[LETTERHEAD OF PRUDENTIAL]
EXHIBIT (b)(2)
August 17, 2000
Kohlberg & Company, L.L.C.
000 Xxxxx Xxxxxx
Mt. Kisco, New York 10549
Attention: Xx. Xxxxx Xxxxxxxx
Gentlemen:
I'm pleased to confirm the agreement in principle of The Prudential
Insurance Company of America, itself, or through one or more of its subsidiaries
or managed accounts ("Prudential"), subject to the following conditions, to
purchase from KBII Acquisition Company, Inc. a newly formed corporation (the
"Company") $19,000,000 principal amount of 13%* Subordinated Fixed Rate Term
Notes due 2008 (the "Notes"), with detachable warrants for the purchase of
common equity representing 14.5% of the fully diluted common equity of KBII
Holdings, Inc. a newly formed corporation ("Holdings") at a nominal purchase and
exercise price. Holdings shall own 100% of the outstanding capital stock of the
Company. The Notes and the warrants are collectively referred to as the
"Securities". Prudential's agreement in principle will expire October 15, 2000,
unless extended in writing by Prudential. The purchase price of the Notes will
be 100% of the principal amount thereof. Certain terms with respect to the
Securities would be as provided in the summary of terms and conditions attached.
Prudential's purchase of the Securities would be subject to these
conditions:
(a) Prudential, the Company, Holdings' equity holders and the Company's
senior lenders have agreed on the terms, conditions, covenants and other
provisions (including subordination provisions) satisfactory to Prudential with
respect to the Securities,
(b) Holdings has received $28.4 million in cash consideration for its
common stock, not less than $24.5 million of which shall come from Kohlberg &
Company (or affiliates thereof),
(c) The Company has entered into a $47.5 million senior credit facility
with lenders and on terms satisfactory to Prudential, $37.5 million of which
shall be simultaneously funded with the Notes,
-----------------------------------------------------------
*This rate is subject to change until locked by the Company
and may increase based upon changes in the U.S. Treasury
market and/or changes in Prudential's credit spreads.
KOHLBERG & COMPANY, L.L.C.
August 17, 2000
Page 2
(d) Prudential is satisfied that no material adverse change in the
condition (financial or otherwise) or prospects of BI Incorporated ("BI") has
occurred since June 30, 1999,
(e) the information provided to the date of this letter with respect to
BI, the Company and Holdings is complete and accurate in all material respects,
(f) the Company simultaneously acquires on a non-hostile basis not less
than 90% of the outstanding common stock of BI on terms and conditions
satisfactory to Prudential,
(g) Prudential's Law Department is satisfied with the documentation,
proceedings, legal opinions and other matters relating to the proposed
financing, and
(h) a $285,000 processing fee has been paid to Prudential, $115,000 upon
the acceptance by the Company of this letter, and the balance at closing.
The processing fee shall be non-refundable. In addition, following rate
lock with respect to the Notes, the Company may have to pay one or both of the
fees described below.
The first fee, the Delayed Delivery Fee, would be due if the financing is
not canceled or closed by the 42nd day following rate lock. It represents the
loss in yield to Prudential from receiving the coupon on the Notes later than
expected and would be calculated each time the proposed closing date is
extended. This fee must be paid on the date the transaction closes or is
canceled.
To calculate the Delayed Delivery Fee, Prudential would:
Step 1. determine the semi-annual yield of the Notes;
Step 2. determine the yield of a short-term investment of its choice over
the expected period of delay;
Step 3. subtract the short-term yield (Step 2) from the Note yield (Step
1);
Step 4. multiply that amount (Step 3) by the number of days from the 42nd
day after the coupon was fixed to the date this financing closes or
is canceled;
Step 5. divide that amount (Step 4) by 360; and
Step 6. multiply that amount (Step 5) by the dollar amount of the Notes on
which the coupon was fixed.
KOHLBERG & COMPANY, L.L.C.
August 17, 2000
Page 3
The second fee, the Cancellation Fee, could be due if the financing is
canceled for any reason after the Company has locked a rate on the Notes. It
represents the effect of an increase after the coupon was fixed in the purchase
price of a U.S. Treasury Note comparable in duration to the Notes. This fee
must be paid on the date the transaction is canceled.
