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Exhibit (b)(2)
[LOGO OF AMERICAN CAPITAL STRATEGIES] 311 SOUTH WACKER DRIVE
SUITE 4550
CHICAGO, IL 60606
TELEPHONE: (312) 697-4919
FAX: (312) 697-4917
http:/www.American-Capital .com
December 22, 2000
Mr. James R. Bazet
President and Chief Executive Officer
Cobra Electronics Corporation
6500 West Cortland Street
Chicago, IL 60707
Dear Jim:
Attached is the Term Sheet outlining the financing that American Capital would
provide to Cobra for its acquisition of Lowrance Electronics, Inc. As you know,
we are very excited about the opportunity to work with you and Cobra. American
Capital's Investment Committee, which needs to approve the deal, is well aware
of the transaction and enthusiastic about moving forward aggressively towards a
closing.
As part of the process, you may show the attached Term Sheet to Lowrance and its
advisors. Please give me a call with any questions that you may have.
Very truly yours,
/s/ Mark D. Schindel
Mark D. Schindel
Principal
The undersigned accepts and agrees to the terms of the attached Term Sheet on
this 22nd day of December, 2000
/s/ James R. Bazet
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James R. Bazet
Chief Executive Officer
MDS/ms
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AMERICAN CAPITAL STRATEGIES, LTD.
FINANCING TERM SHEET
FOR
COBRA ELECTRONICS GROUP
I. GENERAL TERMS
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A. DATE OF TERM SHEET
December 22, 2000
B. ISSUER
Cobra Electronics Corporation (the "Company")
C. PURCHASER
American Capital Strategies, Ltd. ("American Capital")
D. TOTAL INVESTMENT BY AMERICAN CAPITAL
1. SENIOR SECURED SUBORDINATED NOTES
The "Senior Subordinated Notes" shall total: $15,000,000
2. TOTAL
The "Total Financing" shall total: $15,000,000
E. DEFINITIONS
1. NOTES
The Senior Subordinated Notes shall be referred to as the "Notes."
F. USE OF PROCEEDS
To acquire Lowrance Electronics Inc., and the refinance existing debt (the
"Transaction").
G. CLOSING DATE
The date of the closing is to be determined, but in no event later than
February 28, 2001 (the "Close" or "Closing").
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II. SENIOR SUBORDINATED NOTES
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A. AMOUNT $15,000,000.
B. MATURITY
The Senior Subordinated Notes will mature on February 28, 2009 (the
"Senior Subordinated Maturity Date").
C. AMORTIZATION
Equal monthly payments of principal commencing on the first month
following the 5th anniversary of Closing such that the loan is fully
repaid on the Senior Subordinated Maturity Date.
D. INTEREST
Interest shall be payable monthly in arrears on the first business day of
each month 1) in cash at a fixed rate equal to 14 percentage points plus
2) 4.50 percentage points payable in kind due on the Senior Subordinated
Maturity Date. Interest payments shall be computed on the basis of a 360-
day year composed of twelve 30-day months, and the actual number of days
elapsed.
III. TERMS OF THE NOTES
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A. OPTIONAL PREPAYMENT
The Company may prepay the Notes in multiples of $100,000.
Optional prepayments will be applied in inverse order of maturity.
The Company will pay a prepayment fee in the first year of 4% of the
amount prepaid, 3% in the second year, 1% in the third year and will incur
no prepayment fee thereafter.
B. MANDATORY PREPAYMENTS
Mandatory prepayments of the Notes will be made upon the occurrence of any
of the following events:
1. A change in control, merger, consolidation or similar combination,
sale of a material portion of the Company's assets, or other similar
transaction; or
2. A change in the position of President and Chief Executive Officer.
Mandatory prepayments will be subject to the same prepayment fees as
optional prepayments, in addition to default interest rates if
appropriate.
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C. COLLATERAL SECURITY
The Notes and obligations to repurchase any Company securities owned by
American Capital will be secured by a valid security interest in all of the
Company's assets, including without limitation all contract rights, real
estate, machinery, furniture, fixtures and equipment, capital leases, and
receivables of the Company, subordinated only in lien priority to
$58,500,000 of Additional Debt (Defined herein).
D. ADDITIONAL DEBT
The Company shall have no greater than $20,000,000 of additional term debt
(the "Additional Term Debt") and no greater than $36,500,000 of a revolving
line of credit (the "RLOC"), and $2,000,000 of capitalized leases on terms
acceptable to American Capital (together, the "Additional Debt") at
Closing. In addition, documentary letters of credit for approximately
$11.0 million will be outstanding at close.
