UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
Amendment No. 2
The Sports Club Company, Inc.
(Name of Issuer)
Common Stock, par value $0.01 per share
(Title of Class of Securities)
84917P10
(CUSIP Number)
Lois Barberio, Secretary
The Sports Club Company, Inc.
11100 Santa Monica Boulevard, Suite 300
Los Angeles, CA 90025
(310) 479-5200
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications)
March 31, 2003
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition that is the subject of this Schedule 13D, and is filing this
schedule because of Sections 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check
the following box / /.
NOTE: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Section 240.13d-7(b) for
other parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a Filing Person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
(1) Name of Filing Person
S.S. or I.R.S. Identification No. of Above Person
Rex A. Licklider
(2) Check the Appropriate Box if a Member of a Group (See Instructions) (A) /X/
(B) / /
(3) SEC Use Only
(4) Source of Funds (See Instructions)
PF.
(5) Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e) / /
(6) Citizenship or Place of Organization
U.S.
(7) Sole Voting Power
76,667
Number of Shares (8) Shared Voting Power
Beneficially Owned 2,530,012
by Each Reporting
Person With (9) Sole Dispositive Power
76,667
(10) Shared Dispositive Power
2,530,012
(11) Aggregate Amount Beneficially Owned by Each Filing Person
2,606,679
(12) Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) / /
(13) Percent of Class Represented by Amount in Row (11)
13.7%(1)
(14) Type of Filing Person (See Instructions)
IN
--------
(1) Based on 18,205,690 shares of common stock, par value $0.01 per share, of
The Sports Club Company, Inc., a Delaware corporation (the "Issuer"),
outstanding as reported in the Company's Form 10-K filed March 31, 2003.
(1) Name of Filing Person
S.S. or I.R.S. Identification No. of Above Person
Judith Ann Deemer
(2) Check the Appropriate Box if a Member of a Group (See Instructions) (A) / /
(B) / /
(3) SEC Use Only
(4) Source of Funds (See Instructions)
PF.
(5) Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d)or 2(e)
/ /
(6) Citizenship or Place of Organization
U.S.
(7) Sole Voting Power
0
Number of Shares (8) Shared Voting Power
Beneficially Owned 2,530,012
by Each Reporting
Person With (9) Sole Dispositive Power
0
(10) Shared Dispositive Power
2,530,012
(11) Aggregate Amount Beneficially Owned by Each Filing Person
2,530,012
(12) Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) / /
(13) Percent of Class Represented by Amount in Row (11)
13.4%(1)
(14) Type of Filing Person (See Instructions)
IN
--------
(1) Based on 18,205,690 shares of common stock, par value $0.01 per share, of
The Sports Club Company, Inc., a Delaware corporation (the "Issuer"),
outstanding as reported in the Company's Form 10-K filed March 31, 2003.
(1) Name of Filing Person
S.S. or I.R.S. Identification No. of Above Person
The Licklider Living Trust dated May 2, 1986
(2) Check the Appropriate Box if a Member of a Group (See Instructions) (A) / /
(B) / /
(3) SEC Use Only
(4) Source of Funds (See Instructions)
PF.
(5) Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e) / /
(6) Citizenship or Place of Organization
U.S.
(7) Sole Voting Power
0
Number of Shares (8) Shared Voting Power
Beneficially Owned 2,530,012
by Each Reporting
Person With (9) Sole Dispositive Power
0
(10) Shared Dispositive Power
2,530,012
(11) Aggregate Amount Beneficially Owned by Each Filing Person
2,530,012
(12) Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
Instructions) / /
(13) Percent of Class Represented by Amount in Row (11)
13.4%
(14) Type of Filing Person (See Instructions)
IN
--------
(1) Based on 18,205,690 shares of common stock, par value $0.01 per share, of
The Sports Club Company, Inc., a Delaware corporation (the "Issuer"),
outstanding as reported in the Company's Form 10-K filed March 31, 2003.
The Schedule 13D filed with the Securities and Exchange Commission (the
"Commission") on December 5, 1994 and amended by Amendment No. 1 thereto filed
with the Commission on May 9, 2000, is hereby further amended as follows.
Item 1. Security and Issuer
This statement relates to the common stock, par value $0.01 per share (the
"Common Stock"), of The Sports Club Company, Inc., a Delaware corporation (the
"Issuer"). The principal executive offices of the Issuer are located at 11100
Santa Monica Blvd., Suite 300, Los Angeles, California 90025.
Item 2. Identity and Background
(a) This Statement is being filed by Rex A. Licklider, Judith Ann Deemer
("Mrs. Licklider"), and The Licklider Living Trust dated May 2, 1986 (the
"Living Trust") (collectively the "Filing Persons").
(b) The Filing Persons' business address is 11100 Santa Monica Blvd., Suite
300, Los Angeles, California 90025.
(c) Mr. Licklider currently serves as Co-Chief Executive Officer of the
Sports Club at its principal executive offices. Ms. Deemer is the spouse of Mr.
Licklider and together they serve as co-trustees of the Living Trust, a trust
for the benefit of Mr. and Mrs. Licklider. Under the Living Trust, each of Mr.
Licklider and Mrs. Licklider has equal authority to vote or dispose of all
shares held by the Living Trust.
(d) The Filing Persons have not, during the last five years, been convicted
in a criminal proceeding (excluding traffic violations or similar misdemeanors).
(e) The Filing Persons have not, during the past five years, been a party
to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a judgment,
decree or final order enjoining future violations of, or prohibiting or
mandating activities subject to, federal or state securities laws or finding any
violation with respect to such laws.
(f) Mr. and Mrs. Licklider are citizens of the United States of America;
the Living Trust is organized under the laws of the State of California.
Item 3. Source and Amount of Funds or Other Consideration
The following information amends and supplements Item 3.
The Filing Persons acquired the following shares between April 24, 2000 and
April 9, 2003.
Open Market Cash Purchase
Purchase Date Number of Shares Price per Share
------------- ---------------- ---------------
4/24/00 485,000* $3.00
6/14/00 76,000 $3.625
8/1/00 900 $3.25
8/25/00 1,000 $3.625
9/6/00 2,000 $3.125
9/6/00 2,000 $3.1875
9/6/00 3,900 $3.25
9/7/00 3,000 $3.4375
9/15/00 4,000 $3.625
9/15/00 6,200 $3.75
9/15/00 1,000 $3.875
9/15/00 1,900 $4.00
11/9/00 1,000 $4.00
11/15/00 2,000 $3.50
11/16/00 1,200 $3.4375
11/21/00 2,000 $3.4375
11/22/00 1,000 $3.3125
11/24/00 2,000 $3.3125
12/6/00 2,000 $3.3125
12/7/00 2,000 $3.3125
12/12/00 2,000 $3.25
12/14/00 9,000 $3.4064
12/20/00 2,000 $3.1875
12/22/00 2,000 $3.125
1/5/01 2,000 $2.9375
2/1/01 1,000 $2.70
2/2/01 1,000 $2.70
4/19/01 200 $3.15
4/23/01 300 $3.15
4/24/01 500 $3.15
4/26/01 400 $3.15
5/3/01 600 $3.10
5/4/01 500 $3.05
5/10/01 500 $3.05
5/10/01 1,000 $3.10
5/17/01 1,000 $3.05
5/24/01 2,000 $3.05
5/31/01 500 $3.05
5/31/01 5,500 $3.10
5/31/01 600 $3.15
5/31/01 3,400 $3.20
6/6/01 4,000 $3.20
6/8/01 500 $3.20
6/18/01 2,000 $3.20
6/19/01 2,000 $3.10
6/20/01 1,500 $3.00
11/6/01 900 $3.00
11/9/01 4,100 $3.00
11/21/01 1,900 $2.75
11/23/01 300 $2.71
11/27/01 3,000 $2.71
11/28/01 100 $2.71
11/30/01 20,000 $2.79
12/3/01 700 $2.71
5/22/02 1,000 $2.45
5/24/02 1,000 $2.55
5/28/02 1,000 $2.50
6/04/02 1,000 $2.45
6/14/02 1,000 $2.55
6/19/02 1,000 $2.60
6/20/02 1,000 $2.55
6/21/02 1,000 $2.55
6/24/02 1,000 $2.55
6/25/02 1,000 $2.55
6/28/02 1,000 $2.55
7/1/02 1,000 $2.45
7/2/02 1,000 $2.40
7/3/02 100 $2.30
7/8/02 300 $2.30
7/10/02 800 $2.30
7/10/02 10,000 $2.431
7/12/02 30,000 $2.37
7/18/02 800 $2.30
7/22/02 1,000 $2.20
7/26/02 1,000 $2.16
7/29/02 1,000 $2.16
8/2/02 1,000 $2.16
8/12/02 500 $2.20
8/13/02 500 $2.20
8/20/02 1,000 $2.19
--------
*Includes 195,000 shares previously reported.
