Exhibit: (b)(2)
KPP
KEY PRINCIPAL PARTNERS CORP.
February 18, 2004
Mr. Michael Coleman, President and CEO
Kona Acquisition, Corp.
1000 Cody Road
Mobile, AL 36695-3425
Fax: 251-776-5199
Dear Mike:
We are pleased to advise Kona Acquisition Corp. ("Kona") that Key Principal
Partners, LLC ("KPP") hereby commits to provide $15,000,000 of subordinated
debt to facilitate the going-private transaction of Integrity Media, Inc.
("Integrity"). KPP has completed its due diligence process and received the
necessary approvals from its Investment Committee and is therefore prepared to
provide you with a financing facility (the "Facility") on the terms and
conditions set forth in the attached term sheet (the "Term Sheet"). The Term
Sheet is intended as an outline only and does not purport to summarize all of
the provisions to be contained in legal documentation. Such definitive legal
documentation shall be in form and substance satisfactory to KPP in its sole
discretion. In addition, the attached Term Sheet is designed to allow for the
Borrower to either be Kona or Integrity, depending on the preferred structure
determined by the Company's Board of Directors.
By countersigning and returning this commitment letter to KPP, and in
consideration of the expense and effort which KPP will incur in reliance on the
signed copy of this commitment letter and in negotiating with the Company,
senior debt provider, and other related parties, the Kona agrees that:
1. It will negotiate exclusively with KPP with respect to the senior
subordinated debt for the purpose of consummating the transaction and
will not solicit commitments or take any actions to obtain a
commitment from any other investor for senior subordinated debt for
the purpose of consummating the transaction for a period of two years
from the date of this commitment letter, unless KPP and Kona have
agreed to terminate this commitment letter prior to the end of such
period. In addition, if the going-private is structured as a
self-tender, Integrity will also be bound to this provision.
2. If negotiations for the investment by KPP in the Borrower terminate at
any time, including after the period described in paragraph 1 above
then Kona shall pay KPP within a reasonable period after receipt of a
statement of such expenses, all out of pocket expenses, including
legal expenses, incurred by KPP with respect to the proposed
investment.
3. KPP, its affiliates, and their respective directors, officers and
employees will be indemnified and defended and hold KPP, its
affiliates and such other persons harmless from and against all
losses, claims, damages, liabilities and expenses (including
reasonable expenses of litigation or preparation therefor) which KPP
or any such affiliates or such other persons in connection with or
arising out of the matters referred to herein, except for damages
resulting from the gross negligence or willful misconduct of the
indemnitee.
800 Superior Avenue
Cleveland, Ohio 44114
Kona Acquisition, Corp.
Page 2
February 18, 2004
In addition to the Conditions Precedent listed in the Term Sheet, KPP will
require the following as a condition to its commitment:
a) Satisfaction with the legal proceeding by Thomas Nelson, related
to the Women of Faith series.
b) Satisfaction with the Romanian Hacker issue.
c) The total funding for the transaction and to pay related fees and
expenses in connection therewith shall not exceed $33,234,000 and
shall be provided from (i) $18,234,000 in senior debt and
(ii) $15,000,000 in subordinated notes.
d) No material adverse change occurring in the business, assets,
financial condition, or income of the Company or any of its
subsidiaries, taken as a whole, since the date of the latest
audited financial statements provided to us and no material
adverse change occurring in the Company's ability to operate in
accordance with the financial projections furnished to us or to
comply with the proposed financial covenants.
At your request, KPP has not exceeded the limit of out of pocket expenses of
$75,000. However, as KPP proceeds with the Transaction and hires the service of
legal counsel, KPP will need to have this limit removed. Additional deposit
amounts will also be required.
If you are in agreement with the foregoing, please sign and return to us the
enclosed copy of this letter by Friday, February 20, 2004. This offer shall
terminate and this letter shall be of no further effect at such time unless
prior thereto we shall have received a signed copy of this letter by such date.
We look forward to working with you on this transaction.
Sincerely,
KEY PRINCIPAL PARTNERS, CORP
/s/ John R. Sinnenberg /s/ Cindy J. Babitt
- ------------------------ --------------------
John R. Sinnenberg Cindy J. Babitt
Managing Partner Vice President
AGREED & ACCEPTED
KONA ACQUISITION, CORP.
