, but normally realize compensation income upon exercise of an NQO to the
extent that the fair market value of the shares of common stock on the date of
exercise of the NQO exceeds the exercise price paid. I/OMagic Corporation will
be required to withhold taxes on ordinary income realized by an optionee upon
the exercise of a NQO.
In the case of an optionee subject to the "short-swing" profit
recapture provisions of Section 16(b) of the Exchange Act, the optionee realizes
income only upon the lapse of the six-month period under Section 16(b), unless
the optionee elects to recognize income immediately upon exercise of his or her
option.
ISOS
----
Holders of ISOs will not be considered to have received taxable income
upon either the grant of the option or its exercise. Upon the sale or other
taxable disposition of the shares, long-term capital gain will normally be
recognized on the full amount of the difference between the amount realized and
the option exercise price paid if no disposition of the shares has taken place
within either two years from the date of grant of the option or one year from
the date of exercise. If the shares are sold or otherwise disposed of before the
end of the one-year or two-year periods, the holder of the ISO must include the
gain realized as ordinary income to the extent of the lesser of the fair market
value of the option stock minus the option price, or the amount realized minus
the option price. Any gain in excess of these amounts, presumably, will be
treated as capital gain. I/OMagic Corporation will be entitled to a tax
deduction in regard to an ISO only to the extent the optionee has ordinary
income upon the sale or other disposition of the option shares.
17
Upon the exercise of an ISO, the amount by which the fair market value
of the purchased shares at the time of exercise exceeds the option price will be
an "item of tax preference" for purposes of computing the optionee's alternative
minimum tax for the year of exercise. If the shares so acquired are disposed of
prior to the expiration of the one-year or two-year periods described above,
there should be no "item of tax preference" arising from the option exercise.
POSSIBLE ANTI-TAKEOVER EFFECTS
Although not intended as an anti-takeover measure by the board of
directors, one of the possible effects of the 2002 Plan could be to place
additional shares, and to increase the percentage of the total number of shares
outstanding, in the hands of the directors and officers of I/OMagic Corporation.
Such persons may be viewed as part of, or friendly to, incumbent management and
may, therefore, under certain circumstances be expected to make investment and
voting decisions in response to a hostile takeover attempt that may serve to
discourage or render more difficult the accomplishment of such attempt.
In addition, options may, in the discretion of the committee, contain a
provision providing for the acceleration of the exercisability of outstanding,
but unexercisable, installments upon the first public announcement of a tender
offer, merger, consolidation, sale of all or substantially all of the assets of
I/OMagic Corporation, or other attempted changes in the control of I/OMagic
Corporation. In the opinion of the board of directors, such an acceleration
provision merely ensures that optionees under the 2002 Plan will be able to
exercise their options as intended by the board of directors and stockholders of
I/OMagic Corporation prior to any such extraordinary corporate transaction which
might serve to limit or restrict such right. The board of directors is, however,
presently unaware of any threat of hostile takeover involving I/OMagic
Corporation.
REQUIRED VOTE OF STOCKHOLDERS
The affirmative vote of a majority of the shares of common stock
represented and voting on this proposal will constitute stockholder approval of
the 2002 Plan. As noted above, the board of directors has approved the 2002
Plan. Stockholders should be aware, however, that the board of directors may be
viewed as having a conflict of interest in approving, and recommending that
stockholders approve, the 2002 Plan.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF
THE 2002 PLAN.
18
PROPOSAL 3
AMENDMENT TO ARTICLES OF INCORPORATION TO
EFFECT A ONE-FOR-FIFTEEN REVERSE STOCK SPLIT
OF I/OMAGIC CORPORATION'S COMMON STOCK
GENERAL
As of August 28, 2002, 67,930,291 shares of our common stock were
outstanding and the per share closing price of our common stock on that date was
$0.60. In order to reduce the number of shares of common stock outstanding, the
board of directors has unanimously adopted a resolution seeking stockholder
approval to grant the board of directors authority to amend and restate our
Articles of Incorporation to effect a one-for-fifteen reverse stock split of our
common stock. Approval of this reverse stock split proposal would give the board
of directors authority to implement the reverse stock split at any time it
determined prior to December 31, 2002. In addition, approval of this reverse
stock split proposal would also give the board of directors authority to decline
to implement a reverse stock split prior to such date or at all.
If our stockholders approve the reverse stock split proposal and the
board of directors decides to implement the reverse stock split, we will file
the Amended and Restated Articles of Incorporation ("Restated Articles") with
the Secretary of State of the State of Nevada through which every fifteen shares
of common stock issued and outstanding will be converted into one fully paid and
nonassessable share of common stock, with any fractional shares that result from
such reverse stock split to be rounded up to the nearest whole share of common
stock. The reverse stock split, if implemented, would not change the number of
authorized shares of common stock or preferred stock or the par value of our
common stock or preferred stock. Except for any changes as a result of the
treatment of fractional shares, each stockholder will hold the same percentage
of common stock outstanding immediately prior to the reverse stock split as such
stockholder did immediately prior to the split.
PURPOSE
Over the past few years, market prices for stocks trading in the U.S.
markets have generally declined. For example, the closing price for the S&P 500
Index decreased from 1,381.76 on March 2, 2000 to 917.87 on August 28, 2002. In
order to reduce the number of shares of our common stock outstanding and thereby
attempt to proportionally raise the per share price of our common stock, the
board of directors determined that a reverse stock spit was desirable in order
to: (i) encourage greater investor interest in our common stock by making the
stock price more attractive to the many investors, particularly institutional
investors, who refrain from investing in lower priced stocks; and (ii) reduce
trading fees and commissions incurred by stockholders, since these costs are
based to a significant extent on the number of shares traded.
The board of directors believes that the reverse stock split may help
encourage greater interest in our common stock. The board of directors believes
that the current market price of our common stock may impair its acceptability
to institutional investors, professional investors and other members of the
investing public. Many institutional and other investors look upon stock trading
at low prices as unduly speculative in nature and, as a matter of policy, avoid
investing in such stocks. Various brokerage house policies and practices also
tend to discourage individual brokers from dealing in low-priced stocks.
Moreover, the analysts at many brokerage firms do not monitor the trading
activity or otherwise provide research coverage of lower priced stocks. If
effected, the reverse stock split would reduce the number of outstanding shares
of our common stock and increase the trading price of our common stock. The
board of directors believes that raising the trading price of our common stock
will increase the attractiveness of our common stock to the investment community
and possibly promote greater liquidity for our existing stockholders.
19
Because broker commissions on low-priced stocks generally represent a
higher percentage of the stock price than commissions on higher priced stocks,
the current share price of our common stock, in the absence of the reverse stock
split, may continue to result in individual stockholders paying transaction
costs (commissions, markups or markdowns) which are a higher percentage of their
total share value than would be the case if the share price was substantially
higher. For this reason, individual and institutional investors may be unwilling
to purchase our common stock at its current market price.
Our common stock is listed on the OTC Bulletin Board(R). A reverse
stock split as set forth in this proposal may enable us to list our common stock
on the Nasdaq SmallCap Market. If our common stock was listed on the Nasdaq
SmallCap Market, the board of directors believes that the liquidity in the
trading market for our common stock may be increased, which would, in turn,
increase the trading price and decrease the transaction costs of trading shares
of our common stock.
If the stockholders approve the reverse stock split proposal, the
reverse stock split will be effected, if at all, only upon a determination by
the board of directors that the reverse stock split is in the best interests of
I/OMagic Corporation and our stockholders at that time. This determination will
be made by the board of directors to create the greatest marketability of our
common stock based on prevailing market conditions at that time. No further
action on the part of stockholders will be required to either implement or
abandon the reverse stock split. If the board of directors does not implement a
reverse stock split prior to December 31, 2002, the authority granted in this
proposal to implement a reverse stock split on these terms will terminate. The
board of directors reserves its right to elect not to proceed with the reverse
stock split if it determines, in its sole discretion, that the split is no
longer in the best interests of I/OMagic Corporation and our stockholders.
RISKS ASSOCIATED WITH THE REVERSE STOCK SPLIT
THERE CAN BE NO ASSURANCE THAT THE TOTAL MARKET CAPITALIZATION OF OUR COMMON
STOCK AFTER THE PROPOSED REVERSE STOCK SPLIT WILL BE EQUAL TO OR GREATER THAN
THE TOTAL MARKET CAPITALIZATION BEFORE THE PROPOSED REVERSE STOCK SPLIT OR THAT
THE PER SHARE MARKET PRICE OF OUR COMMON STOCK FOLLOWING THE REVERSE STOCK SPLIT
WILL EITHER EXCEED OR REMAIN HIGHER THAN THE CURRENT PER SHARE MARKET PRICE.
There can be no assurance that the market price per new share of our
common stock (the "New Shares") after the reverse stock split will rise or
remain constant in proportion to the reduction in the number of old shares of
our common stock (the "Old Shares") outstanding before the reverse stock split.
For example, based on the closing market price of our common stock on August 28,
2002 of $0.60 per share, if the board of directors decided to implement the
reverse stock split, there can be no assurance that the post-split market price
of our common stock would be $9.00 per share or greater. Accordingly, the total
market capitalization of our common stock after the proposed reverse stock split
may be lower than the total market capitalization before the proposed reverse
stock split and, in the future, the market price of our common stock following
the reverse stock split may not exceed or remain higher than the market price
prior to the proposed reverse stock split. In many cases, the total market
capitalization of a company following a reverse stock split is lower than the
total market capitalization before the reverse stock split.
20
THERE CAN BE NO ASSURANCE THAT THE REVERSE STOCK SPLIT WILL RESULT IN A PER
SHARE PRICE THAT WILL ATTRACT INSTITUTIONAL INVESTORS AND BROKERS.
While the board of directors believes that a higher stock price may
help generate investor interest, there can be no assurance that the reverse
stock split will result in a per share price that will attract institutional
investors and brokers.
A DECLINE IN THE MARKET PRICE FOR OUR COMMON STOCK AFTER THE REVERSE STOCK SPLIT
MAY RESULT IN A GREATER PERCENTAGE DECLINE THAN WOULD OCCUR IN THE ABSENCE OF A
REVERSE STOCK SPLIT, AND THE LIQUIDITY OF OUR COMMON STOCK COULD BE ADVERSELY
AFFECTED FOLLOWING A REVERSE STOCK SPLIT.
The market price of our common stock will also be based on our and
other factors, some of which are unrelated to the number of shares outstanding.
If the reverse stock split is effected and the market price of our common stock
declines, the percentage decline as an absolute number and as a percentage of
our overall market capitalization may be greater than would occur in the absence
of a reverse stock split. In many cases, both the total market capitalization of
a company and the market price of a share of such company's common stock
following a reverse stock split are lower than they were before the reverse
stock split. Furthermore, the liquidity of our common stock could be adversely
affected by the reduced number of shares that would be outstanding after the
reverse stock split.