E. INTER-CREDITOR AGREEMENT
An Inter-Creditor Agreement between American Capital and any senior lender
will, at a minimum, provide American Capital with the cross-acceleration
rights, ability to vote its interest in bankruptcy, no pay-over in
bankruptcy, no release of liens and a maximum standstill provision of 180
days and will otherwise be acceptable to American Capital.
F. REPRESENTATIONS AND WARRANTIES
The documentation for the Total Financing shall contain such
representations and warranties as are customary for loans and investments
of a similar size and nature, including but not limited to, representations
regarding due organization, principal place of business of the Company,
litigation, taxes, other debts, leases, information provided, management's
background, subsidiaries, identification of management, no material
changes, no side agreements, compliance with laws and no brokers, except as
noted in III.I.5.
G. FINANCIAL COVENANTS
The documentation for the Notes shall contain financial covenants of the
Company, including but not limited to:
1. Minimum fixed charge coverage ratio;
2. Maximum debt to EBITDA ratio;
3. Maximum debt to equity ratio; and
4. Other financial covenants acceptable to American Capital.
Such covenants shall be based on the most recent twelve months' pro-forma
performance of the combined companies, and shall conform to those of the
senior lender.
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H. NEGATIVE COVENANTS
The documentation for the Notes shall contain negative covenants of the
Company, including but not limited to:
1. No debt except Additional Debt that declines by the amount of
scheduled principal payment on the Additional Term Debt (such amount
reduced by scheduled principal payments being the "Net Additional Term
Debt"). In addition, the Additional Debt may increase further by the
PIK interest on the Notes and an increase in the RLOC if such increase
would be supported by the advance rates under the revolving line of
credit and the standards concerning qualified receivables and
inventory existing at Closing;
2. No breach of the terms of the Additional Debt;
3. No changes in the business of the Company other than those consistent
with its business as a designer and marketer of consumer electronics
products for two-way and mobile communications and as a designer,
manufacturer and marketer of sonar and GPS devices;
4. No dividends;
5. No brokerage fees other than fees paid to Mesirow Financial and the
advisor to Lowrance;
6. No change of location;
7. No changes in corporate structure;
8. No purchases or carrying of "margin securities" with the proceeds of
the Total Financing;
9. No acquisitions with a purchase price of greater than $5 million or
sales of corporate assets except those within limits to be negotiated;
and
10. No additional leases, liens and investments except within the amounts
defined as Additional Debt documents.
We would work with the senior lender to conform covenants.
I. AFFIRMATIVE COVENANTS
The documentation for the Note will include affirmative covenants of the
Company requiring the Company:
1. To provide monthly financial statements, annual audits (by a "Big
Five" auditor), projections, monthly officer certificates, copies of
material agency filing and material litigation filings and copies of
default notices;
2. To hold quarterly board meetings;
3. To maintain adequate hazard and business interruption insurance and
key man life insurance;
4. To provide a right of first offer to American Capital on any future
issuance of subordinated debt (although this does not limit the
ability of the Company to solicit alternative arrangements and accept
any financing
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deemed by the Directors, in their sole discretion, to be in the best
interests of the Company); and
5. To provide access to Company information.
We would work with the senior lender to conform covenants.
J. DEFAULTS
The Notes shall be in default under the following circumstances:
1. Failure to pay interest and principal when due with respect to any
portion of the Total Financing or any other indebtedness of the
Company (except trade debt that may be legitimately in dispute);
2. Failure to comply with or observe covenants;
3. Default under the terms of the Additional Debt;
4. Misrepresentation or breach of warranty; and
5. Such other defaults as are customary for Notes of a similar nature.
In default the interest rate on the Notes will increase by 2%.
IV. DEBENTURE CONVERSION
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A. CONVERSION OPTION
American Capital will have the right to convert the accumulated PIK
interest portion of its Notes into 350,000 shares (equal to 4.5% of the
fully diluted ownership at Close) of Common Stock of the Company.
B. EXPIRATION
The Conversion Option will expire on the tenth anniversary of the Closing.
C. EXERCISE DATE
The Conversion Option will be exercisable any time after the third
anniversary of the Closing.