The Filing Persons sold 95,000 shares on May 31, 2000, and 195,000 shares
on August 1, 2000, in both cases for cash in the amount of $3.00 per share.
The Filing Persons were issued 15,384 shares on December 28, 2001, as
compensation for their guarantee of a loan to the Issuer.
Mr. Licklider was granted a stock option on May 20, 2001 to purchase
115,000 shares, of which 76,667 shares will be exercisable within sixty days.
The Filing Persons purchased 2,000 shares of Series C Convertible Preferred
Stock for cash in the amount of $2,000,000 on September 6, 2002. The shares are
convertible into 666,666 shares of Common Stock.
All cash purchases were made with personal funds of the Filing Persons.
Item 4. Purpose of Transaction
The following information amends and supplements Item 4.
On March 31, 2003, the Filing Persons executed a term sheet and on April 9,
2003, the Filing Persons entered into an amended and restated term sheet (the
"Term Sheet") with Millennium Partners LLC and its affiliates ("Millennium"),
Palisade Concentrated Equity Partnership, L.P. ("Palisade"), D. Michael Talla
("Talla"), and Kayne Anderson Capital Advisors L.P. ("Kayne," and, together with
Millennium, Talla and Palisade, the "Other Parties"). The Filing Persons and the
Other Parties are referred to herein as the "Term
Sheet Parties." Millennium, Talla and Kayne are significant beneficial owners of
the Issuer's Common Stock and have filed either a Schedule 13D or Schedule 13G
pursuant to the Act. The Term Sheet sets forth a non-binding preliminary plan
for the Term Sheet Parties to consummate a "going private transaction" whereby
Palisade, the Filing Persons and Millennium would fund the acquisition of all of
the Issuer's outstanding Common Stock, other than Common Stock held by the Term
Sheet Parties and certain other specified stockholders (the "Surviving
Stockholders"). The Term Sheet provides that the "going private transaction"
would be effectuated by means of a merger (the "Merger") of a company formed by
Palisade with and into the Issuer, with the Issuer being the surviving entity
(the "Surviving Entity") in the Merger. In addition, concurrently with the
consummation of the Merger, (i) the Filing Persons, Millennium, Talla and the
Surviving Stockholders, if any, would exchange all of their shares of the
Issuer's Common Stock for shares of the Surviving Entity's common stock, and
(ii) the Filing Persons, Millennium, Talla and Kayne will exchange all of their
shares of the Issuer's Series B Preferred Stock and Series C Preferred Stock for
shares of the Surviving Entity's Preferred Stock with the rights and privileges
specified in the Term Sheet. Upon consummation of the Merger, the Term Sheet
Parties and the Surviving Stockholders, if any, would beneficially own all of
the outstanding shares of common stock of the Surviving Entity, and the Issuer's
Common Stock would cease to be authorized to be quoted and traded on the
American Stock Exchange. The transactions contemplated by the Term Sheet are
subject to a number of significant conditions precedent as set forth in the Term
Sheet. None of the provisions of the Term Sheet are binding on the Issuer, which
previously formed a Special Committee of its Board of Directors to address any
proposal to engage in a "going private transaction" by, among other actions,
exploring alternatives to any such proposed transaction. As a result of
executing the Term Sheet, the Filing Persons may be deemed to have formed a
"group" with the Other Parties for purposes of Section 13(d) of the Act and the
rules promulgated thereunder. Accordingly, the Filing Persons may be deemed to
be the beneficial owner of the shares of the Issuer's Common Stock beneficially
owned by the Other Parties as reported in their respective Schedule 13D or
Schedule 13G reports. The Filing Persons expressly disclaim beneficial ownership
of the Issuer's Common Stock beneficially owned by the Other Parties.
Additionally, the Filing Persons expressly disclaim any assertion or presumption
that the Filing Persons and the Other Parties constitute a "group."
Except as set forth in this Item 4, the Filing Persons have no plans or
proposals which relate to or which would result in any of the actions specified
in clauses (a) through (j) of Item 4 of Schedule 13D.
Item 5. Interest in Securities of the Issuer
(a) As of the date of this Amendment No. 2 to Schedule 13D, the Filing
Persons beneficially owns 2,606,679 shares, or 13.7% of the Common Stock.
(b) 2,530,012 shares of the Common Stock of the Sports Club are held in the
name of the Living Trust. Mr. and Mrs. Licklider serve as co-trustees of the
Living Trust and thus have equal authority to vote or dispose of shares. The
Filing Persons therefore have shared voting and dispositive power over all
shares held by the Living Trust. 76,667 shares are subject to stock options
granted to Mr. Licklider.
(c) See Item 3.
(d) Not applicable.
(e) Not applicable.
Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to
Securities of the Issuer
The following information amends and restates Item 6.
In connection with the Issuer's renewal and extension of its $15,000,000
credit facility with Comerica Bank - California ("Comerica") in July 2001, the
Filing Persons guaranteed up to $5,000,000 of any amounts drawn under the
facility. Pursuant to an Indemnification and Contribution Agreement dated as of
July 3, 2001, by and among the Issuer, the Filing Persons and the other
guarantors with respect to the facility, the Issuer agreed to pay to the Filing
Persons in consideration of their provision of such guaranty: (i) a commitment
fee equal to 1% of their pro rata portion (33.33%) of its maximum permitted
borrowing under the facility, and (ii) a usage fee equal to 2% of their pro rata
portion of the average annual outstanding advances under the facility, which
fees may be paid by the Issuer in cash or Common Stock. On December 31, 2001,
the Issuer issued 15,384 shares of Common Stock to the Filing Persons in payment
of the commitment fee due at that time.
On September 6, 2002, the Filing Persons purchased 2,000 shares of Series C
Preferred Stock from the Issuer pursuant to a Preferred Stock Purchase Agreement
by and among the Issuer, the Filing Persons and the other purchasers. The
purchase price was $2,000,000. Each share of the Series C Preferred Stock is
convertible at the option of the holder at any time into shares of Common Stock
at a conversion price of $3.00 per share (subject to adjustment under certain
circumstances). The Series C Preferred Stock entitles each holder thereof to one
vote for each share of Common Stock into which such Series C Preferred Stock is
convertible and cumulative dividends at the rate of $90 per share, payable at
the Issuer's option in additional shares of Series C Preferred Stock.
In connection with the Filing Persons' acquisition of their shares of
Series C Preferred Stock, the Issuer, the Filing Persons and the other investors
in the Series C Preferred Stock (collectively with the Filing Persons, the
"Investors") entered into an Investors' Rights Agreement dated as of September
6, 2002 (the "Investors' Rights Agreement") which agreement governs, among other
things, the right of the Investors to cause the Issuer to register under the
Securities Act the shares of Common Stock into which their Series C Preferred
Stock is convertible.
On March 31, 2003, as amended and restated on April 9, 2003, the Filing
Persons executed the Term Sheet described in Item 4 above.
Other than the Indemnification and Contribution Agreement, the Preferred
Stock Purchase Agreement, the Investors' Rights Agreement and the Term Sheet,
the Filing Persons do not have any contract, arrangement, understanding or
relationship (legal or otherwise) with respect to any securities of the Issuer.