PRINCIPAL EFFECTS OF THE REVERSE STOCK SPLIT
CORPORATE MATTERS. If approved and effected, the reverse stock split
would have the following effects:
o fifteen Old Shares owned by a stockholder would be exchanged
for one New Share;
o the number of shares of our common stock issued and
outstanding will be proportionately reduced;
o proportionate adjustments will be made to the per share
exercise price and the number of shares issuable upon the
exercise of all outstanding options and warrants entitling the
holders thereof to purchase shares of our common stock, which
will result in approximately the same aggregate price being
required to be paid for such options or warrants upon exercise
of such options or warrants immediately preceding the reverse
stock split;
o the number of shares reserved for issuance under our existing
stock option plans and employee stock purchase plans will be
reduced proportionately.
FRACTIONAL SHARES. No scrip or fractional certificates will be issued
in connection with the reverse stock split. Instead, any fractional share that
results from the reverse stock split will be rounded up to the next whole share
of our common stock.
If approved and effected, the reverse stock split will result in some
stockholders owning "odd lots" of less than 100 shares of our common stock.
Brokerage commissions and other costs of transactions in odd lots are generally
somewhat higher than the costs of transactions in "round lots" of even multiples
of 100 shares.
AUTHORIZED SHARES. Upon the effectiveness of the reverse stock split,
the number of authorized shares of common stock that are not issued or
outstanding would increase due to the reduction in the number of shares of our
common stock issued and outstanding. As of September 6, 2002, we had 100,000,000
shares of common stock and 10,000,000 shares of preferred stock authorized, of
21
which 1,000,000 shares were designated Series A Preferred Stock and 1,000,000
shares were designated Series B Preferred Stock. As of September 6, 2002, there
were issued and outstanding, 67,930,291 shares of common stock, 875,000 shares
of Series A Preferred Stock and 250,000 shares of Series B Preferred Stock.
Authorized but unissued shares will be available for issuance, and we may issue
such shares in financings or otherwise. If we issue additional shares, the
ownership interest of holders of our common stock may also be diluted. Also, the
issued shares may have rights, preferences or privileges senior to those of our
common stock.
ACCOUNTING MATTERS. The reverse stock split will not affect the par
value of our common stock. As a result, as of the effective time of the reverse
stock split, the stated capital on our balance sheet attributable to our common
stock will be reduced proportionately, and the additional paid-in capital
account will be credited with the amount by which the stated capital is reduced.
The per share net income or loss and net book value of our common stock will be
restated because there will be fewer shares of our common stock outstanding.
POTENTIAL ANTI-TAKEOVER EFFECT. Although the increased proportion of
unissued authorized shares to issued shares could, under certain circumstances,
have an anti-takeover effect (for example, by permitting issuances that would
dilute the stock ownership of a person seeking to effect a change in the
composition of our board of directors or contemplating a tender offer or other
transaction for the combination of I/OMagic Corporation with another company),
the reverse stock split proposal is not being proposed in response to any effort
of which we are aware to accumulate our shares of common stock or obtain control
of I/OMagic Corporation, nor is it part of a plan by management to recommend a
series of similar amendments to our board of directors and stockholders. Other
than the reverse stock split proposal, our board of directors does not currently
contemplate recommending the adoption of any other amendments to our Articles of
Incorporation that could be construed to affect the ability of third parties to
take over or change the control of I/OMagic Corporation.
PROCEDURE FOR EFFECTING REVERSE STOCK SPLIT AND EXCHANGE OF STOCK CERTIFICATES
If the stockholders approve the proposal to authorize the board of
directors to implement the reverse stock split and the board of directors
decides to implement the reverse stock split on or prior to December 31, 2002,
we will file the Restated Articles with the Secretary of State of the State of
Nevada to amend our existing Articles of Incorporation. The reverse stock split
will become effective at the time specified in the Restated Articles, which is
referred to below as the "effective time." Beginning at the effective time, each
certificate representing Old Shares will be deemed for all corporate purposes to
evidence ownership of New Shares. The text of the Restated Articles to effect
the reverse stock split, if implemented by the board of directors, would be in
substantially the form attached hereto as APPENDIX B. The text of the form of
Restated Articles attached to this proxy statement includes certain revisions to
our current articles of incorporation which are described in Proposal 4. In
addition, the text of the form of Restated Articles attached to this proxy
statement is subject to modification to include such changes as may be required
by the Office of the Secretary of State of the State of Nevada and as the board
of directors deems necessary and advisable to effect the reverse stock split,
including the insertion of the effective time determined by the board of
directors.
As soon as practicable after the effective time, stockholders will be
notified that the reverse stock split has been effected. We expect that our
transfer agent, Transfer Online, will act as exchange agent for purposes of
implementing the exchange of stock certificates. Holders of Old Shares will be
asked to surrender to the exchange agent certificates representing Old Shares in
exchange for certificates representing New Shares in accordance with the
procedures to be set forth in the letter of transmittal we send to our
stockholders. No new certificates will be issued to a stockholder until such
22
stockholder has surrendered such stockholder's outstanding certificate(s),
together with the properly completed and executed letter of transmittal, to the
exchange agent. Any Old Shares submitted for transfer, whether pursuant to a
sale, other disposition or otherwise, will automatically be exchanged for New
Shares. STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT
SUBMIT ANY CERTIFICATE(S) UNTIL REQUESTED TO DO SO.
NO DISSENTERS' RIGHTS
Under the Nevada Revised Statutes, our stockholders are not entitled to
dissenters' rights with respect to the reverse stock split, and the Company will
not independently provide stockholders with any such right.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
The following is a summary of certain material federal income tax
consequences of the reverse stock split, does not purport to be a complete
discussion of all of the possible federal income tax consequences of the reverse
stock split and is included for general information only. Further, it does not
address any state, local or foreign income or other tax consequences. Also, it
does not address the tax consequences to holders that are subject to special tax
rules, such as banks, insurance companies, regulated investment companies,
personal holding companies, foreign entities, nonresident alien individuals,
broker-dealers and tax-exempt entities. The discussion is based on the
provisions of the United States federal income tax law as of the date hereof,
which is subject to change retroactively as well as prospectively. This summary
also assumes that the Old Shares were, and the New Shares will be, held as a
"capital asset," as defined in the Internal Revenue Code of 1986, as amended
(i.e., generally, property held for investment). The tax treatment of a
stockholder may vary depending upon the particular facts and circumstances of
such stockholder. Each stockholder is urged to consult with such stockholder's
own tax advisor with respect to the tax consequences of the reverse stock split.
No gain or loss should be recognized by a stockholder upon such
stockholder's exchange of Old Shares for New Shares pursuant to the reverse
stock split. The aggregate tax basis of the New Shares received in the reverse
stock split (including any fraction of a New Share deemed to have been received)
will be the same as the stockholder's aggregate tax basis in the Old Shares
exchanged therefor. The stockholder's holding period for the New Shares will
include the period during which the stockholder held the Old Shares surrendered
in the reverse stock split.
Our view regarding the tax consequences of the reverse stock split is
not binding on the Internal Revenue Service or the courts. ACCORDINGLY, EACH
STOCKHOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR WITH RESPECT TO ALL
OF THE POTENTIAL TAX CONSEQUENCES TO HIM OR HER OF THE REVERSE STOCK SPLIT.
REQUIRED VOTE OF STOCKHOLDERS
The affirmative vote of a majority of the shares outstanding on the
Record Date will be required to approve this proposal. If the stockholders do
not approve Proposal 3 or if, after stockholder approval of Proposal 3, the
board of directors declines to implement the reverse stock split, the language
necessary to effect the reverse stock split will be subsequently deleted from
the Article FOURTH of the Restated Articles, and the Restated Articles will be
filed with the Secretary of State of the State of Nevada to effect the various
other changes discussed below in Proposal 4.
23
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL
TO GRANT AUTHORITY TO OUR BOARD OF DIRECTORS TO AMEND AND RESTATE THE ARTICLES
OF INCORPORATION TO EFFECT A ONE-FOR-FIFTEEN REVERSE STOCK SPLIT OF OUR COMMON
STOCK AT ANY TIME PRIOR TO DECEMBER 31, 2002.
PROPOSAL 4
APPROVAL OF AMENDED AND RESTATED ARTICLES OF INCORPORATION
TO MODERNIZE AND CONFORM TO CURRENT NEVADA LAW
GENERAL
Our board of directors has approved the Restated Articles substantially
in the form attached hereto as APPENDIX B and has recommended that our
stockholders consider and adopt the Restated Articles at the 2002 Annual
Meeting. Our current Articles of Incorporation initially were adopted in January
1996. Since that time, the Articles of Incorporation, as well as applicable
corporate law provisions, have been amended numerous times.
PURPOSE
Proposal 4 is primarily intended to modernize the Articles of
Incorporation generally by taking advantage of the most recent provisions of the
Nevada Revised Statutes and by deleting provisions of the Articles of
Incorporation that are unnecessary, ineffective or otherwise inappropriate as a
result of revisions to applicable law. If Proposal 4 is approved, the Restated
Articles will become effective upon filing of the Restated Articles with the
Secretary of State of the State of Nevada. In addition, if Proposal 3 is
approved and the board of directors elects to effectuate the reverse stock
split, the Restated Articles (including the language relating to the reverse
stock split) will become effective upon filing with the Secretary of State of
the State of Nevada regardless of whether Proposal 4 is approved.
From time to time, we are required to deliver copies of our Articles of
Incorporation to governmental and private entities in connection with our
business activities. However, the Articles of Incorporation are comprised of
five separate documents (collectively, the "Current Articles"). By deleting
unnecessary provisions, the proposed Restated Articles will update the Current
Articles to be consistent with current Nevada law as well as eliminate the
number of separate documents that are now required.
