WILLIAM BLAIR MEZZANINE CAPITAL FUND III LETTERHEAD]
Exhibit 99.3
[XXXXXXX XXXXX XXXXXXXXX CAPITAL FUND III LETTERHEAD]
November 23, 2009
ISI Security Group, Inc.
00000 Xxxxxxxx Xxxxx
Xxx Xxxxxxx, Xxxxx 00000
00000 Xxxxxxxx Xxxxx
Xxx Xxxxxxx, Xxxxx 00000
Gentlemen:
Xxxxxxx Xxxxx Xxxxxxxxx Capital Fund III, L.P., a Delaware limited partnership (the “Purchaser”),
is pleased to provide to ISI Security Group, Inc., a Delaware corporation (the “Company”) the
Purchaser’s commitment to enter into an amendment (the “Amendment”) to that certain Note and
Warrant Purchase Agreement dated as of October 22, 2004 between the Company and the Purchaser (as
amended, the “Purchase Agreement”) on terms and conditions set out below. Capitalized terms used
herein without definition shall have the meanings given to them in the Purchase Agreement.
The terms of the Amendment are as follows:
| A. | Prepayment in Full of Note A. On the Closing Date (defined below), Argyle
Security, Inc. (“Parent”) shall make a capital contribution to the Company in an amount
equal to $8 million from proceeds of the Bridge Notes (as defined below) and the Company
shall use $5.0 million of such funds and the New Note (as defined below), plus other funds,
to prepay in full the principal amount of, and accrued and unpaid Current Interest on, that
certain Amended and Restated Senior Subordinated Promissory Note A dated January 8, 2009
made by the Company payable to the order of the Purchaser. The Holder shall waive the
requirement of any prior notice from the Company in connection with such prepayment and
shall waive any prepayment premium or fee payable in connection with such prepayment,
including without limitation, the prepayment premium set out in Section 2(c) of
Note A. At the closing, all Deferred Interest on Note A shall be converted into a new note
(the “New Note”). The New Note shall bear interest, computed on the basis of actual days
elapsed in a 360-day year, at the rate of 20% per annum and such interest shall accrue and
be added to the principal balance of the New Note. The New Note shall convert in the
manner and on the terms set forth in clause (C) below. |
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| B. | Modification to Interest Rate on Note. The interest rate on the Note shall be
reduced, effective as of the Closing Date, from 11.58% to 10.00%. Additionally, the
requirement that the interest rate under the Note increase on October 1, 2010 from 11.58%
to 15.58% shall be eliminated. |
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| C. | Conversion of New Note Into Parent Common Shares. The New Note shall convert
automatically into shares of Parent’s common stock as of the closing of a Qualified Equity
Offering (as defined below) at an exchange rate per dollar of interest exchanged equal to
the price per share established for the Qualified Equity Offering; provided that, if the
Qualified Equity Offering does not occur by June 30, 2010, the New Note shall automatically
convert into shares of Parent’s common stock as of June 30, 2010 at an exchange rate equal
to the price per share equal to the volume weighted average sales price per share of the
Parent’s common stock from trades quoted on the OTC Bulletin Board for the ten (10) trading
days immediately prior to the Closing Date. For purposes hereof, “Qualified Equity
Offering” means a rights offering of shares of Parent’s common stock following the Closing
Date or any other private or public placement of shares of the Parent’s capital stock for
cash. |
| D. | Re-Set of Certain Financial Covenants. The financial covenants
under Sections 4.7(b) and (c) of the Purchase Agreement shall be re-set as follows
commencing with the quarter ending December 31, 2009: |
| i. | Senior Debt to EBITDA. |
| (a) | 2.20 to 1.00 for fiscal quarter ending
December 31, 2009, |
| (b) | 2.20 to 1.00 for fiscal quarter ending
March 31, 2010, |
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| (c) | 2.97 to 1.00 for fiscal quarter ending June
30, 2010,and |
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| (d) | 2.20 to 1.00 for each fiscal quarter ending
thereafter. |
| ii. | Total Debt to EBITDA. |
| (a) | 4.68 to 1.00 for fiscal quarter ending
December 31, 2009, |
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| (b) | 5.78 to 1.00 for fiscal quarter ending
March 31, 2010, |
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| (c) | 8.25 to 1.00 for fiscal quarter ending June
30, 2010, and |
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| (d) | 3.85 to 1.00 for each fiscal quarter
thereafter. |
| iii. | Fixed Charge Coverage. |
| (a) | 0.90 to 1.00 for fiscal quarter ending December 31, 2009, |
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| (a) | 0.90 to 1.00 for fiscal quarter ending
March 31, 2010, and |
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| (b) | 1.00 to 1.00 for each fiscal quarter
thereafter. |
For fiscal quarters commencing with the fiscal quarter ending December 31,
2009 through the fiscal quarter ending June 30, 2010, the Fixed Charge
Coverage Ratio shall be based on cumulative reporting beginning October 1,
2009 for such periods, and for the fiscal quarters ending September 30,
2010 and thereafter, the Fixed Charge Coverage Ratio shall be measured on
a trailing twelve (12) month basis.