Item 7. Material to Be Filed as Exhibits
Exhibit A Agreement regarding the Joint Filing of Schedule 13D.*
Exhibit B Indemnification and Contribution Agreement entered into as
of July 3, 2001 by and among The Sports Club Company, Inc.,
Rex A. Licklider, D. Michael Talla and MDP Ventures II LLC;
incorporated herein by reference to Exhibit 2 to the Issuer's
Current Report on Form 8-K filed with the Commission on
July 17, 2002.*
Exhibit C Certificate of Designation of Series C Convertible Preferred
Stock of The Sports Club Company, Inc., incorporated by
reference to Exhibit 99.1 to the Issuer's Current Report on
Form 8-K filed with the Commission on September 9, 2002.*
Exhibit D Preferred Stock Purchase Agreement entered into as of
September 6, 2002 by and among The Sports Club Company, Inc.,
MDP Ventures II LLC, Rex A. Licklider as Trustee of the
Licklider Living Trust and D. Michael Talla, Trustee of the
Talla Family Irrevocable Trust, incorporated herein by
reference to Exhibit 99.3 to the Issuer's Current Report
on Form 8-K filed with the Commission on September 9, 2002.*
Exhibit E Investors' Rights Agreement entered into as of September 6,
2002 by and among The Sports Club Company, Inc., MDP Ventures
II LLC, Rex A. Licklider as Trustee of the Licklider Living
Trust, D. Michael Talla as Trustee of the Talla Family
Irrevocable Trust, incorporated herein by reference to
Exhibit 99.2 to the Issuer's Current Report on Form 8-K filed
with the Commission on September 9, 2002.*
Exhibit F Amended and Restated Term Sheet entered into as of April 9,
2003 by and among Palisade Concentrated Equity Partnership
L.P., Rex Licklider, D. Michael Talla, Millennium Partners
LLC, Millennium Entertainment Partners L.P., MDP
Ventures I LLC, MDP Ventures II LLC, Millennium
Development Partners L.P. and Kayne Anderson Capital
Advisors L.P.
-----------
*Previously filed
SIGNATURE
After reasonable inquiry and to the best of its knowledge and belief, each
of the undersigned certifies that the information set forth in this statement is
true, complete and correct and agrees that this statement may be filed jointly
with the other undersigned parties.
Dated: April 14, 2003 /s/ Rex A. Licklider
--------------------------------------
Rex A. Licklider
Dated: April 14, 2003 /s/ Judith Ann Deemer
--------------------------------------
Judith Ann Deemer
Dated: April 14, 2003 /s/ Rex A. Licklider
--------------------------------------
Licklider Living Trust
By: Rex A. Licklider
Exhibit F
Amended and Restated Term Sheet for Proposed Funding for
The Sports Club Company, Inc. Transaction
Dated as of April 9, 2003
(amending and restating that certain Term Sheet Dated as of March 31, 2003)
Amended and Restated
Term Sheet for Proposed Funding for
The Sports Club Company, Inc. Transaction
Dated as of April 9, 2003
(amending and restating that certain Term Sheet dated as of March 31, 2003)
The Company The Sports Club Company, Inc. (the "Company").
The Insider Stockholders Rex Licklider and
Millennium Partners (as defined on Schedule B
attached hereto)(and certain affiliated person
and entities)(the "Insider Stockholders").
The Signing Stockholders The Insider Stockholders, David Michael Talla,
and Kayne Anderson Capital Advisors, LP (and
certain affiliated persons and entities)(the
"Signing Stockholders").
The Surviving Stockholders The Signing Stockholders and the other
stockholders set forth on Schedule A attached
hereto (collectively, the "Surviving
Stockholders") who elect to convert their
shares of Company Common (as defined below)
into shares of Surviving Common (as defined
below). The Surviving Stockholders shall be
certain management stockholders and certain
key investors holding shares of the Company's
common stock, $0.01 par value ("Company
Common") and the Company's Series B and Series
C Convertible Preferred Stock (the "Series B
Preferred" and "Series C Preferred",
respectively).
The Investors Palisade Concentrated Equity Partnership,
L.P. ("Palisade") or such other investors
selected by Palisade and acceptable to the
Company (the "Investors").
Aggregate Funding (a)Approximately $18.50 million by the
Investors, plus (b) up to an additional $4.1
million by the Insider Stockholders to the
extent necessary to purchase up to 1,380,688
shares of Company Common included in, or
constituting, the Public Stock (as defined
below). The Insider Stockholders shall
provide funds sufficient to purchase at $3.00
per share an amount equal to the difference
between 1,380,688 shares and the number of
shares not cashed out in the Merger (as
defined below) by Baron Capital, Townsend
Group, Mark Spino, Phil Swain, and Nanette
Pattee Francini (the "Inside Amount").
SECTION I - NON-BINDING PROVISIONS
Deal Structure Palisade will invest on the terms set forth
below in a newly formed entity which will
initially be a partially-owned subsidiary of
Palisade ("MergerCo"). The Company, Palisade
and MergerCo shall enter into an agreement
and plan of merger under which MergerCo
shall merge (the "Merger") with and into the
Company, with the Company surviving
following the Merger (the "Surviving
Corporation"). The certificate of
incorporation and bylaws of MergerCo shall
become the certificate of incorporation
(the "Charter") and bylaws of the Surviving
Corporation.
Except as set forth below, upon consummation
of the Merger, each share of outstanding
Company Common, other than the shares of
Company Common owned by MergerCo, would be
converted into the right to receive $3.00
per share in cash. Simultaneous with the
closing of the Merger, (A) each share of
Series B Preferred and Series C Preferred of
the Company will be converted, on a [1] for
[1] basis, into shares of Series 1 Preferred
Stock and Series 2 Preferred Stock of the
Surviving Corporation (the "Series 1
Preferred" and "Series 2 Preferred",
respectively), and (B) each share of Series
3 Convertible
Preferred Stock of MergerCo shall be
converted into one share of Series 3
Preferred (as defined below). The Series 1
Preferred and the Series 2 Preferred will
have substantially similar rights (subject
to the priority of the Series 3 Preferred as
defined below) to the Series B Preferred and
the Series C Preferred, respectively.
Securities Purchased Simultaneous with the closing of the Merger,
(a) the Surviving Stockholders and, to the
extent not included therein, the Insider
Stockholders, will contribute to MergerCo
all shares of Company Common owned by them,
in exchange for the same number and type of
shares of common stock of MergerCo (the
"MergerCo Common"), and (b) the Insider
Stockholders shall purchase up to $2 million
worth of Series 2 Preferred at the original
issue price and conversion rate of the
Series B Preferred and up to an additional
$2.1 million of MergerCo Common at $3.00 per
share. In no event shall the aggregate
amount of securities purchased pursuant to
the immediately preceding sentence be less
than the Inside Amount, which shares will be
converted into the same number of shares of
the common stock of Surviving Corporation
following the Merger (the "Surviving
Common").
Simultaneous with the closing of the Merger,
the Investors will purchase from MergerCo
1.25 million shares of Series 3 Convertible
Preferred Stock of MergerCo for $5,000,000,
which will convert on a one share for one
share basis into Series 3 Convertible
Preferred Stock of the Surviving Corporation
("Series 3 Preferred"), having the rights
and terms set forth below. In addition,
simultaneous with the closing of the Merger,
the Investors shall purchase 4,408,221
shares of MergerCo Common, at $3.00 per
share, which shares shall be converted into
the same number of shares of Surviving
Common.
Purchase Price for Public he price per share to be paid to the public
holders of the Company Common, other than
the Surviving Stockholders (the "Public
Stock"), will be $3.00 per share.
Use of Proceeds To provide financing for the purchase of all
of the outstanding shares of Public Stock
and to provide the Surviving Corporation
with general working capital following the
consummation of the Merger.
Cash on Hand Condition Immediately following the consummation of
the Merger and upon payment of the
Transaction Fees (as defined below), the
Surviving Corporation shall have at least
$8.5 million dollars in cash and cash
equivalents on hand, including sums borrowed
from the Company's lines of credit in the
amount of $15,000,000 which were in
existence on February 28, 2003 (which shall
become lines of credit of the Surviving
Corporation); if this condition is
neither satisfied nor waived by Investors
holding a majority of the Series 3
Preferred, the Investors, at their option,
may decline to provide the funding for the
Merger.