PRINCIPAL EFFECTS OF THE RESTATED ARTICLES
As noted above, the Nevada Revised Statutes has been revised in certain
respects since our Articles of Incorporation were filed in 1996. As a result of
these revisions, many of the provisions of the Current Articles are unnecessary
or otherwise inappropriate under current law. For example, the Current Articles
have a broad purpose statement which states that we may engage in any lawful act
or activity, despite the provision in the Nevada Revised Statutes that subject
to any limitations contained in a corporation's articles of incorporation, every
corporation generally has broad powers to, among other things, carry on any
lawful business necessary or incidental to the attainment of the objectives of
the corporation, whether or not the business is similar in nature to the
objectives set forth in its articles. Accordingly, the purpose clause is no
longer necessary. The proposed Restated Articles incorporate a number of these
types of changes, including, among others, the following articles:
24
o FIRST: Name. This provision, which relates to the name of the
corporation, has been retained.
o SECOND: Registered Office and Agent. This provision is not
required by the Nevada Revised Statutes to be included in the
Restated Articles and has been deleted.
o THIRD: Purpose and Business. As discussed above, this
provision is not required by the Nevada Revised Statutes and
has been deleted.
o FOURTH: Capital Stock (New Article SECOND). This provision has
been revised to incorporate the terms of the various
certificate of amendments and certificate of designations in
order to combine the separate documents which comprise our
Current Articles into the Restated Articles. Article SECOND of
the Restated Articles will consolidate the terms of the
following documents: (i) Restated Articles of Incorporation
dated January 10, 1996; (ii) Amended and Restated Certificate
of Designation of Series A Cumulative Preferred Stock dated
December 29, 2000; (iii) Certificate of Amendment dated
January 12, 2001; and (iv) Certificate of Designation of
Series B Preferred Stock dated January 12, 2001. In addition,
this provision has been revised to include the language
necessary to effect the reverse stock split discussed in
Proposal 3. If the stockholders do not approve Proposal 3 or
if, after stockholder approval of Proposal 3, the board of
directors declines to implement the reverse stock split, the
language necessary to effect the reverse stock split will be
subsequently deleted from this provision and the Restated
Articles will be filed with the Secretary of State of the
State of Nevada to effect the various other changes discussed
in Proposal 4.
o FIFTH: Adoption of Bylaws. This provision is duplicative of
provisions in the Nevada Revised Statutes and thus has been
deleted.
o SIXTH: Stockholder Amendment of Bylaws. This provision has
been deleted to be consistent with the current Nevada Revised
Statutes.
o SEVENTH: Board of Directors. This provision is duplicative of
provisions in the Nevada Revised Statutes and thus has been
deleted.
o EIGHTH: Term of Board of Directors. This provision has been
deleted to be consistent with the current Nevada Revised
Statutes, which requires directors of a non-classified board
to be elected at the annual meeting of stockholders.
o NINTH: Vacancies on Board of Directors. The Nevada Revised
Statutes permits a number of provisions relating to matters
affecting directors to be in either the articles of
incorporation or the bylaws of a corporation. Because the
matters contained in this provision of the Current Articles
are duplicative of a provision in our Amended and Restated
Bylaws, this provision has been deleted.
o TENTH: Removal of Directors. This provision has been deleted
to be consistent with the current Nevada Revised Statutes.
o ELEVENTH: Stockholder Action (New Article FOURTH). This
provision, which eliminates stockholder action by written
consent unless permitted by a majority of the board of
directors, has been retained.
25
o TWELFTH: Special Stockholder Meeting. The Nevada Revised
Statutes permits a number of provisions relating to matters
affecting stockholders to be in either the articles of
incorporation or the bylaws of a corporation. Because the
matters contained in this provision of the Current Articles
are governed by a provision in our Amended and Restated
Bylaws, this provision has been deleted.
o THIRTEENTH: Location of Stockholder Meetings. The Nevada
Revised Statutes permits a number of provisions relating to
matters affecting stockholders to be in either the articles of
incorporation or the bylaws of a corporation. Because the
matters contained in this provision of the Current Articles
are governed by a provision in our Amended and Restated
Bylaws, this provision has been deleted.
o FOURTEENTH: Private Property of Stockholders. This provision
is duplicative of provisions in the Nevada Revised Statutes
and thus has been deleted.
o FIFTEENTH: Stockholder Appraisal Rights in Business
Combinations. This provision has been deleted to be consistent
with the current Nevada Revised Statutes.
o SIXTEENTH: Other Amendments. This provision has been deleted
to be consistent with the current Nevada Revised Statutes.
o SEVENTEENTH: Term of Existence. This provision is not required
by the Nevada Revised Statutes and has been deleted.
o EIGHTEENTH: Liability of Directors (New Article SIXTH). The
Nevada Revised Statutes permits a Nevada corporation to
include in its articles of incorporation a provision that
limits or eliminates, with certain exceptions, a director's
personal liability for monetary damages resulting from a
breach of his or her fiduciary duty of care to a corporation.
Article SIXTH of the proposed Restated Articles revises
Article EIGHTEENTH of the Current Articles to eliminate, to
the maximum extent permitted by the Nevada Revised Statutes, a
director's liability to us and our stockholders for monetary
damages for breach of his or her fiduciary duty of care or
other duty as a director by reason of any act or omission
occurring after Article SIXTH becomes effective. Article SIXTH
does not, however, eliminate or limit a director's liability
for (i) any act or omission involving intentional misconduct,
fraud or a knowing violation of law, or (ii) the payment of
unlawful distributions to stockholders. Furthermore, it does
not limit liability for claims against a director arising out
of his or her role as an officer or in any other capacity, nor
does it affect the director's responsibilities under the
federal securities laws or any other law. Because our
directors may have a beneficial financial interest in this
proposal, they may be deemed to have a conflict of interest in
recommending it to the stockholders.
The board of directors believes that the diligence exercised
by directors arises primarily from their desire to act in our
company's best interests and not from fear of monetary damage
awards. The board of directors also believes, however, that
effective corporate governance is hindered by the threat of
personal liability for business judgments made in good faith
by directors and the threat of lawsuits seeking to establish
liability for good faith business judgments. Consequently, the
board of directors believes that the elimination of liability
provided by Article SIXTH will not affect the level of
scrutiny and care exercised by our directors, but will instead
serve our best interests by enhancing our ability to attract
and retain qualified non-employee directors. The measures
limiting the liability of directors are not being proposed in
response to any specific resignation, threat of resignation or
26
refusal to serve by any present or potential member of the
board of directors. We intend to continue to provide liability
insurance for our directors and officers, to the extent such
insurance is available to us on satisfactory terms, regardless
of whether the stockholders approve this proposal. Article
SIXTH will effectively eliminate a potential cause of action
against one of our directors for damages for an alleged
violation of the director's fiduciary duty to us. Management
is not aware of any presently pending or threatened lawsuits
to which Article SIXTH would apply if it were currently in
effect.
o NINETEENTH: Name and Address of Incorporator. This provision
is not required by the Nevada Revised Statutes to be included
in the Restated Articles and has been deleted.
In addition to the foregoing provisions, the Restated Articles include
the provisions listed below, which are intended to update the Current Articles
to be consistent with the current Nevada Revised Statutes.
o NON-ASSESSMENT OF CAPITAL STOCK (New Article THIRD). This
provision, which provides that no stock issued as fully paid
up shall ever be assessable or assessed, and the articles of
incorporation shall not be amended in this particular, has
been added. This provision prevents the board of directors
from levying and collecting assessments upon the capital stock
of the I/OMagic Corporation.
o INDEMNIFICATION OF DIRECTORS AND OFFICERS (New Article FIFTH).
Section 78.751 of the Nevada Revised Statutes provides that we
may include in our articles of incorporation, bylaws or
agreements, provisions expanding rights to indemnification
beyond that otherwise provided by the Nevada Revised Statutes.
The Nevada Revised Statutes provides a detailed statutory
framework covering indemnification of directors, officers or
agents of a corporation who have been or are threatened to be
made parties to any legal proceeding by reason of their
service to a corporation ("indemnified parties"). Under Nevada
law, indemnification must be made to indemnified parties who
have been successful "on the merits or otherwise" with respect
to the defense of any such proceeding, but Nevada law does not
require indemnification in any other circumstances. We may
not, however, indemnify persons who acted in a manner that
they did not believe in good faith to be in or not opposed to
our best interests or, with respect to any criminal
proceeding, that they had reasonable cause to believe was
unlawful. The Nevada Revised Statutes permits a corporation to
advance expenses incurred in defending such a proceeding if
the indemnified party undertakes to repay such sums in the
event it is later determined that he or she should not have
been indemnified.
The board of directors believes it is appropriate to provide
mandatory indemnification to its officers and directors in
response to the increasing hazard of unfounded litigation
directed against directors and officers and its related
expense and our potential liability, and in order to continue
to attract and retain qualified directors and officers in
light of these circumstances. Because the directors may have a
beneficial financial interest in recommending that the
stockholders adopt new Article FIFTH, they may be deemed to
have a conflict of interest in recommending this proposal to
the stockholders. At present, there is pending litigation
involving Mr. Shahbaz for which indemnification would be
permitted. In that regard, the board of directors has agreed
to indemnify Mr. Shahbaz in connection with this litigation in
a manner consistent with Section 78.751 of the Nevada Revised
Statutes and the indemnification agreement entered into
between Mr. Shahbaz and I/OMagic Corporation. Other than as
described in the preceding sentence, management is not aware
of any threatened litigation or proceeding that could result
in a claim for indemnification by any director or officer.
27
REQUIRED VOTE OF STOCKHOLDERS
The affirmative vote of a majority of the shares outstanding on the
Record Date will be required to approve this proposal.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL
TO AMEND AND RESTATE THE ARTICLES OF INCORPORATION TO MODERNIZE AND CONFORM TO
CURRENT NEVADA LAW.
28
PROPOSAL 5
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The board of directors has selected Singer Lewak Greenbaum & Goldstein
LLP as our independent auditors for the fiscal year ending December 31, 2002.
Singer Lewak Greenbaum & Goldstein LLP served as our independent auditors for
the fiscal year ending December 31, 2001. At the 2002 Annual Meeting, the
stockholders are being asked to ratify the appointment of Singer Lewak Greenbaum
& Goldstein LLP as our independent auditors for the fiscal year ending December
31, 2002. A representative of Singer Lewak Greenbaum & Goldstein LLP is expected
to be present at the 2002 Annual Meeting and will have the opportunity to
respond to appropriate questions and to make a statement if he or she so
desires. In the event ratification by the stockholders of the appointment of
Singer Lewak Greenbaum & Goldstein LLP as our independent auditors is not
obtained, the board of directors will reconsider such appointment.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" RATIFICATION
OF THE APPOINTMENT OF SINGER LEWAK GREENBAUM & GOLDSTEIN LLP AS OUR INDEPENDENT
AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2002.
29
STOCKHOLDER PROPOSALS
Stockholders of I/OMagic Corporation may submit proposals for
consideration at future stockholder meetings, including director nominations.
Proposals of our stockholders, including director nominations, that are intended
to be presented by such stockholders at our next annual meeting of stockholders
and that such stockholders desire to have included in our proxy statement
relating to such meeting must be received by us no later than , 2003 in order to
be considered for possible inclusion in our proxy statement and form of proxy
relating to that meeting.
If a stockholder wishes to present a proposal, including a director
nomination, at our 2003 annual meeting and the proposal is not intended to be
included in our proxy statement relating to that meeting, the stockholder must
give advance notice in writing to the Secretary of I/OMagic Corporation prior to
the deadline for such meeting determined in accordance with our Amended and
Restated Bylaws (the "Bylaw Notice Deadline"). The Bylaw Notice Deadline with
respect to the 2003 annual meeting is , 2003. If a stockholder gives notice of a
proposal outside of the Bylaw Notice Deadline, the stockholder will not be
permitted to present the proposal to the stockholders for a vote at the meeting
according to our bylaws.