To calculate the Cancellation Fee, Prudential would:
Step 1. determine the bid price of a U.S. Treasury Note with a duration
closest to that of the Notes, on the date the coupon was fixed;
Step 2. determine the ask price of the same Treasury Note on the date the
financing is canceled;
Step 3. subtract the bid price (Step 1) from the ask price (Step 2). If the
difference is a negative number, no Cancellation Fee would be due.
If the difference is a positive number, then Prudential would -
Step 4. divide the price increase (Step 3) by the bid price (Step 1); and
Step 5. multiply that amount (Step 4) by the dollar amount of the Notes on
which the coupon was fixed.
To determine the price of the Treasury Notes, Prudential will use the prices
reported by Bridge\Telerate Service or any other publicly available source of
similar market data. We will also round the price to two decimal places and base
each price on a Treasury Note with a par value of $100.
In calculating both the Delayed Delivery Fee and Cancellation Fee, the
transaction will be considered "canceled" on October 15, 2000 (or such later day
we may agree to in writing) or on any prior day on which the Company has told
Prudential that the Company no longer wants to pursue the proposed financing.
We intend to hire the law firm of Xxxxxx Xxxxxxx to represent us in
connection with the proposed transaction and may hire other consultants to
advise us with respect to discrete issues. We understand that Kohlberg &
Company, L.L.C. will pay the fees, charges and disbursements of Xxxxxx Godward
and any such consultants if the proposed transaction fails to close for any
reason and that the Company will make such payments in the event the proposed
transaction closes.
KOHLBERG & COMPANY, L.L.C.
August 17, 2000
Page 4
If these terms are acceptable to you, please sign the enclosed copy of this
letter and return it to me by August 17, 2000, along with a check made payable
to "The Prudential Insurance Company of America" in the amount of $115,000 in
partial payment of the processing fee.
This letter supersedes our letters dated July 26, 2000, August 2, 2000,
August 7, 2000, August 9, 2000 and August 15, 2000 regarding the subject matter
hereof.
I look forward to receiving your signed letter and to working with you on
the proposed transaction.
Very truly yours,
/s/ Xxxxxxx X. XxXxxx
---------------------
Xxxxxxx X. XxXxxx
Accepted and agreed to:
Kohlberg & Company, L.L.C.
By: /s/ Xxxxxxxxxxx Xxxxxxxx
--------------------------------
Xxxxxxxxxxx Xxxxxxxx
Its:
-------------------------------
BI Incorporated
---------------
$19,000,000 Senior Subordinated Notes
Summary of Terms and Conditions
The Offering:
------------
Issuer (debt): KBII Acquisition Company, Inc. a newly formed
corporation ("Newco" or the "Company") wholly owned by
Holdings. (Notes will be issued by the same entity, and
have same guarantors (if any), as the senior bank
facility.)
Guarantors: Each of the Company's subsidiaries, including (without
limitation) BI Incorporated ("BI").
Issuer (equity): KBII Holdings, Inc. ("Holdings"), a newly formed
corporation with a capitalization and identity of
ownership acceptable to Prudential.
Purchaser: The Prudential Insurance Company of America and/or one
or more of its direct or indirect subsidiaries or
managed accounts ("Prudential").
Issue: $19.0 million principal amount of 13%* senior
subordinated notes due 2008 of the Company (the "Notes")
and warrants (the "Warrants") to purchase 14.5% of
Holdings on a fully diluted basis.
Separability: The Notes and the Warrants will be separately
transferable, subject to compliance with applicable
federal and state securities laws.
Use of Proceeds: The net proceeds from the sale of the Notes will be used
to fund a portion of the non-hostile purchase of not
less than [90%] [requisite level for "squeeze out"
merger] of the common stock of BI.
------------------------------------
*Rate subject to change until locked
Upfront Fee to
Investors: 1.5% of the principal amount of the Notes,
$115,000 of which is payable upon the
signing of a commitment letter with the
balance due at closing. The portion of the
fee payable at the signing of the
commitment letter is refundable to the
Company only if the Investment Committee
of Prudential's Board of Directors or its
designee fails to authorize the transaction.
The Notes:
---------
Principal Amount: $19.0 million.
Maturity: 2008 (8 year final maturity).