Dividends The Series 3 Preferred shall entitle the
holder(s) to accumulated dividends at a
rate of 12.0% per annum (based on the
original issue price rather than on the
liquidation preference amount thereof)
from and after the date of issue, which
shall be paid prior and in preference to
any dividends (including accrued dividends)
on the Series 1 Preferred, Series 2
Preferred, Surviving Common and any other
class of equity security that is junior to
the Series 3 Preferred with respect to the
payment of dividends. Credit for dividends
will be accumulated on a quarterly basis
and, will be paid (A) in cash (when
permitted by (i) applicable law, (ii) the
Indenture (as defined below), and (iii) the
Company's current credit facility with
Comerica or any replacement thereof which
is equal to or greater than the aggregate
credit line under the current Comerica
facility, or,
(B) in any event, at the option of the
Investors, in shares of Series 4 Preferred
(as defined below). Additionally, holders
of the Series 3 Preferred will be entitled
to participate on an as-converted basis in
any dividends paid on the Surviving Common.
"Series 4 Preferred" means a series of
preferred stock of the Surviving Corporation
which is identical in all respects to the
Series 3 Preferred except that for the issue
price ($3.00), conversion price ($3.00),
antidilution trigger ($3.00) and liquidation
preference amount (as set forth below) shall
be as set forth herein. Except as otherwise
expressly set forth herein, all references
to Series 3 Preferred in this term sheet
shall be deemed to be a reference to both
the Series 3 Preferred and the Series 4
Preferred except for the designation of the
Series 3 Preferred's liquidation preference,
antidilution trigger, conversion rate and
issue price. In addition, except as
otherwise expressly stated in this term
sheet, the Series 4 Preferred and Series 3
Preferred shall vote as a single class on
all matters and have all of the same
features, rights and privileges.
Ranking The Series 3 Preferred will, with respect to
dividends and rights on liquidation, rank
senior to the Surviving Common and all other
classes of Surviving Corporation's other
equity securities.
Liquidation Preference In the event of a Liquidation
Event (as defined below), the holders of the
Series 3 Preferred will be entitled to
receive, prior and in preference to any
distribution of any of the assets of the
Surviving Corporation to holders of any
Series 1 Preferred, Series 2 Preferred,
Surviving Common and any other class of
equity security that is junior to the Series
3 Preferred, the Liquidation Preference (as
defined below)
"Liquidation Preference" means (i)
approximately $14.58 per share of Series 3
Preferred (the $14.58 liquidation preference
assumes that the Investors invest
$18,224,663 in the Series 3 Preferred and
MergerCo Common; accordingly, that $14.58
amount shall be adjusted up or down to
reflect the entire aggregate initial
investment in the Series 3 Preferred and
MergerCo Common by the Investors as
contemplated in this term sheet), (ii) $3.00
per share of Series 4 Preferred, and (iii)
any accrued but unpaid dividends on such
preferred.
"Liquidation Event" means (i) any
liquidation, dissolution, or winding up of
the Surviving Corporation, whether voluntary
or involuntary, (ii) the insolvency of the
Surviving Corporation, (iii) a consolidation
or merger of the Surviving Corporation with
or into any other corporation or
corporations which results in the
stockholders of the Surviving Corporation
owning less than 50% of the outstanding
capital stock of the surviving entity, (iv)
a sale of all or substantially all of the
assets of the Surviving Corporation, (v) the
issuance and/or sale by the Surviving
Corporation and/or its stockholders in a
single or integrated transaction of shares
of Surviving Common (or securities
convertible into, or exercisable or
exchangeable for, shares of Surviving
Common) constituting a majority of the
shares of Surviving Common outstanding
immediately following such issuance and/or
sale (treating all securities convertible
into shares of Surviving Common as having
been fully converted and all options and
other rights to acquire shares of Surviving
Common or securities convertible into shares
of Surviving Common as having been fully
exercised), and (vi) any other form of
acquisition or business transaction, in a
single or integrated transaction, pursuant
to which a change of control occurs such
that the person, entity or "group" (as
defined under Section 13(d)(3)of the `34
Act) seeking to acquire the Surviving
Corporation and/or its capital stock has the
power to elect a
majority of the Board of Directors as a
result of the transaction or integrated
transaction.
Conversion The Series 3 Preferred will initially be
convertible into Surviving Common at $4.00
per share and, together with the MergerCo
Common (converted into Surviving Common)
being purchased by the Investors in this
transaction, will represent approximately
twenty one and two thirds percent (21.66%)
of the Surviving Corporation (assuming the
conversion of the Series B Preferred and
the Series C Preferred) following the
Merger. The parties hereto acknowledge that
the Company does not currently have any
warrants outstanding. The parties further
acknowledge that setting the conversion
rate of the Series 3 Preferred at the $4
per share rate confirms the agreement among
the parties to base the conversion rate on
the amount paid in respect of the shares of
Series 3 Preferred rather than on the
liquidation preference amount for those
shares of Series 3 Preferred.
Each share of the Surviving Corporation's
preferred stock held by the Investors will
be convertible into the number of shares of
Surviving Common determined by dividing (i)
the Applicable Issue Price (as defined
below), by (ii) the Applicable Conversion
Price (as hereinafter defined) in effect at
the date any such shares are surrendered for
conversion. The "Applicable Conversion
Price" shall, initially, be $4.00 for the
Series 3 Preferred and $3.00 for Series 4
Preferred, each as adjusted in accordance
with the adjustments and anti-dilution
provisions described below. The "Applicable
Issue Price" shall be $4.00 for the Series 3
Preferred and $3.00 for the Series 4
Preferred. Each share of Series 3 Preferred
and each share of Series 4 Preferred will
automatically convert into Surviving Common
on the basis described in this section upon
the earlier of (i) the consent of the
holders of at least a majority in interest
of the outstanding shares of Series 3
Preferred and Series 4 Preferred, or (ii) a
Qualified IPO (as defined below).
"Qualified IPO" means a firm commitment
underwritten public offering, led by a
nationally recognized investment banking
firm, of shares of Surviving Common in which
the gross cash proceeds to the Surviving
Corporation exceed $50 million (before
deduction of underwriters commissions,
filing fees and other offering expenses),
and the price per share is at least equal to
$16.00 per share (which price shall be
subject to equitable adjustment whenever
there shall occur a stock split, stock
dividend, combination, reorganization,
reclassification, recapitalization or other
similar event involving Surviving
Corporation's securities).
Adjustments to the
Conversion Price and
Anti-Dilution Provisions The Applicable Conversion Price shall be
subject to (i) equitable adjustment as
the result of any subdivision, combination
of shares or recapitalization, stock
dividends, stock splits and similar
transactions affecting the Surviving Common,
and (ii) weighted average anti-dilution
protection providing for adjustment of the
Applicable Conversion Price in the event of
issuance of Surviving Common (or any
security or instrument which is
convertible into, or exercisable for,
Surviving Common), other than Excluded
Securities (as defined below) of the
Surviving Corporation at a price per share
less than the Applicable Conversion Price
then in effect immediately prior to such
issue or sale.
"Excluded Securities" means securities
issued (i) upon conversion of any Series 1
or Series 2 Preferred Stock (or any other
Preferred Stock issued after the
consummation of the Merger in accordance
with the terms hereof); (ii) of shares or
grant of options or other rights to purchase
shares of Surviving Common under the
Surviving Corporation's written equity
incentive programs for employees and
directors in effect as of February 28, 2003,
or as approved by the Board (including the
Palisade Director (as defined below) );
(iii) to licensors, banks or other sources
of debt financing or to lessors of real or
personal property pursuant to bank
financing, license or lease transactions
approved by the Board of Directors
(including the Palisade Director); (iv)
pursuant to a stock split of the Surviving
Common or declared dividend or distribution
on the Surviving Common; (v) for
consideration other than cash in any merger,
consolidation, acquisition or other business
combination or any strategic alliance, joint
venture or business partnership approved by
a majority of the disinterested members of
the Board of Directors; (vi) pursuant to any
options, warrants and other convertible
securities outstanding as of the date of
issuance of the Series 3 Preferred; (vii)
pursuant to a Qualified IPO; (viii)
securities issued to Rex Licklider, Michael
Talla and Millennium as guarantors of
Surviving Corporation's indebtedness owing
to any lending institution pursuant to the
terms of the Indemnification and
Contribution Agreement, dated as of July 3,
2001 by and between such guarantors and the
Company, as in effect on the date hereof,
whether such indebtedness is existing as of
the consummation of the Merger or
thereafter; and (ix) securities issued as
"PIK" dividends under the Series 1 or Series
2 Preferred, or under any other securities
which by their terms shall not be subject to
the pre-emptive rights of the Series 3
Preferred.