Any proposals submitted by stockholders must comply with the
requirements for stockholder proposals set forth in our Amended and Restated
Bylaws. A copy of the full text of the applicable bylaw provisions may be
obtained by writing to our Secretary. All notices of proposals by stockholders,
whether or not included our proxy materials, should be sent to I/OMagic
Corporation, 1300 East Wakeham Avenue, Santa Ana, California 92705, Attention:
Secretary.
We have not been notified by any stockholder of his intent to present a
stockholder proposal from the floor at the 2002 Annual Meeting. Accordingly, no
stockholder motions from the floor will be considered at the meeting. The
enclosed proxy card grants the proxy holders discretionary authority to vote on
any matter properly brought before the 2002 Annual Meeting.
ANNUAL REPORT
A copy of Amendment No. 1 to our annual report on Form 10-K for the
year ended December 31, 2001, as filed with the Securities and Exchange
Commission, is available without charge by writing to: I/OMagic Corporation,
1300 East Wakeham Avenue, Santa Ana, California 92705, Attention: Chief
Financial Officer, and via the Securities and Exchange Commission's website at
WWW.SEC.GOV.
ALL STOCKHOLDERS ARE URGED TO COMPLETE, SIGN AND RETURN PROMPTLY THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE.
30
APPENDIX A
I/OMAGIC CORPORATION
2002 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of this 2002 Stock Option Plan (the
"Plan") of I/OMagic Corporation, a Nevada corporation (the "Company"), is to
provide the Company with a means of attracting and retaining the services of
highly motivated and qualified directors and key personnel. The Plan is intended
to advance the interests of the Company by affording to directors and key
employees, upon whose skill, judgment, initiative and efforts the Company is
largely dependent for the successful conduct of its business, an opportunity for
investment in the Company and the incentives inherent in stock ownership in the
Company. In addition, the Plan contemplates the opportunity for investment in
the Company by consultants that do business with the Company. For purposes of
this Plan, the term Company shall include subsidiaries, if any, of the Company.
2. LEGAL COMPLIANCE. It is the intent of the Plan that all options
granted under it ("Options") shall be either "Incentive Stock Options" ("ISOs"),
as such term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended ("Code"), or non-qualified stock options ("NQOs"); provided, however,
that ISOs shall be granted only to employees of the Company. An Option shall be
identified as an ISO or an NQO in writing in the document or documents
evidencing the grant of the Option. All Options that are not so identified as
ISOs are intended to be NQOs. In addition, the Plan provides for the grant of
NQOs to consultants that do business with the Company. It is the further intent
of the Plan that it conform in all respects with the requirements of Rule 16b-3
of the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended ("Rule 16b-3"). To the extent that any aspect of the Plan or
its administration shall at any time be viewed as inconsistent with the
requirements of Rule 16b-3 or, in connection with ISOs, the Code, such aspect
shall be deemed to be modified, deleted or otherwise changed as necessary to
ensure continued compliance with such provisions.
3. ADMINISTRATION OF THE PLAN.
3.1 PLAN COMMITTEE. The Plan shall be administered by a
committee ("Committee"). The members of the Committee shall be appointed from
time to time by the Board of Directors of the Company ("Board") and shall
consist of not less than two nor more than five persons. Such persons shall be
directors of the Company. Notwithstanding the foregoing, the Board may act as
the Committee at any time or from time to time.
3.2 GRANTS OF OPTIONS BY THE COMMITTEE. In accordance with the
provisions of the Plan, the Committee, by resolution, shall select those
eligible persons to whom Options shall be granted ("Optionees"); shall determine
the time or times at which each Option shall be granted, whether an Option is an
ISO or an NQO and the number of shares to be subject to each Option; and shall
fix the time and manner in which the Option may be exercised, the Option
exercise price, and the Option period. The Committee shall determine the form of
option agreement to evidence the foregoing terms and conditions of each Option,
which need not be identical, in the form provided for in SECTION 7. Such option
agreement may include such other provisions as the Committee may deem necessary
or desirable consistent with the Plan, the Code and Rule 16b-3.
3.3 COMMITTEE PROCEDURES. The Committee from time to time may
adopt such rules and regulations for carrying out the purposes of the Plan as it
may deem proper and in the best interests of the Company. The Committee shall
keep minutes of its meetings and records of its actions. A majority of the
members of the Committee shall constitute a quorum for the transaction of any
A-1
business by the Committee. The Committee may act at any time by an affirmative
vote of a majority of those members voting. Such vote may be taken at a meeting
(which may be conducted in person or by any telecommunication medium) or by
unanimous written consent of Committee members without a meeting.
3.4 FINALITY OF COMMITTEE ACTION. The Committee shall resolve
all questions arising under the Plan and option agreements entered into pursuant
to the Plan. Each determination, interpretation, or other action made or taken
by the Committee shall be final and conclusive and binding on all persons,
including, without limitation, the Company, its stockholders, the Committee and
each of the members of the Committee, and the directors, officers and employees
of the Company, including Optionees and their respective successors in interest.
3.5 NON-LIABILITY OF COMMITTEE MEMBERS. No Committee member
shall be liable for any action or determination made by him or her in good faith
with respect to the Plan or any Option granted under it.
4. BOARD POWER TO AMEND, SUSPEND, OR TERMINATE THE PLAN. The Board may,
from time to time, make such changes in or additions to the Plan as it may deem
proper and in the best interests of the Company and its stockholders. The Board
may also suspend or terminate the Plan at any time, without notice, and in its
sole discretion. Notwithstanding the foregoing, no such change, addition,
suspension, or termination by the Board shall (i) materially impair any option
previously granted under the Plan without the express written consent of the
optionee; or (ii) increase the number of shares subject to the Plan, materially
increase the benefits accruing to optionees under the Plan, materially modify
the requirements as to eligibility to participate in the Plan or alter the
method of determining the option exercise price described in SECTION 8, without
stockholder approval.
5. SHARES SUBJECT TO THE PLAN. For purposes of the Plan, the Committee
is authorized to grant Options for up to 2,000,000 shares of the Company's
common stock ("Common Stock"), or the number and kind of shares of stock or
other securities which, in accordance with SECTION 13, shall be substituted for
such shares of Common Stock or to which such shares shall be adjusted. The
Committee is authorized to grant Options under the Plan with respect to such
shares. Any or all unsold shares subject to an Option which for any reason
expires or otherwise terminates (excluding shares returned to the Company in
payment of the exercise price for additional shares) may again be made subject
to grant under the Plan.
6. OPTIONEES. Options shall be granted only to officers, directors or
key employees of the Company or consultants that do business with the Company
designated by the Committee from time to time as Optionees. Any Optionee may
hold more than one option to purchase Common Stock, whether such option is an
Option held pursuant to the Plan or otherwise. An Optionee who is an employee of
the Company ("Employee Optionee") and who holds an Option must remain a
continuous full or part-time employee of the Company from the time of grant of
the Option to him until the time of its exercise, except as provided in SECTION
10.3.
7. GRANTS OF OPTIONS. The Committee shall have the sole discretion to
grant Options under the Plan and to determine whether any Option shall be an ISO
or an NQO. The terms and conditions of Options granted under the Plan may differ
from one another as the Committee, in its absolute discretion, shall determine
as long as all Options granted under the Plan satisfy the requirements of the
Plan. Upon determination by the Committee that an Option is to be granted to an
Optionee, a written option agreement evidencing such Option shall be given to
the Optionee, specifying the number of shares subject to the Option, the Option
exercise price, whether the Option is an ISO or an NQO, and the other individual
terms and conditions of such Option. Such option agreement may incorporate
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generally applicable provisions from the Plan, a copy of which shall be provided
to all Optionees at the time of their initial grants under the Plan. The Option
shall be deemed granted as of the date specified in the grant resolution of the
Committee, and the option agreement shall be dated as of the date specified in
such resolution. Notwithstanding the foregoing, unless the Committee consists
solely of non-employee directors, any Option granted to an executive officer,
director or 10% beneficial owner for purposes of Section 16 of the Securities
Exchange Act of 1934, as amended ("Section 16 of the 1934 Act"), shall either be
(a) conditioned upon the Optionee's agreement not to sell the shares of Common
Stock underlying the Option for at least six months after the date of grant or
(b) approved by the entire Board or by the stockholders of the Company.
8. OPTION EXERCISE PRICE. The price per share to be paid by the
Optionee at the time an ISO is exercised shall not be less than 100% of the Fair
Market Value (as hereinafter defined) of one share of the optioned Common Stock
on the date as of which the Option is granted. No ISO may be granted under the
Plan to any person who, at the time of such grant, owns (within the meaning of
Section 424(d) of the Code) stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or of any parent thereof,
unless the exercise price of such ISO is at least equal to 110% of Fair Market
Value on the date of grant. The price per share to be paid by the Optionee at
the time an NQO is exercised shall not be less than 85% of the Fair Market Value
on the date as of which the NQO is granted, as determined by the Committee. For
purposes of the Plan, the "Fair Market Value" of a share of the Company's Common
Stock as of a given date shall be:
8.1 If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation The Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, or if
the Common Stock is traded on the OTC Bulletin Board(R) or its successor, the
Fair Market Value shall be the closing sale price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange, system or board on
the day immediately preceding the given date, as report in The Wall Street
Journal or such other source as the Committee deems reliable;
8.2 If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the day immediately preceding the given date, as
report in The Wall Street Journal or such other source as the Committee deems
reliable; or
8.3 In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the Committee.
In addition, with respect to any ISO, the Fair Market Value on any given date
shall be determined in a manner consistent with any regulations issued by the
Secretary of the Treasury for the purpose of determining fair market value of
securities subject to an ISO plan under the Code.
9. CEILING OF ISO GRANTS. The aggregate Fair Market Value (determined
at the time any ISO is granted) of the Common Stock with respect to which an
Optionee's ISOs, together with incentive stock options granted under any other
plan of the Company and any parent, are exercisable for the first time by such
Optionee during any calendar year shall not exceed $100,000. If an Optionee
holds such incentive stock options that become first exercisable (including as a
result of acceleration of exercisability under the Plan) in any one year for
shares having a Fair Market Value at the date of grant in excess of $100,000,
then the most recently granted of such ISOs, to the extent that they are
exercisable for shares having an aggregate Fair Market Value in excess of such
limit, shall be deemed to be NQOs.
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10. DURATION, EXERCISABILITY, AND TERMINATION OF OPTIONS.
10.1 OPTION PERIOD. The option period shall be determined by
the Committee with respect to each Option granted. In no event, however, may the
option period exceed ten years from the date on which the Option is granted, or
five years in the case of a grant of an ISO to an Optionee who is a 10%
stockholder at the date as of which the Option is granted as described in
SECTION 8.