/s/ P. Michael Coleman
- ------------------------
Michael Coleman
Kona Acquisition, Corp.
INTEGRITY MEDIA, INC.
PROPOSED INVESTMENT BY
KEY PRINCIPAL PARTNERS, LLC
TERMS AND CONDITIONS
The proposed investment by Key Principal Partners, LLC (the "Investor") in
Integrity Media, Inc. (the "Company") has two components, senior subordinated
debt and warrants, outlined as follows:
SENIOR SUBORDINATED DEBT
ISSUER: Integrity Media, Inc. or Kona Acquisition Corp. ("IM", the
"Borrower" or the "Company")
INVESTMENT AMOUNT: $15.0 million.
INVESTMENT: $15.0 million face amount Senior Subordinated Notes (the
"Sub Debt") with detachable Warrants (the "Warrants")
exercisable at a nominal cost (i.e. penny warrants) into
Common Stock of the Company representing a 7% (on a fully
diluted basis) equity interest in the Company. In addition,
KPP will receive a payment of $220,000 upon redemption of
the Warrant. Terms for the Warrants are detailed in the
Warrants section.
INVESTORS: Key Principal Partners, LLC and KPP II, LLC (collectively,
"KPP" or the "Investors")
RATE: 12.5% per annum computed on an actual/360 day basis, payable
quarterly in arrears, plus 2.0% accrued (and paid at the
Issuer's option) on a quarterly basis (PIK). To satisfy IRS
requirements for interest deductibility, quarterly
redemption payments are required after year five
FACILITY FEE: 2.0% of investment amount at closing, of which $50,000 was
paid concurrently with the acceptance and execution of this
Indicative Term Sheet.
FINAL MATURITY: Seven (7) years from closing.
AMORTIZATION: Two equal semi-annual principal payments beginning the last
day of the sixth month of year seven.
USE OF PROCEEDS: The proceeds from the Sub Debt, along with senior credit
borrowings will be used by the Company to purchase
approximately 2.3 million shares of Class A Stock,
refinance the current senior debt, redeem certain
management shares and pay reasonable transaction fees.
RANKING: The principal and premium, if applicable, and interest on
the Sub Debt will be subordinated and junior in right of
payment to all Senior Debt (to be defined in a manner
satisfactory to Investors). The terms of the subordination
shall be satisfactory to Investors and to the provider(s)
of Senior Debt.
OPTIONAL
PREPAYMENTS: The Sub Debt may be prepaid in whole or in part (in
multiples of $1,000,000) upon 30 days written notice and with
payment of all accrued interest on the amount prepaid to the date
of prepayment. A fee will also be charged equal to 5% of the
amount prepaid if such prepayment occurs prior to the first
anniversary, 4% of the amount prepaid if such prepayment occurs
prior to the second anniversary and 3% of the amount prepaid if
such prepayment occurs prior to the third anniversary.
MANDATORY
PREPAYMENTS: At the Investors' option, upon a Change of Control, or
sale of 20% or more of the Company's consolidated assets, the
principal of the Sub Debt shall be prepaid in full with accrued
interest thereon plus, during the first three years, a premium
equal to 5% of the amount prepaid if such prepayment occurs prior
to the first anniversary, 4% of the amount prepaid if such
prepayment occurs prior to the second anniversary and 3% of the
amount prepaid if such prepayment occurs prior to the third
anniversary.
EXPENSES: The Company agrees to pay all reasonable out-of-pocket costs and
expenses heretofore or hereafter incurred by Investors (including
fees and disbursements of counsel), whether or not any financing
by Investors is consummated, in connection with the following:
this term sheet, all due diligence by Investors and their
representatives concerning this term sheet, all financing
documentation, and the closing of the proposed financing.
Expenses shall be submitted by Investors (with supporting
documentation) to the Company and paid on a periodic basis as
determined by the Investors. KPP will not spend more than $75,000
without the approval of Michael Coleman. A non-refundable $50,000
deposit was paid upon acceptance and execution of the initial
indicative term sheet, which deposit will be applied first,
against expenses, and second, against the facility fee.