Redemption Subject to applicable provisions of the
Delaware General Corporation Law, the
Series 3 Preferred and Series 4 Preferred
then outstanding, in addition to the
Survivor Common issued to the Investors
in connection with the Merger
(collectively, the "Investor Holdings")
shall be redeemable, at the option of the
Investors, if, after five (5) years from
the date of issuance, the Surviving
Corporation has not consummated a Qualified
IPO. The Investor Holdings shall be
redeemable, at the option of the Surviving
Corporation, commencing six (6) years from
the date of issuance. In each case the
redemption price paid for the Investor
Holdings shall be the greater of (i) the
aggregate Liquidation Preference of the
Investor Holdings as of the redemption date,
or (ii) fair market value per share (as
determined by a third-party appraiser
selected by the Surviving Corporation and
a majority in interest of the holders of the
Series 3 Preferred and Series 4 Preferred)
of the Investor Holdings as of the
redemption date; provided that in making
such determination of fair market value,
the appraiser shall determine separately
and in writing the discount for minority
interest and the discount for illiquidity
of the securities and shall apply whichever
amount yields a smaller discount; provided
further that, if at the time of such
determination, the Investor Holdings is not
deemed by the appraiser to be a minority
interest, then neither discount shall apply.
Protective Provisions The following protective provisions shall
also each be granted in favor of each of Rex
Licklider and David Michael Talla, acting
independently, provided that such rights
shall automatically be extinguished on the
first to occur of (a) a Qualified IPO or
(b) for each, the date on which the
aggregate number of shares of Surviving
Common and preferred stock of the Surviving
Corporation held by him falls below the
Protective Provision Ownership Threshold
(as defined below); and provided further
that these rights are personal to Rex
Licklider and David Michael Talla and
cannot be transferred to any subsequent
holder of the securities now held by either
or both of them. The following protective
provisions shall also each be granted in
favor of Millenium Partners but shall
attach and be transferable with the Series 2
Preferred held by Millennium Partners at
the closing of the Merger (the "Series 2
Protected Shares"), provided that such
rights shall automatically be extinguished
on the first to occur of (a) a Qualified
IPO or (b)the date on which the holder of
the Series 2 Protected Shares falls below
the Protective Provision Ownership
Threshold (as defined below). In addition,
the following protective provisions shall
also each be granted in favor of the holders
of the Series 1 Preferred
Stock, the Series 3 Preferred Stock and the
Series 4 Preferred Stock, (each such Series,
a "Protected Series"), provided that such
rights shall automatically be extinguished
on the first to occur of (a) a Qualified IPO
or (b) the date on which the then-current
holder(s of any such Protected Series hold,
in aggregate, a number of shares that is
less than the applicable Protective
Provision Ownership Threshold (as defined
below) for that Protected Series. Such
rights shall attach to and be transferable
with the shares of such Protected Series.
Each of the foregoing shall also have the
preemptive rights and tag-along rights set
forth herein under the headings "Preemptive
Rights" and "Tag-Along Rights" with respect
to Subject Securities on the same conditions
set forth above, provided that the term
"Protective Provision Ownership Threshold"
shall be changed to Preemptive Rights
Ownership Threshold (as defined below) in
order to determine whether such rights
continue to apply.
"Protective Provision Ownership Threshold"
for a given holder or a given Protected
Series, means 50.1% of the aggregate number
of shares of Surviving Common and preferred
stock of the Surviving Corporation held by
that holder or, for Protected Series, held
by the holders of that Protected Series, at
the time of the closing of the Merger;
provided that for purposes of this
definition, such securities shall only
include shares of Surviving Common and
preferred stock of the Surviving
Corporation, as the case may be, on an as
converted to Surviving Common basis
(excluding therefrom stock options and other
grants made under any Surviving Corporation
equity incentive program).
"Preemptive Rights Ownership Threshold"
means the same thing as a Protective
Provision Ownership Threshold, provided that
for purposes of this definition, the
applicable percentage shall be 25% rather
than 50.1%.
For so long as the Protective Provisions
apply to the Series 3 Preferred and Series 4
Preferred issued hereunder, consent of
holders of a majority of such securities
then outstanding, voting as a single class,
will be required to:
a) alter or change the rights, preferences
or privileges of the Series 3 Preferred,
whether by merger, consolidation or
otherwise,
b) increase or decrease (other than by
redemption or conversion) the authorized
number of shares of Series 3 Preferred,
c) create any new class or series of equity
security having rights or preferences on
a parity with or senior or superior to
the Series 3 Preferred with respect to
voting, dividends, liquidation preference
or redemption features (or reclassify any
then currently outstanding equity
security in a similar manner), whether by
merger, consolidation or otherwise,
d) amend the Charter or the Surviving
Corporation's bylaws in a way that
adversely affects the rights of the
Series 3 Preferred, whether by merger,
consolidation or otherwise,
e) permit any subsidiary to issue stock
(other than to its parent),
f) effect any voluntary Liquidation Event
unless in connection with such
Liquidation Event (i) the holders of the
Investor Holdings receive cash equal to
or greater than 2x (if such transaction
is consummated on or prior to the second
anniversary of the closing of the
Merger) and, at any time thereafter,
equal to or greater than 3x, the
original amount invested in respect of
such Investor Holdings and (ii) the
transaction
giving rise to such Liquidation Event
was approved by a majority of the
disinterested members of the Board of
Directors,
g) repurchase or redeem any securities,
other than (i) a redemption of the
Series 3 Preferred as described
herein, (ii) mandatory redemption of
the Series 1 Preferred or the Series 2
Preferred initiated by the holders
thereof in accordance with the terms
of the Charter (as in effect from time
to time), (iii) repurchases of stock
issued to employees, directors or
consultants as approved by the Board of
Directors upon termination of
employment, directorship or consultancy,
and any other shares of common stock
presently subject to repurchase rights
approved by the Board of Directors, or
(iv) other repurchases or redemptions
of stock issued to employees of less
than aggregate of $2,000,000 of
securities in any 12 month rolling
period,
h) unless approved by the disinterested
members of the Board of Directors,
effect any material transaction with any
member of senior management or other
affiliates, except for transactions
pursuant to written agreements with such
senior manager or other affiliate which
were, on or prior to February 28, 2003,
in effect,
i) enter into a new line of business or
change the primary line of business from
the current line of business,
j) (A) make any single acquisition of or
investment in any other person or entity
that involves the payment of cash or
property in excess of $1,000,000, or (B)
make acquisitions of or investments in
other persons or entities that involve
the payment of cash or property in
excess of $3,000,000, in the aggregate,
in any calendar year, in either case
other than (i) an acquisition or
investment authorized in the Surviving
Corporation's approved annual budget or
business plan, (ii) an acquisition
pursuant to the terms of that certain
management agreement currently being
negotiated by the Company and Millennium
Partners or one of its affiliates
(provided that Millennium Partners and
the Company shall provide a copy thereof
to the Investors as soon as possible
after that agreement has been signed),
or (iii) any transaction involving the
creation of a partnership, limited
liability company or other venture
involving the Company and one or more
third parties relating predominantly to
the financing, development or operation
of The Sports Club/LA Beverly Hills or
any other "step-out" club facility
("Step Out Financings"),
k) incur indebtedness for borrowed money in
the aggregate amount of more than
$20,000,000, unless authorized in the
Surviving Corporation's approved annual
budget or business plan; provided that,
any sale, lease, exchange, mortgage,
pledge or other disposition of less than
35% of the assets of the Company in a
single transaction or series of
transactions, solely relating to the
real property and improvements of either
(or both) of The Sports Club/LA--Los
Angeles and The Sports Club/Irvine (the
"Sports Club Financings") shall not be
subject to the consents or approvals
contemplated by this paragraph,
l) enter into an operating or capital lease
for an amount of more than $10,000,000,
unless authorized in the Surviving
Corporation's approved annual budget or
business plan
m) increase the amount of stock options
available to be issued under the
Surviving Corporation's employee option
plans above the amount reserved for
issuance under that plan as of February
28, 2003,
n) unless approved by the Board of
Directors or the Compensation
Committee (including, in either case,
all of the Series 3 Directors thereon),
issue more than 100,000 new options, in
the aggregate, to any one employee,
o) hire or fire the chief executive officer
of the Surviving Corporation,
p) permit any subsidiary to do any of the
foregoing, or
q) enter into an agreement or understanding
(orally or in writing) to do any of the
foregoing.