10.2 EXERCISABILITY OF OPTIONS. Each Option shall be
exercisable in whole or in consecutive installments, cumulative or otherwise,
during its term as determined in the discretion of the Committee; provided,
however, that each Option granted to an Optionee who is not an officer, director
or consultant of the Company or a Company affiliate shall provide for the right
to exercise at the rate of at least 20% per year over five years from the date
the Option is granted, subject to reasonable conditions such as continued
employment.
10.3 TERMINATION OF OPTIONS DUE TO TERMINATION OF EMPLOYMENT,
DISABILITY, OR DEATH OF OPTIONEE; TERMINATION FOR "CAUSE," OR RESIGNATION IN
VIOLATION OF AN EMPLOYMENT AGREEMENT. All Options granted under the Plan to any
Employee Optionee shall terminate and may no longer be exercised if the Employee
Optionee ceases, at any time during the period between the grant of the Option
and its exercise, to be an employee of the Company; provided, however, that the
Committee may alter the termination date of the Option if the Optionee transfers
to an affiliate of the Company. Notwithstanding the foregoing, (i) if the
Employee Optionee's employment with the Company shall have terminated for any
reason (other than involuntary dismissal for "cause" or voluntary resignation in
violation of any agreement to remain in the employ of the Company, including,
without limitation, any such agreement pursuant to SECTION 14), he may, at any
time before the expiration of three months after such termination or before
expiration of the Option, whichever shall first occur, exercise the Option (to
the extent that the Option was exercisable by him on the date of the termination
of his employment); (ii) if the Employee Optionee's employment shall have
terminated due to disability (as defined in Section 22(e)(3) of the Code and
subject to such proof of disability as the Committee may require), such Option
may be exercised by the Employee Optionee (or by his guardian(s), or
conservator(s), or other legal representative(s)) before the expiration of
twelve months after such termination or before expiration of the Option,
whichever shall first occur (to the extent that the Option was exercisable by
him on the date of the termination of his employment); (iii) in the event of the
death of the Employee Optionee, an Option exercisable by him at the date of his
death shall be exercisable by his legal representative(s), legatee(s), or
heir(s), or by his beneficiary or beneficiaries so designated by him, as the
case may be, within twelve (12) months after his death or before the expiration
of the Option, whichever shall first occur (to the extent that the Option was
exercisable by him on the date of his death); and (iv) if the Employee
Optionee's employment is terminated for "cause" or in violation of any agreement
to remain in the employ of the Company, including, without limitation, any such
agreement pursuant to SECTION 14, his Option shall terminate immediately upon
termination of employment, and such Option shall be deemed to have been
forfeited by the Optionee. For purposes of the Plan, "cause" may include,
without limitation, any illegal or improper conduct (1) which injures or impairs
the reputation, goodwill, or business of the Company; or (2) which involves the
misappropriation of funds of the Company, or the misuse of data, information, or
documents acquired in connection with employment by the Company that results in
material harm to the Company. A termination for cause may also include any
resignation in anticipation of discharge for cause or resignation accepted by
the Company in lieu of a formal discharge for cause.
11. MANNER OF OPTION EXERCISE; RIGHTS AND OBLIGATIONS OF OPTIONEES.
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11.1 WRITTEN NOTICE OF EXERCISE. An Optionee may elect to
exercise an Option in whole or in part, from time to time, subject to the terms
and conditions contained in the Plan and in the agreement evidencing such
Option, by giving written notice of exercise to the Company at its principal
executive office.
11.2 CASH PAYMENT FOR OPTIONED SHARES. If an Option is
exercised for cash, such notice shall be accompanied by a cashier's or personal
check, or money order, made payable to the Company for the full exercise price
of the shares purchased.
11.3 STOCK SWAP FEATURE. At the time of the Option exercise,
and subject to the discretion of the Committee to accept payment in cash only,
the Optionee may determine whether the total purchase price of the shares to be
purchased shall be paid solely in cash or by transfer from the Optionee to the
Company of previously acquired shares of Common Stock, or by a combination
thereof. If the Optionee elects to pay the total purchase price in whole or in
part with previously acquired shares of Common Stock, the value of such shares
shall be equal to their Fair Market Value on the date of exercise, determined by
the Committee in the same manner used for determining Fair Market Value at the
time of grant for purposes of SECTION 8.
11.4 INVESTMENT REPRESENTATION FOR NON-REGISTERED SHARES AND
LEGALITY OF ISSUANCE. The receipt of shares of Common Stock upon the exercise of
an Option shall be conditioned upon the Optionee (or any other person who
exercises the Option on his or her behalf as permitted by SECTION 10.3)
providing to the Committee a written representation that, at the time of such
exercise, it is the intent of such person(s) to acquire the shares for
investment only and not with a view toward distribution. The certificate for
unregistered shares issued for investment shall be restricted by the Company as
to transfer unless the Company receives an opinion of counsel satisfactory to
the Company to the effect that such restriction is not necessary under then
pertaining law. The providing of such representation and such restrictions on
transfer shall not, however, be required upon any person's receipt of shares of
Common Stock under the Plan in the event that, at the time of grant of the
Option relating to such receipt or upon such receipt, whichever is the
appropriate measure under applicable federal or state securities laws, the
shares subject to the Option shall be (i) covered by an effective and current
registration statement under the Securities Act of 1933, as amended, and (ii)
either qualified or exempt from qualification under applicable state securities
laws. The Company shall, however, under no circumstances be required to sell or
issue any shares under the Plan if, in the opinion of the Committee, (i) the
issuance of such shares would constitute a violation by the Optionee or the
Company of any applicable law or regulation of any governmental authority, or
(ii) the consent or approval of any governmental body is necessary or desirable
as a condition of, or in connection with, the issuance of such shares.
11.5 STOCKHOLDER RIGHTS OF OPTIONEE. Upon exercise, the
Optionee (or any other person who exercises the Option on his behalf as
permitted by SECTION 10.3) shall be recorded on the books of the Company as the
owner of the shares, and the Company shall deliver to such record owner one or
more duly issued stock certificates evidencing such ownership. No person shall
have any rights as a stockholder with respect to any shares of Common Stock
covered by an Option granted pursuant to the Plan until such person shall have
become the holder of record of such shares. Except as provided in SECTION 13, no
adjustments shall be made for cash dividends or other distributions or other
rights as to which there is a record date preceding the date such person becomes
the holder of record of such shares.
11.6 HOLDING PERIODS FOR TAX PURPOSES. The Plan does not
provide that an Optionee must hold shares of Common Stock acquired under the
Plan for any minimum period of time. Optionees are urged to consult with their
own tax advisors with respect to the tax consequences to them of their
individual participation in the Plan.
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12. SUCCESSIVE GRANTS. Successive grants of Options may be made to any
Optionee under the Plan.
13. ADJUSTMENTS.
13.1 If the outstanding Common Stock shall be hereafter
increased or decreased, or changed into or exchanged for a different number or
kind of shares or other securities of the Company or of another corporation, by
reason of a recapitalization, reclassification, reorganization, merger,
consolidation, share exchange, or other business combination in which the
Company is the surviving parent corporation, stock split-up, combination of
shares, or dividend or other distribution payable in capital stock or rights to
acquire capital stock, appropriate adjustment shall be made by the Committee in
the number and kind of shares for which options may be granted under the Plan.
In addition, the Committee shall make appropriate adjustment in the number and
kind of shares as to which outstanding and unexercised options shall be
exercisable, to the end that the proportionate interest of the holder of the
option shall, to the extent practicable, be maintained as before the occurrence
of such event. Such adjustment in outstanding options shall be made without
change in the total price applicable to the unexercised portion of the option
but with a corresponding adjustment in the exercise price per share.
13.2 In the event of the dissolution or liquidation of the
Company, any outstanding and unexercised options shall terminate as of a future
date to be fixed by the Committee.
13.3 In the event of a Reorganization (as hereinafter
defined), then,
(i) If there is no plan or agreement with respect to
the Reorganization ("Reorganization Agreement"), or if the
Reorganization Agreement does not specifically provide for the
adjustment, change, conversion, or exchange of the outstanding
and unexercised options for cash or other property or
securities of another corporation, then any outstanding and
unexercised options shall terminate as of a future date to be
fixed by the Committee; or
(ii) If there is a Reorganization Agreement, and the
Reorganization Agreement specifically provides for the
adjustment, change, conversion, or exchange of the outstanding
and unexercised options for cash or other property or
securities of another corporation, then the Committee shall
adjust the shares under such outstanding and unexercised
options, and shall adjust the shares remaining under the Plan
which are then available for the issuance of options under the
Plan if the Reorganization Agreement makes specific provisions
therefor, in a manner not inconsistent with the provisions of
the Reorganization Agreement for the adjustment, change,
conversion, or exchange of such options and shares.
13.4 The term "Reorganization" as used in this SECTION 13
shall mean any reorganization, merger, consolidation, share exchange, or other
business combination pursuant to which the Company is not the surviving parent
corporation after the effective date of the Reorganization, or any sale or lease
of all or substantially all of the assets of the Company. Nothing herein shall
require the Company to adopt a Reorganization Agreement, or to make provision
for the adjustment, change, conversion, or exchange of any options, or the
shares subject thereto, in any Reorganization Agreement which it does adopt.
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13.5 The Committee shall provide to each optionee then holding
an outstanding and unexercised option not less than 30 calendar days' advanced
written notice of any date fixed by the Committee pursuant to this SECTION 13
and of the terms of any Reorganization Agreement providing for the adjustment,
change, conversion, or exchange of outstanding and unexercised options. Except
as the Committee may otherwise provide, each optionee shall have the right
during such period to exercise his option only to the extent that the option was
exercisable on the date such notice was provided to the optionee.
Any adjustment to any outstanding ISO pursuant to
this SECTION 13, if made by reason of a transaction described in Section 424(a)
of the Code, shall be made so as to conform to the requirements of that Section
and the regulations thereunder. If any other transaction described in Section
424(a) of the Code affects the Common Stock subject to any unexercised ISO
theretofore granted under the Plan (hereinafter for purposes of this SECTION 13
referred to as the "old option"), the Board of Directors of the Company or of
any surviving or acquiring corporation may take such action as it deems
appropriate, in conformity with the requirements of that Code Section and the
regulations thereunder, to substitute a new option for the old option, in order
to make the new option, as nearly as may be practicable, equivalent to the old
option, or to assume the old option.
13.6 No modification, extension, renewal, or other change in
any option granted under the Plan may be made, after the grant of such option,
without the optionee's consent, unless the same is permitted by the provisions
of the Plan and the option agreement. In the case of an ISO, optionees are
hereby advised that certain changes may disqualify the ISO from being considered
as such under Section 422 of the Code, or constitute a modification, extension,
or renewal of the ISO under Section 424(h) of the Code.
13.7 All adjustments and determinations under this SECTION 13
shall be made by the Committee in good faith in its sole discretion.
