EXHIBIT (b)(3)
February 2, 2004
Mr. Brian Schwartz
Managing Director
H.I.G. Capital, LLC
1001 Brickell Bay Drive
27th Floor
Miami, Florida 33131
Dear Brian:
We are pleased to advise H.I.G. Capital, LLC ("HIG") that American Capital
Strategies, Ltd. ("ACAS") commits (the "COMMITMENT") to HIG, TZ Holdings, Inc.
("TZHI") and TZ Acquisition, Inc. ("TZAI" and, collectively with TZHI, the
"ACQUIRORS") to purchase $15,000,000 of senior secured subordinated notes (the
"SENIOR SUB NOTES") and $11,000,000 of junior secured subordinated notes (the
"JUNIOR SUB NOTES" and together with the Senior Sub Notes, the "NOTES") in
connection with the acquisition of T-NETIX, Inc. and all of its subsidiaries
(collectively, "T-NETIX") by TZAI as more fully described in that certain
Agreement and Plan of Merger (the "MERGER AGREEMENT") by and among TZHI, TZAI
and T-NETIX (the "ACQUISITION"), subject to the terms and conditions set forth
in this letter and the attached Financing Term Sheet dated February 2, 2004 (the
"TERM SHEET", which forms a part of this letter and is incorporated herein by
reference). As used herein, "OLD T-NETIX" shall mean T-NETIX, Inc. and all of
its subsidiaries prior to the merger contemplated by the Merger Agreement (the
"MERGER") and "NEW T-NETIX" shall mean T-NETIX, Inc. and all its subsidiaries
after the Merger.
CONDITIONS TO CLOSING: Without limiting the foregoing, ACAS will not be
obligated to perform under the Commitment unless and until the Conditions
Precedent as outlined in the Term Sheet have been satisfied.
INDEMNIFICATION: HIG and the Acquirors agree to indemnify and hold harmless ACAS
and its affiliates and each of their respective directors, officers, employees
and agents (collectively, the "INDEMNIFIED PARTIES" and individually, an
"INDEMNIFIED PARTY"), from and against any and all losses, claims, damages,
expenses or liabilities to which any Indemnified Party may become subject,
insofar as such losses, claims, damages, expenses or liabilities (or actions,
suits or proceedings, including any inquiry or investigation or claims in
respect thereof) arise out of, in any way relate to, or result from a claim made
by a Third Party (as hereinafter defined) in respect of, the transactions
described in this letter or the financing contemplated hereby (whether or not
any Indemnified Party is a party to any action or proceeding out of which any
such losses, claims, damages, expenses or liabilities arise), and to reimburse
each Indemnified Party upon demand, for any reasonable and documented legal
expenses or other reasonable and documented expenses incurred by any Indemnified
Party in or in connection with investigating, preparing to defend, defending or
otherwise participating in any such claim, action or proceeding related to any
such loss, claim, damage or liability, except that HIG and the Acquirors shall
not be obligated to indemnify, hold harmless or reimburse any Indemnified Party
to the extent that any such losses, claims, damages, expenses or liabilities are
determined in a final judgment by a court of competent jurisdiction to have
resulted solely from the gross negligence or willful misconduct of such
Indemnified Party. The term "THIRD PARTY" as used in this letter means any
person, corporation or entity other than HIG or an Acquiror.
EXPIRATION OF COMMITMENT: The Commitment shall expire at 5:00 p.m., Central
Standard Time, on February 2, 2004, if not accepted by that time. If the
Commitment is accepted on or before its expiration in accordance with the
preceding sentence, the Commitment will nevertheless terminate at 5:00p.m.,
Central Standard Time, on March 31, 2004.
H.I.G. Capital, LLC
February 2, 2004
Page 2 of 2
This letter may be executed by the parties hereto in one or more counterparts,
each of which shall be an original and all of which together shall constitute
but one and the same Commitment.
This letter supercedes and replaces, in their entirety, all prior term sheets,
discussions, indications of interests and proposals (whether written or oral)
previously delivered to HIG.
If you are in agreement with the foregoing, please sign and return this letter
to ACAS at the address indicated above. The Commitment will become effective
upon execution by an officer of HIG, receipt of the Commitment Fee, and
reimbursement of Pre-Commitment Expenses.
Very truly yours,
American Capital Strategies, Ltd.
/s/ Darin R. Winn
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Darin R. Winn
Managing Director
Accepted and approved this 2nd day of February, 2004
H.I.G. Capital, LLC
By: /s/ Brian Schwartz
- -----------------------------------
Name: Brian Schwartz
Title: Managing Director
H.I.G. Capital, LLC
February 2, 2004
TERM SHEET
FEBRUARY 2, 2004
ISSUER: Prior to the completion of the Acquisition, TZAI,
and following the completion of the Merger, New
T-NETIX.