Board Composition Following the consummation of the Merger,
and so long as more than twenty five percent
(25% of the Series 3 Preferred is
outstanding, the Surviving Corporation's
board of directors (the "Board") shall
consist of seven (7) directors, at least two
(2) of whom shall be independent directors.
Palisade shall be entitled to designate two
directors (each a "Series 3 Director"), one
of whom may be an affiliate of Palisade (the
"Palisade Director") and one of whom shall
be an independent director. The Surviving
Stockholders shall be entitled to designate
four directors and to nominate the other
independent director. Each of the Series 3
Directors, including the independent
director designated by Palisade, shall have
the right (but not the obligation) to be a
member of the audit and compensation
committees of the Board, and any other
committees which the Board establishes.
At such time, if ever, that the number
of shares of Series 3 Preferred outstanding
at any time shall fall below the 25%
threshold specified above, then the two
directors appointed by Palisade will resign
upon request by the other members of the
Surviving Corporation's Board.
Information Rights The Surviving Corporation shall provide to
an Investor who holds shares of Series 3
Preferred:
a) Monthly, year-to-date consolidated
financial statements in accordance with
generally accepted accounting principles
consistently applied (including profit
and loss statement and balance sheet),
as soon as reasonably practicable after
such financial statements become
available in final form to the Surviving
Corporation's management, and in any
event within 20 days of the end of a
month;
b) Quarterly management report summarizing
operations and business outlook, as soon
as reasonably practicable after such
reports become available in final form
to the Surviving Corporation's
management, and in any event within 30
days of the end of a quarter;
c) Annual independent certified audit
within 90 days after the year's end from
Surviving Corporation's independent
accounting firm;
d) Before each year end, any projections
for the next year which are provided to
the Board;
e) Within 20 days after filing or receipt
thereof, as applicable, provide (i)
pleadings of any material lawsuits filed
by or against the Surviving Corporation
or any subsidiary; and (ii) written
notice of all commenced legal or
arbitration proceedings, and all
proceedings by or before any
governmental or regulatory authority or
agency, in which the Surviving
Corporation or any subsidiary is a
party, provided that, in both cases,
(x) the Surviving Corporation will not
be required to provide information or
documents that would cause the Surviving
Corporation or any subsidiary to lose
the benefit of attorney/client privilege
or violate a confidentiality obligation
and (y) the Surviving Corporation will
not be required to provide information
or documents with respect to any lawsuit
or other proceeding in which the
Surviving Corporation or any subsidiary
is adverse to the holders of Series 3
Preferred or the Investors;
f) As soon as reasonably practicable,
provide notice of (i) material lawsuits
threatened against the Surviving
Corporation or any subsidiary and (ii)
material developments in
any commenced legal proceeding to which
the Surviving Corporation or any
subsidiary is a party, provided that,
in both cases, (x) the Surviving
Corporation will not be required to
provide information or documents that
would cause the Surviving Corporation
or any subsidiary to lose the benefit of
attorney/client privilege or violate a
confidentiality obligation, and (y)
the Surviving Corporation will not be
required to provide information or
documents with respect to any lawsuit or
other proceeding in which the Surviving
Corporation or any subsidiary is adverse
to the holders of Series 3 Preferred or
the Investors;
g) Within 20 days after filings, copies of
all material documents filed with
government agencies outside of the
ordinary course of business;
h) Within 10 days after receipt, provide
copies of any notifications received by
the Surviving Corporation or any
subsidiary regarding material defaults
on any loans, leases or material
contracts to which the Surviving
Corporation or any subsidiary is a party
or pursuant to which any of its
properties or assets are bound;
i) As soon as is made available to the
Board of Directors in final form, but in
any event within 30 days before the
commencement of each new fiscal year, a
budget consisting of a business plan and
projected financial statements for such
fiscal year;
j) With reasonable promptness, such other
notices, information and data with
respect to the Surviving Corporation or
any subsidiary as the Surviving
Corporation delivers generally to the
holders of Surviving Common in respect
of their holdings; and
k) Such other information concerning the
business, financial condition or
corporate affairs of the Surviving
Corporation or any subsidiary as may be
reasonably requested (and which shall
not substantially interfere with the
management of the Surviving Corporation
or any subsidiary by the Surviving
Corporation's or any subsidiary's senior
management).
In addition, the Surviving Corporation shall
permit any Investor holding at least 5% of
the Series 3 Preferred then issued and
outstanding (or its authorized
representative) to visit and inspect the
properties of the Surviving Corporation and
its subsidiaries, including their respective
corporate and financial records, and to
discuss its business and finances with
officers of the Surviving Corporation and
its subsidiaries, as applicable, during
normal business hours, following reasonable
notice and as often as may be reasonably
requested, so long as any such visit or
inspection does not interrupt the business
of the Surviving Corporation or any such
subsidiary. Notwithstanding the foregoing,
(x) the Surviving Corporation will not be
required to provide, or provide access to,
information or documents that would cause
the Surviving Corporation to lose the
benefit of attorney/client privilege or
violate a confidentiality obligation and (y)
the Surviving Corporation will not be
required to provide, or provide access to,
information or documents with respect to any
lawsuit or other proceeding in which the
Surviving Corporation is adverse to the
holders of Series 3 Preferred or the
Investors.
Registration Rights
a) If, at any time subsequent to six(6)
months after the closing of an initial
public offering of the Surviving
Corporation's securities ("IPO"),
including a Qualified IPO, the holders
of a majority of the Registrable Shares
(as defined below) then outstanding
(calculated on an as-converted to common
stock basis) request that the Surviving
Corporation file a registration
statement with the Securities and
Exchange Commission (the "SEC"), the
Surviving Corporation will use its best
efforts to cause such Registrable Shares
to be registered under the Securities Act
of 1933, as
amended, and under applicable state
"Blue Sky" laws, as soon as reasonably
practicable (and in any event within 90
days of request), subject to customary
underwriters' cutbacks and blackouts;
provided that, the Surviving Corporation
shall not be obligated to effect more
than three (3)registrations pursuant to
this subsection (a). Demand rights under
this subsection (a) will be triggered if
requested by holders of at least 25% of
the Registrable Shares having a minimum
aggregate value at the time of such
request of $2,000,000. In no event,
however, shall the Company be required to
file and cause to become effective more
than two (2) registration statements
during any year, and holders of
Registrable Shares will not exercise any
such demand registration rights if
Surviving Corporation would be required
to incur the expense of an audit of its
financial statements at any time other
than in connection with its annual
year-end audit.
b) The holders of the Registrable Shares
shall have the right to request that the
Surviving Corporation file a registration
statement on Form S-3 (or any successor
form) covering the Registrable Shares at
any time after the Surviving Corporation
is eligible to use such form, provided
that the minimum aggregate value of the
shares so registered shall be at least
$1,000,000, and, in such case, the
Surviving Corporation will use its best
efforts to cause such shares to be
registered, subject to customary
underwriters' cutbacks and blackouts,
as soon as practicable (and in any event
within 90 days of request). Any demand
registration made pursuant to this
subsection (b) and declared effective by
the Securities and Exchange Commission
shall count toward the three (3) demand
rights afforded holders of Registrable
Securities pursuant to subsection (a).
c) The holders of the Registrable Shares
shall also have unlimited "piggy-back"
rights, subject to underwriters'
cutbacks, with respect to registrations
by the Surviving Corporation or other
shareholders of the Surviving Corporation
(other than registrations on Form S-8 (or
any successor form), and registrations on
Form S-4 (or any successor form) made in
connection with an acquisition).
d) All registration rights are transferable
by an Investor to any transferee of
Registrable Shares issued to that
Investor hereunder.
e) The Surviving Corporation shall bear all
registration expenses (exclusive of
underwriting discounts and commissions),
subject to customary exceptions for
withdrawn registrations and the like, in
a demand or piggyback registration,
including reasonable and customary fees
and expenses of counsel to the
Investors. All underwriting discounts
and commissions in respect of
Registrable Shares shall be paid by the
Investors pro rata on the basis of the
number of shares so registered.
