SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) OCTOBER 18, 2006
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I/OMAGIC CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA 000-27267 88-0290623
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
4 MARCONI, IRVINE, CALIFORNIA 92618
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949) 707-4800
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NOT APPLICABLE
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(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (SEE General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
(1) CHANGES TO EXISTING CREDIT FACILITY
On October 18, 2006, I/OMagic Corporation (the "Company") and GMAC
Commercial Finance LLC ("GMAC") entered into a Forbearance Agreement (the
"Agreement") that provides for the forbearance by GMAC from enforcing its rights
and remedies under that certain Loan and Security Agreement dated March 9, 2005
by and between the Company and GMAC (the "Loan Agreement") as a result of the
Company failing to satisfy a financial covenant contained in the Loan Agreement.
The Agreement is effective through January 15, 2007, at which time all
obligations to GMAC will be due and payable in full. GMAC's agreement to forbear
from enforcing its rights under the Loan Agreement and related documents is
subject to the following conditions: (i) there are no further events of default
under the Loan Agreement; (ii) the Company complies with all terms and
conditions of the Agreement and the Loan Agreement (as amended by the
Agreement); (iii) the Company maintains EBITDA of at least the following: (a)
$160,000 for the quarter ended September 30, 2006, (b) $150,000 for the four
months ended October 31, 2006, (c) $250,000 for the five months ended November
30, 2006, and (d) $360,000 for the six months ended December 31, 2006; (d) the
Company must hire a permanent Chief Financial Officer by no later than December
15, 2006; and (e) as soon as available, the Company must deliver to GMAC a copy
of it semi-annual audited financial statements. The Agreement also amends the
Loan Agreement to (1) delete the Company's inventory from the calculation of the
borrowing base, (2) reduce the maximum amount that may be borrowed under the
Loan Agreement from $10 million to $5 million, (3) increase the static reserve
from $1,000,000 to $1,350,000, and (4) increase the fixed charge coverage ratio
from 1.2:1.0 to 1.5:1.0. Under the Agreement, the Company also reaffirmed all
its obligations under the Loan Agreement and related documents and released GMAC
from any liability related to facts in existence as of the date of the
Agreement. The Agreement also provides that the Company must pay GMAC a
no-refundable forbearance fee of $25,000 and that from and after the date of the
Agreement, advances under the credit facility will bear interest at the
post-default rate of prime plus 2.75% per annum. On October 18, 2006, the prime
rate was 8.25%.
During the term of the GMAC credit facility, the Company's averaged
borrowings in the amount of approximately $3.9 million with such borrowings
being secured by substantially all of the Company's tangible assets which had a
book value of $20.5 million at June 20, 2006. In addition, GMAC has never used
the Company's inventory value in its calculation of the borrowing base.
(2) INITIAL TERMS AND CONDITIONS OF CREDIT FACILITY
On March 9, 2005, the Company entered into the Loan Agreement for an
asset-based line of credit with GMAC. The line of credit allowed the Company to
borrow up to a maximum of $10.0 million. The line of credit was to expire on
March 9, 2008 and is secured by substantially all of the Company's assets. The
line of credit allowed for a sublimit of $2.0 million for outstanding letters of
credit. Advances on the line of credit bore interest at the floating commercial
loan rate initially equal to the prime rate plus 0.75%.
These rates are applicable if the average amount available for
borrowing for the prior six month period is between $1.0 million and $3.5
million. If the average amount available for borrowing is less than $1.0
million, then the rates applicable to all amounts borrowed increase by 0.25%. If
the average amount available for borrowing is greater than $3.5 million, then
the rates applicable to all amounts borrowed decrease by 0.25%. For the unused
portion of the line, the Company is to pay on a monthly basis, an unused line
fee in the amount of 0.25% of the average unused portion of the line for the
preceding month.
The obligations of the Company under the Loan Agreement are secured by
substantially all of the Company's assets and guaranteed by the Company's
wholly-owned subsidiary, IOM Holdings, Inc. (the "Subsidiary"). The obligations
of the Company and the guarantee obligations of its Subsidiary are secured
pursuant to a Pledge and Security Agreement executed by the Company, a
Collateral Assignment Agreement executed by the Company, a Guaranty Agreement
executed by its Subsidiary, a General Security Agreement executed by its
Subsidiary, an Intellectual Property Security Agreement and Collateral
Assignment executed by the Company, and an Intellectual Property Security
Agreement and Collateral Assignment executed by its Subsidiary
ITEM 2.03 CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN
OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT.
The disclosures contained in Item 1.01 of this Current Report on Form
8-K are incorporated herein by this reference.
ITEM 8.01. OTHER EVENTS.
The Company is in the process of obtaining a replacement credit
facility. To that end, the Company is in negotiations with several financial
institutions and has obtained one proposal from a financial institution which
exceeds the current maximum borrowing capacity of $5.0 million under the GMAC
credit facility.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 20, 2006 I/OMAGIC CORPORATION
By: /S/ TONY SHAHBAZ
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Tony Shahbaz, Chief Executive Officer