14. CONTINUED EMPLOYMENT. As determined in the sole discretion of the
Committee at the time of grant and if so stated in a writing signed by the
Company, each Option may have as a condition the requirement of an Employee
Optionee to remain in the employ of the Company, or of its affiliates, and to
render to it his or her exclusive service, at such compensation as may be
determined from time to time by it, for a period not to exceed the term of the
Option, except for earlier termination of employment by or with the express
written consent of the Company or on account of disability or death. The failure
of any Employee Optionee to abide by such agreement as to any Option under the
Plan may result in the termination of all of his or her then outstanding Options
granted pursuant to the Plan. Neither the creation of the Plan nor the granting
of Option(s) under it shall be deemed to create a right in an Employee Optionee
to continued employment with the Company, and each such Employee Optionee shall
be and shall remain subject to discharge by the Company as though the Plan had
never come into existence.
15. TAX WITHHOLDING. The exercise of any Option granted under the Plan
is subject to the condition that if at any time the Company shall determine, in
its discretion, that the satisfaction of withholding tax or other withholding
liabilities under any federal, state or local law is necessary or desirable as a
condition of, or in connection with, such exercise or a later lapsing of time or
restrictions on or disposition of the shares of Common Stock received upon such
exercise, then in such event, the exercise of the Option shall not be effective
unless such withholding shall have been effected or obtained in a manner
acceptable to the Company. When an Optionee is required to pay to the Company an
amount required to be withheld under applicable income tax laws in connection
with the exercise of any Option, the Optionee may, subject to the approval of
the Committee, which approval shall not have been disapproved at any time after
the election is made, satisfy the obligation, in whole or in part, by electing
to have the Company withhold shares of Common Stock having a value equal to the
amount required to be withheld. The value of the Common Stock withheld pursuant
to the election shall be determined by the Committee, in accordance with the
criteria set forth in SECTION 8, with reference to the date the amount of tax to
be withheld is determined. The Optionee shall pay to the Company in cash any
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amount required to be withheld that would otherwise result in the withholding of
a fractional share. The election by an Optionee who is an officer of the Company
within the meaning of Section 16 of the 1934 Act, to be effective, must meet all
of the requirements of Section 16 of the 1934 Act.
16. TERM OF PLAN.
16.1 EFFECTIVE DATE. Subject to stockholder approval, the Plan
was adopted by the Board effective as of September 3, 2002. The Board intends to
obtain stockholder approval for the Plan as soon as practicable.
16.2 TERMINATION DATE. Except as to options granted and
outstanding under the Plan prior to such time, the Plan shall terminate at
midnight on September 3, 2012, and no Option shall be granted after that time.
Options then outstanding may continue to be exercised in accordance with their
terms. The Plan may be suspended or terminated at any earlier time by the Board
within the limitations set forth in SECTION 4.
17. NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to amend, modify, or rescind any previously approved compensation
plans, programs or options entered into by the Company. This Plan shall be
construed to be in addition to and independent of any and all such other
arrangements. Neither the adoption of the Plan by the Board nor the submission
of the Plan to the stockholders of the Company for approval shall be construed
as creating any limitations on the power or authority of the Board to adopt,
with or without stockholder approval, such additional or other compensation
arrangements as the Board may from time to time deem desirable.
18. GOVERNING LAW. The Plan and all rights and obligations under it
shall be construed and enforced in accordance with the laws of the State of
California.
19. INFORMATION TO OPTIONEES. Optionees under the Plan who do not
otherwise have access to financial statements of the Company will receive the
Company's financial statements at least annually.
20. TRANSFERABILITY OF OPTIONS. Options granted under the Plan are
nontransferable other than by will, by the laws of descent and distribution, by
instrument to an inter vivos or testamentary trust in which the Options are to
be passed to beneficiaries upon the death of the trustor (settlor), or by gift
to immediate family. The term "immediate family" means any child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, and
also includes adoptive relationships.
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APPENDIX B
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
I/OMAGIC CORPORATION
To the Secretary of State
State of Nevada
Pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter
78, the undersigned officers of the corporation hereinafter named, which is a
corporation for profit organized under the laws of the State of Nevada, do
hereby certify that the following is the entire text of the Articles of
Incorporation of the corporation as heretofore amended and as hereby restated
and that the Board of Directors of the corporation at a meeting duly convened
and held on the 25th day of July 2002 adopted resolutions to amend and
restate the corporation's Articles of Incorporation as follows:
FIRST: The name of the corporation is I/OMagic Corporation (the "Company").
SECOND:
A.
AUTHORIZED SHARES
The total number of shares which the Company shall have authority to
issue is one hundred ten million (110,000,000) shares of capital stock, of which
one hundred million (100,000,000) shares shall be designated common stock, par
value of $0.001 per share, and ten million (10,000,000) shares shall be
designated preferred stock ("Other Stock"), par value of $0.001 per share.
Immediately upon the filing of these Amended and Restated Articles of
Incorporation, each fifteen (15) outstanding shares of the Company's common
stock will be combined, automatically and without further action, into one (1)
share of common stock, with any fractional shares resulting from such
combination being rounded up to the nearest whole share.
B.
SERIES A PREFERRED STOCK
1. AUTHORIZED AMOUNT
-----------------
The Company is authorized to issue 10,000,000 (Ten Million) shares of
preferred stock, $.001 par value, of which 1,000,000 (One Million) shares are
restated and designated as the Series A Preferred Stock (the "Preferred Stock"),
having the voting powers, preferences, relative, participating, optional and
other special rights and the qualifications, limitations and restrictions
thereof that are set forth below. Upon any issued shares of Preferred Stock
being outstanding for three years, the Company shall be obligated to redeem any
issued shares at the stated value of $8.00 per share (the "Stated Value"). The
Preferred Stock may not be sold, transferred or encumbered without the written
consent of the Company, unless and until it is converted into Common Stock.
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2. DIVIDEND RIGHTS
---------------
The holders of Preferred Stock shall be entitled to receive dividends
on an equal basis with the holders of the common stock of the Company. The
Company currently has no plans to declare or pay a dividend of any kind.
3. LIQUIDATION PREFERENCE
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of each share of Preferred
Stock outstanding shall be entitled to be paid out of the assets of the Company
available for distribution to shareholders prior to any distribution to any
class of shares, whether such assets are capital, surplus, or earnings, a
liquidation preference per share equal to the Stated Value of the Preferred
Stock plus accrued dividends if any. If upon liquidation, dissolution, or
winding up of the Company, the assets to be distributed to the holders of the
Preferred Stock shall be insufficient to permit payment to such shareholders of
the full preferential amounts aforesaid, then all of the assets of the
corporation available for distribution to holders of the Preferred Stock shall
be distributed pro rata, so that each holder receives that portion of the assets
available for distribution as the number of shares of Preferred Stock held by
such holder bears to the total number of shares of Preferred Stock then
outstanding.
(b) A consolidation or merger of the Company with or into any other
company or companies, or a sale, conveyance or disposition of all or
substantially all of the assets of the Company or the effectuation by the
Company of a transaction (including a merger or other reorganization) or series
of related transactions in which more than fifty percent of the voting power of
the corporation is disposed of, shall not be considered to be a liquidation,
dissolution or winding up within the meaning of this section 3, provided however
that each holder of Preferred Stock shall have the right to convert such
holder's shares of preferred stock immediately prior to the record date relating
to such transactions into shares of common stock in accordance with this
Description.
4. CONVERSION
----------
Each share of Preferred Stock may be converted by the holder thereof,
in whole or in part at any time or from time-to-time without the payment of any
additional consideration, into fully paid and non-assessable shares of Common
Stock of the Company, as calculated and subject to adjustment set forth below:
(a) The holder would provide the Company with a written Notice
of Conversion at the principal office of the Company via certified mail
(Attention to the president of the Company), return receipt requested, with an
original certificate evidencing the Preferred Stock. The Notice may provide for
the conversion of some or all of the Preferred Stock and shall be calibrated in
number of dollars.
(b) Upon receipt of such Notice of Conversion, the Company
shall calculate the "Weighted Average Trading Price" (as hereinafter defined)
during the 20 trading days prior to the date the Company received the Notice of
Exercise. The Weighted Average Trading Price shall equal; (a) the product of the
closing bid price of the Company's common stock on each trading day multiplied
by the number of such shares traded that day; each of these products shall be
added together for each of the 20 days; (b) this amount shall then be divided by
the aggregate number of such shares that traded during this 20 day period of
time. Provided, however, the Weighted Average Trading Price shall not be less
than $2.50 per share (the "Floor") nor greater than $7.00 per share (the
"Ceiling"). In the event the Company reclassifies, splits or otherwise
recapitalizes its common stock, the Floor and Ceiling shall be adjusted so that
the aggregate outstanding shares before and after such transaction shall have
the same aggregate value as the Floor and Ceiling before the transaction.
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(c) The Company shall then, as of the date it received the
Notice of Conversion issue to the Holder who has provided the Notice of
Conversion an amount of shares of common stock of the Company equal to the
dollar amount set forth in the Notice of Conversion divided by the Weighted
Average Trading Price. The Company shall promptly issue whatever remaining
non-converted shares of Preferred Stock at the Stated Value to such Holder.
At the time of such surrender, the person exercising such option to
convert shall be deemed to be the Holder of the shares of Common Stock issuable
upon such conversion, notwithstanding that the stock transfer books of the
Company may then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to such person.
The term "Common Stock" as used in this Paragraph 5 shall mean the
shares of the Common Stock of the Company, authorized at the date of the initial
issuance of the Preferred Stock or, in case of a reclassification or exchange of
such Common Stock, shares of the stock into or for which such Common Stock shall
be reclassified or exchanged and all provisions of this section 4 shall be
applied appropriately thereto and to any stock resulting from any subsequent
reclassification or exchange thereof. In case the Company shall declare a
dividend or make any other distribution with respect to any stock of I/O Magic
Corporation payable in Common Stock, rights or convertible Securities, as the
case may be, then such dividend or distribution shall be distributed to the
holders of the Preferred Stock, as if such shares of Preferred Stock had been
converted into Common Stock on the day prior to the record date for such
distribution.
5. FORCED CONVERSION
-----------------
The Company shall have the right to require all of the Holders of the
Preferred Stock to convert their shares of Preferred Stock, without payment of
any further consideration, into shares of Common Stock of the Company at the
Weighted Average Trading Price calculated utilizing the date the Conversion
Notice (defined as a written notification that it is the Company's intent to
convert the outstanding shares of Preferred Stock into Common Stock of the
Company) provided by the Company is received by the holder ("Forced Conversion
Date"). In the event of any reclassification, stock split or recapitalization by
the Company of its common stock, the minimum price at which the Company has a
right to provide a Forced Conversion Date shall not be adjusted. Such Notice
shall be sent to the registered office of the holder with the Company, certified
mail, return receipt requested. The Company shall have the right to provide the
Conversion Notice (a written notification that it is in the Company's intention
to convert the outstanding shares of Preferred Stock into Common Stock) only
during the five business days following the date on which the Company's common
stock closed at or above a bid price of $3.00 per share during 15 consecutive
trading days at anytime after the issuance of the Preferred Stock. Such
Conversion Notice may require the conversion of some or all of the Preferred
Stock. The applicable Floor and Ceiling shall be applied to a Forced Conversion.