f) The registration rights will be subject
to additional terms and conditions as
are reasonable and customary, including
indemnification, the period of time in
which the registration statement will be
kept effective, reporting obligations
under the Securities Exchange Act of
1934, as amended (the "'34 Act"), and
underwriting arrangements.
g) If requested by the underwriters and the
Surviving Corporation, the holders of
Registrable Shares shall not sell or
otherwise transfer any securities of the
Surviving Corporation for a period of up
to 180 days following the effective date
of the registration statement for the
Surviving Corporation's Qualified IPO
and up to 90 days following the
effective date of any follow-on
offering, provided that, and so long
as, the Surviving Corporation's
officers, directors and all holders of
more than 2% of the Surviving
Corporation's outstanding capital stock
are locked up for the same period and
on the same terms.
h) Registration rights terminate upon the
earlier of (i) five years following the
Qualified IPO, if any and (ii) with
respect to a particular holder,
whenever, and for so long as, such
holder is, and remains, eligible to sell
all its Registrable Shares under Rule
144(k).
i) For so long as (i) the registration
rights described above have not
terminated or expired and (ii) the
Investors hold, in the aggregate, at
least 25% of the Series 3 Preferred
issued to them hereunder, no future
registration rights may be granted
without consent of the holders of a
majority of the Registrable Shares,
unless such rights are subordinated to
the Investors' registration rights.
j) In the event of an IPO,if the underwriter
exercises an overallotment provision,
holders of the Registrable Shares will be
entitled to sell up to 10% of the
overallotment prior to the Surviving
Corporation selling any additional stock,
subject to underwriter's customary
cutback. If such overallotment is
insufficient to permit each of the
holders of Registrable Shares to exercise
their right to sell such portion of their
respective Registrable Shares as each
such holder elects, then the number of
Registrable Shares sold in the
overallotment by holders of Registrable
Shares shall be determined on a pro rata
basis. Any shares not sold in the
overallotment by the holders of the
Registrable Shares may be sold by the
Surviving Corporation or such
stockholder(s)as the Surviving
Corporation may permit.
"Registrable Shares" means (1) shares of
Surviving Common which were issued to the
Investors hereunder, (2) shares of Surviving
Common which are issued or issuable upon
conversion of the Series 3 Preferred, and
(3) any shares of Surviving Common issued to
or issuable to (whether upon conversion or
exercise of or in exchange for any other
security) any holder of the securities
described in subsections (1) or (2) of this
definition.
Preemptive Rights For so long as an Investor holds at least
25% of the Series 3 Preferred issued to it
hereunder, prior to a Qualified IPO, a
merger, or an acquisition of all or
substantially all of the equity securities
or assets of the Surviving Corporation
approved by the Board of Directors
(including both Series 3 Directors) (an
"Approved Acquisition"), such Investor
shall have the right to purchase its pro
rata share, based on such Investor's
holdings of Surviving Common and Surviving
Common issuable upon conversion of Series 3
Preferred as compared with the total
outstanding Surviving Common (on an
as-converted to common basis), of all new
issuances of Surviving Common or Preferred
Stock except issuances of Excluded
Securities.
Tag-Along Rights For so long as at least 25% of the
Series 3 Preferred issued hereunder remains
outstanding, if, at any time prior to a
Qualified IPO or an Approved Acquisition,
a holder of any Subject Security (as
defined below) seeks to sell, transfer or
convey ("Transfer") any such Subject
Security, such Transfer shall be subject
to customary Tag-Along Rights in favor of
the holders of the Series 3 Preferred,
provided that, such holders comply with the
requirements of the purchaser of such
securities in accordance with the terms and
conditions of the operative purchase
agreement. In such event, the holder of
Series 3 Preferred will have the right to
participate in the Transfer on the same
terms as the selling shareholder on a
pro-rata basis, subject to certain customary
limitations.
"Subject Securities" means the Series 1
Preferred, the Series 2 Preferred and the
Surviving Common (other than that which are
Registrable Shares) or any security which is
exercisable or exchangeable for or
convertible into any of the foregoing (other
than the Series 3 Preferred).
Right of First Offer Prior to a Qualified IPO or Approved
Acquisition, if Palisade or any Investor,
on the one hand, or any Surviving
Stockholder, on the other (in each such
case, a "Selling Stockholder"), wishes to
sell, transfer or convey any securities of
Surviving Corporation owned by such person
or entity, including shares of Surviving
Common and shares of the Series 1, 2 and 3
Preferred (the "Offered Shares"), then the
Selling Stockholder must offer to sell the
Offered Shares first to Surviving
Corporation, and, secondly, to the other
non-Selling Stockholders (if Surviving
Corporation elects not to, or cannot
legally, purchase all Offered Shares) at
the price, and on the terms proposed by the
Selling Stockholder (the "Proposed Terms").
Surviving Corporation shall have the right
(the "Surviving Corporation Right") to
purchase all, but not less than all, of the
Offered Shares in accordance with the
Proposed Terms. If the Surviving Corporation
does not exercise the Surviving Corporation
Right to purchase all Offered Shares, then
the non-Selling Stockholders will be
permitted to purchase all (but not less than
all) of the Offered Shares, in accordance
with the Proposed Terms, in the ratio that
the number of securities of Surviving
Corporation owned by non-Selling
Shareholders wishing to exercise their
rights hereunder (assuming conversion of
all convertible securities, options and
warrants owned by such person(s), including
the Series 1, 2 and 3 Preferred) bears to
the total number of shares of Surviving
Common outstanding as of such date (again,
assuming conversion of all such convertible
securities, options and warrants). If the
non-Selling Stockholders do not exercise
their right to purchase all of the Offered
Shares in accordance with the Proposed
Terms, the Selling Stockholder may sell
the Offered Shares to a third-party upon
terms and conditions no more favorable
than the Proposed Terms. The Definitive
Documents (as hereinafter defined) shall
provide customary notice, exercise
requirements, payment terms and other
terms and conditions as are typically
included in such provisions.
Notwithstanding the foregoing, any holder
of less than 5% of the Surviving Common (on
a fully-diluted as converted basis), shall
be subject to the obligations of this Right
of First Offer but shall not be entitled
to the benefits thereof.
Voting Agreement In connection with the execution of a
definitive merger agreement, the Investors
identified by Palisade shall enter into a
voting agreement with the Surviving
Stockholders and Palisade pursuant to
which such Investors shall give the
Surviving Stockholders or their nominee an
irrevocable proxy to vote their shares in
favor of the Merger and the transactions
contemplated hereby and such Insider
Stockholders agree to vote their shares in
favor thereof.
Rollover Agreement In connection with the execution
of a definitive merger agreement, certain
Investors identified by Palisade shall enter
into a Rollover Agreement with MergerCo,
pursuant to which such Investors shall agree
to convert the securities of MergerCo owned
by them into shares of capital stock of the
Surviving Corporation containing similar
terms following the Merger.
Indemnity Agreement In connection with the closing of the
Merger, the Surviving Corporation shall
enter into an Indemnity Agreement with
Palisade agreeing to indemnify Palisade in
connection with any breach of any
representation or warranty contained in the
definitive merger agreement (other than a
representation or warranty made by
Palisade).
Employment Agreements The executive officers of the Company
identified by Palisade following its due
diligence review of the Company shall
enter into employment agreements with the
Surviving Corporation in form and substance
reasonably satisfactory to Palisade and such
executive officers.
Key Man Insurance The Surviving Corporation will obtain a
key man insurance policy in the amount of $1
million to cover Rex Licklider.