SECURITIES: $15.0 million aggregate principal amount of Senior
Sub Notes and $11.0 million aggregate principal
amount Junior Sub Notes.
PURCHASER: ACAS
USE OF PROCEEDS: The proceeds of the purchase of the Notes shall be
used to (1) finance the Acquisition, and (2) pay
associated fees, costs and expenses.
SENIOR SUBORDINATED NOTES
PRINCIPAL AMOUNT OF NOTES: $150,000,000.
INTEREST RATE: The Senior Sub notes shall bear a fixed cash
interest rate of 12.0% per annum, payable monthly
in arrears. An additional interest rate of 5.5%
per annum shall accrue monthly (the "SENIOR PIK
INTEREST") and shall be added to the principal
balance of the Senior Sub Notes. In an event of
default, the cash interest rate will increase by
2.0%.
MATURITY AND AMORTIZATION: The principal balance of the Senior Sub Notes plus
all accrued and unpaid interest shall be payable
in full on the 6th anniversary of the closing date
of the Acquisition (the "Closing Date").
JUNIOR SUBORDINATED NOTES
PRINCIPAL AMOUNT OF NOTES: $11,000,000.
INTEREST RATE: The Junior Sub Notes shall bear a fixed cash
interest rate of 12.0% per annum fixed, payable
monthly in arrears. An additional interest rate of
8.0% per annum shall accrue monthly (the "JUNIOR
PIK INTEREST") and shall be added to the principal
balance of the Junior Sub Notes. In an event of
default, the cash interest rate will increase by
2.0%.
MATURITY AND AMORTIZATION: The principal balance of the Junior Sub Notes plus
all accrued and unpaid interest shall be payable
in full on the 6th anniversary of the Closing
Date.
H.I.G. Capital, LLC
February 2, 2004
OTHER TERMS OF THE NOTES
COLLATERAL: Prior to the completion of the Acquisition, the
Notes will be secured by a subordinated lien on
the capital stock of the Acquirors and the capital
stock of Old T-NETIX held by TZAI. After
completion of the Acquisition, the Notes will be
secured by a subordinated lien on all the stock
and assets of TZHI and New T-NETIX.
SUBORDINATION: The Notes shall be subordinate and junior in right
of payment, on terms acceptable to ACAS, to the
senior secured credit facilities of TZHI and
T-NETIX of up to $50.0 million (the "SENIOR CREDIT
FACILITY") provided by Dymas Funding Company, LLC
("DYMAS"), consisting of (1) a $17.0 million four
year term loan facility which will be fully drawn
on the Closing Date, (2) a $19.0 million four year
term loan facility which will be fully drawn on
the Closing Date and (3) a $14.0 million four year
revolving facility (the "REVOLVING Facility"), of
which approximately $2.0 million (and up to a
maximum of $5.5 million ) will be drawn on the
Closing Date. ACAS and shall enter into an
Intercreditor Agreement with Dymas, as agent for
the senior lenders, with respect to the Notes. The
Intercreditor Agreement shall be on terms that are
acceptable to ACAS.
The Junior Sub Notes shall be subordinate and
junior in right of payment to the Senior Sub
Notes.
MANDATORY PREPAYMENTS: Mandatory prepayments of the Notes will be made
upon the occurrence of any of the following
events:
(1) A public offering of New T-NETIX's
securities; or
(2) A change in control, merger, consolidation or
similar combination, sale of a material
portion of New T-NETIX's assets, or other
similar transaction.
FINANCIAL COVENANTS: The documentation for the Notes shall contain
financial covenants of TZHI and New T-NETIX,
including but not limited to:
(1) Minimum fixed charge coverage ratio;
(2) Maximum funded debt to EBITDA ratio
satisfactory to ACAS;
(3) Maximum funded debt to EBITDA ratio at the
Closing Date satisfactory to ACAS;
(4) Annual capital expenditure limitations; and
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H.I.G. Capital, LLC
February 2, 2004
(5) Other financial covenants reasonably
acceptable to ACAS.
Such covenants shall be based on the most recent
twelve months' performance of New T-NETIX and
shall be set at a maximum 10% set-off from similar
covenants contained in the Senior Credit Facility.
TRANSFERABILITY: The Notes, as well as each holder's interest
therein, will be freely transferable (subject to
securities laws) on the Closing Date or subsequent
to the Closing Date.
BOARD RIGHTS: American Capital shall receive (1) attendance
privileges to all meetings of the boards of
directors (the "BOARDS") of TZHI and New T-NETIX,
as well as all committees of the Boards, (2) all
information normally provided to members of the
Boards, and (3) reimbursement of out-of-pocket
expenses for all meetings attended.