| E. | Consent to Amendment to Senior Debt. The Purchaser agrees to consent
to the Company entering into an amendment to the Loan and Security Agreement pursuant
to clause (c)(i) below. |
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| F. | Board Observation Rights. At the closing, Parent and the Company
will enter into an agreement, in form and substance satisfactory to the Purchaser,
granting the Purchaser the right, so long as any obligations under the Purchase
Agreement, the Note or the New Note are outstanding, to have one (1) observer present
at all meetings of the Board of Directors of each of Parent and the Company. The
foregoing board observer right shall become effective as of the conversion date of the
New Note. |
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| G. | Consent to Note Modification Agreements to PDI Seller Notes. The
Purchaser agrees to consent to the modifications to the PDI Seller Notes (as defined
below) on terms consistent with the terms set forth in the commitment letter dated the
date hereof between ISI Detention (as defined below) and the holders of the PDI Seller
Notes. |
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| H. | Legal Fees. At the closing, the Company will pay (i) all currently
outstanding legal fees and expenses of the Purchaser’s outside counsel related to
prior matters involving Parent, the Company and the MML Entities (as defined below)
and their affiliates, and (ii) the reasonable fees and expenses of the Purchaser’s
outside counsel in connection with the preparation, negotiation and closing of the
Amendment and the transactions contemplated by this commitment letter, in each case
whether or not the Amendment closes. |
All other terms and provisions of the Purchase Agreement and the other Transaction Documents will
remain unchanged and in full force and effect.
The Purchaser’s commitment to enter into the Amendment is subject to the following conditions
precedent: (a) satisfaction of each of the terms and conditions set forth herein; (b) the
negotiation, execution and delivery of definitive documentation for the Amendment consistent with
the terms of this commitment letter; and (c) the negotiation, execution and delivery of definitive
documentation for (i) an amendment to that certain Loan and Security Agreement dated October 3,
2008 between the Company and The PrivateBank and Trust Company (the “PrivateBank”) consistent with
the terms set forth in the commitment letter dated the date hereof between ISI and PrivateBank,
(ii) a note modification agreement to each of those certain Guaranteed Convertible Promissory Notes
dated January 1, 2008 by ISI Detention Contracting Group, Inc., a California corporation (“ISI
Detention”), payable to the order of Xxxxxxxx Detention, Inc., a California corporation (“PDI”),
each in the original principal amount of $1.5 million (collectively and as amended or modified, the
“PDI Seller Notes”), consistent with the terms set forth in the commitment letter dated the date
hereof between ISI Detention and the holders of the PDI Seller Notes, and (iii) an aggregate of
$10.45 million in convertible debt, subordinate in all respects to the obligations of Parent and
the Company under the Purchase Agreement, the Note and the New Note, to be issued to one or more
affiliates of MML Capital Partners, LLC by Parent in the form of (y) $8.0 million principal amount
of convertible subordinated bridge notes (the “Bridge Notes’), and (z) $2.45 million principal
amount of convertible subordinated note consistent with the terms set forth in the commitment
letter dated the date hereof among Mezzanine Management Fund IV A, LP (“Fund A”), Mezzanine
Management Fund IV A Coinvest, LP (“Coinvest Fund A”, and together with Fund A, the “MML
Entities”), and Parent. The definitive documentation with respect to each of the transactions
referred to in clause (c) above shall be in form and substance satisfactory to the Purchaser, and
without prior written consent of the Purchaser, contain any substantive provisions not set forth in
the commitment letters referred to in clause (c) above.
The Purchaser hereby waives the Events of Default that occurred and exist as a result of Company’s
non-compliance with the financial covenant set out in Section 4.7(c)(ii) of the Purchase Agreement
for the period ended September 30, 2009, (ii) Section 7.1(f) of the Purchase Agreement, and (iii)
the Company’s non-compliance with Section 4.5(g) of the Purchase Agreement arising from the
Company’s cancellation of accounts receivable identified as “Xxxxxx” in the amount of $423,981.45;
provided that, the foregoing waivers will be null and void if the Company and the Purchaser have
not executed and delivered the Amendment on or before December 15, 2009 on terms consistent with
this commitment letter and in form and substance satisfactory to the Purchaser. The Purchaser
hereby agrees that it shall not avail itself any of the remedies set forth in Section 7.2 of the
Purchase Agreement, including but not limited to its right to accelerate the payment obligations of
the Company. Such waivers shall not prejudice or constitute a waiver of any right or remedies which
the Purchaser may have or be entitled to with respect to any other breach of any other provision of
the Purchase Agreement. The waivers granted herein shall not be construed as a waiver of any other
presently existing or future violation of a covenant or an Event of Default.
This commitment letter forms the entire agreement that has been entered into between us with
respect to the Amendment and sets forth the entire understanding of the parties with respect
thereto. This commitment letter may be modified or amended only by the written agreement of all of
us. This commitment letter is not assignable by the Borrower without our prior written consent and
is intended to be solely for the benefit of the parties hereto.
This commitment letter may be executed in counterparts which, taken together, shall constitute an
original. Delivery of an executed counterpart of this commitment letter by .pdf or facsimile shall
be effective as delivery of a manually executed counterpart thereof. This commitment letter shall
be governed by, and construed in accordance with, the laws of the State of Illinois.
This commitment letter will expire at 5:00 p.m. (central time) on November 23, 2009, unless
accepted in writing by the Company on or before such time and will expire at 5:00 p.m. (central
time) on December 15, 2009 unless definitive documentation for the Amendment is executed and
delivered and all conditions for closing have been satisfied or waived (such date, the “Closing
Date”) on or prior to such date.
[Remainder of Page Left Blank; Signatures Appear on Following Page]
We appreciate the opportunity to present you with this commitment and look forward to working with
you.
Very truly yours,
XXXXXXX XXXXX XXXXXXXXX CAPITAL FUND III, L.P.
| By: | Xxxxxxx Xxxxx Xxxxxxxxx Capital Partners III, L.L.C., its General Partner |
| By: | /s/ Xxxxx X. Xxxxx | |||
| Xxxxx X. Xxxxx | ||||
| Managing Director | ||||
ACKNOWLEDGED AND AGREED:
ISI SECURITY GROUP, INC.
By:
|
/s/ Xxxxxx X. Xxxxxxx
Title: Chief Financial Officer |