BREAK-UP
FEES: Should the Company execute and accept this term sheet
and complete the transaction detailed in "Use of Proceeds", or
any similar transaction resulting in a going private of IM before
November 10, 2005, without utilizing the Investors' Sub Debt,
Investors shall be entitled to receive a break-up fee of
$400,000, as liquidated damages for the time, effort and
opportunity cost of providing this term sheet and pursuing this
investment. The Company shall remain liable for all expenses
incurred by KPP and their affiliates.
COMPETING
OFFERS: Upon acceptance and return of this term sheet, the
Company and its respective agents and representatives shall not
discuss, solicit, negotiate with respect to, or accept any
proposals or offers for the proposed Sub Debt financing of the
Company.
PRINCIPAL
COVENANTS Affirmative and negative covenants typical for senior
subordinated debt in a leveraged transaction, including, but
not limited to, the following, all of which will be
applicable to the Company and any subsidiaries:
REPORTING
REQUIREMENTS: The Company shall remit audited annual financial statements
to each registered Investor no later than 90 days after the
close of the fiscal year. The Company shall remit monthly an
internal financial and management report no later than 30 days
after the end of each month. The Company shall maintain their
current auditor, PricewaterhouseCoopers. The Company shall
promptly provide the investors with copies of any material
correspondence with any regulatory authorities such as the
SEC, EPA, etc.
DEBT SERVICE
COVERAGE RATIO: Shall be greater than a minimum level, which is to increase
over time. Minimum levels to be negotiated. The Debt Service
Coverage Ratio is defined as the ratio of (i) EBITDA for the
four previous quarters minus cash capital expenditures and
cash taxes for the four previous quarters to (ii) the sum of
(x) cash interest expense for the four previous quarters
(subject to pro-forma adjustment for the transaction) plus
(y) regularly scheduled principal payments for the four
previous quarters (subject to pro-forma adjustments for the
transaction).
MINIMUM
EBITDA: EBITDA for the rolling four previous quarters shall be greater
than a minimum level, which is to increase over time.
LEVERAGE RATIO: Shall be less than a minimum level, which is to decrease over
time. Maximum levels to be negotiated.
OFFICERS' AND
DIRECTORS'
COMPENSATION: Parameters regarding the compensation program (including
equity participation programs) for senior executive management
to be agreed prior to closing.
CHANGE OF
CONTROL: Definition to be negotiated. It is expected that the
management shareholders of Company will be required to retain
their holdings, other than for estate planning purposes, until
the Sub Debt is paid in full and the warrant holder has the
opportunity to participate, on a pro rata basis, in any sale
of shares. A basket will be provided for the buyback of
employees who leave the Company.
CAPITAL
EXPENDITURES/
PRODUCT MASTERS: There will be a covenant specifying limits on the amount of
capital expenditures and product masters in any fiscal year.
The intention here is not to inhibit expenditures required to
support the approved business plan or to meet identified
growth opportunities.
DEBT: Total Senior Debt not to exceed Senior Bank Debt committed at
closing plus a basket to be negotiated. Such indebtedness to
reduce according to the amortization/reduction schedule agreed
at or before closing. No additional debt will be allowed
without Investors' approval.
RESTRICTED
PAYMENTS: The Company may not pay cash dividends. Dividends
from any Subsidiary to the Company will be permitted. Further
restrictions may be appropriate upon review of the Company's
corporate structure.
SALE OF ASSETS
OR SUBSIDIARY
STOCK: Except in the ordinary course of business, the Company shall not
be permitted to sell assets equal to more than 10% of its
collective total assets on a rolling 12-month basis, or 20% in
the aggregate. The proceeds from such permitted sale to be
representative of Fair Market Value and will be utilized to
purchase replacement assets or repay debt.
MERGER OR
CONSOLIDATION: The Company will not merge or consolidate with any entity or
permit any entity to merge into it. Acquisitions will require
Investor approval.
TRANSACTIONS
WITH
AFFILIATES: Neither the Company nor any subsidiary nor any affiliate will
enter into, or modify any outstanding transactions or contracts
with affiliates on terms which are less favorable to the Company
or such subsidiary than those of transactions with unrelated
parties obtained in arm's length dealings. No loans, advances,
guarantees, indemnities, etc., shall be given by Company or
subsidiaries.