CONDITIONS PRECEDENT: The obligation of ACAS to purchase the Notes will
be subject to customary conditions precedent,
including, without limitation:
(1) Satisfaction with the legal structure and
documentation of the Acquisition and the
Transactions and, after giving affect
thereto, TZHI will own more than 50% of the
stock of New T-NETIX and in no event stock
representing less than voting control of New
T-NETIX. As used herein, the term
"TRANSACTIONS" means (a) the borrowings under
the Senior Credit Facility, (b) the issuance
of the Notes, (c) equity investment by HIG
and ACAS of not less than $20.0 million (the
"Equity Financing"), and (d) the payments of
fees and expenses in connection with each of
the foregoing.
(2) No material adverse effect on the business,
affairs, management, results of operations,
financial condition, assets or liabilities of
the TZHI and New T-NETIX, taken as a whole,
after giving effect to the Acquisition and
the Transactions (a "MATERIAL ADVERSE
EFFECT"), or any development that ACAS
considers reasonably likely to result in a
Material Adverse Effect.
(3) Satisfaction by ACAS, in its sole discretion,
with the capital structure of the Acquirors
and Old T-NETIX, and the terms of any
outstanding indebtedness, including any
indebtedness issued to facilitate the
Acquisition.
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February 2, 2004
(4) Cash equity of not less than $20.0 million of
the pro forma capitalization of TZHI and New
T-NETIX invested by HIG and ACAS (the "EQUITY
INVESTORS").
(5) No claim, action, suit, investigation,
litigation or proceeding, pending or
threatened in any court or before any
arbitrator or governmental instrumentality,
that relates to the Acquisition or the
Transaction, or that, in the opinion of ACAS,
has a reasonable likelihood of having a
Material Adverse Effect.
(6) Evidence satisfactory to ACAS of the absence
of any other liens on the collateral
described herein, other than such liens
previously mentioned or approved by ACAS in
its sole discretion.
(7) HIG, the Acquirors and Old T-NETIX shall have
obtained all required licenses, approvals,
waivers and consents, governmental and
otherwise, in connection with the Acquisition
and the Transactions, all of which shall
remain in full force and effect.
(8) TZHI and New T-NETIX shall have insurance
satisfactory to ACAS.
(9) HIG and the Acquirors shall have delivered to
ACAS, within twenty (20) days following the
end of each month beginning with the month
ended January 31, 2004 (and including the
month ended December 31, 2003) and ending
prior to the Closing Date, complete and
correct copies of the monthly financial
reports of Old T-NETIX in the same format as
the reports previously provided by Old
T-NETIX to ACAS.
(10) All fees and expenses payable to ACAS shall
have been paid to the extent due in
accordance with the terms herein.
(11) Old T-NETIX shall have a minimum trailing
twelve-month pro forma adjusted EBITDA at
the Closing Date satisfactory to ACAS
(subject to such add-backs to be mutually
agreed upon by ACAS and HIG).
(12) Not more than $5.5 million shall be funded
under the Revolving Facility (such specific
funding amount subject to working capital
fluctuations to be discussed and mutually
agreed upon) at the Closing Date, and Old
T-NETIX shall have, at the Closing Date, a
minimum unused but available borrowing
capacity under the Revolving Facility of not
less than $3.0 million, in each instance,
after (1) giving effect to the initial
advances made under the Senior Credit
Facility on the Closing Date, (2) existing
letters of credit, and (3) the payment of all
fees and expenses related to the Acquisition
and the Transactions.
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February 2, 2004
(13) The Acquirors shall have received an amount
of funds under the Senior Credit Facility,
the purchase of the Notes, and the Equity
Financing sufficient to consummate the
Acquisition; provided that the Acquirors
shall have received not less than $20.0
million in proceeds from the Equity
Investors.
COVENANTS: Except as specified under Conditions Precedent,
covenants under the definitive documentation
entered into in connection with the purchase of
the Notes will be standard and customary for
transactions of this type.
EVENTS OF DEFAULT: The definitive documentation with respect to the
Notes shall contain customary events of default
for a transaction and company of this nature,
including, without limitation, payment,
cross-default on other indebtedness or liability,
violation of covenants, breach of representation
or warranty, environmental, challenge to validity
of documents, lien ceases to be perfected, first
priority, no judgments, change of control, ERISA,
injunction or restraint on material portion of
business, strike, lockout or other act restricting
conduct of business, or indictment of a Borrower
or any senior officer. The definitive
documentation shall also include an event of
default for any change of key management not
replaced within 90 days of a person reasonably
satisfactory to ACAS.
REPRESENTATIONS AND
WARRANTIES: Customary for financings of this type.
EQUITY CO-INVESTMENT: ACAS shall be given the opportunity to con-invest
up to $1,000,000 in TZHI in the same class of
equity and on the same terms as HIG.
DOCUMENTATION: The Acquirors and Old T-NETIX will enter into
definitive legal documentation prepared by ACAS'
counsel on terms and conditions that are normal
and customary for transactions of this type.
GOVERNING LAW: The definitive legal documentation shall be
governed by the laws of the State of New York.
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