From and after each Forced Conversion Date, all rights of the Holders
of the Preferred Stock designated for conversion as holders of Preferred Stock
shall cease, such shares shall not thereafter be transferred (except with the
consent of the Company) on the books of the Company, such shares shall not be
deemed to be outstanding for any purpose whatsoever and each Holder of the
Preferred Stock designated for conversion shall have the rights of holders of
Common Stock as to such shares of Common Stock into which the shares of
Preferred Stock are converted pursuant to this section 5, which rights shall
arise on and continue after each Forced Conversion Date.
B-3
Upon delivery and surrender of the certificates representing the
appropriate number of shares to be converted under this section 5, duly endorsed
or accompanied by proper instruments of transfer, the Company shall thereupon,
on each Forced Conversion Date, issue the appropriate number of shares of Common
Stock to the person whose name appears on such certificate or certificates as
the owner thereof, Each surrendered certificate shall be canceled, but in cases
in which less than all the shares represented by any such certificate share
converted, a new certificate shall be issued representing the unconverted
shares.
6. TRADING RESTRICTIONS
--------------------
In the event any shares of Preferred Stock are converted into common
stock, for any reason, such shares of Common Stock shall be subject to the
following trading restrictions:
(a) such shares may not be traded, transferred or encumbered
during the Rule 144 holding period for non-affiliates;
(b) during each 30 day period thereafter, such shares may be
traded at the rate of 10% aggregate common shares converted from the Preferred
Stock.
7. SENIOR EQUITY SECURITIES
------------------------
While any of the share of Preferred Stock are outstanding, the Company
shall not authorize or issue additional shares of Preferred Stock with respect
to any liquidation, dissolution or winding up rights superior or in parity with
the liquidation rights set forth herein or shares which may be otherwise
reclassified or converted into Preferred Stock or alter or change the
preferences, special rights or powers of Preferred Stock so as to adversely
affect the shares of Preferred Stock described herein, or create a separate
class or series of preferred stock or other equity securities (including,
without limitation, instruments convertible into or otherwise carrying rights to
acquire equity securities) having priority (including, without limitation, any
priority as to dividends) over or on a parity with the Preferred Stock, unless
there is given the affirmative consent (given in writing or at a meeting duly
called for that purpose) of the Holders of at least three-fourths of the
aggregate number of shares of Preferred Stock then outstanding, provided that
without approval of each holder of Preferred Stock, such amendment or change
cannot reduce the Stated Value.
8. VOTING
------
The Preferred Stock issued hereunder shall have no voting rights as a
class until the Preferred stock is Converted into Common Stock, or as set forth
herein and as required by law.
9. RESERVATION OF SHARES
---------------------
The Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock an amount of Common Stock
sufficient to provide for a conversion of all outstanding Preferred Stock
shares.
B-4
C.
SERIES B PREFERRED STOCK
1. AUTHORIZED AMOUNT
-----------------
The Company is authorized to issue 10,000,000 (Ten Million) shares of
preferred stock, $.001 par value of which 1,000,000 (One Million) shares are
designated as the Series B Preferred Stock (the "Preferred Stock"), having the
voting powers, preferences, relative, participating, optional and other special
rights and the qualifications, limitations and restrictions thereof that are set
forth below. Upon any issued shares of Preferred Stock being outstanding for two
years, the Company shall be obligated to redeem any issued shares at the stated
value of $8.00 per share (the "Stated Value"). The Preferred Stock may not be
sold, transferred or encumbered without the written consent of the Company,
unless and until it is converted into Common Stock.
2. DIVIDEND RIGHTS
---------------
The holders of Preferred Stock shall be entitled to receive dividends
on an equal basis with the holders of the common stock of the Company. The
Company currently has no plans to declare or pay a dividend of any kind.
3. LIQUIDATION PREFERENCE
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of each share of Preferred
Stock outstanding shall be entitled to be paid out of the assets of the Company
available for distribution to shareholders prior to any distribution to any
class of shares, whether such assets are capital, surplus, or earnings a
liquidation preference per share equal to the Stated Value of the Preferred
Stock plus accrued dividends if any. If upon liquidation, dissolution, or
winding up of the Company, the assets to be distributed to the holders of the
Preferred Stock shall be insufficient to permit payment to such shareholders of
the full preferential amounts aforesaid, than all of the assets of the
corporation available for distribution to holders of the Preferred stock shall
be distribute pro rata, so that each holder received that portion of the assets
available for distribution as the number of shares of Preferred Stock held by
such holder bears to the total number of shares of Preferred Stock then
outstanding.
(b) A consolidation or merger of the Company with or into any other
company or companies, or a sale, conveyance or disposition of all substantially
all of the assets of the Company of the effectuation by the Company of a
transaction (including a merger or other reorganization) or series of related
transactions in which more than fifty percent of the voting power of the
corporation is disposed of shall not be considered to be a liquidation,
dissolution or winding up within the meaning of this section 3, provided however
that each holder of Preferred Stock shall have the right to convert such
holder's shares of preferred stock immediately prior to the record date relating
to such transactions into shares of commons tock in accordance with this
Description.
4. CONVERSION
----------
Each share of Preferred Stock may be converted by the holder thereof,
in whole or in part at any time or from time-to-time without the payment of any
additional consideration, into fully paid and non-assessable shares of Common
Stock of the Company, as calculated and subject to adjustment set forth below:
(a) The holder would provide the Company with a written Notice of
Conversion at the principal office of the Company via certified mail (Attention
to the president of the Company), return receipt requested, with an original
certificate evidencing the Preferred Stock. The Notice may provide for the
conversion of some or all of the Preferred Stock and shall be calibrated in
number of dollars.
B-5
(b) Upon receipt of such Notice of Conversion, the Company shall
calculate the "Weighted Average Trading Price" (as hereinafter defined) during
the 20 trading days prior to the date the Company received the Notice of
Exercise. The Weighted Average Trading Price shall equal: (a) the product of the
closing bid price of the Company's common stock on each trading day multiplied
by the number of such shares traded that day; each of these products shall be
added together for each of the 20 days; (b) this amount shall then be divided by
the aggregate number of such shares that traded during this 20 day period of
time. Provided, however, the Weighted Average Trading Price shall not be less
than $2.50 per share (the "Floor") nor greater than $7.00 per share (the
"Ceiling"). In the event the Company reclassifies, splits or otherwise
recapitalized its common stock, the Floor and Ceiling shall be adjusted so that
the aggregate outstanding shares before and after such transaction shall have
the same aggregate value as the Floor and Ceiling before the transaction.
(c) The Company shall then, as of the date it received the Notice of
Conversion issue to the Holder who has provided the Notice of Conversion an
amount of shares of common stock of the Company equal to the dollar amount set
forth in the Notice of Conversion divided by the Weighted Average Trading Price.
The Company shall promptly issue whatever remaining non-converted shares of
Preferred Stock at the Stated Value to such Holder.
At the time of such surrender, the person exercising such option to
convert shall be deemed to be the Holder of the shares of Common Stock issuable
upon such conversion, notwithstanding that the stock transfer books of the
Company may then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to such person.
The term "Common Stock" as used in this Paragraph 5 shall mean the
shares of the Common Stock of the Company, authorized at the date of the initial
issuance of the Preferred Stock, or in case of reclassification or exchange of
such Common Stock, shares of the stock into or for which such Common Stock shall
be reclassified or exchanged and all provisions of this section 4 shall be
applied thereof. In case the Company shall declare a dividend or make any other
distribution with respect to any stock of I/OMagic Corporation payable in Common
Stock, rights or convertible Securities, as Stock as if such shares of Preferred
Stock had been converted into Common Stock on the day prior to the record date
for such distribution.
5. FORCED CONVERSION
-----------------
The Company shall have the right to require all the Holders of the
Preferred Stock to convert their shares of Preferred Stock, without payment of
any further consideration, into shares of Common Stock of the Company at the
Weighted Average Trading Price calculated utilizing the date the Conversion
Notice (defined as a written notification that it is the Company's intent to
convert the outstanding shares of Preferred Stock into Common stock of the
Company) provided by the Company is received by the holder ("Forced Conversion
Date"). In the event of any reclassification, stock split or recapitalization by
the Company of its common stock, the minimum price at which the Company has a
right to provide a Forced Conversion Date shall not be adjusted. Such Notice
shall be sent to the registered office of the holder with the Company, certified
mail, return receipt requested. The Company shall have the right to provide the
Conversion Notice only during the five business days following the date on which
the Company's common stock closed at or above a bid price of $3.00 per share
during 15 consecutive trading days at anytime after the issuance of the
Preferred Stock. Such Conversion Notice may require the conversion of some of
all of the Preferred Stock. The applicable Floor and Ceiling shall be applied to
a Forced Conversion.
B-6
From and after each Forced Conversion Date, all rights of the Holders
of the Preferred Stock designated for conversion as holders of Preferred Stock
shall cease, such shares shall not thereafter be transferred (except with the
consent of the Company) on the books of the Company, such shares shall not be
deemed to be outstanding for any purpose whatsoever and each Holder of the
Preferred Stock designated for conversion shall have the rights of holders of
Common Stock as to such shares of Common stock into which the shares of
Preferred Stock are converted pursuant to this section 5 which rights shall
arise on and continue after each Forced Conversion Date.
Upon delivery and surrender of the certificated representing the
appropriate number of shares to be converted under this section 5, duly endorsed
or accompanied by proper instruments of transfer, the Company shall thereupon,
on each Forced Conversion Date, issue the appropriate number of shares of Common
Stock to the person whose name appears on such certificate or certificates as
the owner thereof. Each surrendered certificate shall be canceled, but in cases
in which less than all the shares represented by any such certificate are
converted, a new certificate shall be issued representing the unconverted
shares.
6. TRADING RESTRICTIONS
--------------------
In the event any shares of Preferred Stock are converted into common
stock, for any reason, such shares of Common Stock shall be subject to the
following trading restrictions:
(a) such shares may not be traded, transferred or encumbered
during the Rule 144 holding period for non-affiliates;
(b) during each 30 day period thereafter, such shares may be
traded at the rate of 10% of the aggregate common shares converted from the
Preferred Stock.