D. PUT RIGHT
American Capital may deliver for mandatory redemption by the Company any
Common Shares received in exchange for its PIK interest at any time after
the earlier to occur of:
1. The fifth anniversary of Closing;
2. Sale of the Company or a material portion of its assets; or
3. Repayment in Full of the Notes.
The put right can only be exercised if the average daily volume for the 10
days prior to its exercise is less than 125,000 shares.
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E. PUT PRICE
The put price (the "Put Price") shall be the Fair Market Value (as
described herein) of the Common Shares on the date of the put (the "Put
Date").
F. PUT PAYMENT METHOD
The Put Price will be paid in cash. The payment will be made no later than
90 days after the Put Date.
G. NOTE REPAYMENT OPTIONS
Upon repayment or prepayment of the Notes, American Capital will have three
options pertaining to the disposition of the PIK interest accumulated
thereon:
1. American Capital may receive payment of the PIK interest in cash;
2. American Capital may receive 350,000 shares of Common Stock of the
Company; or
3. American Capital may rollover the accumulated PIK interest into a new
senior subordinated note bearing interest at a rate equal to the then
Prime Rate plus 1.5%. Such note will retain the right to be converted
into 350,000 shares of common stock until the Expiration Date.
V. OTHER EQUITY TERMS
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A. BOARD RIGHTS
American Capital will receive Board of Directors ("BOD") meeting attendance
privileges and rights to receive all information normally provided to
Directors and will receive reimbursement of reasonable out of pocket
expenses. American Capital agrees to comply with all "blackout" dates
observed by the Directors and other Company insiders.
The BOD shall mean the boards of directors of the Company and all
subsidiaries of the Company.
B. TRANSFERABILITY
The Notes, Common Shares, or the interest in such securities provided by
this Term Sheet, will be freely transferable (subject to federal securities
laws), at the Closing or subsequent to the Closing.
C. AUTHORIZED SHARES
For the life of the Notes, the Company shall maintain shares of Common
Stock in reserve sufficient for the exercise of the Conversion Option.
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D. SHAREHOLDERS' AGREEMENT
1. The CEO will agree to a 5 year lockup agreement subject to developing
a plan that affords the CEO the ability to exercise his existing
options.
2. A sale of shares by the CEO (other than a sale consistent with the
plan discussed herein) would trigger the American Capital put right.
E. REGISTRATION RIGHTS
American Capital will have the right to registration of its shares.
F. ANTI-DILUTION RIGHTS
The Conversion Rights and Common Stock will include anti-dilution rights
that provide appropriate adjustments to reflect:
1. Dividends and other distributions in respect of the Common Stock;
2. Below-market stock, warrant and option issuances; and
3. Issuances to, and purchases of Company stock by, employee benefit
plans.
G. PRE-EMPTIVE RIGHTS
The Conversion Rights and Common Stock will include pre-emptive rights that
will allow American Capital to purchase its pro-rata share of securities in
the event of any sale of the Company's equity securities, except as part of
a merger or acquisition transaction.
H. FAIR MARKET VALUE
"Fair Market Value" will be the fair market value of a security, as
determined by one of the following:
1. In the event the Company is no longer public, an independent third
party valuation by either Houlihan, Lokey, Howard and Zukin, Duff &
Phelps or Willamette Management Associates (the choice of one of the
three will be made by the Company), determined on a control premium
basis, without consideration for lack of liquidity due to a minority
interest;
2. Sale of the Company; or
3. The average public trading price during the ten business day period
immediately preceding the determination of Fair Market Value.
VI. OTHER TERMS
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A. CONDITIONS PRECEDENT
Purchase of the Notes will be subject to various conditions precedent
customary for transactions of this size and nature, including but not
limited to:
1. Satisfactory completion of business, legal and accounting due
diligence;
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2. Execution of definitive agreements, instruments and documents related
to the definitive acquisition agreement between the parties,
satisfactory in form and substance to American Capital in its sole
discretion;
3. Execution of definitive agreements, instruments and documents related
to Additional Debt, Notes, and Common Stock, satisfactory in form and
substance to American Capital in its sole discretion;
4. Review and acceptance of employment agreements with Jim Bazet, Tony
Mirabelli, Darrell Lowrance, and Ron Weber.;
5. The absence of any material adverse change in the business or
financial condition of the Company; the Seller's business; or the
capital markets from the date of this Term Sheet until the Closing;
6. Satisfactory completion of the credit approval process of American
Capital;
7. The Company having no less than $65,100,000 of working capital
(defined as current assets less current liabilities, whereby the
current liabilities exclude the revolver portion thereof) at Closing;
and
8. The Company having no less than $47,000,000 of equity at Closing.
B. PROCESSING FEE
1. TERM SHEET PROCESSING FEE
The Company shall pay American Capital a processing fee of 0.5% of the
Total Financing upon the acceptance of an American Capital term sheet
(the "Term Sheet Processing Fee").