Conditions Precedent The conditions precedent to the completion
of the Merger will include, among others:
(i)the concurrence of the special committee
of the Company's board of directors
("Special Committee") that the price of
$3.00 to be paid for the Public Stock is
fair from a financial point of view, (ii)
the absence of any objection by the Special
Committee to any other aspect of the terms
and conditions of the proposed agreement
of merger, (iii) the approval of the terms
and conditions of the Merger and all
Definitive Documents by (A) the Company's
board of directors and (B) the Surviving
Stockholders and (C) the Investors, (iv)
the negotiation and execution of Definitive
Documents (as hereinafter defined), (v)
the satisfactory completion of due
diligence by the Investors and their
representatives, (vi) the absence of any
material adverse change in the business of
the Company, (vii) the receipt by the
Investors of an opinion of counsel to the
Company as to certain matters, in form and
substance acceptable to the Investors,
(viii) the receipt of the Noteholders'
Consent (as defined below), together with
an opinion of special counsel to the
Company, addressed to the Trustee under
the Indenture, to the effect that the
"Change of Control" provisions set forth
in the Indenture may be amended by the
approval or consent of holders of a
majority in principal amount of the
Senior Notes then outstanding provided
that such opinion is either addressed to
Palisade or such special counsel delivers a
letter to Palisade allowing Palisade to rely
on such opinion; (ix) the Special
Committee's (and the Company's Board's)
having taken such action as is necessary
to render the Company Rights Agreement (as
defined below) inapplicable to the Merger
and the other transactions contemplated
hereby, and (x) the solicitation of
proxies in accordance with Regulation
14D of the '34 Act, and the approval
by the Company's shareholders of the Merger
and the Definitive Documents.
"Noteholders' Consent" means the consent of
the holders of Senior Notes necessary to
amend the terms of the Indenture dated April
1, 1999 between the Company and U.S. Bank
Trust National Association, as trustee (the
"Indenture"), to eliminate the change of
control repurchase obligation as set forth
in the Indenture resulting from the Merger
or the other transactions contemplated
hereby.
"Company Rights Agreement" means the Rights
Agreement dated as of October 6, 1998 by and
between the Company and American Stock
Transfer & Trust Company, as amended.
Closing The closing is anticipated to occur once the
Company has received all necessary approvals
for the Transaction.
SECTION II - BINDING PROVISIONS
Exclusivity In exchange for the Investors committing
time and incurring expense to close the
transactions contemplated hereby, the
Signing Stockholders each agree that until
June 8, 2003, they shall not, directly or
indirectly, make any solicitations, enter
into any negotiations or discuss a possible
financing, merger, sale, recapitalization
or any possible disposition of all or
substantially all of the assets of the
Company or the capital stock of the Company,
including the shares of capital stock of the
Company owned by them (a "Transaction"),
with any party other than Palisade and the
Investors; provided, however, that nothing
in this Section II shall prevent or
preclude any one or more of the Signing
Stockholders from entering into any such
negotiations or discussions with regard to,
or from otherwise investigating,
considering, approving or entering into, any
Transaction or
potential Transaction that is being
investigated, considered, negotiated or
discussed, or that is proposed to be entered
into, by the Special Committee or its
advisors, or from discussing Transactions
or potential Transactions with the Special
Committee and its advisors. Notwithstanding
the foregoing, in the event that the
transaction contemplated by this Term
Sheet has not been abandoned by the parties
hereto and any one or more of the Signing
Stockholders enter or enters into any
such negotiations or discussions and as a
result of such negotiations or discussions
the Signing Stockholders intend to enter,
prior to June 8, 2003, into an agreement
relating to such Transaction, the Signing
Stockholders shall give Palisade notice of
such intent at least three (3) days prior to
entering into such other transaction, and
during such three day period shall negotiate
in good faith with Palisade in order that
Palisade shall have the opportunity to
propose revised terms and conditions to
the terms and and conditions set forth in
this Term Sheet. Nothing in this Section II
shall be construed to prevent or preclude
any Signing Stockholder, or any designee
of a Signing Stockholder on the Board of
Directors of the Company from fulfilling
his or her fiduciary duty in his or her
capacity as a director or officer of the
Company.
Expenses If the Company, MergerCo and Palisade do
not enter into the definitive agreement for
any reason (including if the Company enters
into an alternative transaction), other than
as a result of a breach of the terms of this
Term Sheet by Palisade, then Rex Licklider,
David Michael Talla and Millennium Partners,
on a joint and several basis, shall pay
all reasonable expenses incurred by the
Investors in connection with their due
diligence, legal review and documentation of
the investment, including without limitation
reasonable fees and expenses of legal
counsel (the "Palisade Fees"). Such
Palisade Fees shall be payable within
thirty (30) days of receipt of invoices
therefor. For purposes of this provision,
failure to enter into a definitive agreement
resulting from an inability of the parties
to agree on the terms of the exclusivity,
termination fee and expense provisions
of a definitive agreement shall not be
deemed a breach of the terms of this
Term Sheet by Palisade and Rex Licklider,
David Michael Talla and Millennium
Partners shall, on a joint and several
basis, pay the Palisade Fees to Palisade
pursuant to the terms of this provision.
Confidentiality The terms herein are confidential and will
not be disclosed except as otherwise agreed
in advance in writing by each of the parties
hereto, subject to the parties reporting and
disclosure obligations under the '34 Act.
Counterparts This Term Sheet may be executed in any
number of counterparts, each of which shall
be an original, but all of which together
shall constitute one instrument. This Term
Sheet may also be executed via facsimile,
which shall be deemed an original.
Governing Law This Term Sheet and the related
transaction documents and all matters
arising directly or indirectly herefrom and
therefrom shall be governed by the laws of
the State of Delaware on all matters, in
each case, without reference to the choice
or conflicts of law provisions thereof.
Effect of Term Sheet The parties expressly agree that no binding
obligations will be created until Definitive
Documents are executed and delivered by
the parties, other than as set forth under
the heading "Binding Provisions" (namely,
"Exclusivity, "Expenses," "Confidentiality,"
"Counterparts," "Governing Law," and
"Effect of this Term Sheet") which are
intended to be and shall be legally binding.
Subject to the foregoing, it is understood
that any of the parties is free to terminate
the discussions at any time and for any
reason prior to the execution of Definitive
Documents.
[Signature Pages Follow]
This Term Sheet is hereby accepted and agreed to as of April 9, 2003, by each of
the following:
Palisade Concentrated Equity Partnership, L.P.
By: Palisade Concentrated Holdings, LLC, its general partner
By: /s/ Eric J. Bertrand
-----------------------------
Name: Eric J. Bertrand
Title: Member
Signed on April 9, 2003
THE SIGNING STOCKHOLDERS:
/s/ Rex Licklider
Rex Licklider
Signed on April 10, 2003
/s/ David Michael Talla
David Michael Talla
Signed on April 10, 2003
Millennium Partners LLC
By: Millennium Partners Management LLC, its manager
By: Millennium Manager I, Inc., its managing member
/s/ Philip Lovett
By: Philip Lovett
Its:
Signed on April 9, 2003
Millennium Entertainment Partners L.P.
By: Millennium Entertainment Associates L.P., its general partner
By: Millennium Entertainment Corp., its general partner
/s/ Philip Lovett
By: Philip Lovett
Its:
Signed on April 9, 2003
MDP Ventures I LLC
By: Millennium Development Partners L.P., its managing member
By: Millennium Development Associates L.P., its general partner
By: Millennium Development Corp., its general partner
/s/ Philip Lovett
By: Philip Lovett
Its:
Signed on April 9, 2003
MDP Ventures II LLC
By: Millennium Development Partners II, LLC, its managing member
/s/ Philip Lovett
By: Philip Lovett
Its:
Signed on April 9, 2003
Millennium Development Partners L.P.
By: Millennium Development Associates LP, its general partner
By: Millennium Development Associates L.P., its general partner
By: Millennium Development Corp., its general partner
/s/ Philip Lovett
By: Philip Lovett
Its:
Signed on April 9, 2003
Kayne Anderson Capital Advisors, LP.
By: Kayne Anderson Investment Management, Inc, its general partner I
By: /s/ Robert Sinnott
Robert Sinnott
Managing Director
Signed on April 10, 2003
SCHEDULE A
SURVIVING STOCKHOLDERS
Kayne Anderson Capital Advisors, LP Rex Licklider David Michael Talla
Millennium Partners LLC Millennium Entertainment Partners L.P.
MDP Ventures I LLC
MDP Ventures II LLC
Millennium Development Partners L.P.
Baron Capital
Townsend Group
Mark Spino
Phil Swain
Nanette Pattee Francini
SCHEDULE B
MILLENIUM PARTNERS ENTITIES
For purposes of this Term Sheet, "Millennium Partners" means the following
entities, collectively:
Millennium Partners LLC
Millennium Entertainment Partners L.P.
MDP Ventures I LLC
MDP Ventures II LLC
Millennium Development Partners L.P.