INTERCREDITOR
TERMS AND
CONDITIONS: Acceptable to Investors in their sole discretion
EVENTS OF
DEFAULT: Standard for this type of debt, including but not limited to
the following:
(i) Failure to pay interest when due if such failure continues
for a period of five consecutive days whether or not such
payment shall be prohibited by the subordination
provisions of the Senior Debt;
(ii) failure to pay principal or premium, if any, when due
whether or not such payment shall be prohibited by the
subordination provisions of the Senior Debt;
(iii) breach of any covenant with customary cure periods;
(iv) default in any representation or warranty;
(v) any final judgment in excess of an aggregate of $50,000
which is not covered by insurance, against the Company or
any subsidiary which is not discharged, annulled or stayed
for a period of 90 days;
(vi) certain events of bankruptcy, insolvency and
reorganization of the Company or any of its subsidiaries,
and
(vii) non-payment or acceleration of Senior Debt and
non-payment or other default of any other debt, subject to
customary cure periods to be negotiated.
If (i) an Event of Default described above in clause (vi) or
(vii) occurs, the principal amount of the debt, and any accrued
but unpaid interest, shall become due and payable immediately or
(ii) any other Event of Default shall have occurred and be
continuing, the holders of not less than 67% in aggregate
principal of the Sub Debt then outstanding may, by notice to the
Borrower,
declare to be due and payable, immediately, the principal
amount of the Sub Debt and any accrued and unpaid interest,
and, if such Event of Default is not involuntary, plus a
premium calculated in the manner provided under Optional
Prepayments; provided, however, that if sufficient payment or
deposits shall have been made to pay the principal of,
premium, if any, and interest on the Sub Debt due otherwise
than by such declaration plus certain expenses, and any and
all defaults (other than the nonpayment of principal and
interest on the Loan that shall have become due and by such
declaration) shall have been remedied or waived, the holders
of 67% in aggregate principal amount of Sub Debt then
outstanding may waive all defaults and rescind and annul such
declaration and consequences.
CONDITIONS
PRECEDENT: Customary for subordinated debt of this type and also
including specific conditions precedent for a leveraged
transaction which are appropriate, in the judgment of
Investors, including but not limited to:
1. Satisfaction with customer and vendor checks.
2. Satisfaction with the terms and conditions of any existing
indebtedness or other indebtedness to be incurred in
connection with this transaction.
3. Satisfaction with the terms and conditions of existing or
proposed insurance coverage including business
interruption insurance.
4. Satisfaction with legal documentation.
5. Satisfaction that the Company has received all necessary
and appropriate governmental, regulatory and legal
approvals and opinions for continued operation, and
Investors comfort with such approvals and opinions.
6. Review of and satisfaction with all material
correspondence between the Company and all regulatory or
other governmental or quasi-governmental authorities,
including but not limited to the SEC, the EPA, NASDAQ,
etc.
COUNSEL: Counsel representing Investors will be selected at the sole
discretion of Investors.
REPRESENTATIONS
AND WARRANTIES: To include but not be limited to:
Information and materials presented to Investors by or on
behalf of the Company is materially accurate in all respects.
No adverse change since 12/31/2002.
AGREEMENT
MODIFICATION: Modifications and changes to the Agreement may be made with
the consent of the holders of a majority in principal amount
of the Sub Debt then outstanding, except that without consent
of each Sub Debt holder affected thereby, no modification or
change may reduce the economic interest of any Sub Debt holder
including, but not limited to (i) extend the maturity or time
of or right to receive payment of interest or principal of any
Sub Debt, (ii) reduce the rate of interest
or the principal amount, the redemption provisions on the Sub
Debt, (iii) change the subordination provisions in a manner
which would adversely affect the holders of the Sub Debt, (iv)
impair or affect the right to institute suit for enforcement of
any such payment or (v) reduce the percentage of holders
necessary to modify or change the agreement.
INTEGRITY MEDIA, INC.
WARRANTS
INDICATIVE TERMS AND CONDITIONS
FORM OF WARRANTS: Investors will receive detachable equity Warrants
representing a 7% economic interest on a fully diluted
basis in the Company. In addition, KPP will receive a
payment of $220,000 upon redemption of the Warrant.