7. SENIOR EQUITY SECURITIES
------------------------
While any of the shares of Preferred tock are outstanding, the Company
shall not authorize or issue additional shares of Preferred stock with respect
to any liquidation, dissolution or winding up rights superior or in parity with
the liquidation rights set forth herein or shares which may be otherwise
reclassified or converted into Preferred Stock, or alter or change the
preferences, special rights or powers of Preferred Stock so as to adversely
affect the shares of Preferred Stock described herein, or create a separate
class or series of preferred stock or other equity securities (including,
without limitation, instruments convertible into o otherwise carrying rights to
acquire equity securities) having priority (including, without limitation, any
priority as to dividends) over or on a parity with the Preferred Stock, unless
there is given the affirmative consent (given in writing or at a meeting duly
called for that purpose) of the Holders of at least three-fourths of the
aggregate number of shares of Preferred Stock than outstanding, provided that
without approval of each holder or Preferred Stock, such amendment or change
cannot reduce the Stated Value.
8. VOTING
------
The Preferred Stock issued hereunder shall have no voting rights as a
class until Preferred Stock is Converted into Common Stock, or as set forth
herein and as required by law.
9. RESERVATION OF SHARES
---------------------
The Company shall at all times reserve and keep available out of its
authorized unissued shares of Common Stock an amount of Common Stock sufficient
to provide for a conversion of all outstanding Preferred Stock shares.
B-7
D.
PREFERRED STOCK
Shares of Other Stock may be issued from time to time in one or more
classes or series as the Board of Directors, by resolution or resolutions, may
from time to time determine, each of said classes or series to be distinctively
designated. The voting powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations or restrictions
thereof, if any, of each such class or series may differ from those of any and
all other classes or series of Other Stock at any time outstanding, and the
Board of Directors is hereby expressly granted authority, subject to any
limitations contained in any class or series of Other Stock at any time
outstanding, to fix or alter, by resolution or resolutions, the designation,
number, voting powers, preferences and relative, participating, optional and
other special rights, and the qualifications, limitations and restrictions
thereof, of each such class or series, including, but without limiting the
generality of the foregoing, the following:
(i) The distinctive designation of, and the number of shares
of Other Stock that shall constitute, such class or series, which number (except
as otherwise provided by the Board of Directors in the resolution establishing
such class or series) may be increased or decreased (but not below the number of
shares of such class or series then outstanding) from time to time by like
action of the Board of Directors;
(ii) The rights in respect of dividends, if any, of such class
or series of Other Stock, the extent of the preference or relation, if any, of
such dividends to the dividends payable on any other class or classes or any
other series of the same or other class or classes of capital stock of the
Company, and whether such dividends shall be cumulative or noncumulative;
(iii) The right, if any, of the holders of such class or
series of Other Stock to convert the same into, or exchange the same for, shares
of any other class or classes or of any other series of the same or any other
class or classes of capital stock of the Company and the terms and conditions of
such conversion or exchange;
(iv) Whether or not shares of such class or series of Other
Stock shall be subject to redemption, and the redemption price or prices and the
time or times at which, and the terms and conditions on which, shares of such
class or series of Other Stock may be redeemed;
(v) The rights, if any, of the holders of such class or series
of Other Stock upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company or in the event of any merger or consolidation of or
sale of assets by the Company;
(vi) The terms of any sinking fund or redemption or purchase
account, if any, to be provided for shares of such class or series of Other
Stock;
(vii) The voting powers, if any, of the holders of any class
or series of Other Stock generally or with respect to any particular matter,
which may be less than, equal to or greater than one vote per share, and which
may, without limiting the generality of the foregoing, include the right, voting
as a class or series by itself or together with the holders of any other class
or classes or series of the same or other class or classes of Other Stock or all
classes or series of Other Stock, to elect one or more directors of the Company
(which, without limiting the generality of the foregoing, may include a
specified number or portion of the then-existing number of authorized
directorships of the Company, or a specified number or portion of directorships
in addition to the then-existing number of authorized directorships of the
Company) generally or under such specific circumstances and on such conditions,
as shall be provided in the resolution or resolutions of the Board of Directors
adopted pursuant hereto; and
B-8
(viii) Such other powers, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof, as the Board of Directors shall determine.
THIRD: The capital stock of the Company, after the amount of the subscription
price has been paid in money, property or services, as the directors shall
determine, shall not be subject to assessment to pay the debts of the Company,
nor for any other purpose, and no stock issued as fully paid up shall ever be
assessable or assessed, and the Articles of Incorporation shall not be amended
in this particular.
FOURTH: Any action required or permitted to be taken by the stockholders of the
Company must be effective at a duly called annual meeting or at a special
meeting of stockholders of the Company, unless such action requiring or
permitting stockholder approval is approved by a majority of the directors, in
which case such action may be authorized or taken by the written consent of the
holders of outstanding shares of voting stock having not less than the minimum
voting power that would be necessary to authorize or take such action at a
meeting of stockholders at which all shares entitled to vote thereon were
present and voted, provided all other requirements of applicable law and the
Articles of Incorporation have been satisfied.
FIFTH: The Company shall, to the fullest extent permitted by Nevada Revised
Statutes section 78.751, as the same may be amended, supplemented or replaced
from time to time, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person. Pursuant to said section 78.751,
the expenses of officers and directors incurred in defending a civil or criminal
action, suit or proceeding must be paid by the Company as they are incurred and
in advance of the final disposition of the action, suit or proceeding, upon
receipt of an undertaking by or on behalf of the director or officer to repay
the amount if it is ultimately determined by a court of competent jurisdiction
that he is not entitled to be indemnified by the Company.
SIXTH: A director of the Company shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the Nevada Revised Statutes as the same exist or may hereafter
be amended. Any amendment, modification or repeal of the foregoing sentence by
the stockholders of the Company shall not adversely affect any right or
protection of a director of the Company in respect of any act or omission
occurring prior to the time of such amendment, modification or repeal.
The number of shares of the Company outstanding and entitled to vote on
an amendment to and restatement of the Articles of Incorporation are 67,930,291
shares of common stock; the foregoing amendments and restatement have been
consented to and approved by a majority of the stockholders holding at least a
majority of the common stock outstanding and entitled to vote thereon.
B-9
IN WITNESS WHEREOF, I/OMagic Corporation has caused these Amended and
Restated Articles of Incorporation to be signed by its Chairman, President,
Chief Executive Officer, Chief Financial Officer and Secretary on this _____
day of __________ 2002.
---------------------------------------
Tony Shahbaz,
Chairman, President, Chief Executive
Officer, Chief Financial Officer and
Secretary
B-10
ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss.
COUNTY OF ORANGE )
On _______________, 2002, before me, ____________________, a Notary
Public, personally appeared Tony Shahbaz, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
-----------------------------------
Notary's Signature
I/OMAGIC CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 4, 2002
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned stockholder of I/OMagic Corporation (the "Company") hereby
appoints Tony Shahbaz, as the attorney, agent and proxy holder of the
undersigned, with the power to appoint his substitute, to represent and vote, as
designated below, all shares of common stock of the Company held of record by
the undersigned at the close of business on September 6, 2002, at the 2002
Annual Meeting of stockholders to be held at The Westin South Coast Plaza Hotel,
686 Anton Boulevard, Costa Mesa, California 92626 on November 4, 2002, at 9:00
a.m. local time, and at any and all adjournments thereof. Our board of directors
recommends a vote FOR each of the following proposals:
1. To elect six directors as follows:
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to
below, except as marked to vote for all nominees
the contrary below listed below
(INSTRUCTION: To withhold authority to vote for any individual
nominee, strike a line through the nominee's name in the list
provided below.)
Tony Shahbaz Daniel Hou Anthony Andrews
Steel Su Young -Hyun Shin Daniel Yao
IF THE UNDERSIGNED STOCKHOLDER WISHES TO CUMULATE VOTES IN THE ELECTION
OF DIRECTORS, THE UNDERSIGNED MUST APPEAR AND VOTE IN PERSON AT THE
ANNUAL MEETING. IF ANY STOCKHOLDER GIVES PROPER NOTICE AT THE ANNUAL
MEETING OF HIS OR HER INTENTION TO CUMULATE VOTES IN THE ELECTION OF
DIRECTORS, THE PROXY HOLDER WILL HAVE THE FULL DISCRETION AND AUTHORITY
TO VOTE CUMULATIVELY EXCEPT TO THE EXTENT DESCRIBED IN THE "VOTING AND
PROXY" SECTION OF THE PROXY STATEMENT.
2. To approve the adoption of a 2002 Stock Option Plan.
3. To approve a one-for-fifteen reverse split of the issued and
outstanding shares of the Company's common stock through which every 15
shares of common stock outstanding at the effective date of the Amended
and Restated Articles of Incorporation shall be converted into one
fully paid and nonassessable share of common stock, with any fractional
shares that result from such reverse stock split to be rounded up to
the nearest whole share of common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To approve the Amended and Restated Articles of Incorporation to amend,
restate and replace the Company's current Articles of Incorporation, to
effect various changes recommended by the board of directors in the
event Proposal 3 is not approved by the stockholders or if approved,
the board of directors determines in its discretion to decline to
implement the reverse stock split.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. To ratify the appointment of Singer Lewak Greenbaum & Goldstein LLP as
independent auditors of the Company for the fiscal year ending December
31, 2002.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. To vote in his discretion on such other business as may properly come
before the meeting, or any adjournment or adjournments thereof.
THIS PROXY CARD, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY CARD WILL BE
VOTED FOR THE PROPOSALS INDICATED AND IN ACCORDANCE WITH THE DISCRETION OF THE
PROXY HOLDER ON ANY OTHER BUSINESS. ALL OTHER PROXIES HERETOFORE GIVEN BY THE
UNDERSIGNED IN CONNECTION WITH THE ACTIONS PROPOSED ON THIS PROXY CARD ARE
HEREBY EXPRESSLY REVOKED. THIS PROXY CARD MAY BE REVOKED AT ANY TIME BEFORE IT
IS VOTED BY WRITTEN NOTICE TO THE SECRETARY OF THE COMPANY, BY ISSUANCE OF A
SUBSEQUENT PROXY CARD OR BY VOTING AT THE ANNUAL MEETING IN PERSON. HOWEVER, A
STOCKHOLDER WHO HOLDS SHARES THROUGH A BROKER OR OTHER NOMINEE MUST BRING A
LEGAL PROXY TO THE MEETING IF THAT STOCKHOLDER DESIRES TO VOTE AT THE MEETING.
Please mark, date, sign and return this proxy card promptly in the enclosed
envelope. When shares are held by joint tenants, both should sign. When signing
as attorney, executor, administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full corporate name by President
or other authorized officer. If a partnership, please sign in partnership name
by authorized person.
DATED:
---------------------------------------------
(Signature of Stockholder(s))
---------------------------------------------
(Print Name(s) Here)
[ ] PLEASE CHECK IF YOU ARE PLANNING
TO ATTEND THE ANNUAL MEETING
2