2. CLOSING PROCESSING FEE
The Company shall pay American Capital a processing fee at Closing
(the "Closing Processing Fee") of the following percentages less the
Term Sheet Processing Fee previously paid to American Capital:
a. SENIOR SUBORDINATED NOTE 3.0%
C. EXPENSES
American Capital shall be reimbursed for all reasonable out-of-pocket
expenses incurred prior to and at the Closing including, but not limited
to, legal, environmental (including phase I, compliance audits and phase II
reports, when indicated), appraisal, consulting, research, duplication,
background investigations and travel expenses whether or not the
transactions contemplated herein are consummated. American Capital agrees
to use its best efforts (where it is not in conflict with its own
interests) to coordinate the use of outside services with the Senior
Lenders so as to limit the expenses incurred by the Company.
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1. TERM SHEET EXPENSE DEPOSIT
The Company shall pay American Capital an expense deposit of 0.2% of
the Total Financing upon the acceptance of an American Capital term
sheet (the "Term Sheet Expense Deposit").
D. EXCLUSIVITY
This Term Sheet is confidential and may not be shown or disclosed by the
Company (or any broker or other agent of the Company) without the prior
written consent of American Capital.
For a period of 90 days following your acceptance of this Term Sheet, the
Company shall not (nor will it permit its officers, directors, agents,
representatives or affiliates to), directly or indirectly, solicit,
initiate or encourage any negotiations or discussions with respect to any
offer or proposal to make an investment, loan or other commitment of
capital for the Company with the effect of reducing or eliminating the
financing covered by this Term Sheet.
E. PROCEDURAL TERMS
This Term Sheet is not a commitment to make an investment, rather, upon
your acceptance of this Term Sheet and payment of the required fees and
deposit, this Term Sheet will evidence the agreement of American Capital to
commence in good faith its due diligence and its internal financing
approval process, and will evidence the Company's agreement to pay and
reimburse American Capital as provided herein, whether or not any financing
is ultimately consummated. American Capital will not be under any
obligation to consummate the proposed financing until such time as the
foregoing conditions have been satisfied. American Capital recognizes the
time sensitive nature of this Transaction and agrees to use its best
efforts to complete as quickly as possible its due diligence and internal
review process. American Capital further agrees to inform the Company
immediately if it chooses not to proceed with the transaction or believes
that the terms need to be revised in any way.
F. STANDSTILL
Without prior approval of the Board of Directors of the Company, American
Capital will not, directly or indirectly, acquire or agree to acquire, by
purchase or otherwise, any Voting Stock or Convertible Securities if after
such acquisition the total combined Voting Power of the Voting Stock owned
by the Lender would exceed 4.75% of the total combined Voting Power of the
Outstanding Voting Stock on such date.
American Capital shall not, without prior approval of the Board of
Directors of the Company, (i) solicit proxies with respect to any Voting
Stock or Convertible Securities, or become a "participant" in any
"solicitation" (as such terms are used in Rule 14a-11 under the Exchange
Act) relating to the election of directors of the Company; or (ii) join a
partnership, limited partnership, syndicate or other "Group", or otherwise
act in concert with any Person or Group for the purpose of acquiring,
holding, voting or disposing of Outstanding Capital Voting Stock.
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G. TERMINATION
Except for the obligation of the Company to reimburse American Capital for
its fees and expenses under Paragraph C and the obligations of the Company
under the exclusivity provisions of Paragraph D, as provided above (which
obligations will survive the expiration of this Term Sheet), this Term
Sheet automatically will expire and be of no further force or effect as of
December 24, 2000 (the "Termination Date") or upon the occurrence of any of
the following events:
1. The Company fails to accept this Term Sheet in accordance with the
procedure set forth above;
2. Prior to any such acceptance, American Capital notifies the Company
that this Term Sheet is withdrawn;
3. American Capital notifies the Company that the results of its due
diligence are unsatisfactory;
4. American Capital notifies the Company that it has not obtained
internal approval of the financing upon the terms and conditions set
forth herein or due to capital restraints; or
5. Exclusivity expires and the Company elects to terminate the agreement.