Interest Rate: Through the third anniversary of closing, the
Notes will bear cash interest at a rate of 12%
per annum on the accreted value of the Notes and
will bear an additional PIK interest rate of 1%
per annum on the accreted value, payable quarterly.
Thereafter, the Notes will bear cash interest at a
rate of 13% per annum on the accreted value of the
Notes through maturity, payable quarterly.*
Mandatory Redemption: None.
Optional Redemption: Provided that there is a concurrent Liquidity Event,
the Notes will be redeemable at the option of the
Company, in whole or in part, at any time, plus
accrued and unpaid interest thereon, at the following
terms (percentages are percentage of principal
amount prepaid):
Years 1-3: 100% + Make Whole Amount**
Year 4: 106.00%
Year 5: 104.00%
Year 6: 102.50%
Year 7: 101.00%
Year 8: 100.00%
--------------------------------------------------------------------------------
* Rate subject to change until locked
** In year 3 only, if the pro forma cash on cash return to Prudential on its
---------
Notes and warrants would be: (i) greater than 2.00x, the Make Whole Amount will
be reduced to the extent necessary (but in no event beyond zero) to result in a
cash on cash return of 2.00x (or such greater return as results following
elimination of the Make Whole Amount); and (ii) at least 1.85x but less than
2.00x, then in lieu of the Make Whole Amount, the amount shall be 108%, but in
no event will this reduction result in a cash on cash return of less than 1.85x.
If there is not a concurrent Liquidity Event, the Notes
will be redeemable at the option of the Company, in
whole or in part, at any time, plus accrued and unpaid
interest thereon, at the following terms (percentages
are percentage of principal amount):
Years 1-3: 100% + Make Whole Amount
Year 4: 110.00%
Year 5: 107.00%
Year 6: 105.00%
Year 7: 103.00%
Year 8: 100.00%
Notwithstanding the foregoing, no optional prepayment
shall be permitted without the consent of Prudential if
(i) there is no concurrent Liquidity Event and (ii) such
prepayment would result in a right to put the Warrants
and, furthermore, if such put right were exercised, the
Company would not be permitted to pay 100% of the put
price in cash for any reason.
Make Whole Amount
Definition: The "Make Whole Amount" shall be equal to the excess of
(x) the present value of the expected future principal
and interest payments on the Notes (including all PIK
amounts) discounted at a rate equal to the Treasury Note
yield corresponding closest to the weighted remaining
average life on the Notes calculated at the time of the
prepayment plus 100 basis points (or, in the case of a
year 3 Liquidity Event, 250 basis points) over (y) the
outstanding accreted amount. The Make Whole Amount shall
in no event be less than 0.
Liquidity Event
Definition: "Liquidity Event" shall mean (i) the sale in a single
transaction of substantially all of Holdings equity
securities (include all of the warrants and shares
------
purchased upon exercise), (ii) a qualified initial
public offering of Holdings common stock by a nationally
recognized underwriter of more than $35 million in gross
proceeds or (iii) the sale of all or substantially all
of the Company's assets and the concurrent distribution
to the holders of the warrants and shares purchased upon
exercise thereof of their pro rata share of the net
sales proceeds.
Security: None.
Ranking: The Notes will rank junior in right of payment to the
Company's senior indebtedness incurred under the
proposed senior credit facilities and up to $7.5 million
other senior indebtedness. The amount of senior
indebtedness that the Notes will be subordinated to will
at no time be greater than $55 million. The Notes will
include other subordination terms with respect to the
Company's senior lenders typical for transactions of
this type satisfactory to Prudential. All other future
subordinated debt will rank junior to the Notes pursuant
to terms satisfactory to Prudential.
Change of Control: In the event of a Change of Control, the Company will,
at the option of the holders thereof, (i) purchase all
of the outstanding Notes at the Optional Redemption
price, and (ii) other than in a circumstance where Take
Along Rights or Come Along Rights are concurrently
exercised (to the extent so exercised in the case of
Come Along Rights), purchase the warrants and any shares
purchased upon exercise thereof at the fair market value
thereof.
"Change of Control" will be deemed to have occurred at
such time as Kohlberg & Company ("Kohlberg") ceases to
control a majority of the Board of Directors of
Holdings.
Financial Covenants: To be determined and expected to be at levels 10% to 15%
behind the Senior Secured Credit Facilities. The
Financial Covenants will include (but not be limited
to):
(i) Maximum Total Leverage Ratio.