Holders of the Warrants will be entitled to one Board
Seat and one Board Observation Right.
EXERCISE PRICE: Nominal ($0.01) purchase price upon exercise.
EXERCISE: The Warrants will be exercisable at the option of
the holder, in whole or in part, at any time prior to
the later of the date on which the Sub Debt is paid in
full, and the eight year anniversary of the Closing,
at an exercise price of $0.01 per share.
PUT/CALL PROVISION: At any time after year five, the Warrants may be Put
back to the Company for cash consideration equal to
the warrant percentage times the Market Price. Market
Price as determined at the time of the put or call
shall be the higher of: a) 5.5X EBITDA less net debt
and b) the fair market value ("FMV"). The FMV shall be
determined by an independent investment banking firm
mutually agreeable to KPP and the Company. Both FMV
and the put multiple formula as used herein are
intended to represent the net equity value of the
Company.
The FMV will not incorporate a discount either for
lack of liquidity or for minority ownership. The put
may be exercised before year five in the event of a
Change of Control, the sale of 25% or more of the
combined assets of the Company, the breach of the Loan
Covenant regarding additional indebtedness or a breach
of the Company's covenants contained in the Warrant
Agreement. The Company will also have the right to
Call the Warrants after year six, using the same method
of valuation as in the Put provision.
The Company shall use its best efforts to finance the
Put in the event that at the time of Put notice, the
Company does not have sufficient funds to make the
purchase required by such Put notice, or the terms of
the Senior Debt Documents prevent the Company from
honoring its obligations under the Put notice. If the
Company is unable to finance the Put using its best
efforts, the Investors shall have the right to convert
such amount to a note with terms to be negotiated.
"LOOK BACK": If the Company realizes proceeds as a result of a
transaction within 365 days of a Call event that is
greater than the valuation used for the Call, the
former holders of the warrants will be allowed a "Look
Back". The "Look Back" will entitle them to receive
additional compensation for what the warrants would
have been worth at the subsequent transaction date.
ANTI-DILUTION
PROVISIONS: The number and price of securities issuable upon exercise
shall be subject to adjustment from time to time upon the
occurrence of certain events as follows: dividends paid in
stock or other securities; a reclassification, reorganization
or merger; stock splits and reverse stock splits; dissolution;
and issuance or sale of common stock or securities convertible
into common stock or options exercisable, all at less than the
prevailing market price; and dilution in the case of other
securities.
REGISTRATION
RIGHTS: Customary Registration Rights to be required. Demand
registration rights to be exercised only in the event the
Company is public.
TAG ALONG RIGHTS: The Holders of Warrants or Warrant Shares shall have the right
to participate in any sale of common stock by the Company to
any unaffiliated third party, such participation to be
pro-rata with the common stockholders.
DRAG ALONG
OBLIGATIONS: The Holders of the Warrants or Warrant Shares shall be
obligated to sell all of their Warrants or Warrant Shares in
the event of a sale of all of the common stock of the Issuer
to a third party, and consent to and support the sale of the
Company (whether by sale of assets, merger or otherwise) to a
third party, so long as the consideration received from such
sale is for cash.
PRE-EMPTIVE
RIGHTS: Holders of Warrants or Warrant Shares shall have a right of
first refusal, subject to customary exceptions, to purchase
future equity securities to be offered by the Issuer pro-rata
at a price at least as favorable as the price paid by
purchasers of such securities to maintain its ownership
position.
COVENANTS: Restrictions on additional indebtedness same as for Sub Debt
until 180 days after the first put date. Restrictions on
loans, guarantees, comfort letters etc. from Company or any
Subsidiary to any other Subsidiary. Delivery to all Warrant
Holders of financial information as requested pursuant to
terms and conditions in connection with Sub Debt. Prohibition
against changing line of business. Warrant Holders to be paid
pro rata share of any dividends regardless of whether Warrants
have been exercised. Transactions with Affiliates to be no
less favorable than a similar Arm's Length transaction.
EXPENSES: Registration shall be at the expense of the Company, other
than the underwriting discount. Expenses of the
investors/warrant holders in attending board meetings or other
Company functions shall be covered by the Company.