(ii) Minimum Interest Coverage Ratio.
(iii) Minimum Fixed Charge Coverage Ratio.
Negative Covenants: Customary for a financing of this type including (but
not limited to):
(i) Limitations on indebtedness, including
indebtedness at Subsidiaries;
(ii) Limitations on dividends and other restricted
payments;
(iii) Limitations on the Company's ability to enter into
sale and leaseback transactions;
(iv) Limitations on liens;
(v) Limitations on transactions with affiliates;
(vi) Limitations on mergers, consolidations and asset
sales;
(vii) Limitations on investments; and
(viii) Prohibition on issuance or transfer of Company
equity securities to any person or entity other
than Holdings.
Affirmative Covenants: As are customary, including consummation of the "squeeze
out" merger with BI by a date certain.
Representations and
Warranties: Customary and acceptable to Prudential.
Conditions Precedent: As are customary, including conditions relevant to the
tender offer.
Expenses: All fees and out-of-pocket expenses of Prudential's
special counsel and other costs incurred in connection
with the documentation and closing of the Notes are
payable by the Company if the transaction closes and by
Kohlberg if it does not.
Warrants:
--------
Warrants Issued to
Purchaser of the
Senior Subordinated
Debt: Purchaser of the Notes will receive Warrants which, when
exercised, would entitle the holders thereof to acquire
14.5% of the fully-diluted common stock of Holdings.
Warrant Exercise Price: Nominal.
Expiration Date: The Warrants will expire on ___________, 2008 (8 years).
Rights As Shareholders: Holders of Warrants will not, by virtue of being such
holders, have any rights as shareholders of Holdings.
The Holders of Warrants will have board observation
rights.
Anti-Dilution
Protection: Until a Qualified Offering, the holders of the Warrants
shall have anti-dilution protection, provided that the
protection shall not apply to issuances to employees
pursuant to board-approved plans adopted subsequent to
closing (subject to maximum dilution to be determined),
and sales for market value. If an investment (in the
form of equity or convertible securities) is made below
market value by an affiliate of Kohlberg, Holdings will
make a rights offering to all holders of the Warrants.
If any Warrant holder fails to provide notice of intent
to participate within 15 days of
notice of the rights offering, they will be entitled to
anti-dilution protection.
Take Along Rights: Until an initial public offering of Holdings' common
stock has occurred, the holders of the Warrants shall be
obligated to be "taken along" in any sale to a non-
affiliate of all of the common stock (and equivalents)
by the other stockholders of Holdings, on the same
terms.
Come Along Rights: At such time prior to a Qualified Offering that Kohlberg
and affiliates sell such portion of their shares of
common stock to reduce their ownership to less than 90%
of the shares held by them at closing of this
transaction, the holders of the Warrants shall be
entitled to sell their shares on a pro rata basis and on
the same terms.
Right of First Offer: Kohlberg & Co. shall have a right of first offer (but
not a right of first refusal) in connection with any
proposed transfer of the warrants prior to the
occurrence of a Liquidity Event.
Put/Call Feature: The holders of the Warrants will have a put to the
Company commencing at the earlier of (i) the date of the
Optional Prepayment of 50% or more of the principal
amount of the Notes in a non-Liquidity Event context, or
(ii) year 6, and the Company shall have a call
commencing in year 7 (subject to prior or concurrent
prepayment of the Notes in their entirety), in each case
at the fair market value thereof. If the put is
exercised and the Company is unable, after using best
efforts, to secure any necessary financing in connection
therewith or is prohibited by the senior bank agreement
from paying in cash all or part of the put
consideration, then the Company shall issue in lieu of
the cash consideration it is prohibited from paying its
subordinated note. Such note shall have subordination
terms identical to the Notes and such other terms and
conditions as shall be mutually agreed upon and set
forth in the put agreement.
Registration Rights: Following an initial public offering of Holdings' common
stock, the holders of the Warrants shall have one demand
registration of the Warrants or the common stock
received upon exercise of the Warrants. In addition, the
holders of the Warrants shall have unlimited piggyback
and Form S-3 registration rights. All registrations
shall be at the
expense of the Company. Such piggyback rights shall be
pari passu with any held by other shareholders at
---- -----
closing and senior to any piggyback rights subsequently
granted.
